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Item 7. Management’s Discussion and Analysis

2024-03-06 compared with 2023-03-08 · 155 added, 152 removed, 167 unchanged (65% of the section changed)

5 unchanged sentences

Risk Factors."

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.

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Financial and operating results reflect the following:

• 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

• Increased total net equivalent production by 62% to 18.6 MBoe/d for the year ended December 31, 2023, as compared to the year ended December 31, 2022

• During the year ended December 31, 2023, 24 gross (18.2 net) horizontal wells were brought online to production

• Realized average combined price on production sold of $54.91 per Boe, before derivative settlements, during the year ended December 31, 2023, including $75.62 per barrel for oil

• Generated cash flow from operations of $207.2 million for the year ended December 31, 2023

• 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

• Incurred total accrual (activity based) capital expenditures before acquisitions of $135.8 million for the year ended December 31, 2023 as compared to $123.1 million for the year ended December 31, 2022

• Paid cash dividends on common shares of $27.7 million during the year ended December 31, 2023

• $15.3 million in cash and $356.0 million in total debt as of December 31, 2023

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 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.

and global economies and markets have experienced heightened volatility following impactful geopolitical events, the effects of widespread inflation and the impact of significantly higher interest rates.

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

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

or global recession.

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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 completed the New Mexico Acquisition from Pecos for an adjusted purchase price of $325 million.

The New Mexico Acquisition was funded through a combination of borrowings under the Company's 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, baseload power generation using produced natural gas for its Champions Field.

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

Construction of the onsite power generation facility was predominately completed during 2023 with temporary power generation beginning in November 2023 and the onsite power generation facility expected to be operational in spring of 2024.

Results of Operations

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

Comparison for the years ended December 31, 2023 and 2022

The following table sets forth selected operating data for the years ended December 31, 2023 and 2022:

Years Ended December 31,

Revenues (in thousands):

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Natural gas sales 2,612 10,755

Natural gas liquids sales 9,865 4,715

Oil and natural gas sales, net $ 372,647 $ 319,343

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Natural gas (MMcf) 5,865 3,229

Natural gas liquids (MBbls) 444 380

Total (MBoe) 6,786 4,199

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Natural gas ($ per Mcf) 0.45 3.33

Natural gas liquids ($ per Bbl) 22.22 12.41

NGLs ($ per Bbl)

Combined ($ per Boe) $ 54.91 $ 76.05

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Natural gas ($ per Mcf) 0.53 1.06

Natural gas liquids ($ per Bbl) 22.22 12.41

NGLs ($ per Bbl)

Combined ($ per Boe) $ 52.38 $ 58.13

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Our revenues are derived from the sale of our oil and natural gas production, including the sale of NGLs that are extracted from our natural gas during processing.

Revenues from product sales are a function of the volumes produced, product quality, market prices, and gas Btu content.

Revenues from product sales are a function of the volumes produced, product quality, market prices, gas Btu content, as well as midstream counterparty fees and deducts.

Our revenues from oil, natural gas and NGL sales do not include the effects of derivatives.

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 $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 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.

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

The Company’s total oil and natural gas revenue, net increased $53.3 million, or 17%, for the year ended December 31, 2023 compared to the year ended December 31, 2022.

The Company’s realized average combined price on its production for the year ended December 31, 2023 decreased by $21.14 per Boe, or 28% compared to the year ended December 31, 2022.

• For the year ended December 31, 2023, oil revenues increased by $64.4 million, or 22%, compared to the year ended December 31, 2022.

Of the increase, $147.2 million was attributable to an increase in volume, which was partially offset by $82.7 million attributable to a decrease in our realized price.

Volumes increased by 49%, while realized prices decreased by 19% as compared to the year ended December 31, 2022.

The oil and natural gas properties acquired in the New Mexico Acquisition contributed $71.9 million to the Company's oil revenues for the 2023 period.

• Oil volumes increased during the year ended December 31, 2023 due to oil and natural gas assets acquired in the New Mexico Acquisition, production from new wells and workovers performed on existing wells.

During the year ended December 31, 2023, we brought online 24 gross (18.2 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.

The New Mexico Acquisition contributed oil volumes of approximately 931 MBbls for the 2023 period.

• The average WTI price decreased by $17.32 per Bbl during the year ended December 31, 2023 when compared to the year ended December 31, 2022.

Natural gas revenues

• 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 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.

• For the year ended December 31, 2023, natural gas revenues decreased by $8.1 million, or 76%, compared to the year ended December 31, 2022.

Realized natural gas prices decreased by 87% partially offset by an increase in volumes of 82% as compared to the year ended December 31, 2022.

The oil and natural gas properties acquired in the New Mexico Acquisition contributed $2.1 million to the Company's natural gas revenues for the 2023 period.

• Natural gas sales volumes increased during the year ended December 31, 2023 compared to the year ended December 31, 2022 due to oil and natural gas properties acquired in the New Mexico Acquisition, production from new wells and workovers performed on existing wells.

The New Mexico Acquisition contributed 2,179 MMcf to the Company's natural gas volumes for the 2023 period.

• The average Henry Hub price decreased by $3.92 per Mcf during the year ended December 31, 2023 compared to the year ended December 31, 2022.

NGLs revenues

• For the year ended December 31, 2023, NGL revenues decreased by $3.0 million, or 30%, compared to the year ended December 31, 2022.

Realized prices decreased by 69%, partially offset by an increase in volumes of 126% as compared to the year ended December 31, 2022.

The oil and natural gas properties acquired in the New Mexico Acquisition contributed $5.3 million to the Company's NGL revenues for the 2023 period.

• NGL sales volumes increased during the year ended December 31, 2023 compared to the year ended December 31, 2022 due to the New Mexico Acquisition, production from new wells and workovers performed on existing wells.

The oil and natural gas properties acquired in the New Mexico Acquisition contributed 451 MBbls to the Company's NGL volumes for the 2023 period.

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

Year Ended December 31,

(In thousands)

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

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

Year Ended December 31,

Costs and Expenses:

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Administrative costs $ 26,569 $ 18,496

Equity-based compensation 3,439 6,793

Share-based compensation

General and administrative expense $ 33,402 $ 21,935

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Interest expense, net $ 31,816 $ 1,090

Loss on derivatives $ 51,574 $ 89,195

(Gain) loss on derivatives, net

$ (6,193) $ 51,574

Income tax expense $ 34,461 $ 32,844

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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.

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

Certain operating cost components, such as direct labor and materials and supplies, generally remain relatively fixed across broad production volume ranges, but can fluctuate depending on activities performed during a specific period.

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 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.

Certain operating cost components, such as saltwater disposal associated with produced 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 $26.4 million for the year ended December 31, 2023 compared to the year ended December 31, 2022.

For the year ended December 31, 2023, the increase was driven by a $20.0 million increase due to higher production, including $13.3 million attributable to the New Mexico Acquisition, and a $10.1 million increase due to higher

workover expense, including $7.6 million attributable to the New Mexico Acquisition, partially offset by a $3.7 million decrease primarily related to lower utility rates.

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 $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 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)

Exploration expense (1)

$ 1,953 $ 9,347

Production and ad valorem taxes increased by $6.3 million for the year ended December 31, 2023 compared to the year ended December 31, 2022.

Production taxes increased primarily due to increases in our oil and natural gas sales, net, including revenues from production associated with the oil and natural gas properties acquired in the New Mexico Acquisition, partially offset by lower commodity prices.

Ad valorem taxes increased for the year ended December 31, 2023 based on higher estimated property values and higher tax rates for the current taxable period.

Exploration Costs

Exploration costs consist of exploratory well expense, expiration of unproved leasehold, and geological and geophysical costs which include seismic survey costs.

The following table presents exploration costs for the years ended December 31, 2023 and 2022:

Year Ended December 31,

(In thousands)

Exploratory well expense (1)

Expiration of unproved leasehold

Geological and geophysical costs 22 79

Total exploration expense $ 2,032 $ 9,566

Expired net acres - Texas 857 1,651

Expired net acres - New Mexico 518 16,239

Net acres renewed after expiration (2)

Total exploration costs

$ 4,165 $ 2,032

(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.

_____________________

(1) The Company determined that an exploratory well was not capable of producing commercial quantities and expensed the associated drilling costs during the year ended December 31, 2023,

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 $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.

Depletion, depreciation, amortization and accretion expense increased by $32.9 million for the year ended December 31, 2023, compared to the year ended December 31, 2022.

The increase for the year ended December 31, 2023 was primarily due to depletion associated with the oil and natural gas acquired in the New Mexico Acquisition and higher production on historical properties along with a higher depletion rate on the historical properties.

Impairment of Oil and Natural Gas Properties

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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.

During the year ended December 31, 2023, the Company recognized an impairment loss on proved properties of $9.8 million relating to certain properties in Texas outside of the Company's acreage in the Champions Field.

This impairment was primarily driven by notably lower commodity pricing at the time of measurement of fair value at year-end 2023.

The Company recognized an impairment loss on proved properties of $7.3 million for the year ended December 31, 2022, which related to a decrease in fair value of its historical properties in New Mexico.

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 $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.

Total G&A expense increased by $11.5 million for the year ended December 31, 2023 compared to the year ended December 31, 2022.

Administrative costs, which include payroll, benefits and non-payroll costs, increased by $8.1 million for the year ended December 31, 2023 compared to the year ended December 31, 2022.

The increase in administrative costs was primarily attributable to increased employee count, professional services, insurance, technology and office costs, which were impacted by additional needs as a result of the New Mexico Acquisition.

Share-based compensation expense increased by $3.4 million for the year ended December 31, 2023 compared to the year ended December 31, 2022.

The increase in share-based compensation expense resulted from the increase in outstanding equity awards due in part to higher employee count as well as expense associated with equity awards attributable to a separation agreement with a former Company executive.

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 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.

The transaction costs of $5.8 million for the year ended December 31, 2023 relate to the New Mexico Acquisition.

During the year ended December 31, 2022, the transaction costs of $2.6 million primarily related 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 $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.

Interest expense increased by $30.7 million during the year ended December 31, 2023 when compared to the year ended December 31, 2022.

The increase in interest expense was primarily due to the higher debt balances as a result of financing for the New Mexico Acquisition, along with higher interest rates on borrowings under our Credit Facility for the year ended December 31, 2023 when compared to rates for the year ended December 31, 2022.

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

Gain/Loss on Derivatives

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

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

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

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

Year Ended December 31,

(In thousands)

Settlements on derivative contracts $ (17,221) $ (75,257)

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

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

Non-cash gain on derivatives

23,414 23,683

Gain (loss) on derivatives, net

$ 6,193 $ (51,574)

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.

The gain on derivatives for the year ended December 31, 2023 was $6.2 million compared to a loss on derivatives of $51.6 million for the year ended December 31, 2022.

The change was primarily driven by a $58.0 million decrease in the cash payments on settlements of derivatives due to the decrease in oil and natural gas prices for the year ended December 31, 2023 compared to the year ended December 31, 2022.

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 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 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 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 December 31, 2022 Year Ended September 30, 2021

See Note 11 - Income Taxes in the Company's consolidated financial statements in "Item 15.

Exhibits and Financial Statement Schedules for a full discussion of income taxes.

Year Ended December 31,

(In thousands)

Current income tax expense $ 6,872 $ 4,472

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

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

Deferred income tax expense

27,589 28,372

Total income tax expense

$ 34,461 $ 32,844

Effective income tax rate 23.6 % 21.7 %

The rise in our effective income tax rate was primarily due to the New Mexico Acquisition increasing our apportionment in New Mexico, which has a higher state tax rate than where we have historically operated.

Liquidity and Capital Resources

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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.

Historically, our primary sources of capital funding and liquidity have been our cash on hand, cash flow from operations and borrowings under our revolving credit facility.

Historically, our primary sources of capital funding and liquidity have been our cash on hand, cash flow from operations, borrowings under our Credit Facility and the issuance of our Senior Notes.

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.

9 unchanged sentences

As of December 31, 2023, we had a working capital deficit of $31.1 million compared to a deficit of $25.3 million as of December 31, 2022.

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.

The current portion of our Senior Notes, which includes our regularly scheduled principal payments of $5 million per quarter, accounts for $20.0 million of our working capital deficit at December 31, 2023.

Additionally, increases in our revenue payable, resulting from revenue suspense associated with oil and natural gas properties acquired in the New Mexico Acquisition, contributed to the working capital deficit.

Partially offsetting these higher current liabilities was an increase of $5.0 million in current derivative assets and higher accounts receivable associated with increased oil and natural gas sales.

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 December 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:

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

The following table summarizes the Company’s cash flows for the years ended December 31, 2023 and 2022:

Year Ended December 31,

(In thousands)

Statement of Cash Flows Data from Continuing Operations:

Net cash provided by operating activities $ 207,195 $ 170,288

Net cash used in investing activities $ (469,556) $ (128,256)

Net cash used in financing activities $ (37,048) $ (14,937)

Net cash provided by (used in) financing activities

$ 264,379 $ (37,048)

Operating Activities

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.

The Company’s net cash provided by operating activities increased by $36.9 million, or 22%, to $207.2 million for the year ended December 31, 2023 from $170.3 million for the year ended December 31, 2022.

The increase was primarily driven by a decrease of $58.0 million in payments to settle commodity derivative contracts and an increase in revenues, partially offset by an increase in operating expenses.

Investing Activities

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.

The Company's cash flows used in investing activities increased by $341.3 million to $469.6 million for the year ended December 31, 2023 from $128.3 million for the year ended December 31, 2022.

The increase was primarily due to the $324.7 million for the New Mexico Acquisition.

Investing activities also increased due to higher year-over-year capital spending for additions to oil and natural gas properties of $23.1 million, or 21%, related to the Company's increased drilling and completion activity during the year ended December 31, 2023 compared to the year ended December 31, 2022, partially attributable to the larger asset base following the New Mexico Acquisition.

Financing Activities

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 $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.

Net cash flow provided by financing activities increased by $301.4 million for the year ended December 31, 2023 compared to the year ended December 31, 2022.

During the year ended December 31, 2023, the Company had net borrowings on its Credit Facility of $129.0 million and proceeds from issuance of its Senior Notes, net of repayments, of $173.0 million, compared to a net paydown of $9.0 million on its Credit Facility for the same period in 2022.

The increase in proceeds from borrowings was primarily attributable to the New Mexico Acquisition.

In addition, the Company distributed an additional $2.6 million of dividends on common stock during the year ended December 31, 2023 compared to the same period in 2022 as a result of higher outstanding share count and a higher dividend per share.

Credit Facility and Senior Notes

The Company's borrowing base on its Credit Facility was $375 million with outstanding borrowings of $185 million on December 31, 2023, representing available borrowing capacity of $190 million.

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

On April 3, 2023, and concurrent with the closing of the New Mexico Acquisition, the Company entered into the fourteenth amendment to the Credit Facility to, among other things, increase the maximum facility amount to $1.0 billion and the borrowing base from $225 million to $325 million, resulting in the addition of new lenders to the lending group.

On November 14, 2023, through the semi-annual redetermination, the Company increased its borrowing base to $375 million, resulting in the addition of two new lenders and the exit of one lender.

The Credit Facility is set to mature in April 2026.

Substantially all of the Company’s assets are pledged to secure the Credit Facility.

During the year ended December 31, 2023, the Company issued $200 million in principal amount of Senior Notes with a maturity date of April 2026.

The proceeds from the Senior Notes were used to finance the New Mexico Acquisition.

The principal balance of the Senior Notes as of December 31, 2023 was $185 million.

See Note 9 - Long-Term Debt in the Company's consolidated financial statements in "Item 15.

Exhibits and Financial Statement Schedules" for a full discussion of our long-term debt.

Distributions

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.

For the year ended December 31, 2023, the Company authorized and declared quarterly dividends totaling approximately $27.9 million, with $27.3 million paid in cash and $0.6 million payable to holders of restricted stock upon vesting.

For the years ended December 31, 2023 and 2022, the Company paid cash dividends of approximately $0.5 million and $0.2 million, respectively, to holders of restricted stock upon vesting.

Contractual Obligations

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.

As of December 31, 2023, the Company has commitments with its primary midstream counterparty and has purchase commitments totaling $13.1 million related to its 2024 drilling program.

In addition, the Company entered into an agreement to form a joint venture and is committed to contributing its portion of capital expenditures into the joint venture company and further entered into a tolling agreement to commit to providing the natural gas needed for the joint venture.

See Note 13 - Commitments and Contingencies in the Company's consolidated financial statements in "Item 15.

Exhibits and Financial Statement Schedules" for a full discussion of our commitments and contingencies.

Critical Accounting Estimates

The discussion and analysis of the Company’s financial condition and results of operations are based upon the Company’s 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 consolidated financial statements and accompanying notes.

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Once a well is drilled, the determination that proved reserves have been discovered may take considerable time and requires both judgment and application of industry experience.

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 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.

When making this determination, current activities, near-term plans for additional exploratory or appraisal drilling and the likelihood of reaching a development program is considered.

If future development activities and the determination of proved reserves are unlikely to occur, the associated suspended exploratory well costs are recorded as dry hole expense and reported in exploration expense in the consolidated statements of operations.

Otherwise, the costs of exploratory wells remain capitalized.

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.

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Of the remaining unproved leasehold costs at December 31, 2023, approximately $2.3 million is scheduled to expire in 2024.

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

The Company expects to renew or extend these leases in 2024.

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

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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.

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 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, 2023, the Company recognized a proved property impairment of $9.8 million relating to certain properties in Texas outside of the Company's acreage in the Champions Field.

Oil and Natural Gas Reserves

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

A third-party consulting firm prepares our reserve report which the estimates are based off of technical and economic data including, but not limited to, well test data, production data, historical price and cost information, and property ownership interests.

A third-party reservoir engineering firm prepares our reserve report, which the estimates are based off of technical and economic data including, but not limited to, well test data, production data, historical price and cost information, and property ownership interests.

The passage of time provides more qualitative information regarding estimates of reserves, when revisions are made to prior estimates to reflect updated information.

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.

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.

If the fair value is less than the carrying value, an impairment charge will be recognized for the amount by which the carrying amount exceeds the fair value.

Because quoted market prices are not available, the fair value is estimated based upon a valuation analyses including comparable companies and transactions and premiums paid.

An impairment loss is recognized if the carrying value of the reporting unit goodwill exceeds the implied fair value of that goodwill.

The Company recognized goodwill of $19.0 million from the result of the Merger, all of which was allocated to the oil and natural gas properties acquired from the Merger.

The Company bypassed the qualitative analysis to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying value amount, including goodwill, since the Company entered into a PSA shortly after acquiring the oil and natural gas properties.

The Company compared the reporting unit fair value of $3.5 million with its carrying amount, including goodwill, of $19.0 million and recognized a goodwill impairment of $18.5 million.

The impairment loss was recognized within loss from discontinued operations for the year ended September 30, 2021 in our consolidated statement of operations.

Business Combinations

The Company periodically acquires assets and assumes liabilities in transactions accounted for as business combinations, such as the New Mexico Acquisition.

In connection with the New Mexico Acquisition, we allocated the purchase price consideration of $324.7 million to the assets acquired and liabilities assumed based on estimated fair values as of the date of the acquisition.

We made a number of assumptions in estimating the fair value of assets acquired and liabilities assumed in the New Mexico Acquisition.

The most significant assumptions relate to the estimated fair values of proved and unproved oil and gas properties.

The fair value of identifiable assets acquired and liabilities assumed is determined based on various valuation techniques, including market prices, discounted cash flow analysis, and independent appraisals.

Significant judgments and assumptions are inherent in these valuation techniques and include, among other things, estimates of reserves, estimates of future commodity prices, expected development costs, lease operating costs and the discount rate that reflects the risk of the underlying cash flow estimates.

Estimated fair values assigned to assets acquired can have a significant impact on future results of operations presented in the Company's financial statements.

A higher fair value assigned to a property results in higher DD&A expense, which results in lower net earnings.

In the event that future commodity prices or reserve quantities are lower than those used as inputs to determine estimates of acquisition date fair values, the likelihood increases that certain costs may be determined to not be recoverable.

See Note 4 - Acquisitions of Oil and Natural Gas Properties in the Company's consolidated financial statements in "Item 15.

Exhibits and Financial Statement Schedules" for a full discussion of our acquisitions.

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

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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