What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2023-03-08 compared with 2021-12-14 · 164 added, 157 removed, 155 unchanged (67% of the section changed)

3 unchanged sentences

The Company’s actual results could differ materially from those discussed in these forward-looking statements.

See "Cautionary Statements Regarding Forward-Looking Statements" and "Part I.

See "Cautionary Statement Regarding Forward-Looking Statements" and "Part I.

Risk Factors."

We operate in the upstream segment of the oil and gas industry and are focused on steadily growing conventional reserves, production and cash flow through the acquisition, exploration, development and production of oil, natural gas and NGLs primarily in the Permian Basin.

The Company’s activities are primarily focused on the San Andres Formation, a shelf margin deposit on the Central Basin Platform and Northwest Shelf.

We intend to continue to develop our reserves and increase production through development drilling and exploration activities on our multi-year inventory of identified potential drilling locations and through acquisitions that meet our strategic and financial objectives.

We operate in the upstream segment of the oil and natural gas industry and are focused on steadily growing conventional reserves, production and cash flow through the acquisition, exploration, development and production of oil, natural gas and NGLs primarily in the Permian Basin in West Texas.

The Company’s activities are primarily focused on the San Andres Formation, a shelf margin deposit on the Northwest Shelf of the Permian Basin.

We intend to continue to develop our reserves and increase production through development drilling and exploration activities and through acquisitions that meet our strategic and financial objectives.

Financial and Operating Highlights

Financial and operating results reflect the following:

• Increased total net equivalent production by 22% to 8.6 MBoe/d for the year ended September 30, 2021, as compared to the same period in 2020

• During the year ended September 30, 2021, 20 gross (14 net) horizontal wells brought online to production

• Began initial, planning, permitting and drilling operations on the EOR Project

• Realized average combined price on production sold of $47.12 per Boe, before derivative settlements, during the year ended September 30, 2021, including $58.29 per barrel for oil

• Completed common stock issuance in fiscal fourth quarter 2021 resulting in approximately $46.7 million of proceeds after underwriter costs and other offering costs

• Generated cash flow from continuing operations of $86.1 million for the year ended September 30, 2021

• Total cash capital expenditures before acquisitions of $60.1 million for the year ended September 30, 2021

• Paid cash dividends on common units/shares of $18.3 million during the year ended September 30, 2021 and announced latest dividend of $0.31 per share with a record date of October 21, 2021, which was paid on November 4, 2021, for a total of $6.0 million

• Exited the fourth quarter with $17.1 million in cash and $60.0 million drawn on our revolving credit facility;

subsequently increased our borrowing base from $135 million to $175 million in October 2021

• Increased total net equivalent production by 33% to 11.5 MBoe/d for the year ended December 31, 2022, as compared to the year ended September 30, 2021

• During the year ended December 31, 2022, 15 gross (11.8 net) horizontal wells brought online to production

• Realized average combined price on production sold of $76.05 per Boe, before derivative settlements, during the year ended December 31, 2022, including $92.86 per barrel for oil

• Generated cash flow from operations of $170.3 million for the year ended December 31, 2022

• Incurred total accrual (activity based) capital expenditures before acquisitions of $123.1 million for the year ended December 31, 2022 as compared to $71.3 million for the year ended September 30, 2021

• Paid cash dividends on common shares of $25.1 million during the year ended December 31, 2022, and announced latest dividend of $0.34 per share with a record date of January 25, 2023, which was paid on February 8, 2023, for a total of $6.7 million

• Exited the year with $13.3 million in cash and $56.0 million drawn on our revolving credit facility

Recent Developments

The Company began initial planning, permitting and drilling operations on its EOR Project, which will utilize a combination of water and CO 2 injection through vertical wells, applied to horizontal producing wells at its core asset in Yoakum County, Texas.

These wells are directly adjacent to several of the largest EOR projects in the U.S., which have employed EOR techniques for many decades.

Common Stock Offering

In July 2021, the Company issued 1.67 million shares of its common stock for total proceeds net of underwriter fees and other offering costs of approximately $46.7 million.

Market Conditions and Commodity Prices

The COVID-19 pandemic and the measures being taken to address and limit the spread of the virus significantly reduced global economic activity, resulting in a significant decline in the demand for and prices of oil, natural gas and NGLs.

The Company cannot estimate the full length or gravity of the future impacts at this time and if there is another significant decline in oil price, it could have a material adverse effect on the Company’s results of operations, financial position, liquidity and the value of oil and natural gas reserves.

The Company has developed and implemented a number of safety measures, which have successfully kept our workforce healthy and safe.

The Company has established an informational campaign to provide employees an understanding of the virus risk factors and safety measures, as well as timely updates from governmental stay-at-home regulations.

Expectations have also been set for employees to communicate immediately if they, or someone they have been in contact with, has experienced symptoms or tested positive for COVID-19.

Additional measures include distribution of educational material regarding health and safety guidance, limiting access to common areas within the office, ensuring social distancing guidance by relocating personnel, and other guidelines as recommended by the Center for Disease Control and Prevention and local authorities.

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 was 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.

However, commodity prices have continued to remain high during 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 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 2023 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, 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 is impacted by such rate increases.

The combination of geopolitical events, inflation and the rising rate environment has led to increasing forecasts of a U.S.

or global recession.

Any such recession could prolong market volatility or cause a decline in commodity prices, among other potential impacts.

The Company cannot estimate the length or gravity of the future impact these events will have on the Company's results of operations, financial position, liquidity and the value of oil and natural gas reserves.

Results of Operations

Comparison for the Years Ended September 30, 2021 and 2020

The following table sets forth selected operating data for the years ended September 30, 2021 and 2020:

Year Ended September 30,

Comparison for the years ended December 31, 2022 and September 30, 2021.

The following table sets forth selected operating data for the years ended December 31, 2022 and September 30, 2021:

December 31, 2022 September 30, 2021

Revenues (in thousands):

1 unchanged sentence

Natural gas sales 10,755 7,500

7,500 (1,267)

Natural gas liquids sales 9,865 4,715

7 unchanged sentences

Daily oil volumes (Bbls/d) 8,814 6,411

Average Prices:

Average Realized Prices:

Oil ($ per Bbl) $ 92.86 $ 58.29

2 unchanged sentences

Combined ($ per Boe) $ 76.05 $ 47.12

Average Prices, including derivative settlements:

Average Realized Prices, including derivative settlements:

Oil ($ per Bbl) $ 71.75 $ 51.47

Natural gas ($ per MMBtu) (1)

Natural gas ($ per Mcf) 1.06 2.75

Natural gas liquids ($ per Bbl) 22.22 12.41

1 unchanged sentence

_____________________

(1) The Company's natural gas and NGL sales are presented net of gathering, processing and transportation fees which at times exceed the price received and result in negative average prices.

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

These gains (losses) are included under other income and expense on the Company’s consolidated statement of operations.

(3) During the years ended September 30, 2021 and 2020, the Company did not have any natural gas liquids derivative contracts in place.

During the year ended September 30, 2020, the Company did not have any natural gas derivative contracts in place.

(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 (expense) on the Company’s consolidated statements of operations.

Oil and Natural Gas Revenues

3 unchanged sentences

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 $75.5 million, or 103%, for the year ended September 30, 2021 compared to the same period in 2020.

The Company’s realized average combined price on its production for the year ended September 30, 2021 increased by $18.90 or 67%, respectively, compared to the same period of 2020.

• For the year ended September 30, 2021, oil revenues increased by $61.5 million, or 82%, compared to the same period in 2020.

The Company’s total oil and natural gas revenue, net increased $170.7 million, or 115%, for the year ended December 31, 2022 compared to the year ended September 30, 2021.

The Company’s realized average combined price on its production for the year ended December 31, 2022 increased by $28.93 per Boe, or 61% compared to the year ended September 30, 2021.

• For the year ended December 31, 2022, oil revenues increased by $162.3 million, or 119%, compared to the year ended September 30, 2021.

Of the increase, $111.2 million was attributable to an increase in our realized price and $51.1 million was attributable to an increase in volume.

Volumes increased by 14% while prices increased by 60% compared to the same period in 2020.

• Oil volumes increased during the year ended September 30, 2021 due to production from new wells and workovers performed on existing wells.

During the year ended September 30, 2021, we brought online 20 new gross (14 net) wells.

Volumes increased by 37%, while realized prices increased by 59% compared to the year ended September 30, 2021.

• Oil volumes increased during the year ended December 31, 2022 due to production from new wells and workovers performed on existing wells.

During the year ended December 31, 2022, we brought online 15 gross (11.8 net) horizontal wells.

• The average WTI price increased by $35.50 per Bbl during the year ended December 31, 2022 when compared to the year ended September 30, 2021, respectively.

Natural gas revenues

• For the year ended September 30, 2021, natural gas revenues increased by $8.8 million, compared to the same period in 2020, to $7.5 million from $(1.3) million.

Volumes increased by 60% and realized prices increased by $3.66/Mcf from negative effective prices experienced in 2020.

• Natural gas sales volumes increased during the year ended September 30, 2021 due to increased production from new wells brought online and increased gas processing capacity available from the Company's midstream gathering and processing partner.

• For the year ended December 31, 2022, natural gas revenues increased by $3.3 million, compared to the year ended September 30, 2021, to $10.8 million from $7.5 million.

Volumes increased by 24%, while realized prices increased by $0.45 per Mcf compared to the year ended September 30, 2021.

• Natural gas sales volumes increased during the year ended December 31, 2022 compared to the year ended September 30, 2021 due to production from new wells and workovers performed on existing wells.

• The average Henry Hub price increased by $3.11 per Mcf during the year ended December 31, 2022 compared to the year ended September 30, 2021.

Natural gas liquids revenues

• For the year ended September 30, 2021, natural gas liquids revenues increased by $5.2 million, compared to the same period in 2020, to $4.7 million from $(0.5) million.

Volumes increased by 46% and realized prices increased by $14.31/Bbl from negative effective prices experienced in 2020.

• Natural gas liquids sales volumes increased during the year ended September 30, 2021 due to increased production from new wells brought online and increased gas processing capacity available from the Company's midstream gathering and processing partner.

Contract Services - Related Party Revenue

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

Year Ended September 30,

• For the year ended December 31, 2022, NGL revenues increased by $5.2 million, compared to the year ended September 30, 2021, to $9.9 million from $4.7 million.

Volumes increase by 17%, while realized prices increased $9.81 per Bbl compared to the year ended September 30, 2021.

• NGL sales volumes increased during the year ended December 31, 2022 compared to the year ended September 30, 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:

Year Ended December 31, 2022 Year Ended September 30, 2021

(In thousands)

2 unchanged sentences

Cost of contract services - related parties (2)

Gross profit - related parties $ 1,923 $ 3,297

Gross profit from contract services $ 1,950 $ 1,923

_____________________

1 unchanged sentence

(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.

The Company's contract services - related parties decreased for the year ended September 30, 2021 due to the restructuring of the monthly fee in the fourth quarter of fiscal 2020.

The monthly fee decreased by $150 thousand per month.

Costs and Expenses

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

Year Ended September 30,

Year Ended December 31, 2022 Year Ended September 30, 2021

Costs and Expenses:

4 unchanged sentences

Depletion, depreciation, amortization and accretion $ 32,113 $ 26,015

Impairment of oil and natural gas properties $ 7,325 $ —

Administrative costs $ 18,496 $ 13,966

2 unchanged sentences

Transaction costs $ 2,638 $ 3,732

Interest expense $ 4,534 $ 5,299

(Gain) loss on derivatives, net $ 89,195 $ (33,876)

Interest expense, net $ 1,090 $ 4,534

Loss on derivatives $ 51,574 $ 89,195

Income tax expense $ 32,844 $ 13,016

Lease Operating Expenses

Lease operating expenses ("LOE") are the costs incurred in the operation and maintenance of producing properties.

Lease Operating Expenses ("LOE")

LOE are the costs incurred in the operation and maintenance of producing properties.

Expenses for compression, direct labor, saltwater disposal and materials and supplies comprise the most significant portion of our lease operating expenses.

1 unchanged sentence

For instance, repairs to our pumping equipment or surface facilities or subsurface maintenance result in increased production expenses in periods during which they are performed.

Certain operating cost components, such as compression and salt water 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 $1.7 million for the year ended September 30, 2021 compared to the same period in 2020.

LOE for the year ended September 30, 2020 reflected the reduced activity following the sharp downturn in commodity prices at the time, partially offset by higher workover costs and the addition of new wells in 2021.

For the year ended September 30, 2021, LOE reflects additional costs due to higher produced volumes as well as higher costs for certain services due to increased activity in the Permian Basin.

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 $10.5 million for the year ended December 31, 2022 compared to the year ended September 30, 2021.

For the year ended December 31, 2022, $5.4 million of the increase was due to higher workover expense as additional workovers were performed in the 2022 period, and $4.2 million of the increase was due to electricity and chemical rate increases, increase in field payroll, saltwater disposal charges, and new wells coming online.

Production and Ad Valorem Tax Expense

3 unchanged sentences

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 $4.4 million for the year ended September 30, 2021 compared to the same period in 2020, primarily due to increases in our production sold resulting from additional wells brought online, workovers performed on existing wells and significantly higher commodity prices.

Also contributing to the increase is higher ad valorem taxes based on the increase in property values during the year ended September 30, 2021.

Production and ad valorem taxes increased by $10.6 million for the year ended December 31, 2022 compared to the year ended September 30, 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 year ended December 31, 2022 based on higher estimated property values for the current taxable period.

Exploration Expense

Exploration expense, which consists of expiration of unproved leasehold and geological and geophysical costs that include seismic survey costs, decreased by $0.4 million, or 4%, for the year ended September 30, 2021, as compared to the same period in 2020.

For the year ended September 30, 2021, the Company incurred lower seismic expense compared to the same period in 2020.

The following table presents exploration expense by area for the years ended September 30, 2021 and 2021:

Year Ended September 30,

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 year ended December 31, 2022 and the year ended September 30, 2021:

Year Ended December 31, 2022 Year Ended September 30, 2021

(In thousands, except acreage data)

7 unchanged sentences

_____________________

(1) As of September 30, 2021 exploration expense includes $3,516 and $5,831 related to expiration of unproved leasehold costs in Texas and New Mexico, respectively.

As of September 30, 2020 exploration expense includes $1,206 and $6,696 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 for the years ended September 30, 2021 and 2020.

Depletion, Depreciation, and Accretion Expense

Depreciation, depletion and amortization is the systematic expensing of the capitalized costs incurred to acquire, explore and develop oil, natural gas and NGLs.

(1) For the year ended December 31, 2022, exploration expense includes $1.8 million and $0.2 million related to expiration of unproved leasehold costs in Texas and New Mexico, respectively.

For the year ended September 30, 2021, exploration expense included $3.5 million and $5.8 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 year ended December 31, 2022 and the year ended September 30, 2021.

Depletion, Depreciation, Amortization and Accretion Expense

Depletion, depreciation and amortization is the systematic expensing of the capitalized costs incurred to acquire, explore and develop oil, natural gas and NGLs.

All costs incurred in the acquisition, exploration and development of properties (excluding costs of surrendered and abandoned leaseholds, delay lease rentals, dry holes and overhead related to exploration activities) are capitalized.

1 unchanged sentence

Accretion expense relates to ARO.

We record the fair value of the legal liability for ARO in the period in which the liability is incurred (at the time the wells are drilled or acquired) at the asset’s inception, with the offsetting increase to property cost.

We record the fair value of the liability for ARO in the period in which the liability is incurred (at the time the wells are drilled or acquired) with the offset to property cost.

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 $4.5 million for the year ended September 30, 2021, respectively, compared to the same period for 2020.

The increase for the year ended September 30, 2021 was due to higher production in addition to a higher depletion rate due to additional capitalized costs.

Depletion, depreciation, amortization and accretion expense increased by $6.1 million for the year ended December 31, 2022, respectively, compared to the year ended September 30, 2021.

The increase for the year ended December 31, 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.

The lower depletion rate was primarily driven by an increase in reserves as a result of the Company's drilling activity and improved commodity prices.

Impairment of Oil and Natural Gas Properties

The cost of proved oil and natural gas properties are assessed on a field-by-field basis for impairment at least annually or whenever events and circumstances indicate that a decline in the recoverability of their carrying value may have occurred.

We compare the expected undiscounted future cash flows of the oil and natural gas properties to the carrying amount of the oil, natural gas and NGL properties to determine if the carrying amount is recoverable.

If the carrying amount exceeds the estimated undiscounted future cash flows, we adjust the carrying amount of the oil and natural gas properties to estimated fair value.

The Company recognized an impairment loss on proved properties of $7.3 million for the year ended December 31, 2022.

The impairment loss relates to the New Mexico field and was driven by the Company focusing its drilling efforts on its acreage in Yoakum County.

No impairment loss was recognized for the year ended September 30, 2021.

General and Administrative Expense ("G&A")

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 recoveries from other owners in properties operated by us and amounts capitalized pursuant to the successful efforts method.

During the year ended September 30, 2021, we incurred, and we expect that we will continue to incur, additional general and administrative expenses as a result of being a publicly-traded company.

Total G&A expense increased by $9.0 million, for the year ended September 30, 2021, compared to the same period for 2020.

Administrative costs, which includes payroll, benefits and non-payroll costs, increased by $3.1 million, for the year ended September 30, 2021, compared to the same period for 2020.

The increase in administrative costs was primarily attributable to increased audit, filing, legal and professional service costs following completion of the Merger.

Equity compensation expense increased by $5.8 million for the year ended September 30, 2021, compared to the same periods for 2020.

The increase is primarily attributable to restricted shares awarded to certain executives and employees following completion of the Merger.

G&A expenses are reported net of overhead recoveries.

Total G&A expense increased by $1.2 million for the year ended December 31, 2022 compared to the year ended September 30, 2021.

Administrative costs, which include payroll, benefits and non-payroll costs, increased by $4.5 million for the year ended December 31, 2022 compared to the year ended September 30, 2021.

The increase in administrative costs was primarily attributable to increased employee count, professional services, insurance, technology, investor relations, and costs related to transitioning fiscal year-ends.

Equity-based compensation expense decreased by $3.3 million for the year ended December 31, 2022 compared to the year ended September 30, 2021.

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

Transaction Costs

Transaction costs were $3.7 million and $1.4 million for the year ended September 30, 2021 and 2020, which reflects expenses associated with the Merger.

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

The transaction costs of $2.6 million for the year ended December 31, 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 year ended September 30, 2021, the transaction costs of $3.7 million primarily relate to costs incurred on the Merger with Tengasco in February 2021.

Interest Expense

Interest expense was $4.5 million and $5.3 million for the years ended September 30, 2021 and 2020, respectively.

The decrease in interest expense in the 2021 period was primarily attributable to a lower average balance on the Company's revolving credit facility during the year ended September 30, 2021 when compared to the same period for 2020.

Interest expense decreased by $3.4 million during the year ended December 31, 2022 when compared to the year ended September 30, 2021.

The Company had a lower outstanding average balance on the revolving credit facility as well as an increase in the capitalized interest related to the Company's EOR project, partially offset by an increase in interest rates, during the year ended December 31, 2022 when compared to the year ended September 30, 2021.

Additionally, interest expense decreased due to the Company settling the remaining open position on its interest rate swap resulting in a settlement of $1.5 million during 2022.

Gain/Loss on Derivatives

The Company recognizes settlements and changes in the fair value of its derivative contracts as a single component within other income (expenses) on its consolidated statement of operations.

The Company recognizes settlements and changes in the fair value of its derivative contracts as a single component within other income (expense) on its consolidated statements of operations.

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 gain (loss) on derivatives for the years ended September 30, 2021 and 2020:

Year Ended September 30,

The following table presents the components of the Company's loss on derivatives for the year ended December 31, 2022 and the year ended September 30, 2021:

Year Ended December 31, 2022 Year Ended September 30, 2021

(In thousands)

Realized gain (loss) on derivatives $ (16,304) $ 26,914

Unrealized gain (loss) on derivatives (72,891) 6,962

Gain (loss) on derivatives $ (89,195) $ 33,876

Our earnings are affected by the changes in value of our derivatives 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 to the extent future commodity price outlook increases between measurement periods, we will have mark-to-market losses.

Settlements on derivative contracts $ (75,257) $ (16,304)

Non-cash gain (loss) on derivatives 23,683 (72,891)

Loss on derivatives $ (51,574) $ (89,195)

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 loss on derivatives for the year ended December 31, 2022 was $51.6 million, which decreased by $37.6 million compared to the year ended September 30, 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 year ended December 31, 2022 compared to the year ended September 30, 2021.

The increase in the loss on settlements on derivatives was due to the increase in oil and natural gas prices for the year ended December 31, 2022 compared to the year ended September 30, 2021.

For example, the average WTI price was $94.90 per Bbl for the year ended December 31, 2022 compared to $59.40 per Bbl for the year ended September 30, 2021.

Income Tax Expense

1 unchanged sentence

See further discussion in Note 4 - Acquisitions and Divestitures to the Company's consolidated financial statements included herein.

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 REP LLC only from February 27, 2021 through September 30, 2021 in the accompanying consolidated financial statements.

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

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 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.

Upon consummation of the Merger, the Company established a $13.6 million provision for deferred income taxes with the conversion to a C-corporation.

Upon consummation of the Merger in February 2021, the Company established a $13.6 million provision for deferred income taxes with the conversion to a C-corporation.

The majority of this deferred tax liability was established by a change in tax status which primarily was attributable to the oil and natural gas properties.

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

Year Ended September 30,

Year Ended December 31, 2022 Year Ended September 30, 2021

(In thousands)

Current expense $ 54 $ —

Deferred expense 12,962 718

Total expense $ 13,016 $ 718

Current income tax expense $ 4,472 $ 54

Deferred income tax expense (benefit) 28,372 12,962

Total income tax expense (benefit) $ 32,844 $ 13,016

Effective income tax rate 21.7 % (38.4) %

6 unchanged sentences

At times and as needed, we may also issue debt or equity securities, including through transactions under our shelf registration statement filed with the SEC.

In October 2021, the revolving credit facility was further amended to, among other things increase the borrowing base to $175 million.

We estimate the combination of the sources of capital discussed above will continue to be adequate to meet our short and long-term liquidity needs.

Cash on hand and operating cash flow can be subject to fluctuations due to trends and uncertainties that are beyond our control.

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

For more information on conditions impacting our liquidity and capital resources, see "—Recent Developments." For further discussion of risks related to our liquidity and capital resources, see "Item 1A.

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.

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

Risk Factors."

On July 2, 2021 the Company completed the offering of 1,666,667 shares of common stock at a price to the public of $30.00 per common share.

The Company received net proceeds of $46.7 million from the sale of the common stock, after deducting underwriting discounts and commissions, and offering expenses paid by the Company.

The Company utilized $35.5 million to pay down its revolving credit facility during its fiscal fourth quarter.

The Company intends to draw on the revolving credit facility in order to fund drilling and infrastructure for normal operations as well as for the EOR Project.

The remaining net proceeds are expected to be used for working capital purposes and other general corporate purposes, which may include financing of capital expenditures, financing acquisitions or investments, repayment or refinancing of outstanding debt, financing other business opportunities, and working capital purposes.

Working Capital

1 unchanged sentence

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

The change in our working capital requirements are 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, 2021, we had a working capital deficit of $46.9 million compared to working capital surplus of $13.9 million as of September 30, 2020.

The working capital deficit at September 30, 2021 reflects $42.1 million in current derivative liabilities compared to $18.8 million in current derivative assets at September 30, 2020.

Additionally, there was an increase of $18.2 million in accounts payable and accrued liabilities as of September 30, 2021 due to increased drilling and completion activity as well as costs incurred for work on the EOR Project.

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 December 31, 2022, we had a working capital deficit of $25.3 million compared to a deficit of $32.8 million as of December 31, 2021.

The working capital deficit at December 31, 2022 reflects $16.5 million in current derivative liabilities compared to $31.0 million in current derivative liabilities at December 31, 2021.

As of December 31, 2022, we had an increase of $14.1 million in accrued capital expenditures and ad valorem tax.

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 December 31, 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:

Year Ended September 30,

Year Ended December 31, 2022 Year Ended September 30, 2021

(In thousands)

4 unchanged sentences

Operating Activities

The Company’s net cash provided by operating activities increased by $23.5 million or 38% to $86.1 million for the year ended September 30, 2021 from $62.6 million for the same periods in 2020.

The increase was primarily driven by an increase in revenues of $74.1 million, partially offset by a $43.2 million decrease in net cash received for settlements of commodity derivative contracts and an increase in operating expenses, excluding equity based compensation, of $9.7 million.

The Company’s net cash provided by operating activities increased by $84.2 million or 98% to $170.3 million for the year ended December 31, 2022 from $86.1 million for the year ended September 30, 2021.

The increase was primarily driven by an increase in revenues of $170.7 million, partially offset by an increase of $59.0 million on settlements for commodity derivative contracts and an increase in operating expenses of $24.4 million, which excludes non-cash expenses such as equity-based compensation, expiration of unproved leasehold costs, impairment of oil and natural gas properties and depreciation, depletion, accretion and amortization expense.

Investing Activities

The Company's cash flows used in investing activities increased by $8.1 million or 16% to $59.6 million for the year ended September 30, 2021 from $51.5 million for the same period in 2020.

The increase was primarily due to higher capital spending of $11.1 million related to the Company's drilling and completion activity in 2021 and additions to other property and equipment by $1.5 million, partially offset by lower acquisitions of oil and natural gas properties by $3.7 million.

The Company's cash flows used in investing activities increased by $68.6 million or 115% to $128.3 million for the year ended December 31, 2022 from $59.6 million for the year ended September 30, 2021.

The increase was primarily due to higher capital spending of $53.3 million related to the Company's increased drilling and completion activity and activity on its EOR Project during the year ended December 31, 2022 compared to the year ended September 30, 2021, in addition to $15.3 million for the purchase of land during the year ended December 31, 2022.

Financing Activities

Net cash flow used in financing activities was $14.9 million during the year ended September 30, 2021, or an increase of $1.8 million, as compared to the same period in 2020.

The most significant cash outflow from financing activities was the net repayment of $41.0 million on the revolving credit facility, as compared to net proceeds of $4.0 million in the same period in 2020.

Also contributing to the cash outflow from financing activities was $18.3 million for the payment of dividends on common stock and units during the year ended September 30, 2021.

Partially offsetting these cash outflows was the $46.7 million in net proceeds during the year ended September 30, 2021 from the issuance of common stock, after deducting underwriter fees and other offering costs.

Net cash flow used in financing activities increased by $22.1 million or 148% to $37.0 million for the year ended December 31, 2022 from $14.9 million for the year ended September 30, 2021.

During the year ended September 30, 2021, the Company issued $46.7 million of equity, net of offering costs.

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

There was no equity issued in 2022.

During the year ended December 31, 2022, the Company had a net paydown on its revolving credit facility of $9.0 million, which compares to a net paydown of $41.0 million for the same period in 2021.

In addition, the Company distributed an additional $6.8 million of dividends on common stock during the year ended December 31, 2022 compared to the same period in 2021.

Revolving Credit Facility

The Company's borrowing base was $135 million with outstanding borrowings of $60 million on September 30, 2021 representing available borrowing capacity of $75 million.

In October 2021, the revolving credit facility was further amended to, among other things, increase the borrowing base to $175 million.

The Company's borrowing base was $225 million with outstanding borrowings of $56 million on December 31, 2022, representing available borrowing capacity of $169 million.

See further discussion in Note 9 - Revolving Credit Facility to the Company's 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 subsequently 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 year ended September 30, 2021, the Company authorized and declared quarterly dividends totaling approximately $18.1 million, with $17.8 million paid in cash and $0.3 million payable to restricted shareholders upon vesting.

For the year ended December 31, 2022, the Company authorized and declared a quarterly dividend totaling approximately $25.3 million, with $24.7 million paid in cash and $0.6 million payable to restricted shareholders upon vesting.

Contractual Obligations

In July 2021, as part of a planned expansion of Stakeholder’s primary gas processing plant, the Company committed to annually drill, complete and connect a minimum number of wells or deliver an annual target volume to Stakeholder's gathering system.

While the minimum number of wells is below our planned development activity, there are financial penalties if the minimum activity levels are not met.

The annual well or volume target is for each of five years beginning January 2022.

The additional capacity from the gas processing plant expansion is expected to lead to increased natural gas sales and decreased gas flaring for the Company.

In August 2021, the Company entered into a purchase agreement for supplies for its EOR project.

Under the agreement, the Company has committed to purchasing supplies totaling approximately $1.2 million and $3.3 million by January 2022 and April 2022, respectively.

The Company has commitments with its primary midstream counterparty and has entered into purchase commitments throughout the year ended December 31, 2022.

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

Critical Accounting Estimates

5 unchanged sentences

Method of Accounting for Oil and Natural Gas Properties

We utilize the successful effort method of accounting for our oil and natural gas exploration and development activities which requires management's assessment of the proper designation of wells and associated costs as developmental or exploratory.

We utilize the successful efforts method of accounting for our oil and natural gas exploration and development activities which requires management's assessment of the proper designation of wells and associated costs as developmental or exploratory.

This classification assessment is dependent on the determination and existence of proved reserves, which is a critical estimate discussed in the section below.

2 unchanged sentences

Development wells are always capitalized.

Costs associated with drilling an exploratory well are initially capitalized, or suspended, pending a determination as to whether proved reserves have

Costs associated with drilling an exploratory well are initially capitalized, or suspended, pending a determination as to whether proved reserves have been found.

At the end of each quarter, the status of all suspended exploratory drilling costs are reviewed to determine whether the costs should continue to remain capitalized or shall be expensed.

2 unchanged sentences

Otherwise, the costs of exploratory wells remain capitalized.

At September 30, 2021, all suspended well costs have been suspended for greater than one year but less than two years.

Similar to the evaluation of suspended exploratory well costs, costs for undeveloped leasehold, for which reserves have not been proven, must also be evaluated for continued capitalization or impairment.

At the end of each quarter, undeveloped leasehold costs are assessed for impairment by considering future drilling plans, drilling activity results, commodity price outlooks, planned future sales or expiration of all or a portion of such projects.

At September 30, 2021, the Company had approximately $20.6 million of undeveloped leasehold.

Of the remaining undeveloped leasehold costs at September 30, 2021, approximately $0.3 million is scheduled to expire in 2022.

Similar to the evaluation of suspended exploratory well costs, costs for unproved leasehold, for which reserves have not been proven, must also be evaluated for continued capitalization or impairment.

At the end of each quarter, unproved leasehold costs are assessed for impairment by considering future drilling plans, drilling activity results, commodity price outlooks, planned future sales or expiration of all or a portion of such projects.

At December 31, 2022, the Company had approximately $12.8 million of unproved leasehold.

Of the remaining unproved leasehold costs at December 31, 2022, approximately $0.6 million is scheduled to expire in 2023.

The Company will renew or extend the lease if the leasehold expiring in 2023 relates to areas in which the Company is actively drilling.

If our drilling is not successful, this leasehold could become partially or entirely impaired.

Once a well is drilled, capitalized well costs for drilling and completion activities must be evaluated at least yearly or whenever facts and circumstances indicate a decline in the recoverability of their carrying value may have occurred.

At the end of each year, the undiscounted future cash flows are compared to the carrying value on a field basis to evaluate if the carrying value is recoverable.

If the carrying value is not recoverable, the Company will compare the carrying value of the asset to its fair value and recognize any impairment loss in the period.

Significant inputs and judgements are used in determining the fair value of the assets.

The Company utilizes a discounted cash flow model in order to estimate fair value by modeling the present value of future cash flows, net of estimated operating and development costs using estimates of proved reserves, future commodity pricing, future production estimates, anticipated capital expenditures, and various discount rates commensurate with the risk and current market conditions associated with the expected cash flow projected.

During the year ended December 31, 2022, the Company recognized a proved property impairment of $7.3 million related to the oil and natural gas properties in New Mexico.

Oil and Natural Gas Reserves

2 unchanged sentences

Estimates of reserves are forecasts based on engineering data, projected future rates of production and the timing of future expenditures.

The process of estimating oil, gas and NGL reserves requires substantial judgment, resulting in imprecise determinations, particularly for new discoveries.

The process of estimating oil, natural gas and NGL reserves requires substantial judgment, resulting in imprecise determinations, particularly for new discoveries.

Different reserve engineers may make different estimates of reserve quantities based on the same data.

2 unchanged sentences

The data for a given reservoir may also change substantially over time as a result of numerous factors, including, but not limited to, additional development activity, evolving production history and continual reassessment of the viability of production under varying economic conditions.

From time to time, we have used commodity derivatives for the purpose of mitigating the risk resulting from fluctuations in the market price of oil and natural gas.

We exercise significant judgment in determining the types of instruments to be used, the level of production volumes to include in our commodity derivative contracts, and the prices at which we enter into commodity derivative contracts.

We have not designated our derivative instruments as hedges for accounting purposes and, as a result, mark our derivative instruments to fair value and recognize the cash and non-cash change in fair value on derivative instruments for each period in the consolidated statements of operations.

We are also required to recognize our derivative instruments on the consolidated balance sheets as assets or liabilities at fair value with such amounts classified as current or long-term based on their anticipated settlement dates.

The accounting for the changes in fair value of a derivative depends on the intended use of the derivative and resulting designation, and is generally determined using established index prices and other sources which are based upon, among other things, futures prices and time to maturity.

These fair values are recorded by netting asset and liability positions, including any deferred premiums, that are with the same counterparty and are subject to contractual terms which provide for net settlement.

Changes in the fair values of our commodity derivative instruments have a significant impact on our net income because we follow mark-to-market accounting and recognize all gains and losses on such instruments in earnings in the period in which they occur.

The amount of income taxes we record requires interpretations of complex rules and regulations of federal, state, and provincial tax jurisdictions.

We use the asset and liability method of accounting for income taxes, under which deferred tax assets and liabilities are recognized for the future tax consequences of (i) temporary differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities and (ii) operating loss and tax credit carryforwards.

Deferred income tax assets and liabilities are based on enacted tax rates applicable to the future period when those temporary differences are expected to be recovered or settled.

The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period the rate change is enacted.

A valuation allowance is provided for deferred tax assets when it is more likely than not the deferred tax assets will not be realized.

The accruals for deferred tax assets and liabilities are often based on assumptions that are subject to a significant amount of judgment.

These assumptions and judgments are reviewed and adjusted as facts and circumstances change, with our projection of earnings or losses during the current calendar year being the most significant judgement.

Material changes to our income tax accruals may occur in the future based on the progress of ongoing audits, changes in legislation or resolution of pending matters.

We test goodwill for impairment annually, or more frequently if events or changes in circumstances dictate that the carrying value of goodwill may not be recoverable.

8 unchanged sentences

Exhibits and Financial Statement Schedules" for a full discussion of our significant accounting policies.

Quantitative and Qualitative Disclosures About Market Risk

Not applicable.

Financial Statements and Supplementary Data

The information required by this item appears beginning on page F-1 of this report.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosures

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-K

Item 7. Management’s Discussion and Analysis