# Riley Exploration Permian, Inc.: Form 10-Q for the period ended Jun 30, 2022

- Company: [Riley Exploration Permian, Inc.](/companies/repx.md) (CIK 1001614)
- Form: 10-Q
- Filed: 2022-08-10
- Accepted by EDGAR: Aug 10, 2022, 16:10 ET
- Period: 2022-06-30
- Accession: 0001001614-22-000009
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1001614/000100161422000009/rep-20220630.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1001614/000100161422000009/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2022-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2022-04-01 to 2022-06-30 | $88.4m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 9 months, 2021-10-01 to 2022-06-30 | $212.9m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Operating income | 3 months, 2022-04-01 to 2022-06-30 | $62.5m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2021-10-01 to 2022-06-30 | $136.9m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2022-04-01 to 2022-06-30 | $697.0k | us-gaap:InterestExpense |
| Interest expense | 9 months, 2021-10-01 to 2022-06-30 | $2.3m | us-gaap:InterestExpense |
| Income tax | 3 months, 2022-04-01 to 2022-06-30 | $10.9m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2021-10-01 to 2022-06-30 | $14.7m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2022-04-01 to 2022-06-30 | $38.6m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2021-10-01 to 2022-06-30 | $52.8m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2022-04-01 to 2022-06-30 | $1.96 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2021-10-01 to 2022-06-30 | $2.69 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2022-04-01 to 2022-06-30 | $1.97 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2021-10-01 to 2022-06-30 | $2.71 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2022-04-01 to 2022-06-30 | 19,660,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2021-10-01 to 2022-06-30 | 19,620,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2021-10-01 to 2022-06-30 | $97.0m | us-gaap:NetCashProvidedByUsedInOperatingActivitiesContinuingOperations |
| Dividends paid | 9 months, 2021-10-01 to 2022-06-30 | $18.3m | us-gaap:PaymentsOfDividendsCommonStock |
| Cash and equivalents | at 2022-06-30 | $16.8m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2022-06-30 | $53.8m | us-gaap:AssetsCurrent |
| Total assets | at 2022-06-30 | $465.8m | us-gaap:Assets |
| Current liabilities | at 2022-06-30 | $109.4m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2022-06-30 | $207.6m | us-gaap:Liabilities |
| Shareholders' equity | at 2022-06-30 | $258.2m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 34,803 characters.

*The following discussion and analysis of the Company’s financial condition and results of operations should be read in conjunction with the Company’s condensed consolidated financial statements and related notes thereto presented in this report as well as the Company's audited consolidated financial statements and related notes included in the Company's Annual Report for the fiscal year ended September 30, 2021. The following discussion contains “forward-looking statements” that reflect the Company’s future plans, estimates, beliefs and expected performance. The Company’s actual results could differ materially from those discussed in these forward-looking statements. See "Cautionary Statement Regarding Forward-Looking Statements" and "Part II. Item 1A. 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.*

### Overview

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

### Financial and Operating Highlights

Financial and operating results reflect the following:

- Increased total net equivalent production by 12% to 10.2 MBoe/d for the three months ended June 30, 2022, as compared to the same period in 2021 and 20% to 10.0 MBoe/d for the nine months ended June 30, 2022, as compared to the same period in 2021
- During the three and nine months ended June 30, 2022, 5 gross (5.0 net) and 12 gross (10.8 net) horizontal wells brought online to production, respectively
- Realized average combined price on production sold of $94.80 per Boe, before derivative settlements, during the three months ended June 30, 2022, including $108.41 per barrel for oil
- Generated cash flow from operations of $97.0 million for the nine months ended June 30, 2022
- Total accrued capital expenditures of $34.4 million and $80.5 million for the three and nine months ended June 30, 2022, respectively
- Paid cash dividends on common shares of $6.1 million during the three months ended June 30, 2022, and announced latest dividend of $0.31 per share with a record date of July 25, 2022, which was paid on August 8, 2022, for a total of $6.1 million
- Exited the fiscal third quarter with $16.8 million in cash and $61.0 million drawn on our revolving credit facility

### Recent Developments

### Market Conditions and Commodity Prices

U.S. and global markets are experiencing heightened volatility following impactful geopolitical events, consistent evidence of widespread inflation, as well as increased fears of an economic recession. Though less impactful than during 2021, cases of COVID-19 continue to affect global activity and demand for commodity products. Additionally, the full-scale military invasion of Ukraine by Russian troops has continued unabated since February 2022. Although the length and impact of the ongoing military conflict is highly unpredictable, the conflict in Ukraine has led to market disruptions, including significant volatility in commodity prices, credit and capital markets, as well as supply chain interruptions.

In addition, global markets are experiencing significant inflation attributable to a number of factors. Certain of our capital expenditures and expenses are affected by general inflation and we expect costs for the remainder of 2022 to continue to be a function of supply and demand. Specifically, costs for oilfield equipment and services continue to experience significant inflation, which we expect to continue for the foreseeable future.

In response to inflation concerns, the U.S. Federal Reserve initiated a monetary tightening policy in 2022, sharply increasing interest rates in June and July 2022 with public estimates of further increases in the future. The Company's floating-rate credit facility will be impacted by such rate increases.

The combination of geopolitical events, inflation and the rising rate environment has led to increasing forecasts of a U.S. or global recession. Any such recession could prolong market volatility or cause a decline in commodity prices, among other potential impacts.

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

### Results of Operations

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

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

*Revenues (in thousands):*

|  | Three Months Ended June 30, 2022 | 2021 | Nine Months Ended June 30, 2022 | 2021 |
| --- | ---: | ---: | ---: | ---: |
| Oil sales | $82,501 | $39,504 | $195,500 | $92,395 |
| Natural gas sales | 2,850 | 957 | 7,344 | 5,592 |
| Natural gas liquids sales | 2,430 | 1,088 | 8,232 | 2,635 |
| Oil and natural gas sales, net | $87,781 | $41,549 | $211,076 | $100,622 |
| **Production Data, net:** |  |  |  |  |
| Oil (MBbls) | 761 | 612 | 2,104 | 1,702 |
| Natural gas (MMcf) | 572 | 732 | 2,098 | 1,795 |
| Natural gas liquids (MBbls) | 70 | 94 | 268 | 272 |
| Total (MBoe) | 926 | 828 | 2,722 | 2,273 |
| Daily combined volumes (Boe/d) | 10,176 | 9,100 | 9,969 | 8,325 |
| Daily oil volumes (Bbls/d) | 8,363 | 6,726 | 7,707 | 6,234 |
| **Average Realized Prices:** |  |  |  |  |
| Oil ($ per Bbl) | $108.41 | $64.55 | $92.91 | $54.29 |
| Natural gas ($ per Mcf) | 4.98 | 1.31 | 3.50 | 3.12 |
| Natural gas liquids ($ per Bbl) | 34.71 | 11.57 | 30.72 | 9.70 |
| Combined ($ per Boe) | $94.80 | $50.18 | $77.55 | $44.28 |
| **Average Realized Prices, including derivative settlements:(1)** |  |  |  |  |
| Oil ($ per Bbl) | $77.31 | $51.84 | $66.50 | $51.16 |
| Natural gas ($ per MMBtu) | 1.29 | 1.39 | 1.31 | 3.22 |
| Natural gas liquids ($ per Bbl) | 34.71 | 11.57 | 30.72 | 9.70 |
| Combined ($ per Boe) | $66.97 | $40.86 | $55.44 | $42.02 |

(1) The Company's calculation of the effects of derivative settlements includes losses on the settlement of its commodity derivative contracts. These losses are included under other income and expense on the Company’s condensed consolidated statements of operations.

### Oil and Natural Gas Revenues

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. 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 $46.2 million and $110.5 million, or 111% and 110%, for the three and nine months ended June 30, 2022 compared to the same periods in 2021. The Company’s realized average combined price on its production for the three and nine months ended June 30, 2022 increased by $44.62 and $33.27, or 89% and 75%, respectively, compared to the same periods in 2021.

### Oil revenues

- For the three months ended June 30, 2022, oil revenues increased by $43.0 million, or 109%, compared to the same period in 2021. Of the increase, $33.4 million was attributable to an increase in our realized price and $9.6 million was attributable to an increase in volume. Volumes increased by 24%, while realized prices increased by 68% compared to the same period in 2021.
- For the nine months ended June 30, 2022, oil revenues increased by $103.1 million, or 112%, compared to the same period in 2021. Of the increase, $81.3 million was attributable to an increase in our realized price and $21.8 million was attributable to an increase in volume. Volumes increased by 24%, while realized prices increased by 71% compared to the same period in 2021.
- Oil volumes increased during the three and nine months ended June 30, 2022 due to production from new wells and workovers performed on existing wells. During the three and nine months ended June 30, 2022, we brought online 5 gross (5.0 net) and 12 gross (10.8 net) horizontal wells, respectively.
- The average WTI price increased by $42.65 and $38.12 per Bbl during the three and nine months ended June 30, 2022, respectively, compared to the same periods in 2021.

### Natural gas revenues

- For the three months ended June 30, 2022, natural gas revenues increased by $1.9 million, compared to the same period in 2021, to $2.9 million from $1.0 million. Volumes decreased by 22%, while realized prices increased by $3.67 per Mcf compared to the same period in 2021.
- For the nine months ended June 30, 2022, natural gas revenues increased by $1.8 million, compared to the same period in 2021, to $7.3 million from $5.6 million. Volumes increased by 17%, while realized prices increased by $0.38 per Mcf compared to the same period in 2021.
- Natural gas sales volumes decreased during the three months ended June 30, 2022 compared to the same period in 2021 due to curtailed volume capacity by our midstream gas gathering and processing counterparty as a result of their capacity expansion project. For the nine months ended June 30, 2022, natural gas sales volumes increased compared to the same period in 2021 due to increased production from new wells and workovers performed on existing wells, partially offset by curtailed volume capacity as seen in during the period.
- The average Henry Hub price increased by $4.55 and $2.65 per Mcf during the three and nine months ended June 30, 2022, respectively, compared to the same periods in 2021.

### Natural gas liquids revenues

- For the three months ended June 30, 2022, NGL revenues increased by $1.3 million, compared to the same period in 2021, to $2.4 million from $1.1 million. Volumes decreased by 26%, while realized prices increased $23.14 per Bbl compared to the same period in 2021.
- For the nine months ended June 30, 2022, NGL revenues increased by $5.6 million, compared to the same period in 2021, to $8.2 million from $2.6 million. Volumes remained flat, while realized prices increased $21.02 per Bbl compared to the same period in 2021.
- NGL sales volumes decreased during the three months ended June 30, 2022 compared to the same period in 2021 due to curtailed volume capacity by our midstream gas gathering and processing counterparty as a result of their capacity expansion project.

### Contract Services - Related Party Revenue

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

*(In thousands)*

|  | Three Months Ended June 30, 2022 | 2021 | Nine Months Ended June 30, 2022 | 2021 |
| --- | ---: | ---: | ---: | ---: |
| Contract services - related parties(1) | $600 | $600 | $1,800 | $1,800 |
| Cost of contract services - related parties(2) | 89 | 91 | 324 | 330 |
| Gross profit - related parties | $511 | $509 | $1,476 | $1,470 |

(1) The Company’s contract services - related parties revenue is derived from master services 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.

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

*(In thousands)*

| Costs and Expenses: | Three Months Ended June 30, 2022 | 2021 | Nine Months Ended June 30, 2022 | 2021 |
| --- | ---: | ---: | ---: | ---: |
| Lease operating expenses | $8,062 | $5,766 | $22,311 | $16,289 |
| Production and ad valorem taxes | $5,526 | $2,017 | $12,033 | $6,061 |
| Exploration costs | $22 | $2,785 | $2,131 | $8,682 |
| Depletion, depreciation, amortization and accretion | $7,188 | $7,082 | $20,688 | $19,323 |
| Administrative costs | $4,399 | $4,030 | $12,046 | $9,176 |
| Equity-based compensation | 553 | 779 | 2,521 | 6,042 |
| General and administrative expense | $4,952 | $4,809 | $14,567 | $15,218 |
| Transaction costs | $— | $321 | $3,896 | $3,534 |
| Interest expense, net | $697 | $1,171 | $2,271 | $3,571 |
| Loss on derivatives | $12,363 | $35,396 | $67,188 | $74,208 |
| Income tax expense | $10,927 | $3,245 | $14,682 | $16,953 |

### Lease Operating Expenses

Lease operating expenses ("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. 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 $2.3 million for the three months ended June 30, 2022 compared to the same period in 2021. For the three months ended June 30, 2022, $2.1 million of the increase was due to higher workover expense as additional workovers were performed in the 2022 period and $1.6 million of the increase was attributable to costs associated with new wells and additional production volumes, partially offset by a $1.4 million decrease attributable to efficiencies on existing wells.

The Company’s LOE increased by $6.0 million for the nine months ended June 30, 2022 compared to the same period in 2021. For the nine months ended June 30, 2022, $4.7 million of the increase was attributable to costs associated with new wells and additional production volume and $3.4 million of the increase was due to higher workover expense as additional workovers were performed in the 2022 period, partially offset by a $2.1 million decrease attributable to efficiencies on existing wells.

### Production and Ad Valorem Tax Expense

Production taxes are paid on produced oil, natural gas and NGLs based on a percentage of revenues at fixed rates established by federal, state or local taxing authorities. In general, the production taxes we pay correlate to changes in our oil, natural gas and NGL revenues. We are also subject to ad valorem taxes in the counties where our production is located. Ad valorem taxes are generally based on the valuation of our oil and natural gas properties, which also trend with oil and natural gas prices and vary across the different counties in which we operate.

Production and ad valorem taxes increased by $3.5 million and $6.0 million for the three and nine months ended June 30, 2022, respectively, compared to the same periods in 2021. Production taxes increased primarily due to increases in our oil and natural gas sales, net, as discussed above. Ad valorem taxes increased for the three and nine months ended June 30, 2022 based on higher estimated property values for the current taxable period.

### Exploration Expense

Exploration expense consists of expiration of unproved leasehold and geological and geophysical costs which include seismic survey costs. The following table presents exploration expense by area for the three and nine months ended June 30, 2022 and 2021:

*(In thousands, except acreage data)*

|  | Three Months Ended June 30, 2022 | 2021 | Nine Months Ended June 30, 2022 | 2021 |
| --- | ---: | ---: | ---: | ---: |
| Exploration expense(1) | $— | $2,785 | $2,053 | $8,615 |
| Geological and geophysical costs | 22 | — | 78 | 67 |
| Total exploration expense | $22 | $2,785 | $2,131 | $8,682 |
| Expired net acres - Texas | — | 159 | 717 | 1,626 |
| Expired net acres - New Mexico | — | 6,867 | 1,664 | 14,068 |
| Net acres renewed after expiration(2) | 9 | — | 106 | 486 |

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

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

### Depletion, Depreciation, Amortization and Accretion Expense

Depletion, depreciation and amortization is the systematic expensing of the capitalized costs incurred to acquire, explore and develop oil, natural gas and NGLs. All costs incurred in the acquisition, exploration and development of properties (excluding costs of surrendered and abandoned leaseholds, delay lease rentals, dry holes and overhead related to exploration activities) are capitalized. Capitalized costs are depleted using the units of production method.

Accretion expense relates to ARO. We record the fair value of the liability for ARO in the period in which the liability is incurred (at the time the wells are drilled or acquired) with the offset to property cost. The liability accretes each period until it is settled or the well is sold, at which time the liability is removed.

Depletion, depreciation, amortization and accretion expense increased by $0.1 million and $1.4 million for the three and nine months ended June 30, 2022, respectively, compared to the same periods for 2021. The increase for the three and nine months ended June 30, 2022 was primarily due to higher production, partially offset by a lower depletion rate. 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.

### General and Administrative Expense ("G&A")

G&A expenses include corporate overhead such as payroll and benefits for our corporate staff, equity-based compensation expense, office rent for our headquarters, audit and other fees for professional services and legal compliance. G&A expenses are reported net of overhead recoveries from other owners in properties operated by us.

Total G&A expense increased by $0.1 million and decreased by $0.7 million for the three and nine months ended June 30, 2022, respectively, compared to the same periods for 2021. Administrative costs, which includes payroll, benefits and non-payroll costs, increased by $0.4 million and $2.9 million, respectively, for the three and nine months ended June 30, 2022, compared to the same periods for 2021. The increase in administrative costs was primarily attributable to increased professional services, insurance, technology and investor relations costs. Equity-based compensation expense decreased by $3.5 million for the nine months ended June 30, 2022, respectively, compared to the same periods in 2021. The higher equity-based compensation during the nine months ended June 30, 2021 relates to restricted shares awarded to certain employees following completion of the Merger that immediately vested.

### Transaction Costs

Transaction costs represent costs incurred on successful or unsuccessful business combinations or unsuccessful property acquisitions. During the three and nine months ended June 30, 2021, the transaction costs of $0.3 million and $3.5 million, respectively, primarily relates to costs incurred on the Merger with Tengasco in February 2021. The Company did not incur any transaction costs during the three months ended June 30, 2022. The transaction costs of $3.9 million for the nine months ended June 30, 2022 primarily relate to a potential business combination and related financing that the Company pursued but ultimately chose not to consummate due to changing market conditions.

### Interest Expense

Interest expense decreased by $0.5 million and $1.3 million during the three and nine months ended June 30, 2022, respectively, when compared to the same periods for 2021. Interest expense decreased due to a lower outstanding average balance on the Company's revolving credit facility as well as the capitalized interest related to the Company's EOR project during the three and nine months ended June 30, 2022, respectively, when compared to the same periods for 2021.

### Gain/Loss on Derivatives

The Company recognizes settlements and changes in the fair value of its derivative contracts as a single component within other income (expense) on its condensed consolidated statements of operations. We have oil and natural gas derivative contracts, including fixed price swaps, basis swaps and collars, that settle against various indices. The following table presents the components of the Company's loss on derivatives for the three and nine months ended June 30, 2022 and 2021:

*(In thousands)*

|  | Three Months Ended June 30, 2022 | 2021 | Nine Months Ended June 30, 2022 | 2021 |
| --- | ---: | ---: | ---: | ---: |
| Settlements on derivative contracts | $(25,783) | $(7,712) | $(60,172) | $(5,133) |
| Non-cash gain (loss) on derivatives | 13,420 | (27,684) | (7,016) | (69,075) |
| Loss on derivatives | $(12,363) | $(35,396) | $(67,188) | $(74,208) |

Our earnings are affected by the changes in value of our derivative portfolio between periods and the related cash received or paid upon settlement of our derivatives. To the extent the future commodity price outlook declines between periods, we will have mark-to-market gains; while future commodity price increases between measurement periods result in mark-to-market losses.

The decrease in the loss on derivatives for the three and nine months ended June 30, 2022 compared to the same periods in 2021 is due to the change in non-cash gain (loss) on derivatives of $41.1 million and $62.1 million, partially offset by the increase in the loss on settlements of $18.1 million and $55.0 million. The change in non-cash gain (loss) on derivatives for the three and nine months ended June 30, 2022 is due to the decrease in total contract volumes for our open derivative contracts with volumes on our fixed price oil swaps decreasing by 55% as of June 30, 2022 when compared to the same period in 2021. Additionally, the change in the non-cash gain (loss) on derivatives was impacted by the change in the estimated forward-looking oil and natural gas prices used at the end of the period to calculate the fair value of the open derivative contracts. The increase in the loss on settlements on derivatives was due to the increase in oil and natural gas prices for the three and nine months ended June 30, 2022 compared to the same periods in 2021. For example, the average WTI price was $108.83 per Bbl for the three months ended June 30, 2022 compared to $66.19 per Bbl for the same period in 2021.

### 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 only from February 27, 2021 through June 30, 2022 in the accompanying condensed consolidated financial statements. Deferred income taxes are provided to reflect the future tax consequences or benefits of differences between the tax basis of assets and liabilities and their reported amounts in the financial statements using enacted tax rates. 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.

*(In thousands)*

|  | Three Months Ended June 30, 2022 | 2021 | Nine Months Ended June 30, 2022 | 2021 |
| --- | ---: | ---: | ---: | ---: |
| Current income tax expense (benefit) | $715 | $(1,009) | $1,608 | $(232) |
| Deferred income tax expense | 10,212 | 4,254 | 13,074 | 17,185 |
| Total income tax expense | $10,927 | $3,245 | $14,682 | $16,953 |
| Effective income tax rate | 22.0% | (18.8)% | 21.8% | (38.0)% |

### Liquidity and Capital Resources

The business of exploring for, developing and producing oil and natural gas is capital intensive. 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. 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. 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. We estimate the combination of the sources of capital discussed above will continue to be adequate to meet our short and long-term liquidity needs.

Cash on hand and operating cash flow can be subject to fluctuations due to trends and uncertainties that are beyond our control. Likewise, our ability to issue equity and obtain credit facilities on favorable terms may be impacted by a variety of market factors as well as fluctuations in our results of operations. During the fiscal third quarter of 2022, the Company's natural gas and NGL sales were negatively impacted due to its primary midstream gas gathering and processing counterparty curtailing volume capacity as work continued on their overall capacity expansion project. With the expansion project being fully commissioned in July, the Company expects to benefit from an increase in production capacity. The Company is not currently aware of additional scheduled curtailments; however, the Company may continue to experience periodic curtailments on natural gas produced in excess of our contractual processing capacity. For further discussion of risks related to our liquidity and capital resources, see "Item 1A. Risk Factors."

### Working Capital

Working capital is the difference in our current assets and our current liabilities. Working capital is an indication of liquidity and potential need for short-term funding. The change in our working capital requirements is driven generally by changes in accounts receivable, accounts payable, commodity prices, credit extended to, and the timing of collections from customers, the level and timing of spending for expansion activity, and the timing of debt maturities. As of June 30, 2022, we had a working capital deficit of $55.6 million compared to a deficit of $46.9 million as of September 30, 2021. The working capital deficit at June 30, 2022 reflects $50.3 million in current derivative liabilities compared to $42.1 million in current derivative liabilities at September 30, 2021. Additionally, we had $8.8 million payable to our counterparties for June 2022 derivative contract settlements, which is included in accounts payable at June 30, 2022. We utilize our revolving credit facility and cash on hand to manage the timing of cash flows and fund short-term working capital deficits. Our current derivative assets and liabilities represent the mark-to-market value as of June 30, 2022 of future commodity production which will settle on a monthly basis through the end of their contractual terms. This aligns with the receipt of oil and natural gas revenues on a monthly basis.

### Cash Flows

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

*(In thousands)*

| Statement of Cash Flows Data from Continuing Operations: | Nine Months Ended June 30, 2022 | 2021 |
| --- | ---: | ---: |
| Net cash provided by operating activities | $96,987 | $58,841 |
| Net cash used in investing activities | $(77,195) | $(39,366) |
| Net cash used in financing activities | $(20,059) | $(18,151) |

#### Operating Activities

The Company’s net cash provided by operating activities increased by $38.1 million or 65% to $97.0 million for the nine months ended June 30, 2022 from $58.8 million for the same period in 2021. The increase was primarily driven by an increase in revenues of $110.5 million, partially offset by an increase of $55.0 million on settlements for commodity derivative contracts and an increase in operating expenses of $15.2 million, which excludes non-cash expenses such as equity-based compensation, expiration of unproved leasehold costs, and depreciation, depletion, accretion, and amortization expense.

#### Investing Activities

The Company's cash flows used in investing activities increased by $37.8 million or 96% to $77.2 million for the nine months ended June 30, 2022 from $39.4 million for the same period in 2021. The increase was primarily due to higher capital spending of $37.2 million related to the Company's increased drilling and completion activity and EOR project during the nine months ended June 30, 2022 compared to the same period in 2021.

#### Financing Activities

Net cash flow used in financing activities increased by $1.9 million or 11% to $20.1 million for the nine months ended June 30, 2022 from $18.2 million for the same period in 2021. During the nine months ended June 30, 2022, the Company utilized $1.0 million net proceeds from its revolving credit facility to fund capital expenditures and working capital. For the same period in 2021, the Company had a net paydown on its revolving credit facility of $3.5 million based on decreased drilling and completion activity during this period. In addition, the Company distributed an additional $5.4 million of dividends on common stock during the nine months ended June 30, 2022 compared to the same period in 2021.

### Revolving Credit Facility

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

### Distributions

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

### Contractual Obligations

The Company has commitments with its primary midstream counterparty and has entered into purchase commitments throughout the nine months ended June 30, 2022. See Note 14 - 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. GAAP. 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 areas requiring the use of assumptions, judgments and estimates include (i) oil and natural gas reserves; (ii) cash flow estimates used in impairment testing of oil and natural gas properties; (iii) depreciation, depletion, amortization and accretion, or DD&A; (iv) ARO; (v) assigning fair value and allocating purchase price in connection with business combinations; (vi) valuation of commodity derivative instruments; (vii) income tax provisions; (viii) carrying value of goodwill; and (ix) accrued amounts. Actual results may differ from these estimates and assumptions used in preparation of the Company’s unaudited condensed consolidated financial statements included herein.

## Controls and procedures

As filed, 1,326 characters.

### Disclosure Controls and Procedures

Our management establishes and maintains disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Such information is accumulated and communicated to our management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), as appropriate to allow timely decisions regarding required disclosure. We have evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report, with the participation of our CEO and CFO, as well as other key members of our management. Based on this evaluation, our CEO and CFO concluded that our disclosure controls and procedures were effective as of June 30, 2022.

### Changes in internal control over financial reporting

There have been no changes in our internal control over financial reporting that occurred for the quarter ending June 30, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 7,864 characters.

We are subject to certain risks and hazards due to the nature of the business activities we conduct. We may experience additional risks and uncertainties not currently known to us. Furthermore, as a result of developments occurring in the future, conditions that we currently deem to be immaterial may also materially and adversely affect us. Any such risk may materially and adversely affect our business, financial condition, cash flows and results of operations. Other than any risks described in this Quarterly Report, there have been no material changes to the risk factors described in our Annual Report on Form 10-K for the year ended September 30, 2021.

### Risks Related to our Business

### A Terrorist attack or armed conflict could harm our business.

Terrorist activities, anti-terrorist efforts and other armed conflicts involving the United States or other countries may adversely affect the United States and global economies and could prevent us from meeting our financial and other obligations. If any of these events occur, the resulting political instability and societal disruption could reduce overall demand for oil and natural gas causing a reduction in our revenues. Oil and natural gas related facilities could be direct targets of terrorist attacks, and our operations could be adversely impacted if infrastructure integral to our customers’ operations is destroyed or damaged. Costs for insurance and other security may increase as a result of these threats, and some insurance coverage may become more difficult to obtain, if available at all

***Recent regulatory restrictions on use of produced water and a moratorium on new produced water disposal wells in the Permian Basin to stem rising seismic activity and earthquakes could increase our operating costs and adversely impact our business, results of operations and financial condition.***

In September 2021, the Texas Railroad Commission curtailed the amount of produced water companies were permitted to inject into some wells near Midland and Odessa in the Permian Basin, and has since indefinitely suspended some permits there and expanded the restrictions to other areas. These actions were taken in an effort to control induced seismic activity and recent increases in earthquakes in the Permian Basin, which have been linked by the U.S. and local seismologists to wastewater disposal in oil fields. These restrictions on the disposal of produced water and a moratorium on new produced water disposal wells could result in increased operating costs, requiring us or our service providers to truck produced water, recycle it or dispose of it by other means, all of which could be costly. We or our service providers may also need to limit disposal well volumes, disposal rates and pressures or locations, or require us or our service providers to shut down or curtail the injection of produced water into disposal wells. These factors may make drilling activity in the affected parts of the Permian Basin less economical and adversely impact our business, results of operations and financial condition.

***Designation as “critical infrastructure” could subject us to additional regulation, including potential weatherization requirements.***

In response to Winter Storm Uri, the February 2021 winter weather event that caused widespread power failure to Texas’ power grid for several days, the Texas legislature drafted new legislation designed to prepare for, prevent and respond to weather emergencies and power outages. On November 30, 2021, the RRC adopted rules to designate certain natural gas facilities as critical infrastructure. While the Commission did not adopt rules related to other sections of the legislation requiring such designees to implement weatherization measures, it is expected that the Commission will initiate a rulemaking at a later date for such purposes.

Under the new rules, “critical gas suppliers” include, but are not limited to, gas wells, oil leases that produce gas, natural gas pipeline facilities, underground natural gas storage facilities and saltwater disposal facilities. “Critical customers,” which are a subset of critical gas suppliers, are facilities that require electricity to operate. The rules allow for certain facilities to apply for an exception to critical designation, but exclude certain types of highly critical facilities from eligibility for such exception.

If we are designated as a “critical gas supplier” or “critical customer,” we would become subject to additional regulation and compliance costs, including potential future operating and capital costs required to weatherize our assets.

***Enhanced scrutiny on ESG matters could have an adverse effect on the Company’s operations.***

Enhanced scrutiny on ESG matters related to, among other things, concerns raised by advocacy groups about climate change, hydraulic fracturing, natural gas flaring, GHG emissions, waste disposal, oil spills, and explosions of natural gas transmission pipelines may lead to increased regulatory scrutiny, which may, in turn, lead to new state and federal safety and environmental laws, regulations, guidelines, and enforcement interpretations. These actions may cause operational delays or restrictions, increased operating costs, additional regulatory burdens, increased risk of litigation, and adverse impacts on the Company’s access to capital. Moreover, governmental authorities exercise considerable discretion in the timing and scope of permit issuance, and the public may engage in the permitting process, including through intervention in the courts. Negative public perception could cause the permits the Company requires to conduct its operations to be withheld, delayed, or burdened by requirements that restrict the Company’s ability to profitably conduct its business.

### We may be unable to quickly adapt to changes in market/investor priorities.

Historically, one of the key drivers in the unconventional resource industry has been growth in production and reserves. With historical volatility in oil and natural gas prices and the likelihood that rising interest rates will increase the cost of borrowing, capital efficiency and free cash flow from earnings have become the key drivers for energy companies, particularly shale producers. Such shifts in focus sometimes require changes in planning and resource management, which may not occur instantaneously. Any delay in responding to such changes in market sentiment or perception may result in the investment community having a negative sentiment regarding our business plan, potential profitability and our ability to operate in a manner deemed "efficient," which may have a negative impact on the price of our common stock.

***The adoption of climate change legislation or regulations restricting emissions of "greenhouse gases" could result in increased operating costs and reduced demand for the oil, NGL and natural gas we produce, while potential physical effects of climate change could disrupt our operations and cause us to incur significant costs in preparing for or responding to those effects.***

Restrictions on GHG emissions that may be imposed could adversely affect the oil and gas industry. The adoption of legislation or regulatory programs to reduce GHG emissions could require us to incur increased operating costs, such as costs to purchase and operate emissions control systems, acquire emissions allowances or comply with new regulatory requirements. Any GHG emissions legislation or regulatory programs applicable to power plants or refineries could also increase the cost of consuming, and thereby reduce demand for, the oil, NGL and natural gas we produce. Consequently, legislation and regulatory programs to reduce GHG emissions could have an adverse effect on our business, financial condition and results of operations.

Filed Aug 10, 2022.
Source: SEC EDGAR, the filing index for accession 0001001614-22-000009. Last ingested by Listed: Nov 12, 2026, 19:52 ET. No prices; not investment advice.