What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-05-10 compared with 2022-11-14 · 114 added, 146 removed, 144 unchanged (64% 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 and the Company's Transition Report on Form 10-QT for the period ended December 31, 2021.

The following discussion and analysis of 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 December 31, 2022.

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

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

Risk Factors" below and the information set forth in the Risk Factors under Part I, Item 1A of the Company's Annual Report for the fiscal year ended September 30, 2021.

Risk Factors" below and the information set forth in the Risk Factors under Part I.

Item 1A of the Company's Annual Report for the fiscal year ended December 31, 2022.

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 Central Basin Platform and Northwest Shelf.

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.

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Financial and operating results reflect the following:

• 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

• Increased total net equivalent production by 34% to 13.2 MBoe/d for the three months ended March 31, 2023, as compared to the three months ended March 31, 2022

• During the three months ended March 31, 2023, 7 gross (5.3 net) horizontal wells brought online to production

• Realized average combined price on production sold of $56.04 per Boe, before derivative settlements, during the three months ended March 31, 2023, including $72.76 per barrel for oil

• Generated cash flow from operations of $33.0 million for the three months ended March 31, 2023

• Incurred total accrual (activity based) capital expenditures before acquisitions of $41.9 million for the three months ended March 31, 2023

• Paid cash dividends on common shares of $6.8 million during the three months ended March 31, 2023, and announced latest dividend of $0.34 per share with a record date of April 25, 2023, to be paid on May 9, 2023, for a total of $6.9 million

• Exited the quarter with $2.3 million in cash and $89.0 million drawn on our revolving credit facility

Recent Developments

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.

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 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, 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.

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

Recent measures have been taken by the U.S.

Federal Reserve to combat persistent inflation by increasing interest rates throughout 2022 and into the first quarter of 2023.

The global banking sector has experienced material disruptions which has also contributed to market volatility.

Further, 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 and into 2023.

Prices for oil and natural gas are determined primarily by prevailing market conditions, which have been and could continue to be volatile.

However, OPEC+ recently cut output in an attempt to create a floor for oil prices, causing an increase in the oil price per barrel.

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

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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.

New Mexico Acquisition

On April 3, 2023, the Company closed on the New Mexico Acquisition.

The aggregate purchase price of the New Mexico Acquisition was $330 million, subject to customary purchase price adjustments pursuant to the Purchase Agreement, and was funded through a combination of borrowings under the Company's revolving credit facility and proceeds from the issuance of $200 million of Senior Notes.

Power Joint Venture

In January 2023, the Company entered into an agreement to form a joint venture created for the purpose of constructing a new power infrastructure for onsite power generation using produced natural gas.

The Company has an initial 30% investment in the joint venture company, RPC Power, and is committed to providing its portion of capital expenditures.

Construction on phase 1 of the project is expected to be completed in June 2023 with Phase 2 of the project expected to be operational by late 2023 or early 2024.

Results of Operations

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

Comparison for the three months ended March 31, 2023 and 2022.

The following table sets forth selected operating data for the three months ended March 31, 2023 and 2022:

Three Months Ended March 31,

Revenues (in thousands):

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Oil ($ per Bbl) $ 67.06 $ 66.60

Natural gas ($ per MMBtu) 1.57 1.69 1.40 3.28

Natural gas ($ per Mcf) 0.55 1.25

Natural gas liquids ($ per Bbl) 6.83 26.71

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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 $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 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 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.

The Company’s total oil and natural gas revenue, net decreased $0.2 million, or 0.3%, for the three months ended March 31, 2023 compared to the three months ended March 31, 2022.

The Company’s realized average combined price on its production for the three months ended March 31, 2023 decreased by $19.59 per Boe, or 26% compared to the three months ended March 31, 2022.

• For the three months ended March 31, 2023, oil revenues increased by $2.6 million, or 4%, compared to the three months ended March 31, 2022.

Of the increase, $20.2 million was attributable to an increase in volume, partially offset by a $17.6 million decrease in our realized price.

Volumes increased by 32%, while realized prices decreased by 21% compared to the three months ended March 31, 2022.

• Oil volumes increased during the three months ended March 31, 2023 due to production from new wells and workovers performed on existing wells.

During the three months ended March 31, 2023, we brought online 7 gross (5.3 net) horizontal wells.

• The average WTI price decreased by $19.25 per Bbl during the three months ended March 31, 2023 when compared to the three months ended March 31, 2022, respectively.

Natural gas revenues

• 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.

• 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.

• For the three months ended March 31, 2023, natural gas revenues decreased by $1.3 million, compared to the three months ended March 31, 2022.

Of the decrease, $2 million was attributable to a decrease in realized prices, partially offset by $0.7 million attributable to an increase in volume.

Volumes increased by 39%, while realized prices decreased by 79%.

• The average Henry Hub price decreased by $2.03 per Mcf during the three months ended March 31, 2023 compared to the three months ended March 31, 2022.

Natural gas liquids revenues

• 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 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.

• For the three months ended March 31, 2023, NGL revenues decreased by $1.6 million compared to the three months ended March 31, 2022.

Of the decrease, $2.7 million was attributable to a decrease in realized price, partially offset by $1.1 million attributable to an increase in volume.

Volumes increased by 44%, while realized prices decreased by 74%.

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

Three Months Ended March 31,

(In thousands)

Contract services - related parties (1)

$ 600 $ 600 $ 1,800 $ 1,800

Cost of contract services - related parties (2)

89 147 263 329

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

Gross profit from contract services $ 490 $ 515

_____________________

(1) The Company’s contract services - related parties revenue is derived from master services agreements with related parties to provide certain administrative support services.

(1) The Company’s contract services - related parties revenue is derived from master service agreements with related parties to provide certain administrative support services.

(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.

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

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

2022 2021 2022 2021

Three Months Ended March 31,

Costs and Expenses:

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Administrative costs $ 5,467 $ 4,014

Equity-based compensation 704 751 2,274 6,377

Share-based compensation 1,114 1,017

General and administrative expense $ 6,581 $ 5,031

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(Gain) loss on derivatives $ (5,755) $ 49,632

Loss from equity method investment $ 232 $ —

Income tax expense (benefit) $ 8,690 $ (2,114)

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.

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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 $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.

The Company’s LOE increased by $2.0 million for the three months ended March 31, 2023 compared to the three months ended March 31, 2022.

For the three months ended March 31, 2023, the increase was driven by a $2.3 million increase due to higher production and a $1.1 million increase due to higher workover expense.

These increases were partially offset by a $1.4 million decrease in LOE expense due to efficiencies related to utility rates, field payroll, and saltwater disposal charges.

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 $3.3 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 September 30, 2022 based on higher estimated property values for the current taxable period.

Production and ad valorem taxes increased by $0.6 million for the three months ended March 31, 2023 compared to the three months ended March 31, 2022.

Ad valorem taxes increased for the three months ended March 31, 2023 based on higher estimated property values for the current taxable period, which was partially offset by a decrease in production taxes of approximately $0.1 million.

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 September 30, 2022 and 2021:

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

2022 2021 2022 2021

The following table presents exploration expense by area for the three months ended March 31, 2023 and the three months ended March 31, 2022:

Three Months Ended March 31,

(In thousands, except acreage data)

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_____________________

(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.

(1) For the three months ended March 31, 2023, exploration expense includes $0.3 million and zero related to expiration of unproved leasehold costs in Texas and New Mexico, respectively.

For the three months ended March 31, 2022, exploration expense included $1.3 million and $0.2 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 months ended March 31, 2023 and 2022.

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 $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.

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.

Depletion, depreciation, amortization and accretion expense increased by $2.5 million for the three months ended March 31, 2023, respectively, compared to the three months ended March 31, 2022.

The increase for the three months ended March 31, 2023 was primarily due to higher production.

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 include corporate overhead such as payroll and benefits for our corporate staff, share-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.

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 $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.

Total G&A expense increased by $1.6 million for the three months ended March 31, 2023 compared to the three months ended March 31, 2022.

Administrative costs, which include payroll, benefits and non-payroll costs, increased by $1.5 million for the three months ended March 31, 2023 compared to the three months ended March 31, 2022, primarily due to increased employee count, professional services, insurance, and technology costs.

Transaction Costs

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

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.

The transaction costs of $1.9 million for the three months ended March 31, 2023 primarily relate to the New Mexico Acquisition that closed April 3, 2023.

During the three months ended March 31, 2022, the transaction costs of $2.6 million 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.

Interest Expense

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.

Interest expense increased by $0.3 million during the three months ended March 31, 2023 when compared to the three months ended March 31, 2022.

The Company had a higher outstanding average balance on the revolving credit facility as well as an increase in interest rates, during the three months ended March 31, 2023 when compared to the three months ended March 31, 2022.

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 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

The following table presents the components of the Company's gain (loss) on derivatives for the three months ended March 31, 2023 and 2022:

Three Months Ended March 31,

(In thousands)

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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

The Company became a taxable entity as a result of its Merger with Tengasco on February 26, 2021.

See further discussion in Note 4 - Acquisitions to the Company's condensed 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 the Company beginning February 27, 2021 in the accompanying condensed consolidated financial statements.

The gain (loss) on derivatives for the three months ended March 31, 2023 and 2022 was $5.8 million and $(49.6) million, respectively.

The non-cash gain on derivatives for the three months ended March 31, 2023 was driven by new contracts entered into during the quarter and higher contract pricing when compared to forward pricing at March 31, 2023.

The non-cash loss on derivatives for the three months ended March 31, 2022 was driven by lower contract pricing when compared to forward pricing at March 31, 2022.

The decrease in the loss on settlements on derivatives was due to the decrease in oil and natural gas prices for the three months ended March 31, 2023 compared to the three months ended March 31, 2022.

Income Tax Expense (Benefit)

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 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 condensed consolidated financial statements included herein for further discussion of income taxes.

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

2022 2021 2022 2021

See Note 10 - Income Taxes to the Company's consolidated financial statements included herein for further discussion of income taxes.

Three Months Ended March 31,

(In thousands)

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Because oil, natural gas and NGL reserves are a depleting resource, like all upstream operators, we must make capital investments to grow and even sustain production.

The Company’s principal liquidity requirements are to finance its operations, fund capital expenditures and acquisitions, make cash distributions and satisfy any indebtedness obligations.

The Company’s principal liquidity requirements are to finance its operations, fund capital expenditures and

acquisitions, make cash distributions and satisfy any indebtedness obligations.

Cash flows are subject to a number of variables, including the level of oil and natural gas production and prices, and the significant capital expenditures required to more fully develop the Company’s oil and natural gas properties.

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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 April 2023, the Company amended its Credit Facility to increase the borrowing base and issued Senior Notes to fund the New Mexico Acquisition.

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.

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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 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 September 30, 2022 of future commodity production which will settle on a monthly basis through the end of their contractual terms.

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 March 31, 2023, we had a working capital deficit of $32.9 million compared to a deficit of $25.3 million as of December 31, 2022.

The working capital deficit at March 31, 2023 reflects $8.0 million in current derivative liabilities compared to $16.5 million in current derivative liabilities at December 31, 2022.

As of March 31, 2023, our accounts payable increased by $13.1 million primarily due to increased capital activity.

We utilize our 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 March 31, 2023 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 September 30,

Three Months Ended March 31,

(In thousands)

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Net cash used in investing activities $ (69,935) $ (10,199)

Net cash used in financing activities $ (37,579) $ (7,666)

Net cash provided by (used in) financing activities $ 25,939 $ (8,504)

Operating Activities

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.

The Company’s net cash provided by operating activities was relatively flat at $33.0 million for the three months ended March 31, 2023 from $30.0 million for the three months ended March 31, 2022.

Investing Activities

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.

The Company's cash flows used in investing activities increased by $59.7 million to $69.9 million for the three months ended March 31, 2023 from $10.2 million for the three months ended March 31, 2022.

The increase was primarily due to funds held in escrow associated with the Company's New Mexico Acquisition of $33.0 million for the three months ended March 31, 2023, with no comparable item for the three months ended March 31, 2022.

Additionally, the Company incurred higher capital spending of $24.8 million related to increased activity during the three months ended March 31, 2023 compared to the three months ended March 31, 2022.

The Company also contributed 1.8 million to its equity method investment in RPC Power.

Financing Activities

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.

Net cash flow provided by financing activities were $25.9 million for the three months ended March 31, 2023 compared to net cash flow used in financing activities of $8.5 million for the three months ended March 31, 2022.

During the three months

ended March 31, 2023, the Company had a draw on its revolving credit facility of $33.0 million, used to fund the escrow for the New Mexico Acquisition, which compares to a net paydown of $2.0 million for the same period in 2022.

Revolving Credit Facility

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..

The Company's borrowing base was $225 million with outstanding borrowings of $89 million on March 31, 2023, representing available borrowing capacity of $136 million.

See further discussion in Note 8 - Long-Term Debt to the Company's condensed consolidated financial statements included herein.

On February 22, 2023, the Company amended its Credit Facility to, among other things, allow for the issuance of Senior Notes of up to $200 million.

On April 3, 2023, the Company amended its Credit Facility to, among other things, increase the borrowing base from $225 million to $325 million.

For more information on the amended Credit Facility and the issuance of the Senior Notes, see Note 13 - Subsequent Events.

Distributions

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.

For the three months ended March 31, 2023, the Company authorized and declared a quarterly dividend totaling approximately $6.9 million, with $6.7 million paid in cash and $0.2 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 September 30, 2022.

In January 2023, the Company entered into an agreement to form a joint venture with Conduit Power LLC.

The Company is committed to contribute its portion of capital expenditures into the joint venture company, RPC Power.

In conjunction with the formation of the joint venture, the Company entered into additional agreements with RPC Power or one of its subsidiaries.

These agreements include RPC Power providing operational expertise on the implementation and management of the power generation for a monthly fee of $20 thousand and the Company committing to provide the natural gas needed to fuel the onsite power generators through 2028.

See Note 12 - Commitments and Contingencies in our notes to the condensed consolidated financial statements.

Critical Accounting Estimates

The discussion and analysis of the Company’s financial condition and results of operations are based upon the Company’s unaudited condensed consolidated financial statements and accompanying notes included herein, which have been prepared in accordance with U.S.

The preparation of financial statements requires the Company to make estimates and assumptions that affect the amounts reported in the unaudited condensed consolidated financial statements and accompanying notes.

These estimates and assumptions may also affect disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.

Changes in facts and assumptions or the discovery of new information may result in revised estimates.

Actual results could differ from these estimates and assumptions used in preparation of the Company’s unaudited condensed consolidated financial statements and it is at least reasonably possible these estimates could be revised in the near term and these revisions could be material.

Certain accounting policies involve judgments and uncertainties to such an extent that there is reasonable likelihood that materially different amounts could have been reported under different conditions, or if different assumptions had been used.

The Company evaluates its estimates and assumptions on a regular basis.

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 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.

The Company's critical accounting policies and estimates are described in "Critical Accounting Estimates" within "Item 7.

Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 1 of the Notes to the Consolidated Financial Statements in Riley Permian's Annual Report on Form 10-K for the year ended December 31, 2022.

The accounting estimates used in preparing our interim condensed consolidated financial statements for the three months ended March 31, 2023 are the same as those described in Riley Permian's Annual Report.

See Note 3 - Summary of Significant Accounting Policies in the Company's consolidated financial statements in "Item 15.

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

Quantitative and Qualitative Disclosures About Market Risk

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What changed 10-Q

Item 2. Management’s Discussion and Analysis