# Riley Exploration Permian, Inc.: Form 10-Q for the period ended Mar 31, 2022

- Company: [Riley Exploration Permian, Inc.](/companies/repx.md) (CIK 1001614)
- Form: 10-Q
- Filed: 2022-05-11
- Accepted by EDGAR: May 11, 2022, 16:18 ET
- Period: 2022-03-31
- Accession: 0001628280-22-013834
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1001614/000162828022013834/rep-20220331.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1001614/000162828022013834/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2022-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2022-01-01 to 2022-03-31 | $67.2m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 6 months, 2021-10-01 to 2022-03-31 | $124.5m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Operating income | 3 months, 2022-01-01 to 2022-03-31 | $41.0m | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2021-10-01 to 2022-03-31 | $74.4m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2022-01-01 to 2022-03-31 | $678.0k | us-gaap:InterestExpense |
| Interest expense | 6 months, 2021-10-01 to 2022-03-31 | $1.6m | us-gaap:InterestExpense |
| Income tax | 3 months, 2022-01-01 to 2022-03-31 | −$2.1m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2021-10-01 to 2022-03-31 | $3.8m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2022-01-01 to 2022-03-31 | −$7.2m | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2021-10-01 to 2022-03-31 | $14.2m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2022-01-01 to 2022-03-31 | −$0.37 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2021-10-01 to 2022-03-31 | $0.73 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2022-01-01 to 2022-03-31 | −$0.37 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2021-10-01 to 2022-03-31 | $0.73 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2022-01-01 to 2022-03-31 | 19,501,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2021-10-01 to 2022-03-31 | 19,584,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2021-10-01 to 2022-03-31 | $51.7m | us-gaap:NetCashProvidedByUsedInOperatingActivitiesContinuingOperations |
| Dividends paid | 6 months, 2021-10-01 to 2022-03-31 | $12.2m | us-gaap:PaymentsOfDividendsCommonStock |
| Cash and equivalents | at 2022-03-31 | $19.6m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2022-03-31 | $51.3m | us-gaap:AssetsCurrent |
| Total assets | at 2022-03-31 | $433.2m | us-gaap:Assets |
| Current liabilities | at 2022-03-31 | $113.9m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2022-03-31 | $208.0m | us-gaap:Liabilities |
| Shareholders' equity | at 2022-03-31 | $225.2m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 34,999 characters.

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

### Overview

We operate in the upstream segment of the oil and natural gas industry and are focused on steadily growing conventional reserves, production and cash flow through the acquisition, exploration, development and production of oil, natural gas and NGLs primarily in the Permian Basin in West Texas. The Company’s activities are primarily focused on the San Andres Formation, a shelf margin deposit on the Central Basin Platform and Northwest Shelf. We intend to continue to develop our reserves and increase production through development drilling and exploration activities and through acquisitions that meet our strategic and financial objectives.

### Financial and Operating Highlights

Financial and operating results reflect the following:

- Increased total net equivalent production by 18% to 9.8 MBoe/d for the three months ended March 31, 2022, as compared to the same period in 2021 and 24% to 9.9 MBoe/d for the six months ended March 31, 2022, as compared to the same period in 2021
- During the three and six months ended March 31, 2022, 2 gross (1.7 net) and 7 gross (5.8 net) horizontal wells brought online to production, respectively
- Realized average combined price on production sold of $75.63 per Boe, before derivative settlements, during the three months ended March 31, 2022, including $92.44 per barrel for oil
- Generated cash flow from operations of $51.7 million for the six months ended March 31, 2022
- Total accrued capital expenditures of $25.3 million and $46.1 million for the three and six months ended March 31, 2022, respectively
- Paid cash dividends on common shares of $6.1 million during the three months ended March 31, 2022, and announced latest dividend of $0.31 per share with a record date of April 21, 2022, which was paid on May 5, 2022, for a total of $6.1 million
- Exited the fiscal second quarter with $19.6 million in cash and $63.0 million drawn on our revolving credit facility

### Recent Developments

### Market Conditions and Commodity Prices

U.S. and global markets are experiencing volatility and disruption following the escalation of geopolitical tensions and the start of the military conflict between Russia and Ukraine. On February 24, 2022, a full-scale military invasion of Ukraine by Russian troops was reported. Although the length and impact of the ongoing military conflict is highly unpredictable, the conflict in Ukraine has led to market disruptions, including significant volatility in commodity prices, credit and capital markets, as well as supply chain interruptions.

In addition, U.S. markets are experiencing a volatile inflationary environment attributable to a number of factors including the Russian military conflict with Ukraine. Certain of our capital expenditures and expenses are affected by general inflation and we expect costs for the remainder of 2022 to continue to be a function of supply and demand.

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

### Results of Operations

### Comparison for the three and six months ended March 31, 2022 and 2021

The following table sets forth selected operating data for the three and six months ended March 31, 2022 and 2021:

*Revenues (in thousands):*

|  | Three Months Ended March 31, 2022 | 2021 | Six Months Ended March 31, 2022 | 2021 |
| --- | ---: | ---: | ---: | ---: |
| Oil sales | $62,376 | $30,784 | $112,999 | $52,891 |
| Natural gas sales | 1,789 | 4,516 | 4,494 | 4,635 |
| Natural gas liquids sales | 2,480 | 1,359 | 5,802 | 1,547 |
| Oil and natural gas sales, net | $66,645 | $36,659 | $123,295 | $59,073 |
| **Production Data, net:** |  |  |  |  |
| Oil (MBbls) | 675 | 543 | 1,343 | 1,090 |
| Natural gas (MMcf) | 682 | 602 | 1,526 | 1,063 |
| Natural gas liquids (MBbls) | 93 | 103 | 198 | 177 |
| Total (MBoe) | 881 | 746 | 1,796 | 1,445 |
| Daily combined volumes (Boe/d) | 9,791 | 8,293 | 9,867 | 7,937 |
| Daily oil volumes (Bbls/d) | 7,497 | 6,031 | 7,381 | 5,988 |
| **Average Realized Prices:** |  |  |  |  |
| Oil ($ per Bbl) | $92.44 | $56.71 | $84.11 | $48.53 |
| Natural gas ($ per Mcf) | 2.62 | 7.51 | 2.95 | 4.36 |
| Natural gas liquids ($ per Bbl) | 26.71 | 13.16 | 29.25 | 8.72 |
| Combined ($ per Boe) | $75.63 | $49.12 | $68.64 | $40.89 |
| **Average Realized Prices, including derivative settlements:(1)** |  |  |  |  |
| Oil ($ per Bbl) | $66.60 | $51.70 | $60.37 | $50.78 |
| Natural gas ($ per MMBtu) | 1.25 | 7.72 | 1.31 | 4.48 |
| Natural gas liquids ($ per Bbl) | 26.71 | 13.16 | 29.25 | 8.72 |
| Combined ($ per Boe) | $54.78 | $45.64 | $49.50 | $42.68 |

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

### Oil and Natural Gas Revenues

Our revenues are derived from the sale of our oil and natural gas production, including the sale of NGLs that are extracted from our natural gas during processing. Revenues from product sales are a function of the volumes produced, product quality, market prices, and gas Btu content. Our revenues from oil, natural gas and NGL sales do not include the effects of derivatives. Our revenues may vary significantly from period to period as a result of changes in volumes of production sold or changes in commodity prices. The Company’s total oil and natural gas revenue, net increased $30.0 million and $64.2 million, or 82% and 109%, for the three and six months ended March 31, 2022 compared to the same periods in 2021. The Company’s realized average combined price on its production for the three and six months ended March 31, 2022 increased by $26.51 and $27.75, or 54% and 68%, respectively, compared to the same periods in 2021.

### Oil revenues

- For the three months ended March 31, 2022, oil revenues increased by $31.6 million, or 103%, compared to the same period in 2021. Of the increase, $24.1 million was attributable to an increase in our realized price and $7.5 million was attributable to an increase in volume. Volumes increased by 24% while prices increased by 63% compared to the same period in 2021.
- For the six months ended March 31, 2022, oil revenues increased by $60.1 million, or 114%, compared to the same period in 2021. Of the increase, $47.8 million was attributable to an increase in our realized price and $12.3 million was attributable to an increase in volume. Volumes increased by 23% while prices increased by 73% compared to the same period in 2021.
- Oil volumes increased during the three and six months ended March 31, 2022 due to production from new wells and workovers performed on existing wells. During the three and six months ended March 31, 2022, we brought online 2 gross (1.7 net) and 7 gross (5.8 net) horizontal wells, respectively.
- The average WTI price increased by $37.09 and $36.00 per Bbl during the three and six months ended March 31, 2022, respectively, compared to the same periods in 2021.

### Natural gas revenues

- For the three months ended March 31, 2022, natural gas revenues decreased by $2.7 million, compared to the same period in 2021, to $1.8 million from $4.5 million. Volumes increased by 13% and realized prices decreased by 65% compared to the same period in 2021.
- For the six months ended March 31, 2022, natural gas revenues decreased by $0.1 million, compared to the same period in 2021, to $4.5 million from $4.6 million. Volumes increased by 44% and realized prices decreased by 32% compared to the same period in 2021.
- Natural gas sales volumes increased during the three and six months ended March 31, 2022 due to increased production from new wells and workovers performed on existing wells, partially offset by curtailed volume capacity by our midstream gas gathering and processing counterparty due to their capacity expansion project.
- The average Henry Hub price increased by $1.17 and $1.70 per Mcf, or 33% and 57%, during the three and six months ended March 31, 2022, respectively, compared to the same periods in 2021. However, during February 2021, natural gas prices surged due to the effects of Winter Storm Uri. The Company benefited from the increase in natural gas prices, which in turn led to higher realized average prices for the three and six months ended March 31, 2021, respectively, compared to the same periods in 2022, despite Henry Hub index average prices having increased during 2022.

### Natural gas liquids revenues

- For the three months ended March 31, 2022, NGL revenues increased by $1.1 million, compared to the same period in 2021, to $2.5 million from $1.4 million. Volumes decreased by 10% and realized prices increased 103% compared to the same period in 2021.
- For the six months ended March 31, 2022, NGL revenues increased by $4.3 million, compared to the same period in 2021, to $5.8 million from $1.5 million. Volumes increased by 12% and realized prices increased 236% compared to the same period in 2021.
- During the three months ended March 31, 2022, NGL sales volumes decreased due to curtailed volume capacity by our midstream gas gathering and processing counterparty as a result of their capacity expansion project, partially offset by increased production from new wells and workovers performed on existing wells. During the six months ended March 31, 2022, NGL sales volumes increased due to production from new wells and workovers performed on existing wells, partially offset by curtailed volume capacity by midstream gas gathering and processing counterparty due to capacity expansion project.

### Contract Services - Related Party Revenue

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

*(In thousands)*

|  | Three Months Ended March 31, 2022 | 2021 | Six Months Ended March 31, 2022 | 2021 |
| --- | ---: | ---: | ---: | ---: |
| Contract services – related parties(1) | $600 | $600 | $1,200 | $1,200 |
| Cost of contract services - related parties(2) | 85 | 91 | 235 | 239 |
| Gross profit - related parties | $515 | $509 | $965 | $961 |

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

(2) The Company's cost of contract services - related parties represents costs specifically attributable to the master service agreements the Company has in place with the respective related parties.

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

*(In thousands)*

| Costs and Expenses: | Three Months Ended March 31, 2022 | 2021 | Six Months Ended March 31, 2022 | 2021 |
| --- | ---: | ---: | ---: | ---: |
| Lease operating expenses | $6,830 | $5,955 | $14,249 | $10,523 |
| Production and ad valorem taxes | $3,502 | $2,755 | $6,507 | $4,044 |
| Exploration costs | $1,498 | $5,473 | $2,109 | $5,897 |
| Depletion, depreciation, amortization and accretion | $6,633 | $6,251 | $13,500 | $12,241 |
| Administrative costs | $4,014 | $2,696 | $7,647 | $5,141 |
| Equity-based compensation | 1,017 | 4,847 | 1,968 | 5,260 |
| General and administrative expense | $5,031 | $7,543 | $9,615 | $10,401 |
| Transaction costs | $2,638 | $2,164 | $3,896 | $3,213 |
| Interest expense, net | $678 | $1,165 | $1,574 | $2,400 |
| Loss on derivatives | $49,632 | $24,903 | $54,825 | $38,812 |
| Income tax expense (benefit) | $(2,114) | $14,231 | $3,755 | $13,716 |

32

### Lease Operating Expenses

Lease operating expenses ("LOE") are the costs incurred in the operation and maintenance of producing properties. Expenses for compression, direct labor, saltwater disposal and materials and supplies comprise the most significant portion of our lease operating expenses. Certain operating cost components, such as direct labor and materials and supplies, generally remain relatively fixed across broad production volume ranges, but can fluctuate depending on activities performed during a specific period. For instance, repairs to our pumping equipment or surface facilities or subsurface maintenance result in increased production expenses in periods during which they are performed. Certain operating cost components, such as compression and saltwater disposal associated with completion water, are variable and increase or decrease as hydrocarbon production levels and the volume of completion water disposal increases or decreases.

The Company’s LOE increased by $0.9 million for the three months ended March 31, 2022 compared to the same period in 2021. For the three months ended March 31, 2022, this increase was primarily attributable to an increase in variable LOE costs as production volumes increased.

The Company’s LOE increased by $3.7 million for the six months ended March 31, 2022 compared to the same period in 2021. For the six months ended March 31, 2022, $1.7 million of the increase was attributable to an increase in variable LOE costs as production volumes increased and $1.3 million of the increase was due to higher workover expense based on the number of workovers performed during the period.

### Production and Ad Valorem Tax Expense

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

Production and ad valorem taxes increased by $0.7 million and $2.5 million for the three and six months ended March 31, 2022, respectively, compared to the same periods in 2021. Production taxes increased primarily due to increases in our production and significantly higher commodity prices. Ad valorem taxes decreased for the three and six months ended March 31, 2022 based on slight adjustments to property values during the current period.

### Exploration Expense

Exploration expense consists of expiration of unproved leasehold and geological and geophysical costs which include seismic survey costs. The following table presents exploration expense by area for the three and six months ended March 31, 2022 and 2021:

*(In thousands, except acreage data)*

|  | Three Months Ended March 31, 2022 | 2021 | Six Months Ended March 31, 2022 | 2021 |
| --- | ---: | ---: | ---: | ---: |
| Exploration expense(1) | $1,465 | $5,403 | $2,053 | $5,827 |
| Geological and geophysical costs | 33 | 70 | 56 | 70 |
| Total exploration expense | $1,498 | $5,473 | $2,109 | $5,897 |
| Expired net acres - Texas | 626 | 1,368 | 717 | 1,467 |
| Expired net acres - New Mexico | 518 | 6,296 | 1,664 | 7,201 |
| Net acres renewed after expiration(2) | 8 | 398 | 97 | 486 |

(1) For the three months ended March 31, 2022, exploration expense includes $1.3 million and $0.2 million related to expiration of unproved leasehold costs in Texas and New Mexico, respectively. For the six months ended March 31, 2022, exploration expense includes $1.5 million and $0.6 million related to expiration of unproved leasehold costs in Texas and New Mexico, respectively.

(2) The Company did not renew any net acreage after expiration in New Mexico during the three and six months ended March 31, 2022 and 2021.

### Depletion, Depreciation, Amortization and Accretion Expense

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

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

Depletion, depreciation, amortization and accretion expense increased by $0.4 million and $1.3 million for the three and six months ended March 31, 2022, respectively, compared to the same periods for 2021. The increase for the three and six months ended March 31, 2022 was primarily due to higher production, partially offset by a lower depletion rate. The depletion rate is a function of capitalized cost and related underlying reserves. The lower depletion rate was primarily driven by an increase in reserves as a result of the Company's drilling activity and improved commodity prices.

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

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

Total G&A expense decreased by $2.5 million and $0.8 million for the three and six months ended March 31, 2022, respectively, compared to the same periods for 2021. Administrative costs, which includes payroll, benefits and non-payroll costs, increased by $1.3 million and $2.5 million, respectively, for the three and six months ended March 31, 2022, compared to the same periods for 2021. The increase in administrative costs was primarily attributable to increased professional services, insurance, technology and investor relations costs based on the Company being a publicly traded company for the full three and six month periods in 2022. Equity-based compensation expense decreased by $3.8 million and $3.3 million for the three and six months ended March 31, 2022, respectively, compared to the same periods in 2021. The higher equity-based compensation during the three and six months ended March 31, 2021 relates to restricted shares awarded to certain employees following completion of the Merger that immediately vested.

### Transaction Costs

Transaction costs represent costs incurred on successful or unsuccessful business combinations or unsuccessful property acquisitions. During the three and six months ended March 31, 2021, the transaction costs of $2.2 million and $3.2 million, respectively, primarily relates to costs incurred on the Merger with Tengasco in February 2021. The transaction costs of $2.6 million and $3.9 million for the three and six months ended March 31, 2022, respectively, primarily relate to a potential business combination and related financing that the Company pursued but ultimately chose not to consummate due to changing market conditions.

### Interest Expense

Interest expense decreased by $0.5 million and $0.8 million during the three and six months ended March 31, 2022, respectively, when compared to the same periods for 2021. Interest expense decreased due to a lower outstanding average balance on the Company's revolving credit facility and capitalized interest related to the Company's EOR project during the three and six months ended March 31, 2022, respectively, when compared to the same periods for 2021.

### Gain/Loss on Derivatives

The Company recognizes settlements and changes in the fair value of its derivative contracts as a single component within other income (expenses) on its condensed consolidated statement of operations. We have oil and natural gas derivative contracts, including fixed price swaps, basis swaps and collars, that settle against various indices. The following table presents the components of the Company's loss on derivatives for the three and six months ended March 31, 2022 and 2021:

*(In thousands)*

|  | Three Months Ended March 31, 2022 | 2021 | Six Months Ended March 31, 2022 | 2021 |
| --- | ---: | ---: | ---: | ---: |
| Settlements on derivatives | $(18,375) | $(2,594) | $(34,389) | $2,579 |
| Non-cash loss on derivatives | (31,257) | (22,309) | (20,436) | (41,391) |
| Loss on derivatives | $(49,632) | $(24,903) | $(54,825) | $(38,812) |

Our earnings are affected by the changes in value of our derivative portfolio between periods and the related cash received or paid upon settlement of our derivatives. To the extent the future commodity price outlook declines between periods, we will have mark-to-market gains; while future commodity price increases between measurement periods result in mark-to-market losses. The increase in the loss on derivatives for the three and six months ended March 31, 2022 compared to the same periods in 2021 is due to the increase in commodity prices. For example, the average WTI price was $95.18 per Bbl for the three months ended March 31, 2022 compared to $58.09 per Bbl for the same period in 2021.

### Income Tax Expense

The Company became a taxable entity as a result of its Merger with Tengasco on February 26, 2021. See further discussion in Note 4 - Acquisitions to the Company's condensed consolidated financial statements included herein. While REP LLC was organized as a limited liability company, taxable income passed through to its unit holders. Accordingly, a provision for federal and state corporate income taxes has been made for the operations of the Company only from February 27, 2021 through March 31, 2022 in the accompanying condensed consolidated financial statements. Deferred income taxes are provided to reflect the future tax consequences or benefits of differences between the tax basis of assets and liabilities and their reported amounts in the financial statements using enacted tax rates. Upon consummation of the Merger, the Company established a $13.6 million provision for deferred income taxes with the conversion to a C-corporation. The majority of this deferred tax liability was established by a change in tax status which primarily was attributable to the oil and natural gas properties. See Note 11 - Income Taxes to the Company's condensed consolidated financial statements included herein for further discussion of income taxes.

*(In thousands)*

|  | Three Months Ended March 31, 2022 | 2021 | Six Months Ended March 31, 2022 | 2021 |
| --- | ---: | ---: | ---: | ---: |
| Current expense | $779 | $1,143 | $892 | $778 |
| Deferred expense (benefit) | (2,893) | 13,088 | 2,863 | 12,938 |
| Total expense (benefit) | $(2,114) | $14,231 | $3,755 | $13,716 |
| Effective income tax rate | 22.9% | (74.7)% | 20.8% | (49.9)% |

### Liquidity and Capital Resources

The business of exploring for, developing and producing oil and natural gas is capital intensive. Because oil, natural gas and NGL reserves are a depleting resource, like all upstream operators, we must make capital investments to grow and even sustain production. The Company’s principal liquidity requirements are to finance its operations, fund capital expenditures and acquisitions, make cash distributions and satisfy any indebtedness obligations. Cash flows are subject to a number of variables, including the level of oil and natural gas production and prices, and the significant capital expenditures required to more fully develop the Company’s oil and natural gas properties. Historically, our primary sources of capital funding and liquidity have been our cash on hand, cash flow from operations and borrowings under our revolving credit facility. At times and as needed, we may also issue debt or equity securities, including through transactions under our shelf registration statement filed with the SEC. We estimate the combination of the sources of capital discussed above will continue to be adequate to meet our short and long-term liquidity needs.

Cash on hand and operating cash flow can be subject to fluctuations due to trends and uncertainties that are beyond our control. Likewise, our ability to issue equity and obtain credit facilities on favorable terms may be impacted by a variety of market factors as well as fluctuations in our results of operations. For instance, during the fiscal third quarter of 2022, the Company is expecting an impact to its natural gas and NGL sales due to its primary midstream gas gathering and processing counterparty curtailing volume capacity as work continues on their overall capacity expansion project. While the Company expects volumes to be impacted only for the month of April, the Company cannot estimate the full impact this will have on its results of operations. For more information on conditions impacting our liquidity and capital resources. For further discussion of risks related to our liquidity and capital resources, see "Item 1A. Risk Factors."

### Working Capital

Working capital is the difference in our current assets and our current liabilities. Working capital is an indication of liquidity and potential need for short-term funding. The change in our working capital requirements is driven generally by changes in accounts receivable, accounts payable, commodity prices, credit extended to, and the timing of collections from customers, the level and timing of spending for expansion activity, and the timing of debt maturities. As of March 31, 2022, we had a working capital deficit of $62.6 million compared to working capital deficit of $46.9 million as of September 30, 2021. The working capital deficit at March 31, 2022 reflects $58.3 million in current derivative liabilities compared to $42.1 million in current derivative liabilities at September 30, 2021. Additionally, we had $7.9 million payable to our counterparties for March 2022 derivative contract settlements. We utilize our revolving credit facility and cash on hand to manage the timing of cash flows and fund short-term working capital deficits. Our current derivative assets and liabilities represent the mark-to-market value as of March 31, 2022 of future commodity production which will settle on a monthly basis through the end of their contractual terms. This aligns with the receipt of oil and natural gas revenues on a monthly basis. Before the impact of derivative assets and liabilities, we have a working capital deficit of $5.1 million as of March 31, 2022.

### Cash Flows

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

*(In thousands)*

| Statement of Cash Flows Data from Continuing Operations: | Six Months Ended March 31, 2022 | 2021 |
| --- | ---: | ---: |
| Net cash provided by operating activities | $51,722 | $38,146 |
| Net cash used in investing activities | $(39,327) | $(16,825) |
| Net cash used in financing activities | $(9,853) | $(13,152) |

#### Operating Activities

The Company’s net cash provided by operating activities increased by $13.6 million or 36% to $51.7 million for the six months ended March 31, 2022 from $38.1 million for the same period in 2021. The increase was primarily driven by an increase in revenues of $64.2 million, partially offset by cash payments of $34.4 million on settlements for commodity derivative contracts and an increase in operating expenses of $9.4 million, which excludes non-cash expenses such as equity-based compensation, expiration of unproved leasehold costs, and depreciation, depletion, accretion, and amortization expense.

#### Investing Activities

The Company's cash flows used in investing activities increased by $22.5 million or 134% to $39.3 million for the six months ended March 31, 2022 from $16.8 million for the same period in 2021. The increase was primarily due to higher capital spending of $22.0 million primarily related to the Company's increased drilling and completion activity and EOR project during the six months ended March 31, 2022 compared to the same period in 2021.

#### Financing Activities

Net cash flow used in financing activities decreased by $3.3 million or 25% to $9.9 million for the six months ended March 31, 2022 from $13.2 million for the same period in 2021. During the six months ended March 31, 2022, the Company utilized $3.0 million net proceeds from its revolving credit facility to fund capital expenditures and working capital. For the same period in 2021, the Company had a net paydown on its revolving credit facility of $3.5 million based on decreased drilling and completion activity during this period. In addition, the Company distributed an additional $4.4 million of dividends on common stock during the six months ended March 31, 2022 compared to the same period in 2021.

### Revolving Credit Facility

The Company's borrowing base was $175 million with outstanding borrowings of $63 million on March 31, 2022, representing available borrowing capacity of $112 million. See further discussion in Note 9 — Revolving Credit Facility to the Company's condensed consolidated financial statements included herein.

On April 29, 2022, the Company amended its Credit Agreement to, among other things, increase the borrowing base from $175 million to $200 million, extend the maturing date to April 2026, replace LIBOR with the SOFR and changed the requirements for hedging to be based on utilization of the borrowing base and the Company's leverage ratio.

### Distributions

For the three months ended March 31, 2022, the Company authorized and declared a quarterly dividend totaling approximately $6.2 million, with $6.1 million paid in cash and $0.1 million payable to restricted shareholders upon vesting.

### Contractual Obligations

In July 2021, as part of a planned expansion of the primary gas processing plant owned by the Company's primary midstream counterparty, Stakeholder, the Company committed to annually drill, complete and connect a minimum number of wells or deliver an annual target volume to Stakeholder's gathering system. While the minimum number of wells is below our planned development activity, there are financial penalties if the minimum activity levels are not met. The annual well or volume target is for each of five years beginning January 2022. The additional capacity from the gas processing plant expansion is expected to lead to increased natural gas sales and decreased gas flaring for the Company.

In August 2021, the Company entered into a purchase agreement for supplies for its EOR project. Under the agreement, the Company has remaining commitments to purchasing supplies totaling approximately $2.6 million by April 2022.

On October 7, 2021, the Company executed two agreements related to its EOR project. The first agreement is a CO2 purchase agreement with Kinder Morgan CO2 Company, LLC and the second agreement is a connection agreement that also established a delivery point for the purchased CO2 with the Cortez Pipeline Company.

On March 25, 2022, the Company executed a purchase order for facility and support equipment for its EOR project. Under the order, the Company has remaining commitments totaling approximately $2.1 million, and the equipment will be delivered within 29 weeks of executing the purchase order.

On April 22, 2022, the Company entered into a purchase agreement for pipe related to its fiscal 2023 drilling program. Under the agreement, the Company has commitments to purchase approximately $10.6 million of pipe by December 2022.

### Critical Accounting Estimates

The discussion and analysis of the Company’s financial condition and results of operations are based upon the Company’s unaudited condensed consolidated financial statements and accompanying notes included herein, which have been prepared in accordance with U.S. GAAP. The preparation of financial statements requires the Company to make estimates and assumptions that affect the amounts reported in the unaudited condensed consolidated financial statements and accompanying notes. These estimates and assumptions may also affect disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.

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

Certain accounting policies involve judgments and uncertainties to such an extent that there is reasonable likelihood that materially different amounts could have been reported under different conditions, or if different assumptions had been used. The Company evaluates its estimates and assumptions on a regular basis. The Company bases its estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Significant areas requiring the use of assumptions, judgments and estimates include (i) oil and natural gas reserves; (ii) cash flow estimates used in impairment testing of oil and natural gas properties; (iii) depreciation, depletion, amortization and accretion, or DD&A; (iv) ARO; (v) assigning fair value and allocating purchase price in connection with business combinations; (vi) valuation of commodity derivative instruments; (vii) income tax provisions; (viii) carrying value of goodwill; and (ix) accrued amounts. Actual results may differ from these estimates and assumptions used in preparation of the Company’s unaudited condensed consolidated financial statements included herein.

## Controls and procedures

As filed, 1,318 characters.

### Disclosure Controls and Procedures

Our management establishes and maintains disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Such information is accumulated and communicated to our management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), as appropriate to allow timely decisions regarding required disclosure. We have evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report, with the participation of our CEO and CFO, as well as other key members of our management. Based on this evaluation, our CEO and CFO concluded that our disclosure controls and procedures were effective as of March 31, 2022.

### Changes in internal control over financial reporting

There have been no changes in our internal control over financial reporting that occurred for the quarter ending March 31, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 7,828 characters.

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

### Risks Related to our Business

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Filed May 11, 2022.
Source: SEC EDGAR, the filing index for accession 0001628280-22-013834. Last ingested by Listed: Nov 4, 2026, 18:14 ET. No prices; not investment advice.