EON Resources Inc.: Form 10-Q for the period ended Sep 30, 2024

References in this report (the “Quarterly Report”) to “we,” “us” or the “Company” refer to EON Resources, Inc. (formerly HNR Acquisition Corp.). References to our “management” or our “management team” refer to our officers and directors, and references to the “Sponsor” refer to HNRAC Sponsors, LLC. References to the Predecessor refer to the business of Pogo Resources, LLC and its subsidiaries prior to the Closing Date. The following discussion and analysis of the Company’s financial condition and results of operations should be read in conjunction with the unaudited consolidated financial statements and the notes thereto contained elsewhere in this Quarterly Report. Certain information contained in the discussion and analysis set forth below includes forward-looking statements that involve risks and uncertainties.

Special Note Regarding Forward-Looking Statements

This Quarterly Report includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Exchange Act that are not historical facts and involve risks and uncertainties that could cause actual results to differ materially from those expected and projected. All statements, other than statements of historical fact included in this Form 10-Q including, without limitation, statements in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” regarding the Company’s financial position, business strategy and the plans and objectives of management for future operations, are forward-looking statements. Words such as “expect,” “believe,” “anticipate,” “intend,” “estimate,” “seek” and variations and similar words and expressions are intended to identify such forward-looking statements. Such forward-looking statements relate to future events or future performance, but reflect management’s current beliefs, based on information currently available. A number of factors could cause actual events, performance or results to differ materially from the events, performance and results discussed in the forward-looking statements. For information identifying important factors that could cause actual results to differ materially from those anticipated in the forward-looking statements, please refer to the Risk Factors section of the Company’s Annual Report on Form 10-K filed with the SEC. The Company’s securities filings can be accessed on the EDGAR section of the SEC’s website at www.sec.gov (http://www.sec.gov). Except as expressly required by applicable securities law, the Company disclaims any intention or obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise.

Overview

We are an independent oil and natural gas company based in Texas and formed in 2020 that is focused on the acquisition, development, exploration, production and divestiture of oil and natural gas properties in the Permian Basin. The Permian Basin is located in west Texas and southeastern New Mexico and is characterized by high oil and liquids-rich natural gas content, multiple vertical and horizontal target horizons, extensive production histories, long-lived reserves and historically high drilling success rates. Our properties are in the Grayburg-Jackson Field in Eddy County, New Mexico, which is a sub-area of the Permian Basin. Pogo focuses primarily on production through waterflooding recovery methods.

Our assets as mentioned above consist of contiguous leasehold positions of approximately 13,700 gross (13,700 net) acres with an average working interest of 100%. We operate 100% of the net acreage across the Company’s assets, all of which is net operated acreage of vertical wells with average depths of approximately 3,810 feet.

Our average daily production for the nine months ended September 30, 2024 was 814 barrel of oil equivalent (“BOE”) per day. Our average daily production for the year ended December 31, 2023, was 1,022 BOE per day. The decrease in production is due to an increase in well downtime, water injection flowlines that needed repair or replacement, and the conveyance of the 10% Override royalty interest to Pogo Royalty.

Impact of Coronavirus (“COVID-19”)

The COVID-19 pandemic resulted in a severe worldwide economic downturn, significantly disrupting the demand for oil throughout the world, and created significant volatility, uncertainty and turmoil in the oil and gas industry. The decrease in demand for oil, combined with pressures on the global supply-demand balance for oil and related products, resulted in oil prices declining significantly in late February 2020. Since mid-2020, oil prices have improved, with demand steadily increasing despite the uncertainties surrounding the COVID-19 variants, which have continued to inhibit a full global demand recovery. In addition, worldwide oil inventories are, from a historical perspective, very low and supply increases from the Organization of the Petroleum Exporting Countries (“OPEC”), Russia and other oil producing nations are not expected to be sufficient to meet forecasted oil demand growth in 2023, with many OPEC countries not able to produce at their OPEC agreed upon quota levels due to their lack of capital investments over the past few years in developing incremental oil supplies.

Global oil price levels will ultimately depend on various factors and consequences beyond the Company’s control, such as: (i) the effectiveness of responses to combat the COVID-19 virus and their impact on domestic and worldwide demand, (ii) the ability of OPEC, Russia and other oil producing nations to manage the global oil supply, (iii) the timing and supply impact of any Iranian sanction relief on Iran’s ability to export oil, (iv) additional actions by businesses and governments in response to the pandemic, (v) the global supply chain constraints associated with manufacturing delays, and (vi) political stability of oil consuming countries.

We continue to assess the impact of the COVID-19 pandemic on our company and may modify our response as the impact of COVID-19 continues to evolve.

Certain prior year financial statements are not comparable to our current year financial statements due to the adoption of fresh start accounting as a result of the Acquisition. References to “Successor” relate to the financial position and results of operations of HNR Acquisition Corp subsequent to November 15, 2023. References to “Predecessor” relate to the financial position and results of operations of HNR Acquisition Corp prior to, and including, November 14, 2023.

Selected Factors That Affect Our Operating Results

Our revenues, cash flows from operations and future growth depend substantially upon:

• the timing and success of production and development activities;
• the prices for oil and natural gas;
• the quantity of oil and natural gas production from our wells;
• changes in the fair value of the derivative instruments we use to reduce our exposure to fluctuations in the price of oil and natural gas;
• our ability to continue to identify and acquire high-quality acreage and development opportunities; and
• the level of our operating expenses.

In addition to the factors that affect companies in our industry generally, the location of substantially all of our acreage discussed above subjects our operating results to factors specific to these regions. These factors include the potential adverse impact of weather on drilling, production and transportation activities, particularly during the winter and spring months, as well as infrastructure limitations, transportation capacity, regulatory matters and other factors that may specifically affect one or more of these regions.

The price at which our oil and natural gas production are sold typically reflects either a premium or discount to the New York Mercantile Exchange (“NYMEX”) benchmark price. Thus, our operating results are also affected by changes in the oil price differentials between the applicable benchmark and the sales prices we receive for our oil production. Our oil price differential to the NYMEX benchmark price during the nine months ended September 30, 2024 and 2023, was $(2.07) and $(3.22) per barrel, respectively. Our natural gas price differential during the nine months ended September 30, 2024 and 2023, was $0.04 and $0.03 per one thousand cubic feet (“Mcf”), respectively. Fluctuations in our price differentials and realizations are due to several factors such as gathering and transportation costs, takeaway capacity relative to production levels, regional storage capacity, gain/loss on derivative contracts and seasonal refinery maintenance temporarily depressing demand.

Market Conditions

The price that we receive for the oil and natural gas we produce is largely a function of market supply and demand. Because our oil and gas revenues are heavily weighted toward oil, we are more significantly impacted by changes in oil prices than by changes in the price of natural gas. World-wide supply in terms of output, especially production from properties within the United States, the production quota set by OPEC, and the strength of the U.S. dollar can adversely impact oil prices.

Historically, commodity prices have been volatile, and we expect the volatility to continue in the future. Factors impacting the future oil supply balance are world-wide demand for oil, as well as the growth in domestic oil production.

Prices for various quantities of natural gas and oil that we produce significantly impact our revenues and cash flows. The following table lists average NYMEX prices for oil and natural gas for the three and nine months ended September 30, 2024 and 2023.

(1) Based on average NYMEX closing prices.

For the nine months ended September 30, 2024, the average NYMEX oil pricing was $78.50 per barrel of oil or 7% lower than the average NYMEX price per barrel for the nine months ended September 30, 2023. Our settled derivatives decreased our realized oil price per barrel by $2.56 and $3.47 in the nine months ended September 30, 2024, and 2023, respectively. Our average realized oil price per barrel after reflecting settled derivatives and location differentials was $77.12 and $74.23 for the three months ended September 30, 2024 and 2023, respectively. Our average realized oil price per barrel after reflecting settled derivatives and location differentials was $73.87 and $73.03 for the nine months ended September 30, 2024 and 2023, respectively.

The average NYMEX natural gas pricing for the nine months ended September 30, 2024, was $2.11 per Mcf, or 14% lower than the average NYMEX price of $2.47 per Mcf for the nine months ended September 30, 2023.

Pogo Royalty Overriding Royalty Interest Transaction

Effective July 1, 2023, the Predecessor transferred to Pogo Royalty, a related party to the Predecessor, an assigned and undivided overriding royalty interest (“ORRI”) equal in amount to ten percent (10%) of our interest all oil, gas and minerals in, under and produced from each lease. The consideration received for the 10% ORRI was $10. Thus, a loss of $816,011 was recorded as a result of the conveyance in the previous year. Additionally, because of this transaction, our reserve balance was decreased as well our current net production volumes and revenues.

Results of Operations

Three months ended September 30, 2024 (Successor) Compared to Three months ended September 30, 2023

The following table sets forth selected operating data for the periods indicated. Average sales prices are derived from accrued accounting data for the relevant period indicated.

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Oil and Natural Gas Sales

Our revenues vary from year to year primarily as a result of changes in realized commodity prices and production volumes. For the three months ended September 30, 2024, our oil and natural gas sales decreased 18% from the three months ended September 30, 2023, driven by a 6% increase in realized prices, excluding the effect of settled commodity derivatives, and a 17% decrease in production volumes, and $1,900,662 in derivative instrument gains in the three months ended September 30, 2024. Realized production from oil and gas properties decreased due to the sale of the ORRI of 10% by the Predecessor in July 2023 and actual decrease in production due to an increase in well downtime, and the impact of water injection flowlines that needed repair or replacement.

Production for the comparable periods is set forth in the following table:

(1) Natural gas is converted to BOE at the rate of one-barrel equals six Mcf based upon the approximate relative energy content of oil and natural gas, which is not necessarily indicative of the relationship of oil and natural gas prices.

Derivative Contracts

We enter into commodity derivatives instruments to manage the price risk attributable to future oil production. We recorded a gain on derivative contracts of $1,900,662 for the three months ended September 30, 2024, compared to a loss of $1,436,100 for the three months ended September 30, 2023. Higher commodity prices in the three months ended September 30, 2024, resulted in realized losses of $107,969 compared to realized losses of $600,740 for the three months ended September 30, 2023. For the three months ended September 30, 2024, unrealized gains were $2,008,631 compared to unrealized losses of $835,360 for the three months ended September 30, 2023.

For the three months ended September 30, 2024, our average realized oil price per barrel after reflecting settled derivatives was $77.12 compared to $74.23 for the three months ended September 30, 2023. For the three months ended September 30, 2024, our settled derivatives decreased our realized oil price per barrel by $1.61 compared to decreasing the price per barrel by $7.80 for the three months ended September 30, 2023. As of September 30, 2024, we ended the period with a $794,195 net derivative asset compared to a net asset of $467,687 as of December 31, 2023.

Other Revenue

Other revenue was $98,452 for the three months ended September 30, 2024, compared to $143,714 for the three months ended September 30, 2023. The revenue is related to providing water services to a third party. The contract is for one year starting on September 1, 2022, and can be renewed by mutual agreement.

Lease Operating Expenses

Lease operating expenses were $2,136,732 for the three months ended September 30, 2024, compared to $2,449,140 for the three months ended September 30, 2023. On a per unit basis, production expenses increased 4.8% from $26.60 per BOE for the three months ended September 30, 2023, to $27.87 per BOE for the three months ended September 30, 2024, due primarily to increases in proactive maintenance activities.

Production Taxes, Transportation and Processing

We pay production taxes, transportation and processing costs based on realized oil and natural gas sales. Production taxes, transportation and processing costs were $489,524 for the three months ended September 30, 2024, compared to $602,449 for the three months ended September 30, 2023. As a percentage of oil and natural gas sales, these costs were 9% and 9% in the three months ended September 30, 2024, and 2023, respectively. Production taxes, transportation, and processing as a percent of total oil and natural gas sales are consistent with historical trends.

Depletion, Depreciation and Amortization

Depletion, depreciation and amortization (“DD&A”) was $507,626 for the three months ended September 30, 2024, compared to $426,838 for the three months ended September 30, 2023. DD&A was $6.62 per BOE for the three months ended September 30, 2024 compared to $4.64 per BOE for the three months ended September 30, 2023. The aggregate increase in DD&A expense for the three months ended September 30, 2024, compared to the three months ended September 30, 2023, was driven by the increase in the oil and gas properties balance due the recognition of the reserves at fair value as a result of the acquisition of the Pogo business by us on November 15, 2023.

Accretion of Asset Retirement Obligations

Accretion expense was $10,395 for the three months ended September 30, 2024, compared to $200,789 for the three months ended September 30, 2023. Accretion expense was $0.14 per BOE for the three months ended September 30, 2024, compared to $2.18 per BOE for the three months ended September 30, 2023. The aggregate decrease in accretion expense for the three months ended September 30, 2024, compared to the three months ended September 30, 2023, was driven by changes in certain assumptions, specifically the inflation factor and discount rate as a result of the acquisition date where we revised our estimates as part of its fair value estimates for the acquired business on November 15, 2023.

General and Administrative

General and administrative expenses were $2,235,263 for the three months ended September 30, 2024, compared to $981,751 for the three months ended September 30, 2023. The increase in general and administrative expenses is primarily due to increased cost of outsourced legal, professional, and accounting services from being a public company, and stock-based compensation in the current period of $326,995.

Interest Expense and amortization of financing costs

Interest expense was $1,841,848 for the three months ended September 30, 2024, compared to $554,262 for the three months ended September 30, 2023. The Successor period interest expense is driven by the Senior Secured term loan entered into as part of the Closing, and the Private Notes Payable. The Predecessor interest expense for the three months ended September 30, 2023 relates to the Predecessor’s revolving credit facility outstanding and an increase in the weighted average interest rate. This revolving credit facility was not assumed in the Acquisition. Amortization of financing costs was $507,701 and was primarily associated with discount on our Private Notes Payable.

Change in fair value of forward purchase agreement

The change in fair value of forward purchase agreement consisted of a loss of $4,209,294 for the three months ended September 30, 2024 for the Successor related to the inputs used in our fair value estimate of the FPA Put Option, primarily the decline in our stock price during the three months ended September 30, 2024. The key inputs to the fair value estimate include our stock price, which declined during the Successor period, and the likelihood, timing and price of a potential dilutive offering.

Change in fair value of warrant liabilities

The change in fair value of warrant liabilities consisted of a loss of $137,911 for the three months ended September 30, 2024 related to fluctuations in the trading price of our warrants, a portion of which are accounted for as liabilities due to the redemption provisions in those issued to Private Note holders.

Nine months ended September 30, 2024 (Successor) Compared to nine months ended September 30, 2023

The following table sets forth selected operating data for the periods indicated. Average sales prices are derived from accrued accounting data for the relevant period indicated.

Oil and Natural Gas Sales

Our revenues vary from year to year primarily as a result of changes in realized commodity prices and production volumes. For the nine months ended September 30, 2024, our oil and natural gas sales decreased 24% from the nine months ended September 30, 2023, driven by a 2% increase in realized prices, excluding the effect of settled commodity derivatives, and a 25% decrease in production volumes, and approximately $180,063 in derivative instrument losses in the nine months ended September 30, 2024. Realized production from oil and gas properties decreased due to the sale of the ORRI of 10% by the Predecessor in July 2023, and actual decrease in production due to an increase in well downtime, and the impact of water injection flowlines that needed repair or replacement.

Production for the comparable periods is set forth in the following table:

(1) Natural gas is converted to BOE at the rate of one-barrel equals six Mcf based upon the approximate relative energy content of oil and natural gas, which is not necessarily indicative of the relationship of oil and natural gas prices.

Derivative Contracts

We enter into commodity derivatives instruments to manage the price risk attributable to future oil production. We recorded a loss on derivative contracts of $180,063 for the nine months ended September 30, 2024, compared to a loss of $673,057 for the nine months ended September 30, 2023. Higher commodity prices in the nine months ended September 30, 2024, resulted in realized losses of $506,571 compared to realized losses of $899,395 for the nine months ended September 30, 2023. For the nine months ended September 30, 2024, unrealized gains were $326,508 compared to unrealized gains of $226,338 for the nine months ended September 30, 2023.

For the nine months ended September 30, 2024, our average realized oil price per barrel after reflecting settled derivatives was $73.87 compared to $73.03, for the nine months ended September 30, 2023. For the nine months ended September 30, 2024, our settled derivatives decreased our realized oil price per barrel by $2.56 compared to decreasing the price per barrel by $3.47 for the nine months ended September 30, 2023. As of September 30, 2024, we ended the period with a $794,195 net derivative asset compared to a net asset of $467,687 as of December 31, 2023.

Other Revenue

Other revenue was $359,270 for the nine months ended September 30, 2024, compared to $461,435 for the nine months ended September 30, 2023. The revenue is related to providing water services to a third party. The contract is for one year starting on September 1, 2022, and can be renewed by mutual agreement.

Lease Operating Expenses

Lease operating expenses were $6,530,431 for the nine months ended September 30, 2024, compared to $7,354,304 for the nine months ended September 30, 2023. On a per unit basis, production expenses increased 18% from $24.12 per BOE for the nine months ended September 30, 2023, to $28.54 per BOE for the nine months ended September 30, 2024, due primarily to increases in proactive maintenance activities.

Production Taxes, Transportation and Processing

We pay production taxes, transportation and processing costs based on realized oil and natural gas sales. Production taxes, transportation and processing costs were $1,326,789 for the nine months ended September 30, 2024, compared to $1,774,310 for the nine months ended September 30, 2023. As a percentage of oil and natural gas sales, these costs were 9% and 9% in the nine months ended September 30, 2024, and 2023, respectively. Production taxes, transportation, and processing as a percent of total oil and natural gas sales are consistent with historical trends.

Depletion, Depreciation and Amortization

Depletion, depreciation and amortization (“DD&A”) was $1,506,242 for the nine months ended September 30, 2024, compared to $1,285,830 for the nine months ended September 30, 2023. DD&A was $6.58 per BOE for the nine months ended September 30, 2024 compared to $4.22 per BOE for the nine months ended September 30, 2023. The aggregate increase in DD&A expense for the nine months ended September 30, 2024, compared to the nine months ended September 30, 2023, was driven by the increase in the oil and gas properties balance due to the recognition of the reserves at fair value as a result of the acquisition of the Pogo business by us on November 15, 2023.

Accretion of Asset Retirement Obligations

Accretion expense was $83,926 for the nine months ended September 30, 2024, compared to $809,423 for the nine months ended September 30, 2023. Accretion expense was $0.37 per BOE for the nine months ended September 30, 2024, compared to $2.65 per BOE for the nine months ended September 30, 2023. The aggregate decrease in accretion expense for the nine months ended September 30, 2024, compared to the nine months ended September 30, 2023, was driven by changes in certain assumptions, specifically the inflation factor and discount rate as a result of the acquisition date where we revised our estimates as part of its fair value estimates for the acquired business on November 15, 2023

General and Administrative

General and administrative expenses were $6,868,749 for the nine months ended September 30, 2024, compared to $3,111,130 for the nine months ended September 30, 2023. The increase for general and administrative expenses is primarily due to increased cost of outsourced legal, professional, and accounting services from being a public company, and stock-based compensation in the current period of $1,516,933.

Interest Expense and amortization of financing costs

Interest expense was $5,732,747 for the nine months ended September 30, 2024, compared to $1,429,200 for the nine months ended September 30, 2023. The Successor period interest expense is driven by the Senior Secured Term loan entered into as part of the Closing, and the Private Notes Payable. The Predecessor interest expense for the nine months ended September 30, 2023 relates to the Predecessor’s revolving credit facility outstanding and an increase in the weighted average interest rate. This revolving credit facility was not assumed in the Acquisition. Amortization of financing costs was $1,982,958 and was primarily associated with discount on our Private Notes Payable.

Change in fair value of forward purchase agreement

The change in fair value of forward purchase agreement consisted of a loss of $4,534,766 for the nine months ended September 30, 2024 for the Successor related to the inputs used in our fair value estimate of the FPA Put Option, primarily due to the decline in our stock price on a year to date basis. The key inputs to the fair value estimate include our stock price, which declined during the Successor period, and the likelihood, timing and price of a potential dilutive offering.

Change in fair value of warrant liabilities

The change in fair value of warrant liabilities consisted of a loss of $484,799 for the nine months ended September 30, 2024 related to fluctuations in the trading price of our warrants, a portion of which are accounted for as liabilities due to the redemption provisions in those issued to Private Note holders.

Liquidity, Capital Resources and Going Concern

Our main sources of liquidity have been internally generated cash flows from operations and credit facility borrowings. Our primary use of capital has been for the development of oil and gas properties and the return of initial invested capital to our owners. We continually monitor potential capital sources for opportunities to enhance liquidity or otherwise improve our financial position.

As of September 30, 2024, we had outstanding debt of $24,735,391 under our Senior Secured Term Loan, $15,000,000 under the Seller Promissory Note, and $3,875,750 of outstanding private notes payable and $1,019,037 from merchant cash advances. A total of $15,048,293 of this is due within one year, including a $5,000,000 estimated excess cash flow payment under the terms of the Senior Secured Term Loan. As of September 30, 2024, we had $2,746,896 of cash and cash equivalents on hand, of which $2,600,000 is in an escrow account pursuant to the requirements of the Senior Secured Term Loan, and had a working capital deficit of $38,801,444. These conditions raise substantial doubt about our ability to continue as a going concern within one year after the date that the financial statements are issued.

We had positive cash flow from operations of $3,346,362 for the nine months ended September 30, 2024 and $8,675,037 for the year ended December 31, 2023 on a pro forma basis of the combined Successor and Predecessor periods. Additionally, management’s plans to alleviate this substantial doubt include improving profitability through streamlining costs, maintaining active hedge positions for its proven reserve production, and the issuance of additional shares of Class A Common Stock. We have a three-year Common Stock Purchase Agreement with a maximum funding limit of $150,000,000 that can fund our operations and production growth, and be used to reduce liabilities. Through the date of this filing, we have received $2,464,688 in cash proceeds related to the sale of 1,885,000 shares of common stock under this agreement and expect to continue to utilize it to fund operational needs. We cannot assure you, however, that any additional capital will be available to us on favorable terms or at all. Our capital expenditures could be curtailed if our cash flows decline from expected levels.

Cash Flows

Sources and uses of cash for the nine months ended September 30, 2024 and 2023, are as follows:

Operating Activities

The decrease in net cash flow provided by operating activities for the nine months ended September 30, 2024, as compared to 2023 is primarily due to decreased production volumes, and higher general and administrative and acquisition costs associated with public filings.

Investing Activities

Net cash used in investing activities for the nine months ended September 30, 2024 was primarily related to $3,275,667 in development costs for our reserves. Cash flows used in investing activities in the Predecessor period for the nine months ended September 30, 2023 consisted primarily of $4,867,872 of cash paid for oil and gas property costs.

Financing Activities

Net cash used by financing activities during the Successor period were primarily related to repayments of the Senior Secured Term Loan of $2,945,312 and Private Notes Payable of $43,750, partially offset by $1,184,272 in cash proceeds from sales of common stock under the Common Stock Purchase Agreement, $967,500 in cash proceeds from merchant cash advances, and an additional $450,000 in cash proceeds from the Private Notes Payable issued during the nine months ended September 30, 2024. Cash flows used in financing activities in the Predecessor period for the nine months ended September 30, 2023 consisted primarily of $2,000,000 in long-term debt repayments.

Off-Balance Sheet Arrangements

We did not have any off-balance sheet arrangements as of September 30, 2024.

Contractual obligations

We have contractual commitments under our Senior Secured Term Loan, the Seller Promissory Note and the Private Notes Payable which include periodic interest payments. See Note 5 to our interim condensed consolidated unaudited financial statements. We have contractual commitments that may require us to make payments upon future settlement of our commodity derivative contracts. See Note 4 to our interim condensed consolidated unaudited financial statements.

Our other liabilities represent current and noncurrent other liabilities that are primarily comprised of environmental contingencies, asset retirement obligations and other obligations for which neither the ultimate settlement amounts nor their timings can be precisely determined in advance.

Critical Accounting Estimates

The following is a discussion of our most critical accounting estimates, judgements and uncertainties that are inherent in the Company’s application of GAAP.

Successful Efforts Method of Accounting

We utilize the successful efforts method of accounting for crude oil and gas producing activities as opposed to the alternate acceptable full cost method. In general, we believe that net assets and net income are more conservatively measured under the successful efforts method of accounting for crude oil and gas producing activities than under the full cost method, particularly during periods of active exploration. The critical difference between the successful efforts method of accounting and the full cost method is that under the successful efforts method, exploratory dry holes and geological and geophysical exploration costs are charged against earnings during the periods in which they occur; whereas, under the full cost method of accounting, such costs and expenses are capitalized as assets, pooled with the costs of successful wells and charged against the earnings of future periods as a component of depletion expense.

Proved Reserve Estimates

Estimates of our proved reserves included in this report are prepared in accordance with GAAP and SEC guidelines. The accuracy of a proved reserve estimate is a function of:

• the quality and quantity of available data;
• the interpretation of that data;
• the accuracy of various mandated economic assumptions; and
• the judgment of the persons preparing the estimate.

Our proved reserve information included in our Annual Report on its Form 10-K filed with the SEC on May 2, 2024 as of December 31, 2023 and 2022, was prepared by independent petroleum engineers. Because these estimates depend on many assumptions, all of which may substantially differ from future actual results, proved reserve estimates will be different from the quantities of oil and gas that are ultimately recovered. In addition, results of drilling, testing and production after the date of an estimate may justify, positively or negatively, material revisions to the estimate of proved reserves.

It should not be assumed that the standardized measure included as of December 31, 2023, is the current market value of our estimated proved reserves. In accordance with SEC requirements, we based the 2023 standardized measure on a twelve-month average of commodity prices on the first day of each month in 2023 and prevailing costs on the date of the estimate. Actual future prices and costs may be materially higher or lower than the prices and costs utilized in the estimate. See Note 12 of notes to the consolidated financial statements for additional information.

Our estimates of proved reserves materially impact depletion expense. If the estimates of proved reserves decline, the rate at which we records depletion expense will increase, reducing future net income. Such a decline may result from lower commodity prices, which may make it uneconomical to drill for and produce higher cost fields. In addition, a decline in proved reserve estimates may impact the outcome of our assessment of our proved properties for impairment.

Impairment of Proved Oil and Gas Properties

We review our proved properties to be held and used whenever management determines that events or circumstances indicate that the recorded carrying value of the properties may not be recoverable. Management assesses whether or not an impairment provision is necessary based upon estimated future recoverable proved reserves, commodity price outlooks, production and capital costs expected to be incurred to recover the reserves, discount rates commensurate with the nature of the properties and net cash flows that may be generated by the properties. Proved oil and gas properties are reviewed for impairment at the level at which depletion of proved properties is calculated. See Note 2 of notes to the consolidated financial statements.

Asset Retirement Obligations

We have significant obligations to remove tangible equipment and facilities and to restore the land at the end of crude oil and natural gas production operations. Our removal and restoration obligations are primarily associated with plugging and abandoning wells. Estimating the future restoration and removal costs is difficult and requires management to make estimates and judgments because most of the removal obligations are many years in the future and contracts and regulations often have vague descriptions of what constitutes removal. Asset removal technologies and costs are constantly changing, as are regulatory, political, environmental, safety and public relations considerations.

Inherent in the present value calculation are numerous assumptions and judgments including the ultimate settlement amounts, credit-adjusted discount rates, timing of settlement and changes in the legal, regulatory, environmental and political environments. To the extent future revisions to these assumptions impact the present value of the existing asset retirement obligations, a corresponding adjustment is generally made to the crude oil and natural gas property or other property and equipment balance. See Note 5 of notes to the consolidated financial statements.

Litigation and Environmental Contingencies

We make judgments and estimates in recording liabilities for ongoing litigation and environmental remediation. Actual costs can vary from such estimates for a variety of reasons. The costs to settle litigation can vary from estimates based on differing interpretations of laws and opinions and assessments on the amount of damages. Similarly, environmental remediation liabilities are subject to change because of changes in laws and regulations, developing information relating to the extent and nature of site contamination and improvements in technology. A liability is recorded for these types of contingencies if we determine the loss to be both probable and reasonably estimable. See Note 9 of notes to the consolidated financial statements.

Forward Purchase Agreement Valuation

We have determined that the FPA Put Option, including the Maturity Consideration, within the Forward Purchase Agreement is (i) a freestanding financial instrument and (ii) a liability (i.e., an in-substance written put option). This liability was recorded as a liability at fair value on the consolidated balance sheet as of the reporting date in accordance with ASC 480. The fair value of the liability was estimated using a Monte-Carlo Simulation in a risk-neutral framework. Specifically, the future stock price is simulated assuming a Geometric Brownian Motion (“GBM”). For each simulated path, the forward purchase value is calculated based on the contractual terms and then discounted back to present. Finally, the value of the forward is calculated as the average present value over all simulated paths. The model also considered the likelihood of a dilutive offering of common stock.

Derivative Instruments

We use derivative financial instruments to mitigate its exposure to commodity price risk associated with oil prices. Our derivative financial instruments are recorded on the consolidated balance sheets as either an asset or a liability measured at fair value. We have elected not to apply hedge accounting for its existing derivative financial instruments, and as a result, we recognize the change in derivative fair value between reporting periods currently in its consolidated statements of operations. The fair value of our derivative financial instruments is determined using industry-standard models that consider various inputs including: (i) quoted forward prices for commodities, (ii) time value of money and (iii) current market and contractual prices for the underlying instruments, as well as other relevant economic measures. Realized gains and losses from the settlement of derivative financial instruments and unrealized gains and unrealized losses from valuation changes in the remaining unsettled derivative financial instruments are reported in a single line item as a component of revenues in the consolidated statements of operations. Cash flows from derivative contract settlements are reflected in operating activities in the accompanying consolidated statements of cash flows. See Note 4 for additional information about our derivative instruments.

New Accounting Pronouncements

The effects of new accounting pronouncements are discussed in Note 2 to the consolidated financial statements.

The information contained above in Item 1.01 related to the shares of our Class A Common Stock to FPA Seller is hereby incorporated by reference into this Item 3.02.

(c)

During the three months ended September 30, 2024, none of our directors or officers (as defined in Rule 16a-1(f) of the Exchange Act) adopted, modified or terminated a “Rule 10b5-1 trading arrangement” or a “non-Rule 10b5-1 trading arrangement” as such terms are defined under Item 408 of Regulation S-K.

Evaluation of Disclosure Controls and Procedures

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer (Principal Executive Officer, Principal Financial and Accounting Officer), as appropriate to allow timely decisions regarding required disclosure.

As required by Rules 13a-15 and 15d-15 under the Exchange Act, our Chief Executive Officer (Principal Executive Officer, Principal Financial and Accounting Officer) carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2024. Based upon his evaluation, our Chief Executive Officer (Principal Executive Officer, Principal Financial and Accounting Officer) concluded that, our disclosure controls and procedures were not effective related to the lack of sufficient accounting personnel to manage the Company’s financial accounting process, lack of segregation of duties, proper accounting for complex financial instruments, lack of design and implementation of controls related to oil and gas activities and lack of capital expenditure review which combined constituted a material weakness in our internal control over financial reporting. As a result, we performed additional analysis as deemed necessary to ensure that our consolidated financial statements were prepared in accordance with U.S. generally accepted accounting principles. Accordingly, management believes that the unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q present fairly in all material respects our financial position, results of operations and cash flows for the period presented.

A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. Management concluded that a deficiency in internal control over financial reporting existed relating to the lack of sufficient accounting personnel to manage the Company’s financial accounting process, lack of segregation of duties, proper accounting for complex financial instruments, lack of design and implementation of controls related to oil and gas activities and lack of capital expenditure constituted a material weakness as defined in the SEC regulations.

Changes in Internal Control over Financial Reporting

As required by SEC rules and regulations implementing Section 404 of the Sarbanes-Oxley Act, our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our consolidated financial statements for external reporting purposes in accordance with GAAP. Our internal control over financial reporting includes those policies and procedures that: (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of our company, (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with GAAP, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors, and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the consolidated financial statements.

Management assessed the effectiveness of our internal control over financial reporting at September 30, 2024. In making these assessments, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control - Integrated Framework (2013). Based on our assessments and those criteria, management determined that we did not maintain effective internal control over financial reporting as of September 30, 2024 due to the material weakness in our internal control over financial reporting described above. We plan to enhance our processes to identify and appropriately recognize accounting transactions in a timelier manner, and understand the nuances of the complex accounting standards that apply to our consolidated financial statements.

Our plans at this time include hiring additional accounting staff and providing enhanced access to accounting literature, research materials and documents and increased communication among our personnel and third-party professionals with whom we consult regarding complex accounting applications. The elements of our remediation plan can only be accomplished over time, and we can offer no assurance that these initiatives will ultimately have the intended effects.

As of the date of this Quarterly Report on Form 10-Q, there have been no material changes to the risk factors disclosed in our annual report as amended on Form 10-K filed with the SEC on May 2, 2024.