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

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q.

The following discussion contains “forward‑looking statements” reflecting our current expectations, estimates and assumptions concerning events and financial trends that may affect our future operating results or financial position. Actual results and the timing of events may differ materially from those contained in these forward‑looking statements due to a number of factors. Factors that could cause or contribute to such differences include, but are not limited to, market prices for oil and natural gas, capital expenditures, economic and competitive conditions, regulatory changes and other uncertainties, as well as those factors discussed below and elsewhere in this Report. Please read “Cautionary Note Regarding Forward‑Looking Statements.” Also, please read the risk factors and other cautionary statements described under “Part I, Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2023 (the "2023 Form 10-K") and elsewhere in this Report. We assume no obligation to update any of these forward‑looking statements, except as required by applicable law.

Overview

Granite Ridge is a scaled, non-operated oil and gas exploration and production company. We own a portfolio of wells and top-tier acreage across the Permian and five other prolific unconventional basins across the United States. Rather than drill wells ourselves, we increase asset diversity and decrease overhead by investing in a smaller piece of a larger number of high-graded wells drilled by proven public and private operators. As a non-operating partner, we pay our pro rata share of expenses, but we are not burdened by long-term contracts and drilling obligations common to operators.

Business Combination

On October 24, 2022 (the “Closing Date”), Granite Ridge and ENPC consummated the business combination pursuant to the terms of the Business Combination Agreement, dated as of May 16, 2022 (the “Business Combination Agreement”), by and among ENPC, Granite Ridge, ENPC Merger Sub, Inc., a Delaware corporation and a wholly-owned subsidiary of Granite Ridge (“ENPC Merger Sub”), GREP Merger Sub, LLC, a Delaware limited liability company and a wholly-owned subsidiary of Granite Ridge (“GREP Merger Sub”), and Granite Ridge Holdings, LLC, a Delaware limited liability company formerly known as GREP Holdings, LLC (“GREP”).

Pursuant to the Business Combination Agreement, on the Closing Date, (i) ENPC Merger Sub merged with and into ENPC (the “ENPC Merger”), with ENPC surviving the ENPC Merger as a wholly-owned subsidiary of Granite Ridge and (ii) GREP Merger Sub merged with and into GREP (the “GREP Merger,” and together with the ENPC Merger, the “Mergers”), with GREP surviving the GREP Merger as a wholly-owned subsidiary of Granite Ridge (the transactions contemplated by the foregoing clauses (i) and (ii) the “Business Combination,” and together with the other transactions contemplated by the Business Combination Agreement, the “Transactions”).

For additional information on the Business Combination, see Note 1 of the Notes to Condensed Consolidated Financial Statements.

Selected Factors That Affect Our Operating Results

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

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

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

The price of oil and natural gas can vary depending on the market in which it is sold and the means of transportation used to transport the oil and natural gas to market.

The price at which our oil and natural gas production is sold typically reflects either a premium or discount to the NYMEX benchmark price. Thus, our operating results are also affected by changes in the oil and natural gas price differentials between the applicable benchmark and the sales prices we receive for our oil and natural gas production.

Our oil price differential to the NYMEX benchmark price during the three months ended September 30, 2024 and 2023 was a discount of $(2.99) per barrel and $(3.79) per barrel, respectively. For the nine months ended September 30, 2024 and 2023, our oil price differential to the NYMEX benchmark price was a discount of $(2.27) per barrel and $(1.34) per barrel, respectively.

Our natural gas price differential to the average NYMEX price during the three months ended September 30, 2024 and 2023 was a discount of $(0.87) per Mcf and $(0.08) per Mcf, respectively. For the nine months ended September 30, 2024 and 2023, our natural gas price differential to the average NYMEX price was a discount of $(0.43) per Mcf and a premium of $0.16 per Mcf, respectively.

Market Conditions

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

Historically, commodity prices have been volatile, and we expect that volatility to continue in the future.

Although we cannot predict the occurrence of events that may affect future commodity prices, or the degree to which these prices will be affected, the prices for any commodity that we produce will generally approximate current market prices in the geographic region of the production. From time to time, we expect that we may hedge a portion of our commodity price risk to mitigate the impact of price volatility on our business.

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

For the three months ended September 30, 2024, the average NYMEX oil pricing was $76.43 per barrel of oil, or 7% lower than the average NYMEX price per barrel for the three months ended September 30, 2023. Our settled derivatives increased our realized oil price per barrel by $0.55 for the three months ended September 30, 2024 and increased our realized oil price per barrel by $0.11 for the three months ended September 30, 2023. For the three months ended September 30, 2024, our average realized oil price per barrel after reflecting settled derivatives was $73.99 compared to

$78.52 for the three months ended September 30, 2023. For the nine months ended September 30, 2024, the average NYMEX oil pricing was $78.58 per barrel of oil, or 2% higher than the average NYMEX price per barrel for the nine months ended September 30, 2023. Our settled derivatives increased our realized oil price per barrel by $0.11 for the nine months ended September 30, 2024 and increased our realized oil price per barrel by $1.29 for the nine months ended September 30, 2023. For the nine months ended September 30, 2024, our average realized oil price per barrel after reflecting settled derivatives was $76.42 compared to $77.25 for the nine months ended September 30, 2023.

For the three months ended September 30, 2024, the average NYMEX natural gas pricing was $2.11 per Mcf, or 21% lower than the average NYMEX price per Mcf for the three months ended September 30, 2023. Our settled derivatives increased our realized natural gas price per Mcf by $0.74 for the three months ended September 30, 2024 and increased our realized natural gas price per Mcf by $0.55 for the three months ended September 30, 2023. For the three months ended September 30, 2024, our average realized natural gas price per Mcf after reflecting settled derivatives was $1.98 compared to $3.13 for the three months ended September 30, 2023. For the nine months ended September 30, 2024, the average NYMEX natural gas pricing was $2.11 per Mcf, or 18% lower than the average NYMEX price per Mcf for the nine months ended September 30, 2023. Our settled derivatives increased our realized natural gas price per Mcf by $0.58 for the nine months ended September 30, 2024 and increased our realized natural gas price per Mcf by $0.72 for the nine months ended September 30, 2023. For the nine months ended September 30, 2024, our average realized natural gas price per Mcf after reflecting settled derivatives was $2.26 compared to $3.46 for the nine months ended September 30, 2023.

Results of Operations

The following table sets forth summary production and operating data for the periods indicated. Because of normal production declines, increased or decreased drilling activities, fluctuations in commodity prices and the effects of acquisitions and divestitures, the historical information presented below should not be interpreted as being indicative of future results.

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Oil and Natural Gas Sales

Our revenues vary from year to year primarily due to changes in realized commodity prices and production volumes. Our oil and natural gas sales for the three months ended September 30, 2024 decreased 13% from the same period in 2023. Oil revenues for the three months ended September 30, 2024 decreased by 3% compared to the same period in 2023, driven by a 6% decrease in realized prices, excluding the effect of settled derivatives, partially offset by a 3% increase in production. Natural gas revenues decreased by 58% for the three months ended September 30, 2024 compared to 2023, driven by a 52% decrease in realized natural gas prices, excluding the effect of settled commodity derivatives, and a 12% decrease in production.

Oil revenues for the nine months ended September 30, 2024 increased by 3% compared to the same period in 2023, driven by a 3% increase in production. Natural gas revenues decreased by 38% for the nine months ended September 30, 2024 compared to 2023 as a result of a 39% decrease in realized natural gas prices, excluding the effect of settled commodity derivatives, partially offset by a 1% increase in production.

Production from oil and gas properties increased for the nine months ended September 30, 2024 as compared to the same period of 2023 due to drilling success and the acquisition of additional net revenue interests. This increase in production is offset by the natural decline of the production rate of existing oil and natural gas wells as well as production lost from the sale of certain of our Permian Basin assets to Vital Energy, Inc. ("Vital Energy") in December 2023. The number of net producing wells increased from 175.24 net wells on September 30, 2023 to 195.88 net wells on September 30, 2024.

Lease Operating Expenses

Lease operating expenses were $13.0 million ($5.62 per Boe) for the three months ended September 30, 2024, a decrease of 23% from $16.9 million ($6.96 per Boe) during the same period in 2023. The decrease was partially due to a decrease of $0.5 million in transportation and gathering expenses related to certain take in kind arrangements on natural gas volumes, which have declined in the Haynesville area. In addition, workover and repair and maintenance expenses for the third quarter of 2024 are lower than the same period of 2023, partially offset by an increase in certain other lease operating expenses as a result of an increase in well count due to acquisitions and additional wells successfully drilled and completed.

Lease operating expenses were $42.2 million ($6.40 per Boe) for the nine months ended September 30, 2024, a decrease of 7% from $45.1 million ($6.96 per Boe) during the same period in 2023. The decrease was primarily due to a decrease of $1.4 million in transportation and gathering expenses related to certain take in kind arrangements on natural gas volumes, which have declined in the Haynesville area. In addition, workover and repair and maintenance expenses for the nine months ended September 30, 2024 are lower than the same period of 2023, partially offset by an increase in certain other lease operating expenses.

Production and Ad Valorem Taxes

We generally pay production taxes based on realized oil and natural gas sales. Production taxes were $5.3 million ($2.29 per Boe) for the three months ended September 30, 2024, compared to $7.1 million ($2.93 per Boe) during the same period in 2023. As a percentage of oil and natural gas sales, our production taxes were 6% and 7% during the three months ended September 30, 2024 and 2023, respectively.

Production taxes were $15.0 million ($2.28 per Boe) for the nine months ended September 30, 2024 compared to $17.9 million ($2.76 per Boe) during the same period in 2023. As a percentage of oil and natural gas sales, our production taxes were 5% and 6% during the nine months ended September 30, 2024 and 2023, respectively.

Production taxes fluctuate with the market value of our production sold, while ad valorem taxes are generally based on the valuation of our oil and natural gas properties at the beginning of the year, which vary across the different areas in which we operate.

Ad valorem taxes increased during both three and nine months ended September 30, 2024 as compared to the same periods in 2023, primarily due to additional wells drilled and completed and new wells acquired.

Depletion and Accretion

Depletion and accretion was $44.1 million ($19.06 per Boe) for the three months ended September 30, 2024, a decrease of 1% from $44.3 million ($18.20 per Boe) during the same period in 2023. The decrease in depletion and accretion expense was primarily due to the decrease in production partially offset by an increase in the depletion rate.

Depletion and accretion was $126.7 million ($19.23 per Boe) for the nine months ended September 30, 2024, an increase of 12% from $113.1 million ($17.45 per Boe) during the same period in 2023. The increase in depletion and accretion expense was primarily due to the increase in production and depletion rate.

Impairment of Unproved Properties

No impairment of unproved properties was recorded for the three months ended September 30, 2024 and 2023. Impairment of unproved properties was $0.7 million for the nine months ended September 30, 2024, and no impairment recorded during the same period in 2023. The impairment in 2024 was recorded on unproved properties in the Permian Basin as the operator of those properties no longer intends to drill certain locations.

Exploration Expense

Exploration expense was $0.3 million for the three and nine months ended September 30, 2024, a decrease of 82% from $1.6 million during the same time periods in 2023. The decrease in exploration expense was primarily due to $1.6 million of costs related to certain mechanical issues encountered on two wells that made them unable to produce hydrocarbons in the three and nine months ended September 30, 2023, partially offset by delay rentals recognized during the same periods in 2024.

General and Administrative

The following table provides components of our general and administrative expenses for the three and nine months ended September 30, 2024 and 2023:

(in thousands)

Total general and administrative expenses were $5.6 million ($2.41 per Boe) for the three months ended September 30, 2024, an increase of 6% from $5.2 million ($2.16 per Boe) during the same period in 2023. The increase was primarily due to higher salary expense and administrative fees during three months ended September 30, 2024.

Total general and administrative expenses were $18.7 million ($2.84 per Boe) for the nine months ended September 30, 2024, a decrease of 14% from $21.8 million ($3.37 per Boe) during the same period in 2023. The decrease was primarily due to $2.5 million of costs directly related to the Warrant Exchange in the nine months ended September 30, 2023, as well as lower insurance costs for the nine months ended September 30, 2024.

Gain/(Loss) on Derivatives – Commodity Derivatives

The following table sets forth the gain (loss) on derivatives for the three and nine months ended September 30, 2024 and 2023:

(in thousands)

The following table represents our net cash receipts from (payments on) derivatives for the three and nine months ended September 30, 2024 and 2023:

(in thousands)

Our earnings are affected by the changes in the value of our derivatives portfolio between periods and the related cash settlements of those derivatives, which could be significant. To the extent the future commodity price outlook declines between measurement periods, we will have mark-to-market gains; while to the extent future commodity price outlook increases between measurement periods, we will have mark-to-market losses.

Interest Expense

Interest expense was $4.8 million for the three months ended September 30, 2024 compared to $1.4 million for the three months ended September 30, 2023. The increase in interest expense during three months ended September 30, 2024 as compared to 2023 was primarily due to the higher average outstanding balance on the revolving credit facility.

Interest expense was $13.8 million for the nine months ended September 30, 2024 compared to $2.9 million for the nine months ended September 30, 2023. The increase in interest expense during the nine months ended September 30, 2024 as compared to 2023 was primarily due the increase in interest rates and amortization of deferred financing costs, and higher average outstanding balance on the revolving credit facility.

In connection with the Third Amendment to the Credit Agreement executed in April 2024, due to an increase in the size of the lender group, certain lenders decreased their commitment amounts and one bank exited the facility, which resulted in a write-off of $2.2 million in deferred financing costs that were previously capitalized. This $2.2 million is included in interest expense in the accompanying condensed consolidated statements of operations for the nine months ended September 30, 2024, which contributed to the increase in interest expense compared to the nine months ended September 30, 2023.

Loss on Derivatives – Common Stock Warrants

We recognized a loss of $5.7 million during the nine months ended September 30, 2023 from the change in fair value of the warrant liability. See Note 3 and Note 9 of the Notes to the Condensed Consolidated Financial Statements for additional information on the common stock warrants and the Warrant Exchange.

Loss on Equity Investments

We recorded a loss of $18.3 million and $19.3 million during the three and nine months ended September 30, 2024, respectively, from the change in fair value of the common and preferred stock of Vital Energy. See Note 2 and Note 4 of the Notes to Condensed Consolidated Financial Statements for additional information on the common and preferred stock of Vital Energy.

Income Tax Expense (Benefit)

We recorded an income tax expense of $4.3 million and $10.8 million for the three and nine months ended September 30, 2024 compared to $5.2 million and $20.1 million for the three and nine months ended September 30, 2023.The effective income tax rate differs from the statutory rate primarily due to the impact of certain discrete items, such as adjusting deferred balances for filed tax returns, and state income taxes. See Note 7 of the Notes to Condensed Consolidated Financial Statements for additional discussion of income taxes.

Liquidity and Capital Resources

Our main sources of liquidity and capital resources as of the periods covered by this Report have been internally generated cash flow from operations and credit facility borrowings. Our primary use of capital has been for the development and acquisition of oil and natural gas properties. We continually monitor potential capital sources for opportunities to enhance liquidity or otherwise improve our financial position.

As of September 30, 2024, we had $195.0 million of debt outstanding under our Credit Agreement (as defined below). We had $127.8 million of liquidity as of September 30, 2024, consisting of $104.7 million of committed borrowing availability under the Credit Agreement and $23.1 million of cash on hand. On November 1, 2024, the Company and its lenders entered into the Fourth Amendment to the Credit Agreement, which amended the Credit Agreement to, among other things, increase the borrowing base and aggregate elected commitments from $300 million to $325 million.

With our cash on hand, cash flow from operations, and borrowing capacity under the Credit Agreement, we believe that we will have sufficient cash flow and liquidity to fund our budgeted capital expenditures and operating expenses for at least the next twelve months. However, we may seek additional access to capital and liquidity. We cannot assure you that any additional capital will be available to us on favorable terms or at all.

Capital Commitments

Our recent capital commitments have been to fund the development and acquisition of oil and natural gas properties. We expect to fund our near-term capital requirements and working capital needs with cash on hand, cash flows from operations and available borrowing capacity under our Credit Agreement. Our capital expenditures could be curtailed if our cash flows decline from expected levels.

Common Stock Dividends

We paid dividends of $14.4 million, or $0.11 per share, and $43.1 million, or $0.33 per share during the three and nine months ended September 30, 2024, respectively. For the three and nine months ended September 30, 2023, we paid dividends of $14.8 million, or $0.11 per share, and $44.1 million, or $0.33 per share, respectively.

Any payment of future dividends will be at the discretion of the Company’s Board of Directors.

Stock Repurchase Program

In December 2022, we announced that our Board of Directors approved a stock repurchase program for up to $50 million of our common stock through December 31, 2023. Under the stock repurchase program, we repurchased shares of our common stock from time to time in open market transactions or in privately negotiated transactions as permitted under applicable rules and regulations. The stock repurchase program terminated on December 31, 2023.

During the three and nine months ended September 30, 2023, we repurchased 868,726 and 1,802,311 shares under the program at an aggregate cost of $6.3 million and $12.1 million, respectively.

Cash Flows

The following table summarizes our changes in cash and cash equivalents for the nine months ended September 30, 2024 and 2023:

(in thousands)

Cash Flows from Operating Activities

The primary factors impacting our cash flows from operating activities generally include: (i) levels of production from our oil and natural gas properties, (ii) prices we receive from sales of oil and natural gas production, including settlement proceeds or payments related to our commodity derivatives, (iii) operating costs of our oil and natural gas properties, (iv) costs of our general and administrative activities and (v) interest expense. Our cash flows from operating activities have historically been impacted by fluctuations in oil and natural gas prices and our production volumes.

The $5.2 million decrease in operating cash flows during the nine months ended September 30, 2024 as compared to the same period in 2023 was primarily due to decreased oil and gas sales and higher interest expense affecting net income. This was offset in part by net cash provided by operating activities which included a benefit of $10.4 million and a reduction of $2.9 million for the nine months ended September 30, 2024 and 2023, respectively, associated with changes in working capital items. Changes in working capital items adjust for the timing of receipts and payments of actual cash.

Cash Flows from Investing Activities

For the nine months ended September 30, 2024, our net cash used in investing activities was $233.6 million, which consisted primarily of $193.4 million of capital expenditures used in the development of oil and natural gas properties and $52.0 million of acquisitions of oil and natural gas properties.

For the nine months ended September 30, 2023, our net cash used in investing activities was $286.5 million, which consisted primarily of $237.1 million of capital expenditures used in the development of oil and natural gas properties and $49.4 million of acquisitions of oil and natural gas properties.

Cash Flows from Financing Activities

For the nine months ended September 30, 2024, our net cash provided by financing activities was $38.5 million, primarily due to $85.0 million of borrowings under our Credit Agreement, partially offset by $43.1 million of dividends paid on our common stock and $3.0 million of deferred financing costs.

For the nine months ended September 30, 2023, our net cash provided by financing activities was $29.1 million, primarily due to $85.0 million of net borrowings under our Credit Agreement, partially offset by $44.1 million of dividends paid on our common stock, and $11.8 million of common stock repurchases.

Granite Ridge Credit Agreement

On October 24, 2022, Granite Ridge entered into a senior secured revolving credit agreement (as amended, the “Credit Agreement”) among Granite Ridge, as borrower, Texas Capital Bank, as administrative agent, and the lenders from time to time party thereto. The Credit Agreement has a maturity date of five years from the effective date thereof.

On April 1, 2024, the Company entered into the Resignation, Appointment, Assignment and Third Amendment to Credit Agreement (the “Third Amendment”) by and among the Company, as borrower, Texas Capital Bank, as resigning administrative agent, Bank of America, N.A. (“Bank of America”), as successor administrative agent, and the lenders from time to time party thereto. The Third Amendment, among other things, (a) appointed Bank of America as administrative agent and L/C Issuer (as defined therein), replacing Texas Capital Bank, (b) increased the size of the lender group by adding nine new banks, with one bank exiting the facility, (c) increased the borrowing base from $275.0 million to $300.0 million, and (d) increased the aggregate elected commitments from $240.0 million to $300.0 million.

At September 30, 2024, the Company had outstanding borrowings of $195.0 million and $0.3 million of outstanding letters of credit issued and outstanding under the Credit Agreement, resulting in availability of $104.7 million. The Credit Agreement is guaranteed by the restricted subsidiaries of Granite Ridge and is secured by a first priority mortgage and security interest in substantially all of the Company’s and its restricted subsidiaries’ assets.

On November 1, 2024, the Company and its lenders entered into the Fourth Amendment to Credit Agreement, which amended the Credit Agreement to, among other things, increase the borrowing base and aggregate elected commitments from $300 million to $325 million. The borrowing base is redetermined semiannually on or about April 1 and October 1 of each calendar year, and is subject to additional adjustments from time to time, including for asset sales, elimination or reduction of hedge positions and incurrence of other debt.

Borrowings under the Credit Agreement may be base rate loans or secured overnight financing rate (“SOFR”) loans. Interest is payable quarterly for base rate loans and at the end of the applicable interest period for SOFR loans. Prior to entry into the First Amendment to the Credit Agreement on November 7, 2023 (the “First Amendment”), SOFR loans accrued interest at SOFR plus an applicable margin ranging from 250 to 350 basis points, depending on the percentage of the borrowing base utilized, plus an additional 10, 15 or 20 basis point credit spread adjustment for a one, three or six month interest period, respectively. Base rate loans accrued interest at a rate per annum equal to the greatest of: (i) the U.S. prime rate as published by the Wall Street Journal; (ii) the federal funds effective rate plus 50 basis points; and (iii) the adjusted SOFR rate for a one-month interest period plus 100 basis points, plus, in the case of this clause (iii) an additional 10 basis point credit spread adjustment, plus, in the case of any base rate loan, an applicable margin ranging from 150 to 250 basis points, depending on the percentage of the borrowing base utilized.

As a result of the First Amendment, SOFR loans now bear interest at SOFR plus an applicable margin ranging from 300 to 400 basis points, depending on the percentage of the borrowing base utilized, plus an additional 10, 15 or 20 basis point credit spread adjustment for a one, three or six month interest period, respectively. Base rate loans now bear interest at a rate per annum equal to the greatest of: (i) the U.S. prime rate as published by the Wall Street Journal; (ii) the federal funds effective rate plus 50 basis points; and (iii) the adjusted SOFR rate for a one-month interest period plus 100 basis points, plus, in the case of this clause (iii) an additional 10 basis point credit spread adjustment, plus, in the case of any base rate loan, an applicable margin ranging from 200 to 300 basis points, depending on the percentage of the borrowing base utilized.

The Company also pays a commitment fee on unused elected commitment amounts under its facility of 50 basis points. The Company may repay any amounts borrowed under the Credit Agreement prior to the maturity date without any premium or penalty.

The Credit Agreement contains certain financial covenants, including the maintenance of the following financial ratios:

(i) a leverage ratio, which is the ratio of Consolidated Total Debt to EBITDAX (each as defined in the Credit Agreement), of not greater than 3.00 to 1.00 as of the last day of each fiscal quarter, and

(ii) a Current Ratio (as defined in the Credit Agreement), of not less than 1.00 to 1.00 as of the last day of each fiscal quarter.

The Credit Agreement contains additional restrictive covenants that limit our ability and our restricted subsidiaries to, among other things, incur additional indebtedness, incur additional liens, enter into mergers and acquisitions, make or declare dividends, repurchase or redeem junior debt, make investments and loans, engage in transactions with affiliates, sell assets and enter into certain hedging transactions. In addition, the Credit Agreement is subject to customary events of default, including a change in control. If an event of default occurs and is continuing, the administrative agent may, with the consent of majority lenders, or shall, at the direction of the majority lenders, accelerate any amounts outstanding and terminate lender commitments.

As of September 30, 2024, we were in compliance with all financial covenants required by the Credit Agreement.

Known Contractual and Other Obligations; Planned Capital Expenditures

Contractual and Other Obligations

Our contractual obligations include long-term debt, cash interest expense on debt, derivative liabilities, asset retirement obligations and an annual service fee to the Manager. Since December 31, 2023, there have been no material changes in our contractual obligations, other than the $85.0 million increase in long-term debt due to borrowings under the Credit Agreement.

Planned Capital Expenditures

For 2024, we are budgeting for approximately $355 million to $365 million in total planned capital expenditures, including approximately $60 million of acquisitions of oil and natural gas properties. Our costs incurred on oil and natural gas properties, excluding acquisitions, during the three months ended September 30, 2024 and 2023 totaled $77.2 million and $75.7 million, respectively, and $206.8 million and $233.1 million during the nine months ended September 30, 2024 and 2023, respectively. Our capital expenditures for the nine months ended September 30, 2024 were primarily funded with cash flows from operations and borrowings under the Credit Agreement. We expect to fund planned capital expenditures with cash generated from operations and, if required, borrowings under our Credit Agreement.

The amount, timing and allocation of capital expenditures are largely discretionary and subject to change based on a variety of factors. If oil and natural gas prices decline below our acceptable levels, or costs increase above our acceptable levels, we may choose to defer a portion of our budgeted capital expenditures until later periods to achieve the desired balance between sources and uses of liquidity and prioritize capital projects that we believe have the highest expected returns and potential to generate near-term cash flow. We may also increase our capital expenditures significantly to take advantage of opportunities we consider to be attractive. We will carefully monitor and may adjust our projected capital expenditures in response to changes in prices, availability of financing, drilling and acquisition costs, industry conditions, the timing of regulatory approvals, contractual obligations, internally generated cash flow, and other factors both within and outside our control.

Acquisitions

The following table reflects our expenditures for acquisitions of proved and unproved properties for the three and nine months ended September 30, 2024 and 2023:

(in thousands)

Satisfaction of Our Cash Obligations for the Next Twelve Months

With our Credit Agreement and our positive cash flows from operations, we believe we will have sufficient capital to meet our drilling commitments, expected general and administrative expenses, and other cash needs for the next twelve months. Nonetheless, any strategic acquisition of assets or increase in drilling activity may lead us to seek additional capital. We may also choose to seek additional capital rather than utilize our credit to fund accelerated or continued drilling at the discretion of management and depending on prevailing market conditions. We will evaluate any potential opportunities for acquisitions as they arise. However, there can be no assurance that any additional capital will be available to us on favorable terms or at all.

Effects of Inflation and Pricing

The oil and natural gas industry is typically very cyclical and the demand for goods and services of oilfield companies, suppliers and others associated with the industry put extreme pressure on the economic stability and pricing structure within the industry. Typically, as prices for oil and natural gas increase, so do all associated costs. Conversely, in a period of declining prices, associated cost declines are likely to lag and may not adjust downward in proportion.

Material changes in prices also impact our current revenue stream, estimates of future reserves, borrowing base calculations of bank loans, impairment assessments of oil and natural gas properties, and values of properties in purchase and sale transactions. Material changes in prices can impact the value of oil and natural gas companies and their ability to raise capital, borrow money and retain personnel. Higher prices for oil and natural gas could result in increases in the costs of materials, services and personnel.

Critical Accounting Estimates

The establishment and consistent application of accounting policies is a vital component of accurately and fairly presenting our financial statements in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”), as well as ensuring compliance with applicable laws and regulations governing financial reporting. While there are rarely alternative methods or rules from which to select in establishing accounting and financial reporting policies, proper application often involves significant judgment regarding a given set of facts and circumstances and a complex series of decisions. Further, these estimates and other factors, including those outside of management’s control, could have a significant adverse impact to the financial condition and results of operations.

In management’s opinion, the more significant reporting areas impacted by management’s judgments and estimates are the choice of accounting method for oil and natural gas activities, oil and natural gas reserve estimation, asset retirement obligations, revenue recognition, impairment of long-lived assets and valuation of financial derivatives.

There have been no material changes in our critical accounting policies and procedures during the nine months ended September 30, 2024. See our disclosure of critical accounting policies in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Item 8. Financial Statements and Supplementary Data” of our 2023 Form 10-K.

Recently Issued or Adopted Accounting Pronouncements

For discussion of recently issued or adopted accounting pronouncements, see Note 2 of the Notes to Condensed Consolidated Financial Statements.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

Commodity Price Risk

We are exposed to market risk as the prices of our commodities are subject to fluctuations resulting from changes in supply and demand. To reduce our exposure to changes in the prices of our commodities, we have entered into, and may in the future enter into, additional commodity price risk management arrangements for a portion of our oil and natural gas production. The agreements that we have entered into generally have the effect of providing us with a fixed price for a portion of our expected future oil and natural gas production over a fixed period of time. Our commodity price risk management arrangements are recorded at fair value and thus changes to the future commodity prices will have an impact on our earnings. A 10% increase in average commodity prices would have decreased the fair value of commodity derivatives by $14.6 million at September 30, 2024. We may incur significant unrealized losses in the future from our use of derivative financial instruments to the extent market prices increase and our derivatives contracts remain in place.

We generally use derivatives to economically hedge a portion of our anticipated future production. Any payments due to counterparties under our derivative contracts are funded by proceeds received from the sale of our production. Production receipts, however, lag payments to the counterparties. Any interim cash needs are funded by cash from operations or borrowings under our Credit Agreement.

Interest Rate Risk

At September 30, 2024, our exposure to interest rate changes related primarily to the borrowings under the Credit Agreement. The interest we pay on these borrowings is set periodically based upon market rates. We had total indebtedness of $195.0 million outstanding under our Credit Agreement at September 30, 2024. The impact of a one percent increase in interest rates on this amount of debt would result in increased annual interest expense of approximately $2.0 million.

We may utilize interest rate derivatives to alter interest rate exposure in an attempt to reduce interest rate expense related to existing debt issues. Interest rate derivatives are used solely to modify interest rate exposure and not to modify the overall leverage of the debt portfolio. We had no outstanding interest rate derivative contracts at September 30, 2024.

Disclosure Controls and Procedures

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

In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.

As of September 30, 2024, an evaluation was performed under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15(b) under the Exchange Act. Based upon our evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that as of September 30, 2024, our disclosure controls and procedures were effective at a level of reasonable assurance.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) during the third quarter of 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.