# Riley Exploration Permian, Inc.: Form 10-Q for the period ended Jun 30, 2021

- Company: [Riley Exploration Permian, Inc.](/companies/repx.md) (CIK 1001614)
- Form: 10-Q
- Filed: 2021-08-13
- Accepted by EDGAR: Aug 13, 2021, 16:08 ET
- Period: 2021-06-30
- Accession: 0001628280-21-016983
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1001614/000162828021016983/rep-20210630.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1001614/000162828021016983/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2021-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2021-04-01 to 2021-06-30 | $42.1m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 9 months, 2020-10-01 to 2021-06-30 | $102.4m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Operating income | 3 months, 2021-04-01 to 2021-06-30 | $19.3m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2020-10-01 to 2021-06-30 | $33.0m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2021-04-01 to 2021-06-30 | $1.2m | us-gaap:InterestExpense |
| Interest expense | 9 months, 2020-10-01 to 2021-06-30 | $3.6m | us-gaap:InterestExpense |
| Income tax | 3 months, 2021-04-01 to 2021-06-30 | $3.2m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2020-10-01 to 2021-06-30 | $17.0m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2021-04-01 to 2021-06-30 | −$21.5m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2020-10-01 to 2021-06-30 | −$81.3m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2021-04-01 to 2021-06-30 | −$1.20 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2020-10-01 to 2021-06-30 | −$5.57 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2021-04-01 to 2021-06-30 | −$1.20 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2020-10-01 to 2021-06-30 | −$5.57 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2021-04-01 to 2021-06-30 | 17,786,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2020-10-01 to 2021-06-30 | 14,872,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2020-10-01 to 2021-06-30 | $58.8m | us-gaap:NetCashProvidedByUsedInOperatingActivitiesContinuingOperations |
| Dividends paid | 9 months, 2020-10-01 to 2021-06-30 | $12.8m | us-gaap:PaymentsOfDividendsCommonStock |
| Cash and equivalents | at 2021-06-30 | $6.9m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2021-06-30 | $27.2m | us-gaap:AssetsCurrent |
| Total assets | at 2021-06-30 | $362.8m | us-gaap:Assets |
| Current liabilities | at 2021-06-30 | $70.5m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2021-06-30 | $198.2m | us-gaap:Liabilities |
| Shareholders' equity | at 2021-06-30 | $164.6m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 32,459 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 unaudited 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 current report on Form 8-K/A filed on April 22, 2021 and unaudited condensed consolidated financial statements and related notes included in the Company's quarterly report on Form 10-Q filed on May 17, 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 Statements Regarding Forward-Looking Statements", “—Forward-Looking Statements and Risk” and “Part II. Item 1A. Risk Factors”.*

### Overview

We operate in the upstream segment of the oil and gas industry and are focused on steadily growing conventional reserves, production and cash flow through the acquisition, exploration, development and production of oil, natural gas and natural gas liquids (“NGLs”) primarily in the Permian Basin. The Company’s activities are primarily focused on the San Andres Formation, a shelf margin deposit on the Central Basin Platform and Northwest Shelf.

### Financial and Operating Highlights

Financial and operating results reflect the following:

- Increased total net equivalent production by 35% to 9.1 MBoe/d for the three months ended June 30, 2021, as compared to the same period in 2020
- During the fiscal third quarter of 2021, drilled 7 gross (4.8 net) horizontal wells and 1 gross (1 net) vertical injection well; completed 5 gross (2.8 net) horizontal wells
- Realized average composite price on commodities of $50.18 per Boe, before derivative settlements, during the fiscal third quarter of 2021, including $64.55 per barrel for oil
- Realized average composite price on commodities of $40.86 per Boe, including derivative settlements, during the fiscal third quarter of 2021
- Generated cash flow from continuing operations of $58.8 million for the nine months ended June 30, 2021
- Total cash capital expenditures before acquisitions of $40.1 million for the nine months ended June 30, 2021
- Paid cash common dividends of $5.0 million on May 7, 2021; and announced latest dividend of $0.28 per share with a record date of July 23, 2021, which was paid August 6, 2021, for a total of $5.5 million
- Exited the third quarter with $6.9 million in cash and $97.5 million drawn on our credit facility; subsequently reduced credit facility borrowings to $62 million in July 2021

### Recent Developments

#### Market Conditions and Commodity Prices

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

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

The Company has developed and implemented a number of safety measures, which have successfully kept our workforce healthy and safe. The Company has established an informational campaign to provide employees an understanding of the virus risk factors and safety measures, as well as timely updates from governmental stay-at-home regulations. Expectations have also been set for employees to communicate immediately if they, or someone they have been in contact with, has experienced symptoms or tested positive for COVID-19. Additional measures include distribution of educational material regarding health and safety guidance, limiting access to common areas within the office, ensuring social distancing guidance by relocating personnel, and other guidelines as recommended by the Center for Disease Control and Prevention (CDC) and local authorities.

#### EOR Project

The Company began initial operations during May 2021 on its enhanced oil recovery (“EOR”) project, which will utilize a combination of water and CO2 injection, applied to horizontal producing wells at its core asset in Yoakum County, Texas (“EOR Project”). This asset is directly adjacent to several of the largest EOR projects in the U.S., which have employed EOR techniques for many decades.

#### Recent Transactions

On April 7, 2021, the Company filed a registration statement on Form S-3 (the “Registration Statement”) with the Securities and Exchange Commission that was declared effective on May 12, 2021, in connection with the offer and sale from time to time (each, an “Offering” and, collectively, the “Offerings”) as set forth in the Registration Statement, the form of prospectus contained therein and one or more preliminary or final supplements to the Prospectus (each, a “Prospectus Supplement”), of the following securities with an aggregate offering price of up to $250,000,000: (i) by the Company of an indeterminate aggregate amount of securities consisting of shares of the Company’s common stock, par value $0.001 per share, or shares of the Company’s preferred stock, par value $0.001, which may be issued in one or more series (any such shares being offered by the Company are hereinafter referred to as the “Primary Shares”); or (ii) by the selling stockholders named in the Registration Statement or any other selling stockholders to be identified in one or more Prospectus Supplements of up to 16,721,922 shares of Common Stock on the terms to be determined at the time of each Offering. On July 2, 2021, the Company issued 1,666,667 shares of common stock at a price to the public of $30.00 per share. Net proceeds from the Offering were approximately $46.7 million, after deducting the underwriting discounts and commissions and estimated offering expenses paid by the Company.

#### 2021 Capital and Operating Plan

We expect our fiscal 2021 capital budget to be approximately $60 million to $66 million, which we believe is consistent with our capital allocation framework, and which we believe will be funded entirely by operating cash flow and proceeds of the stock offering.

### Results of Operations

### Comparison for the Three and Nine Months Ended June 30, 2021 and 2020

The following table sets forth selected operating data for the three months ended June 30, 2021 and 2020:

| Revenues (in thousands): | Three Months Ended June 30, 2021 | 2020 | Nine Months Ended June 30, 2021 | 2020 |
| --- | ---: | ---: | ---: | ---: |
| Oil sales | $39,504 | $6,153 | $92,395 | $59,548 |
| Natural gas sales | 957 | (738) | 5,592 | (1,009) |
| Natural gas liquids sales | 1,088 | (446) | 2,635 | (715) |
| Oil and natural gas sales, net | $41,549 | $4,969 | $100,622 | $57,824 |
| **Production Data, net (in thousands):** |  |  |  |  |
| Oil (MBbls) | 612 | 487 | 1,702 | 1,564 |
| Natural gas (MMcf) | 732 | 400 | 1,795 | 1,162 |
| Natural gas liquids (MBbls) | 94 | 61 | 272 | 181 |
| Total (MBoe)(1) | 828 | 615 | 2,273 | 1,939 |
| Daily combined volumes (BOE/d)(1)(2) | 9,100 | 6,757 | 8,325 | 7,077 |
| Daily oil volumes (BO/d) | 6,726 | 5,350 | 6,234 | 5,706 |
| **Average Prices:(1)(3)** |  |  |  |  |
| Oil ($ per Bbl) | $64.55 | $12.63 | $54.29 | $38.08 |
| Natural gas ($ per Mcf) | 1.31 | (1.85) | 3.12 | (0.87) |
| Natural gas liquids ($ per Bbl) | 11.57 | (7.31) | 9.70 | (3.94) |
| Combined ($ per BOE) | $50.18 | $8.08 | $44.28 | $29.82 |
| Oil, including derivative settlements ($ per Bbl) | $51.84 | $42.76 | $51.16 | $50.98 |
| Natural gas, including derivative settlements ($ per MMbtu) | 1.39 | (1.85) | 3.22 | (0.87) |
| Natural gas liquids, including derivative settlements ($ per Bbl)(4) | 11.57 | (7.31) | 9.70 | (3.94) |
| Average price, including derivative settlements ($ per BOE) | $40.86 | $31.95 | $42.02 | $40.22 |

(1) One BOE is equal to six Mcf of natural gas or one Bbl of oil or NGL based on the approximate energy equivalency. This is an energy content correlation and does not reflect value or price relationship between the commodities.

(2) Average net sales (BOE/d) was derived by dividing the total MBoe by 91 days for the three months ended June 2021 and 2020, respectively. Average net sales (BOE/d) was derived by dividing the total MBoe by 273 days and 274 days for the nine months ended June 2021 and 2020, respectively.

(3) Average prices shown in table reflect prices both before and after the effects of REPX’s settlements of our commodity derivative contracts. REPX’s calculation of such effects includes both gains or losses on cash settlements for commodity derivatives. The impact of these cash settlements are included under other income and expense on the Company’s Statement of Operations

(4) The Company uses commodity based derivative contracts to reduce exposure to fluctuations in crude oil and natural gas prices. As of June 30, 2021, the Company was not engaged in any natural gas liquids derivative contracts.

### Oil and Natural Gas Revenues

The Company’s total oil and natural gas revenue, net increased $36.6 million, or 736%, and $42.8 million, or 74%, for the three and nine months ended June 30, 2021 and June 30, 2020, respectively. The Company’s realized average composite price on commodities for the three and nine months ended June 30, 2021 increased by $42.10 and $14.44 per Boe, or 521% and 48%, respectively, compared to the same period of 2020. The Company’s oil and natural gas sales, net in its financial statements do not include the effects of derivatives as those effects are included within other income.

### Oil revenues

- For the three months ended June 30, 2021, oil revenues increased by $33.4 million, or 542%, compared to the same period in 2020. Of the increase, $31.8 million was attributable to an increase in our realized price and $1.6 million was attributable to an increase in volume. Volume increased by 26% while prices increased by over 400% compared to the same period in 2020.
- For the nine months ended June 30, 2021, oil revenues increased by $32.8 million, or 55%, compared to the same period in 2020. Of the increase, $27.6 million was attributable to an increase in our realized price and $5.2 million was attributable to an increase in volume. Volumes increased by 9% while prices increased by 43% compared to the same period in 2020.
- Oil volumes increased during the three and nine months ended June 30, 2021 due to increased production as a result of new wells and workovers.

### Natural gas revenues

- For the three months ended June 30, 2021, natural gas revenues increased by $1.7 million, compared to the same period in 2020, to $1.0 million from ($0.7) million. Volumes increased by 83% and realized prices increased by $3.16/Mcf from negative effective prices experienced in 2020.
- For the nine months ended June 30, 2021, natural gas revenues increased by $6.6 million, compared to the same period in 2020, to $5.6 million from ($1.0) million. Volumes increased by 54% and realized prices increased by $3.99/Mcf from negative effective prices experienced in 2020.
- Natural gas sales volumes increased during the three and nine months ended June 30, 2021 due to increased production and increased gas processing capacity available from the Company's midstream gathering and processing partner.

### Natural gas liquids revenues

- For the three months ended June 30, 2021, natural gas liquids revenues increased by $1.5 million, compared to the same period in 2020, to $1.1 million from ($0.4) million. Volumes increased by 54% and realized prices increased by $18.88/Bbl from negative effective prices experienced in 2020.
- For the nine months ended June 30, 2021, natural gas liquids revenues increased by $3.4 million, compared to the same period in 2020, to $2.6 million from ($0.7) million. Volumes increased by 50% and realized prices increased by $13.65/Bbl from negative effective prices experienced in 2020.
- Natural gas liquids sales volumes increased during the three and nine months ended June 30, 2021 due to increased production and increased gas processing capacity available from the Company's midstream gathering and processing partner.

### Contract Services - Related Party Revenue

The following tables present the Company's gross profit for related party transactions:

*(In thousands)*

|  | Three Months Ended June 30, 2021 | 2020 | Nine Months Ended June 30, 2021 | 2020 |
| --- | ---: | ---: | ---: | ---: |
| Contract services – related parties(1) | $600 | $1,050 | $1,800 | $3,150 |
| Cost of contract services - related parties | 91 | 97 | 330 | 403 |
| Gross profit - related parties | $509 | $953 | $1,470 | $2,747 |
| Gross profit percentage - related parties | 85% | 91% | 82% | 87% |

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

The Company's contract services - related parties gross profit decreased for the three and nine months ended June 30, 2021 primarily due to the restructuring of the monthly fee in the fourth quarter of fiscal 2020. The monthly fee decreased by $150 thousand per month. See Note 8 – Transactions with Related Parties to the Company's unaudited condensed consolidated financial statement included herein for more information.

### Costs and Expenses

| Costs and Expenses: (in thousands) | Three Months Ended June 30, 2021 | 2020 | Nine Months Ended June 30, 2021 | 2020 |
| --- | ---: | ---: | ---: | ---: |
| Lease operating expenses | $5,754 | $3,760 | $17,323 | $15,517 |
| Production taxes | $2,029 | $293 | $5,027 | $2,808 |
| Exploration expenses | $2,785 | $6,757 | $8,682 | $9,231 |
| Depletion, depreciation, amortization, and accretion | $7,082 | $5,028 | $19,323 | $16,020 |
| Administrative costs | $4,030 | $1,936 | $9,176 | $8,669 |
| Share-based and unit-based compensation | 779 | 291 | 6,042 | 650 |
| General and administrative expense | $4,809 | $2,227 | $15,218 | $9,319 |
| Transaction costs | $321 | $15 | $3,534 | $42 |
| Interest expense | $1,171 | $1,302 | $3,571 | $4,086 |
| (Gain) loss on derivatives, net | $35,396 | $14,205 | $74,208 | $(36,999) |
| Income tax expense | $3,245 | $319 | $16,953 | $319 |

### Lease Operating Expenses

The Company’s lease operating expenses ("LOE"), which include ad valorem taxes, increased by $2.0 million and $1.8 million for the three and nine months ended June 30, 2021, respectively, compared to the same periods in 2020. For the three months ended June 30, 2021, $0.9 million of the increase was attributable to an increase in production volume and $1.1 million was attributable to higher cost on a unit basis. LOE for the fiscal third quarter of 2020 was low on account of reduced activity following the sharp downturn in commodity prices at the time, while LOE incurred during the fiscal third quarter of 2021 is more representative of normalized activity. For the nine months ended June 30, 2021, $2.7 million of the increase was attributable to an increase in production volume, partially offset by $0.5 million of savings from lower costs on a unit basis.

### Production Tax Expense

Production taxes increased by $1.7 million and $2.2 million for the three and nine months ended June 30, 2021, respectively, compared to the same periods in 2020, due to increases in commodity sales.

### Exploration Expense

Exploration expense decreased by $4.0 million and $0.5 million, or 59% and 6% respectively, for the three and nine months ended June 30, 2021, as compared to the same periods in 2020. For the three months ended June 30, 2021, the Company incurred lower expiration of oil and natural gas lease expense in the Montaña field compared to the same period in 2020. For the nine months ended June 30, 2021, geological and geophysical costs decreased and the Company incurred lower expiration of oil and natural gas lease expense in the Montaña field, partially offset by an increase in expiration of oil and natural gas lease expense in the Champions field compared to the same period in 2020.

The following table summarizes exploration expense by field below:

*(In thousands, except acreage data)*

| Three Months Ended June 30, 2021 | Champions | Montaña |
| --- | ---: | ---: |
| Exploration expense(1) | $340 | $2,445 |
| Expired net acres | 159 | 6,867 |
| Net acres renewed after expiration | — | — |
| **Nine Months Ended June 30, 2021** |  |  |
| Exploration expense(1) | $3,465 | $5,150 |
| Expired net acres | 1,626 | 14,068 |
| Net acres renewed after expiration | 486 | — |
| **Three Months Ended June 30, 2020** |  |  |
| Exploration expense(1) | $179 | $6,578 |
| Expired net acres | 77 | 18,678 |
| Net acres renewed after expiration | 64 | — |
| **Nine Months Ended June 30, 2020** |  |  |
| Exploration expense(1) | $592 | $6,696 |
| Expired net acres | 251 | 19,281 |
| Net acres renewed after expiration | 73 | — |

(1) Excludes geological and geophysical costs.

### Depletion, Depreciation, and Accretion Expense

Depletion, depreciation, and accretion expense increased by $2.1 million and $3.3 million for the three and nine months ended June 30, 2021, respectively, compared to the same periods for 2020.

Depletion and amortization expense for proved oil and natural gas properties increased by $1.9 million and $3.2 million for the three and nine months ended June 30, 2021, respectively, compared to the same periods in 2020. For the three and nine months ended June 30, 2021, $1.1 million and $1.2 million was attributable to higher production and $0.8 million and $2.0 million was attributable to higher capitalized costs.

### General and Administrative Costs

Total G&A costs increased by $2.6 million and $5.9 million, for the three and nine months ended June 30, 2021, respectively, compared to the same periods for 2020. Administrative costs, which include payroll, benefits and non-payroll costs, increased by $2.1 million and $0.5 million, for the three and nine months ended June 30, 2021, respectively, compared to the same periods for 2020. The increase in administrative costs was primarily attributable to public company costs following completion of the Merger. Share-based/unit-based compensation expense increased by $0.5 million and $5.4 million for the three and nine months ended June 30, 2021, respectively, compared to the same periods for 2020. The increase is primarily attributable to restricted shares awarded to certain executives and employees following completion of the Merger.

### Transaction Costs

Transaction costs were $0.3 million and $3.5 million for the three and nine months ended June 30, 2021, respectively. The transaction costs are predominately related to various costs incurred for the Merger. See Note 4 - Acquisitions and Divestitures to the Company's unaudited condensed consolidated financial statements included herein for further discussion of the Merger.

### Income Tax Provision

REP LLC became a taxable entity as a result of its Merger with Tengasco on February 26, 2021. See further discussion in Note 4 - Acquisitions and Divestitures. 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 only for the operations of REP LLC in the accompanying consolidated financial statements. Deferred income taxes are provided to reflect the future tax consequences or benefits of differences between the tax basis of assets and liabilities and their reported amounts in the financial statements using enacted tax rates. Upon the Merger into a corporation on February 26, 2021, the Company established a $13.6 million provision for deferred income taxes, of which $1.0 million and $0.2 million is currently a tax benefit for the three and nine months ended June 30, 2021. 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 12 - Income Taxes to the Company's unaudited condensed consolidated financial statements included herein for further discussion of income taxes.

*(In thousands)*

|  | Three Months Ended June 30, 2021 | 2020 | Nine Months Ended June 30, 2021 | 2020 |
| --- | ---: | ---: | ---: | ---: |
| Current benefit | $(1,009) | $— | $(232) | $— |
| Deferred expense | 4,254 | (319) | 17,185 | (319) |
| Total expense | $3,245 | $(319) | $16,953 | $(319) |
| Effective income tax rate | (18.8)% | —% | (38.0)% | —% |

### Gain/Loss on Derivatives

The Company recognizes settlements and changes in the fair value of its derivative contracts as a single component of other income (expenses). We have multiple crude oil and natural gas derivative contracts that settle against various indices. We record commodity derivative gains/losses as the index pricing and forward curves change each period. The following table disaggregates the Company's gain (loss) on derivatives presented in the condensed consolidated statement of operations for the three and nine months ended June 30, 2021 and 2020:

*(In thousands)*

|  | Three Months Ended June 30, 2021 | 2020 | Nine Months Ended June 30, 2021 | 2020 |
| --- | ---: | ---: | ---: | ---: |
| Realized gain (loss) on derivatives | $(7,712) | $14,669 | $(5,133) | $20,161 |
| Unrealized gain (loss) on derivatives | (27,684) | (28,874) | (69,075) | 16,838 |
| Gain (loss) on derivatives | $(35,396) | $(14,205) | $(74,208) | $36,999 |

### Liquidity and Capital Resources

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. We expect that our liquidity and capital resource needs will be met by our sources of liquidity, which as of June 30, 2021, included cash on hand, operating cash flow, and borrowings under our revolving credit facility, and, subsequent to June 30, 2021, included the issuance of equity. For more information on our revolving credit agreement please see Note 9 – Revolving Credit Facility in the Notes to the Unaudited Condensed Consolidated Financial Statements under Item 1. Financial Statements.

Cash on hand and operating cash flow can be subject to fluctuations due to trends and uncertainties that are beyond our control. Likewise, our ability to issue equity and our ability to obtain credit facilities on favorable terms may be impacted by a variety of market factors as well as fluctuations in our results of operations. For more information on conditions impacting our liquidity and capital resources, see “Recent Developments.” For further discussion of risks related to our liquidity and capital resources, see Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2020 filed on March 30, 2021 and our Quarterly Report on Form 10-Q for the quarter ended March 31, 2021 filed on May 17, 2021.

On July 2, 2021 the Company completed the offering of 1,666,667 shares of common stock at a price to the public of $30.00 per common share. The Company received net proceeds of $46.7 million from the sale of the common stock, after deducting underwriting discounts and commissions, and offering expenses paid by the Company. The Company intends to use a significant portion of the net proceeds from this offering to fund drilling and infrastructure for the Company’s EOR Project. In addition, the Company intends to use the remaining net proceeds from this offering for working capital purposes and other general corporate purposes, which may include financing of capital expenditures, financing acquisitions or investments, repayment or refinancing of outstanding debt, financing other business opportunities, and working capital purposes. Subsequent to June 30, 2021, the Company utilized $35.5 million to pay down the Revolving Credit Facility to $62 million. The Company intends to draw on the Revolving Credit Facility in order to fund the initial phases of the EOR Project.

### 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 are driven generally by changes in accounts receivable, accounts payable, commodity prices, credit extended to, and the timing of collections from customers, the level and timing of spending for expansion activity, and the timing of debt maturities. As of June 30, 2021, we had a working capital deficit of $43.3 million. This deficit is primarily attributable to $36.3 million in current derivative liabilities and $17.1 million of accrued liabilities. We utilize our Revolving Credit Facility and cash on hand to manage the timing of cash flows and fund short-term working capital deficits.

### 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, 2021 | 2020 |
| --- | ---: | ---: |
| Net cash provided by operating activities | $58,841 | $49,509 |
| Net cash used in investing activities | (39,366) | (46,202) |
| Net cash used in financing activities | (18,151) | (6,115) |
| Net Increase (Decrease) in Cash and Cash Equivalents | $1,324 | $(2,808) |

#### Operating Activities

The Company’s net cash provided by operating activities increased by $9.3 million or 19% to $58.8 million for the nine months ended June 30, 2021 from $49.5 million for the same periods in 2020. The increase was primarily driven by an increase in revenues of $41.1 million and an increase of $1.5 million in changes in working capital, partially offset by a $25.3 million decrease in net cash received for settlements of commodity derivative contracts and an increase in cash operating expenses of $8.0 million.

#### Investing Activities

The Company's cash flows used in investing activities decreased by $6.8 million or 15% to $39.4 million for the nine months ended June 30, 2021 from $46.2 million for the same period in 2020. The decrease was primarily due to lower capital spending related to the acquisition of oil and natural gas properties by $4.6 million and lower additions to oil and natural gas properties by $2.3 million.

#### Financing Activities

Net cash flow used in financing activities was $18.2 million during the nine months ending June 30, 2021, or an increase of $12.0 million, as compared to the same period in 2020. The largest use of cash, at $12.8 million, was the payment of dividends on common stock and units. The second largest use of cash flow was the net repayment of $3.5 million on the credit facility, as compared to net proceeds of $7.0 million in the same period in 2020. The Company also paid $1.5 million of dividends on the preferred units, which were paid in conjunction with the conversion of such units to common stock as part of the Merger compared to $0 in the same period in 2020 – see Note 11 – Preferred Units to the Company's unaudited condensed consolidated financial statements included herein for further discussion of the preferred units.

### Revolving Credit Facility

The Company's borrowing base was $135 million with outstanding borrowings of $97.5 million at June 30, 2021. Additionally, the Company has an available borrowing capacity of $37.5 million as of June 30, 2021. See further discussion in Note 9 — Revolving Credit Facility to the Company's unaudited condensed consolidated financial statements included herein.

### Distributions

On October 7, 2020, the Board of Managers of REP LLC declared a $3.8 million cash dividend, paid on November 6, 2020. The cash dividend was declared for all issued and outstanding common units, including vested and unvested under the 2018 LTIP of REP LLC.

On February 4, 2021, the Board of Managers of REP LLC declared a $3.8 million cash dividend, paid on February 5, 2021. The cash dividend was declared for all issued and outstanding common units, including vested and unvested under the 2018 LTIP of REP LLC.

On March 4, 2021, the Board of Directors declared a quarterly cash dividend of $0.28 per common share on all of the Company's issued and outstanding common shares to stockholders of record at the close of business on April 16, 2021. The dividend was paid on May 7, 2021 for a total of $5.0 million.

Subsequent to June 30, 2021, the Board of Directors declared on July 9, 2021 a quarterly cash dividend of $0.28 per common share on all of the Company’s issued and outstanding common shares to stockholders of record at the close of business on July 23, 2021. The dividend was paid August 6, 2021 for a total of $5.5 million.

### 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 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. The unaudited condensed consolidated financial statements are based on a number of significant estimates, including estimates of proved oil and natural gas reserves and related present value estimates of future net cash flows therefrom, the carrying value of oil and natural gas properties, accounts receivable and accrued operating expenses, the fair value determination of acquired assets and liabilities, income tax provisions and the fair value of derivatives.

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.

The preparation of the Company’s financial statements requires the Company to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. 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 (1) oil and natural gas reserves; (2) cash flow estimates used in impairment testing of oil and natural gas properties; (3) depreciation, depletion, amortization and accretion, or DD&A; (4) asset retirement obligations; (5) assigning fair value and allocating purchase price in connection with business combinations; (6) accounts receivable; (7) valuation of commodity derivative instruments; (8) accrued liabilities; and (9) income tax provisions. Actual results may differ from these estimates and assumptions used in preparation of the Company’s unaudited condensed consolidated financial statements included herein.

## Market risk

As filed, 6,310 characters.

The Company is exposed to market risk, including the effects of adverse changes in commodity prices and interest rates as described below. The primary objective of the following information is to provide quantitative and qualitative information about the Company's potential exposure to market risks. The term “market risk” refers to the risk of loss arising from adverse changes in oil, natural gas and NGL prices and interest rates. The disclosures are not meant to be precise indicators of expected future losses, but rather indicators of reasonably possible losses. All of the Company’s market risk sensitive instruments were entered into for purposes other than speculative trading.

### Commodity Price Risk

The Company’s major market risk exposure is in the pricing that we receive for our oil, natural gas and NGL production, and primarily our oil production. Pricing for crude oil, natural gas and NGLs have been volatile and unpredictable for several years, and this volatility is expected to continue in the future. The prices we receive for our oil, natural gas and NGLs depend on many factors outside of our control, such as the strength of the global economy and global supply and demand for the commodities we produce.

The Company’s minimum hedging requirement was 50% of PDP volume over the next 24 month period as of June 30, 2021. At June 30, 2021 and September 30, 2020, we had a net liability derivative position of $47.2 million and a net asset derivative position $21.9 million, respectively, related to our price swaps and collars, to reduce price volatility associated with certain of our oil and natural gas sales. These instruments provide only partial price protection against declines in oil and natural gas prices and may partially limit our potential gains from future increases in prices. With respect to these fixed price swap contracts, the counterparty is required to make payment to the Company if the settlement price for any settlement period is less than the swap price, and we are required to make a payment to the counterparty if the settlement price for any settlement period is greater than the swap price. Our derivative contracts are based upon reported settlement prices on commodity exchanges, with crude oil derivative settlements based on NYMEX West Texas Intermediate pricing and with natural gas derivative settlements based on NYMEX Henry Hub pricing.

Due to this volatility, we have historically used, and we expect to continue to use, commodity derivative instruments, such as swaps and collars, to hedge price risk associated with a portion of our anticipated production. Our hedging instruments reduce, but do not eliminate, the potential effects of the variability in cash flow from operations due to fluctuations in oil and natural gas prices and provide increased certainty of cash flows for our drilling program and debt service requirements. See Note 9 - Revolving Credit Facility to the Company's unaudited condensed consolidated financial statements included herein for more information regarding the Company's revolving credit facility.

### Counterparty and Customer Credit Risk

Our cash and cash equivalents are exposed to concentrations of credit risk. We manage and control this risk by investing these funds with major financial institutions. We often have balances in excess of the federally insured limits.

Our derivative contracts expose us to credit risk in the event of nonperformance by counterparties. While we do not require counterparties to our derivative contracts to post collateral, we do evaluate the credit standing of such counterparties as we deem appropriate. Certain counterparties are financial institutions that participate as lenders in our revolving credit facility. The counterparties to our derivative contracts currently in place have investment grade ratings.

Our principal exposures to credit risk are through receivables resulting from joint interest receivables and receivables from the sale of our oil and natural gas production due to the concentration of our oil and natural gas receivables with very few significant customers. The inability or failure of our significant customers to meet their obligations to us or their insolvency or liquidation may adversely affect our financial results.

Joint operations receivables arise from billings to entities that own partial interests in the wells we operate. These entities participate in our wells primarily based on their ownership in leases on which we intend to drill. We have little ability to control whether these entities will participate in our wells.

### Interest Rate Risk

As of June 30, 2021, we had $97.5 million of outstanding borrowings and an additional $37.5 million available under our revolving credit facility. We have entered into floating-to-fixed interest rate swaps to manage interest rate exposure related to our revolving credit facility.

### Cyber Security Risk

The Company's reliance on information technology, including those hosted by third parties, exposes us to cyber security risks that could affect our business, financial condition or reputation and increase compliance challenges.

The Company relies on information technology systems, including internet sites, computer software, data hosting facilities and other hardware and platforms, some of which are hosted by third parties, to assist in conducting our business. Our information technology systems, as well as those of third parties we use in our operations, may be vulnerable to a variety of evolving cybersecurity risks, such as those involving unauthorized access or control, denial-of-service attacks, malicious software, data privacy breaches by employees, insiders or others with authorized access, cyber or phishing-attacks, ransomware, malware, social engineering, physical breaches or other actions.

Although we have implemented information technology controls and systems that are designed to protect information and mitigate the risk of data loss and other cybersecurity risks, such measures cannot entirely eliminate cybersecurity threats, and the enhanced controls we have installed may be breached. If our information technology systems cease to function properly or our cybersecurity is breached, we could suffer disruptions to our normal operations.

## Controls and procedures

As filed, 3,860 characters.

### Evaluation of 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 Securities and Exchange Commission’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 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 not effective as of June 30, 2021 because of the material weakness in our internal control over financial reporting.

As of March 31, 2021, we identified material weaknesses in our internal control over financial reporting. A “material weakness” is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. In particular, we had not yet designed an effective financial reporting process and did not complete thorough reviews of financial reports in a timely manner to allow for an appropriate level of analysis that would have identified these errors. These errors principally related to (i) accounting for share-based compensation and our failure to record compensation expense for certain vested share-based compensation grants in the correct reporting period, (ii) accounting for dividend distributions and our failure to record a declared dividend in the reporting period in which the dividend was declared, (iii) accounting for derivative settlements, and (iv) controls over preparation and review of the Company’s statement of cash flows were not effective. As of June 30, 2021, we have not fully re-designed, implemented and tested internal controls to remediate the material weaknesses.

Each of the material weaknesses could result in a misstatement of our financial statements or disclosures that would result in a material misstatement of our annual or interim consolidated financial statements that would not be prevented or detected.

Our management is in the process of remediating deficiencies to address the material weaknesses identified in the second quarter. The material weaknesses identified above will not be considered remediated until our remediation efforts have been fully implemented and we have concluded that these controls are operating effectively. Consequently, if these or another material weakness or significant deficiencies occur in the future, it could affect the financial results that we report which could result in a restatement of our financial statements or cause us to fail to meet our reporting obligations.

### Changes in internal control over financial reporting

The internal controls over financial reporting after the Merger are now the controls which REP LLC had in place prior to the Merger. There have been no other changes in our internal control over financial reporting that occurred for the quarter ending June 30, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. As noted above, the Company is in the process of developing a remediation plan to address the material weaknesses described above.

## Risk factors

As filed, 734 characters.

We are subject to certain risks and hazards due to the nature of the business activities we conduct. 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 December 31, 2020 and our Quarterly Report on Form 10-Q for the period ended March 31, 2021. 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.

Filed Aug 13, 2021.
Source: SEC EDGAR, the filing index for accession 0001628280-21-016983. Last ingested by Listed: Nov 9, 2026, 19:50 ET. No prices; not investment advice.