Item 1. Financial Statements
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RILEY EXPLORATION PERMIAN, INC. |
CONDENSED CONSOLIDATED BALANCE SHEETS |
| | (Unaudited) | | |
| | September 30, 2022 | | December 31, 2021 |
| | (In thousands, except share amounts) |
Assets | | | | |
Current Assets: | | | | |
Cash and cash equivalents | | $ | 17,908 | | | $ | 8,317 | |
Accounts receivable | | 27,463 | | | 18,002 | |
| | | | |
Prepaid expenses and other current assets | | 3,377 | | | 4,902 | |
Current derivative assets | | 1,607 | | | 83 | |
Total current assets | | 50,355 | | | 31,304 | |
Oil and natural gas properties, net (successful efforts) | | 431,067 | | | 359,131 | |
Other property and equipment, net | | 4,822 | | | 3,174 | |
Non-current derivative assets | | — | | | 267 | |
Other non-current assets, net | | 4,307 | | | 2,293 | |
Total Assets | | $ | 490,551 | | | $ | 396,169 | |
Liabilities and Shareholders' Equity | | | | |
Current Liabilities: | | | | |
Accounts payable | | $ | 10,854 | | | $ | 7,737 | |
Accounts payable - related parties | | 122 | | | 164 | |
Accrued liabilities | | 28,785 | | | 12,874 | |
Revenue payable | | 17,768 | | | 11,370 | |
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Current derivative liabilities | | 22,529 | | | 30,984 | |
Other current liabilities | | 3,003 | | | 947 | |
Total Current Liabilities | | 83,061 | | | 64,076 | |
Non-current derivative liabilities | | 2,423 | | | 9,515 | |
Asset retirement obligations | | 2,689 | | | 2,261 | |
Revolving credit facility | | 48,000 | | | 65,000 | |
Deferred tax liabilities | | 40,586 | | | 17,384 | |
Other non-current liabilities | | 1,138 | | | 95 | |
Total Liabilities | | 177,897 | | | 158,331 | |
Commitments and Contingencies (Note 14) | | | | |
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Shareholders' Equity: | | | | |
Preferred stock, $0.0001 par value, 25,000,000 shares authorized; 0 shares issued and outstanding | | — | | | — | |
Common stock, $0.001 par value, 240,000,000 shares authorized; 20,181,872 and 19,836,885 shares issued and outstanding at September 30, 2022 and December 31, 2021, respectively | | 20 | | | 20 | |
Additional paid-in capital | | 273,821 | | | 271,737 | |
Retained earnings (Accumulated deficit) | | 38,813 | | | (33,919) | |
Total Shareholders' Equity | | 312,654 | | | 237,838 | |
Total Liabilities and Shareholders' Equity | | $ | 490,551 | | | $ | 396,169 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
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RILEY EXPLORATION PERMIAN, INC. |
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS |
(Unaudited) |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
| | (In thousands, except per share/unit amounts) |
Revenues: | | | | | | | | |
Oil and natural gas sales, net | | $ | 87,471 | | | $ | 48,014 | | | $ | 241,897 | | | $ | 126,222 | |
Contract services - related parties | | 600 | | | 600 | | | 1,800 | | | 1,800 | |
Total Revenues | | 88,071 | | | 48,614 | | | 243,697 | | | 128,022 | |
Costs and Expenses: | | | | | | | | |
Lease operating expenses | | 8,813 | | | 5,686 | | | 23,705 | | | 17,407 | |
Production and ad valorem taxes | | 5,826 | | | 2,575 | | | 14,854 | | | 7,347 | |
Exploration costs | | 20 | | | 884 | | | 1,540 | | | 9,142 | |
Depletion, depreciation, amortization and accretion | | 8,346 | | | 6,692 | | | 22,167 | | | 20,025 | |
General and administrative: | | | | | | | | |
Administrative costs | | 5,154 | | | 4,790 | | | 13,567 | | | 11,516 | |
Unit-based compensation expense | | — | | | — | | | — | | | 276 | |
Share-based compensation expense | | 704 | | | 751 | | | 2,274 | | | 6,101 | |
Cost of contract services - related parties | | 89 | | | 147 | | | 263 | | | 329 | |
Transaction costs | | — | | | 198 | | | 2,638 | | | 2,683 | |
Total Costs and Expenses | | 28,952 | | | 21,723 | | | 81,008 | | | 74,826 | |
Income From Operations | | 59,119 | | | 26,891 | | | 162,689 | | | 53,196 | |
Other Income (Expense): | | | | | | | | |
Interest expense, net | | (585) | | | (963) | | | (1,960) | | | (3,299) | |
Gain (loss) on derivatives | | 17,600 | | | (14,987) | | | (44,395) | | | (75,286) | |
Total Other Income (Expense) | | 17,015 | | | (15,950) | | | (46,355) | | | (78,585) | |
Net Income (Loss) From Continuing Operations Before Income Taxes | | 76,134 | | | 10,941 | | | 116,334 | | | (25,389) | |
Income tax benefit (expense) | | (16,317) | | | 3,937 | | | (25,130) | | | (13,539) | |
Net Income (Loss) From Continuing Operations | | 59,817 | | | 14,878 | | | 91,204 | | | (38,928) | |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
7
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RILEY EXPLORATION PERMIAN, INC. |
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - (Continued) |
(Unaudited) |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
| | (In thousands, except per share/unit amounts) |
Discontinued Operations: | | | | | | | | |
Gain (loss) from discontinued operations | | — | | | 775 | | | — | | | (18,738) | |
Income tax benefit (expense) on discontinued operations | | — | | | 1 | | | — | | | (59) | |
Gain (Loss) on Discontinued Operations | | — | | | 776 | | | — | | | (18,797) | |
Net Income (Loss) | | 59,817 | | | 15,654 | | | 91,204 | | | (57,725) | |
Dividends on preferred units | | — | | | — | | | — | | | (574) | |
Net Income (Loss) Attributable to Common Shareholders/Unitholders | | $ | 59,817 | | | $ | 15,654 | | | $ | 91,204 | | | $ | (58,299) | |
Net Income (Loss) per Share/Unit from Continuing Operations: | | | | | | | | |
Basic | | $ | 3.06 | | | $ | 0.77 | | | $ | 4.67 | | | $ | (2.29) | |
Diluted | | $ | 3.05 | | | $ | 0.76 | | | $ | 4.65 | | | $ | (2.29) | |
Net Income (Loss) per Share/Unit from Discontinued Operations: | | | | | | | | |
Basic | | $ | — | | | $ | 0.04 | | | $ | — | | | $ | (1.09) | |
Diluted | | $ | — | | | $ | 0.04 | | | $ | — | | | $ | (1.09) | |
Net Income (Loss) per Share/Unit: | | | | | | | | |
Basic | | $ | 3.06 | | | $ | 0.81 | | | $ | 4.67 | | | $ | (3.38) | |
Diluted | | $ | 3.05 | | | $ | 0.80 | | | $ | 4.65 | | | $ | (3.38) | |
Weighted Average Common Shares/Units Outstanding: | | | | | | | | |
Basic | | 19,546 | | | 19,434 | | | 19,530 | | | 17,218 | |
Diluted | | 19,587 | | | 19,540 | | | 19,632 | | | 17,218 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
8
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RILEY EXPLORATION PERMIAN, INC. |
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN MEMBERS'/SHAREHOLDERS' EQUITY |
(Unaudited) |
(In Thousands) |
| | Nine Months Ended September 30, 2022 |
| | Members' Equity | | Shareholders' Equity |
| | | | Common Stock | | | | | | |
| | Units Outstanding | | Amount | | Shares | | Amount | | Additional Paid-in Capital | | Retained Earnings (Accumulated Deficit) | | Total Shareholders' Equity |
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Balance, December 31, 2021 | | — | | | $ | — | | | 19,837 | | | $ | 20 | | | $ | 271,737 | | | $ | (33,919) | | | $ | 237,838 | |
Share-based compensation expense | | — | | | — | | | — | | | — | | | 1,061 | | | — | | | 1,061 | |
Repurchased shares for tax withholding | | — | | | — | | | (13) | | | — | | | (339) | | | — | | | (339) | |
Issuance of common shares under long-term incentive plan, net | | — | | | — | | | 30 | | | — | | | — | | | — | | | — | |
Dividends declared | | — | | | — | | | — | | | — | | | — | | | (6,154) | | | (6,154) | |
Net loss | | — | | | — | | | — | | | — | | | — | | | (7,168) | | | (7,168) | |
Balance, March 31, 2022 | | — | | | $ | — | | | 19,854 | | | $ | 20 | | | $ | 272,459 | | | $ | (47,241) | | | $ | 225,238 | |
Share-based compensation expense | | — | | | — | | | — | | | — | | | 828 | | | — | | | 828 | |
Repurchased shares for tax withholding | | — | | | — | | | (9) | | | — | | | (252) | | | — | | | (252) | |
Issuance of common shares under long-term incentive plan | | — | | | — | | | 20 | | | — | | | — | | | — | | | — | |
Dividends declared | | — | | | — | | | — | | | — | | | — | | | (6,159) | | | (6,159) | |
Net income | | — | | | — | | | — | | | — | | | — | | | 38,555 | | | 38,555 | |
Balance, June 30, 2022 | | — | | | $ | — | | | 19,865 | | | $ | 20 | | | $ | 273,035 | | | $ | (14,845) | | | $ | 258,210 | |
Share-based compensation expense, net | | — | | | — | | | — | | | — | | | 795 | | | — | | | 795 | |
Repurchased shares for tax withholding | | — | | | — | | | — | | | — | | | (9) | | | — | | | (9) | |
Issuance of common shares under long-term incentive plan, net | | — | | | — | | | 317 | | | — | | | — | | | — | | | — | |
Dividends declared | | — | | | — | | | — | | | — | | | — | | | (6,159) | | | (6,159) | |
Net income | | — | | | — | | | — | | | — | | | — | | | 59,817 | | | 59,817 |
Balance, September 30, 2022 | | — | | | $ | — | | | 20,182 | | | $ | 20 | | | $ | 273,821 | | | $ | 38,813 | | | $ | 312,654 | |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
9
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RILEY EXPLORATION PERMIAN, INC. |
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN MEMBERS'/SHAREHOLDERS' EQUITY- (Continued) |
(Unaudited) |
(In Thousands) |
| | Nine Months Ended September 30, 2021 |
| | Members' Equity | | Shareholders' Equity |
| | | | Common Stock | | | | | | |
| | Units Outstanding | | Amount | | Shares | | Amount | | Additional Paid-in Capital | | Accumulated Deficit | | Total Shareholders' Equity |
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Balance, December 31, 2020 | | 1,568 | | | $ | 154,371 | | | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
Purchase of common units under long-term incentive plan | | (3) | | | (191) | | | — | | | — | | | — | | | — | | | — | |
Dividends on preferred units | | — | | | (574) | | | — | | | — | | | — | | | — | | | — | |
Preferred units converted to common units | | 512 | | | 61,196 | | | — | | | — | | | — | | | — | | | — | |
Dividends on common units | | — | | | (3,770) | | | — | | | — | | | — | | | — | | | — | |
Unit-based compensation expense | | — | | | 276 | | | — | | | — | | | — | | | — | | | — | |
Net loss from January 1, 2021 through February 26, 2021 | | — | | | (19,117) | | | — | | | — | | | — | | | — | | | — | |
Restricted common shares issued in exchange for common units issued under long-term incentive plan | | (24) | | | — | | | 198 | | | — | | | — | | | — | | | — | |
Common shares issued in exchange for common units (effected for 1-for-12 reverse stock split) | | (2,053) | | | (192,191) | | | 16,733 | | | 17 | | | 192,174 | | | — | | | 192,191 | |
Common shares issued for business combination | | — | | | — | | | 891 | | | 1 | | | 26,391 | | | — | | | 26,392 | |
Restricted common shares issued | | — | | | — | | | 3 | | | — | | | — | | | — | | | — | |
Share-based compensation expense | | — | | | — | | | — | | | — | | | 409 | | | — | | | 409 | |
Dividends declared | | — | | | — | | | — | | | — | | | — | | | (4,991) | | | (4,991) | |
Net loss from February 27, 2021 through March 31, 2021 | | — | | | — | | | — | | | — | | | — | | | (32,761) | | | (32,761) | |
Balance, March 31, 2021 | | — | | | $ | — | | | 17,825 | | | $ | 18 | | | $ | 218,974 | | | $ | (37,752) | | | $ | 181,240 | |
Share-based compensation expense | | — | | | — | | | — | | | — | | | 779 | | | — | | | 779 | |
Issuance of common shares under long-term incentive plan | | — | | | — | | | 197 | | | — | | | 4,165 | | | — | | | 4,165 | |
Dividends paid | | — | | | — | | | — | | | — | | | — | | | (55) | | | (55) | |
Net loss | | — | | | — | | | — | | | — | | | — | | | (21,501) | | | (21,501) | |
Balance, June 30, 2021 | | — | | | $ | — | | | 18,022 | | | $ | 18 | | | $ | 223,918 | | | $ | (59,308) | | | $ | 164,628 | |
Share-based compensation expense | | — | | | — | | | — | | | — | | | 751 | | | — | | | 751 | |
Repurchased shares for tax withholding | | — | | | — | | | (17) | | | — | | | (514) | | | — | | | (514) | |
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Common stock sold to public, net of issuance costs | | — | | | — | | | 1,667 | | | 2 | | | 46,682 | | | — | | | 46,684 | |
Dividends declared | | — | | | — | | | — | | | — | | | — | | | (5,513) | | | (5,513) | |
Net income | | — | | | — | | | — | | | — | | | — | | | 15,654 | | | 15,654 | |
Balance, September 30, 2021 | | — | | | $ | — | | | 19,672 | | | $ | 20 | | | $ | 270,837 | | | $ | (49,167) | | | $ | 221,690 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
10
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RILEY EXPLORATION PERMIAN, INC. |
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS |
(Unaudited) |
| | Nine Months Ended September 30, | | |
| | 2022 | | 2021 | | |
| | (In thousands) |
Cash Flows from Operating Activities: | | | | | | |
Net income (loss) | | $ | 91,204 | | | $ | (57,725) | | | |
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | | | | |
Loss from discontinued operations | | — | | | 18,797 | | | |
Oil and gas lease expirations | | 1,465 | | | 8,923 | | | |
Depletion, depreciation, amortization and accretion | | 22,167 | | | 20,025 | | | |
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Loss on derivatives | | 44,395 | | | 75,286 | | | |
Settlements on derivative contracts | | (61,198) | | | (21,477) | | | |
Amortization of deferred financing costs | | 548 | | | 498 | | | |
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Unit-based compensation expense | | — | | | 276 | | | |
Share-based compensation expense | | 2,684 | | | 6,101 | | | |
Deferred income tax expense | | 23,202 | | | 13,352 | | | |
Changes in operating assets and liabilities | | | | | | |
Accounts receivable | | (9,461) | | | (6,949) | | | |
Accounts receivable – related parties | | — | | | (143) | | | |
Prepaid expenses and other current assets | | 1,513 | | | 241 | | | |
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Accounts payable and accrued liabilities | | 6,038 | | | 8,463 | | | |
Accounts payable - related parties | | (42) | | | 800 | | | |
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Revenue payable | | 6,398 | | | 4,481 | | | |
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Other current liabilities | | 1,439 | | | (763) | | | |
Net Cash Provided by Operating Activities - Continuing Operations | | 130,352 | | | 70,186 | | | |
Cash Flows from Investing Activities: | | | | | | |
Additions to oil and natural gas properties | | (82,101) | | | (50,247) | | | |
Acquisitions of oil and natural gas properties | | — | | | (445) | | | |
Additions to other property and equipment | | (1,081) | | | (1,396) | | | |
Tengasco acquired cash | | — | | | 859 | | | |
Net Cash Used in Investing Activities - Continuing Operations | | (83,182) | | | (51,229) | | | |
Cash Flows from Financing Activities: | | | | | | |
Deferred financing costs | | (1,722) | | | (86) | | | |
Proceeds from revolving credit facility | | 4,000 | | | 3,500 | | | |
Repayment under revolving credit facility | | (21,000) | | | (41,000) | | | |
Payment of common share/unit dividends | | (18,257) | | | (14,568) | | | |
Proceeds from issuance of common stock | | — | | | 50,000 | | | |
Public offering costs | | — | | | (3,316) | | | |
Payment of preferred unit dividends | | — | | | (1,491) | | | |
Common stock repurchased for tax withholding | | (600) | | | (514) | | | |
Purchase of common units under long-term incentive plan | | — | | | (191) | | | |
Net Cash Used in Financing Activities - Continuing Operations | | (37,579) | | | (7,666) | | | |
Net Increase in Cash and Cash Equivalents from Continuing Operations | | 9,591 | | | 11,291 | | | |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
11
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RILEY EXPLORATION PERMIAN, INC. |
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued) |
(Unaudited) |
| | Nine Months Ended September 30, | | |
| | 2022 | | 2021 | | |
| | (In thousands) | | |
Cash Flows from Discontinued Operations: | | | | | | |
Operating activities | | — | | | 7 | | | |
Investing activities | | — | | | 3,892 | | | |
Net Increase in Cash and Cash Equivalents from Discontinued Operations | | — | | | 3,899 | | | |
Net Increase in Cash and Cash Equivalents | | 9,591 | | | 15,190 | | | |
Cash and Cash Equivalents, Beginning of Period | | 8,317 | | | 1,877 | | | |
Cash and Cash Equivalents, End of Period | | $ | 17,908 | | | $ | 17,067 | | | |
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Supplemental Disclosure of Cash Flow Information | | | | | | |
Cash Paid For: | | | | | | |
Interest, net of capitalized interest | | $ | 1,866 | | | $ | 2,384 | | | |
Non-cash Investing and Financing Activities - Continuing Operations: | | | | | | |
Changes in capital expenditures in accounts payable and accrued liabilities | | $ | 11,971 | | | $ | 10,576 | | | |
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Right of use assets obtained in exchange for operating lease liability | | $ | 1,624 | | | $ | — | | | |
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Preferred unit dividends | | $ | — | | | $ | 574 | | | |
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Common stock issued in exchange for common units | | $ | — | | | $ | 192,191 | | | |
Assets acquired and liabilities assumed in business combination | | $ | — | | | $ | 3,695 | | | |
Common stock issued for business combination | | $ | — | | | $ | 26,392 | | | |
Preferred units converted to common units | | $ | — | | | $ | 61,196 | | | |
Non-cash Investing - Discontinued Operations: | | | | | | |
Goodwill incurred in business combination | | $ | — | | | $ | 19,013 | | | |
Assets acquired and liabilities assumed in business combination | | $ | — | | | $ | 2,824 | | | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
12
RILEY EXPLORATION PERMIAN, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1)Nature of Business
Organization
Riley Permian is a growth-oriented, independent oil and natural gas company focused on the acquisition, exploration, development and production of oil, natural gas and NGLs in Texas and New Mexico. Our activities primarily include the horizontal development of the San Andres formation, a shelf margin deposit on the Northwest Shelf of the Permian Basin. Our acreage is primarily located on large, contiguous blocks in Yoakum County, Texas.
On February 26, 2021 (the “Closing Date”), Riley Permian (f/k/a Tengasco, Inc. (“Tengasco”)), consummated a merger, dated as of October 21, 2020, by and among Tengasco, Antman Sub, LLC, a newly formed Delaware limited liability company and wholly owned subsidiary of Tengasco (“Merger Sub”), and Riley Exploration – Permian, LLC (“REP LLC”). Merger Sub merged with and into REP LLC, with REP LLC as the surviving company and as a wholly owned subsidiary of Tengasco (collectively, with the other transactions described in the Merger Agreement, the “Merger”). On the Closing Date, the Registrant changed its name from Tengasco, Inc. to Riley Exploration Permian, Inc.
(2)Basis of Presentation
On August 16, 2022, the Board acting by written consent resolved to amend and restate the Company's Second Amended and Restated Bylaws to change the Company's fiscal year period from October 1st through September 30th each year to January 1st through December 31st each year commencing with the 2022 calendar year. On August 19, 2022, the holders of approximately 75% of our outstanding Common Stock acting by written consent approved the Bylaws Restatement and adopted the Third Amended and Restated Bylaws. In accordance with Rule 14c-2 under the Exchange Act, the aforementioned actions taken by written consent became effective on September 23, 2022. As a result, the Company's 2022 fiscal year is now the period from January 1, 2022 to December 31, 2022.
As a result of the change in the Company's fiscal year, this document reflects the Company's Quarterly Report for the three and nine months ended September 30, 2022 and comparative information for the 2021 periods.
These unaudited condensed consolidated financial statements as of September 30, 2022 and for the three and nine months ended September 30, 2022 and 2021 include the accounts of Riley Permian and its wholly owned subsidiaries REP LLC, Riley Permian Operating Company, LLC ("RPOC"), Tengasco Pipeline Corporation, Tennessee Land & Mineral Corporation, and Manufactured Methane Corporation, and have been prepared in accordance with U.S. GAAP. All intercompany balances and transactions have been eliminated upon consolidation. The Merger was accounted for as a reverse merger and, as such, the historical operations of REP LLC are deemed to be those of the Company. Thus, the condensed consolidated financial statements included in this report reflect (i) the historical operating results of REP LLC prior to the Merger; (ii) the consolidated results of the Company following the Merger; (iii) the assets and liabilities of REP LLC at their historical cost; and (iv) the Company’s equity and earnings per share for all periods presented.
Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to the rules and regulations of the SEC. These condensed consolidated financial statements should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended September 30, 2021 and the Company's Transition Report on Form 10-QT for the period ended December 31, 2021.
These condensed consolidated financial statements have not been audited by an independent registered public accounting firm. In the opinion of the Company’s management, the accompanying unaudited financial statements contain all adjustments necessary for fair presentation of the results of operations for the periods presented, which adjustments were of a normal recurring nature, except as disclosed herein. The results of operations for the three and nine months ended September 30, 2022 are not necessarily indicative of the results to be expected for the full fiscal year ending December 31, 2022, for various reasons, including as a result of the impact of fluctuations in prices received for oil and natural gas, natural production declines, the uncertainty of exploration and development drilling results, fluctuations in the fair value of derivative instruments, the current and future impacts of the military conflict between Russia and Ukraine, the volatile inflationary environment in U.S. markets and other factors.
RILEY EXPLORATION PERMIAN, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
(3)Summary of Significant Accounting Policies
Significant Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. These estimates and assumptions may also affect disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.
The Company evaluates these estimates on an ongoing basis, using historical experience, consultation with experts and other methods the Company considers reasonable in the particular circumstances. Actual results may differ significantly from the Company’s estimates. Any effects on the Company’s business, financial position or results of operations resulting from revisions to these estimates are recorded in the period in which the facts that give rise to the revision become known. Significant items subject to such estimates and assumptions include, but are not limited to, 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, accrued capital expenditures and operating expenses, ARO, the fair value determination of acquired assets and assumed liabilities, certain tax accruals and the fair value of derivatives.
Accounts Receivable
Accounts receivable is summarized below: | | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
| | | |
| | | |
| (In thousands) |
Oil, natural gas and NGL sales | $ | 26,380 | | | $ | 17,562 | |
Joint interest accounts receivable | 500 | | | 409 | |
| | | |
Other accounts receivable | 583 | | | 31 | |
Total accounts receivable | $ | 27,463 | | | $ | 18,002 | |
The Company had no allowance for credit losses at September 30, 2022 and December 31, 2021.
RILEY EXPLORATION PERMIAN, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
Other Non-Current Assets, Net
Other non-current assets consisted of the following: | | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
| | | |
| | | |
| (In thousands) |
Deferred financing costs, net | $ | 2,519 | | | $ | 1,345 | |
Prepayments to outside operators | 248 | | | 690 | |
Right of use assets | 1,477 | | | 208 | |
Other deposits | 63 | | | 50 | |
| | | |
Total other non-current assets, net | $ | 4,307 | | | $ | 2,293 | |
The Company incurred $1.7 million in financing costs related to the amendment of its revolving credit facility in April 2022. The Company extended certain existing leases and entered into a new lease during the nine months ended September 30, 2022, which resulted in additions to the right of use assets.
Accrued Liabilities
Accrued liabilities consisted of the following: | | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
| | | |
| | | |
| (In thousands) |
Accrued capital expenditures | $ | 14,966 | | | $ | 5,618 | |
Accrued lease operating expenses | 4,315 | | | 2,534 | |
| | | |
Accrued general and administrative costs | 4,750 | | | 3,404 | |
| | | |
| | | |
| | | |
| | | |
Other accrued expenditures | 4,754 | | | 1,318 | |
Total accrued liabilities | $ | 28,785 | | | $ | 12,874 | |
RILEY EXPLORATION PERMIAN, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
Asset Retirement Obligations
Components of the changes in ARO for the nine months ended September 30, 2022 and the year ended December 31, 2021 are shown below: | | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
| | | |
| (In thousands) |
ARO, beginning balance | $ | 2,453 | | | $ | 2,434 | |
Liabilities incurred | 348 | | | 56 | |
| | | |
Revision of estimated obligations | 326 | | | — | |
Liability settlements and disposals | (178) | | | (58) | |
Accretion | 54 | | | 21 | |
ARO, ending balance | 3,003 | | | 2,453 | |
Less: current ARO(1) | (314) | | | (192) | |
ARO, long-term | $ | 2,689 | | | $ | 2,261 | |
_____________________ (1)Current ARO is included within other current liabilities on the accompanying condensed consolidated balance sheets.
Goodwill
At the closing of the Merger, the Company determined it had two reporting units, and the entire goodwill balance was included in the reporting unit acquired in the Merger (the "Kansas Reporting Unit"). The Company did not fully integrate the Kansas Reporting Unit in the Company's operations as it was deemed to be held for sale upon acquisition. The Company assessed the goodwill balance for impairment since the Company entered into a purchase and sale agreement ("PSA") in March 2021 for $3.5 million before closing adjustments. As the carrying value exceeded the implied fair value at the time of the closing of the Merger, the Company concluded the goodwill balance associated with the Kansas Reporting Unit was impaired and recognized a goodwill impairment loss, included within loss from discontinued operations on the condensed consolidated statement of operations, of $18.5 million for the nine months ended September 30, 2021. See further discussion in Note 12 - Discontinued Operations and Assets Held for Sale.
Revenue Recognition
The following table presents oil and natural gas sales disaggregated by product:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| (In thousands) |
Oil and natural gas sales: | | | | | | | |
Oil | $ | 80,017 | | | $ | 44,026 | | | $ | 224,895 | | | $ | 114,314 | |
Natural gas | 4,216 | | | 1,908 | | | 8,855 | | | 7,381 | |
Natural gas liquids | 3,238 | | | 2,080 | | | 8,147 | | | 4,527 | |
Total oil and natural gas sales, net | $ | 87,471 | | | $ | 48,014 | | | $ | 241,897 | | | $ | 126,222 | |
Recent Accounting Pronouncements
Recently Adopted Accounting Pronouncements
In December 2019, the FASB issued ASU No. 2019-12, "Income Taxes (Topic 740) - Simplifying the Accounting for Income Taxes." This update is intended to simplify the accounting for income taxes by removing certain exceptions and by clarifying and amending existing guidance and is effective for public business entities beginning after December 15, 2020 with early adoption permitted. The Company adopted this ASU effective October 1, 2021. The adoption of this ASU did not have a material impact on the Company's condensed consolidated financial statements.
RILEY EXPLORATION PERMIAN, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
In March 2020, the FASB issued ASU No. 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting” (“ASU 2020-04”), which provides companies with optional guidance to ease the potential accounting burden associated with transitioning away from reference rates (e.g., LIBOR) that are expected to be discontinued. ASU 2020-04 allows, among other things, certain contract modifications, such as those within the scope of Topic 470 on debt, to be accounted for as a continuation of the existing contract. The Company adopted this ASU effective concurrent with the amendment of the Company's revolving credit facility in April 2022. See Note 9 - Revolving Credit Facility for additional information on the amendment of the revolving credit facility. The adoption of this ASU did not have a material impact on the Company's condensed consolidated financial statements.
(4)Acquisitions
Business Combination Between REP LLC and Tengasco
Immediately prior to the closing of the Merger on February 26, 2021, REP LLC converted all of its issued and outstanding Series A Preferred Units into common units of REP LLC. In connection with the Merger, holders of common units of REP LLC were entitled to receive, in exchange for each common unit, shares of common stock of Tengasco (which was renamed Riley Exploration Permian, Inc.), par value $0.001 per share (“Tengasco common stock”) based on the exchange ratio set forth in the Merger Agreement (the “Exchange Ratio”), with cash paid in lieu of the issuance of any fractional shares. The Exchange Ratio was 97.796467 shares of Tengasco common stock for each common unit of REP LLC (as adjusted for the reverse stock split). Immediately prior to the closing of the Merger, Tengasco effected a one-for-twelve reverse stock split resulting in outstanding common stock of approximately 17.8 million shares including shares of Tengasco common stock issued in the Merger.
The combination between REP LLC and Tengasco qualified as a business combination with REP LLC being treated as the accounting acquirer. The assets acquired and liabilities assumed were recognized on the condensed consolidated balance sheet at fair value as of the acquisition date.
The consideration paid in the Merger by REP LLC as the accounting acquirer totaled approximately $26.4 million and was determined based on the closing price of Tengasco’s common stock on February 26, 2021 and the total number of shares outstanding immediately prior to the Merger. The Merger was structured as a tax-free reorganization for United States federal income tax purposes.
The following table summarizes the consideration for the Merger (presented in thousands, except stock price):
| | | | | |
| |
Tengasco common stock price | $ | 29.64 | |
Tengasco common stock - issued and outstanding as of February 26, 2021 | 891 | |
Total consideration | $ | 26,392 | |
The Company incurred approximately $5.0 million of related costs for the Merger, of which $0.2 million and $2.6 million was expensed for the three and nine months ended September 30, 2021 as transaction costs on the condensed consolidated statements of operations.
RILEY EXPLORATION PERMIAN, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
The Company completed the determination of the fair value attributable to the assets acquired and liabilities assumed as of September 30, 2021. The following table presents the allocation of the purchase price to the assets acquired and liabilities assumed based on their fair values on February 26, 2021 (in thousands):
| | | | | |
| |
Assets | |
Cash and cash equivalents | $ | 860 | |
Account receivable | 325 | |
Prepaid and other current assets | 759 | |
Total current assets | 1,944 | |
| |
Oil and gas properties | 4,525 | |
Other property and equipment | 91 | |
Right of use assets | 42 | |
Other non-current assets | 4 | |
Deferred tax assets | 2,987 | |
| |
| |
Total assets acquired | 9,593 | |
| |
Liabilities | |
Accounts payable | 130 | |
Accrued liabilities | 409 | |
Current lease liabilities, operating | 42 | |
Current lease liabilities, financing | 68 | |
Total current liabilities | 649 | |
| |
Asset retirement obligations | 1,565 | |
| |
| |
Total liabilities assumed | 2,214 | |
| |
Net identifiable assets acquired | 7,379 | |
Goodwill | 19,013 | |
Net assets acquired | $ | 26,392 | |
The goodwill recognized was primarily attributable to a substantial increase in the stock price of Tengasco on the Closing Date, which increased the amount of the consideration transferred.
Pro Forma Operating Results (Unaudited)
The following unaudited pro forma combined results for the year ended September 30, 2021 reflect the consolidated results of operations of the Company as if the Merger had occurred on October 1, 2019. Subsequent to the Merger, the Company changed its fiscal year period from October 1st through September 30th each year to January 1st to December 31st each year commencing with the 2022 calendar year. The unaudited pro forma information includes adjustments for $3.6 million of transaction costs being reclassified to the fourth quarter of calendar year 2019 which were incurred during the year ended September 30, 2021. Additionally, the Company adjusted for $0.9 million of oil and natural gas property impairment that Tengasco recognized under the full-cost method of accounting, which would not have been recognized under the successful efforts method, during the three months ended December 31, 2020. Also, the unaudited pro forma information has been tax
RILEY EXPLORATION PERMIAN, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
effected using a 21% tax rate. The common stock was also adjusted for the conversion of the REP LLC preferred units into common units and retroactively adjusted for the Exchange Ratio and one-for-twelve reverse stock split.
| | | | | | | | | |
| For the year ended September 30, 2021 | | |
| (In thousands, except per share/unit amounts) | | |
| (Unaudited) | | |
Total Revenues | $ | 151,036 | | | |
| | | |
| | | |
Pro Forma Net Loss before Taxes | (29,871) | | | |
Pro forma income tax benefit | 6,273 | | | |
Pro Forma Net Loss | $ | (23,598) | | | |
Net Loss per Share/Unit from Continuing Operations: | | | |
Basic | $ | (1.88) | | | |
Diluted | $ | (1.88) | | | |
| | | |
Net Income per Share/Unit from Discontinued Operations: | | | |
Basic | $ | 0.02 | | | |
Diluted | $ | 0.02 | | | |
The unaudited pro forma combined financial information is for informational purposes only and was based off of the fiscal year period October 1st through September 30th as this was the fiscal year in effect at the time of the Merger. The unaudited pro forma financial information was not modified for the change in the Company's fiscal year. It is not intended to represent or to be indicative of the combined results of operations that the Company would have reported had the Merger been completed as of October 1, 2019 and should not be taken as indicative of the Company's future combined results of operations. The actual results may differ significantly from that reflected in the unaudited pro forma combined financial information for a number of reasons, including, but not limited to, differences in assumptions used to prepare the unaudited pro forma combined financial information and actual results.
(5)Oil and Natural Gas Properties
Oil and natural gas properties are summarized below:
| | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
| | | |
| | | |
| (In thousands) |
Proved | $ | 508,834 | | | $ | 421,779 | |
Unproved | 12,937 | | | 18,839 | |
Work-in-progress | 26,008 | | | 13,534 | |
| 547,779 | | | 454,152 | |
Accumulated depletion and amortization | (116,712) | | | (95,021) | |
Total oil and natural gas properties, net | $ | 431,067 | | | $ | 359,131 | |
Depletion and amortization expense for proved oil and natural gas properties was $8.2 million and $6.5 million for the three months ended September 30, 2022 and 2021. Depletion and amortization expense for proved oil and natural gas properties was $21.7 million and $19.3 million for the nine months ended September 30, 2022 and 2021, respectively.
Exploration expense was $20 thousand and $0.9 million for the three months ended September 30, 2022 and 2021, respectively, and $1.5 million and $9.1 million for the nine months ended September 30, 2022 and 2021, respectively. Exploration expense was primarily attributable to the expiration of oil and natural gas leases for the nine months ended September 30, 2022 and three and nine months ended September 30, 2021.
RILEY EXPLORATION PERMIAN, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
(6)Derivative Instruments
Oil and Natural Gas Contracts
The Company uses commodity based derivative contracts to reduce exposure to fluctuations in oil and natural gas prices. While the use of these contracts limits the downside risk for adverse price changes, their use also limits future revenues from favorable price changes. We have not designated our derivative contracts as hedges for accounting purposes, and therefore changes in the fair value of derivatives are included and recognized in other income (expense) in the condensed consolidated statement of operations.
As of September 30, 2022, the Company's oil and natural gas derivative instruments consisted of fixed price swaps, costless collars, and basis protection swaps. The following table summarizes the open financial derivative positions as of September 30, 2022, related to oil and natural gas production:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Weighted Average Price |
Calendar Quarter / Year | | Notional Volume | | Fixed | | Put | | Call |
| | | | ($ per unit) |
Oil Swaps (Bbl) | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Q4 2022 | | 270,000 | | | $ | 56.03 | | | $ | — | | | $ | — | |
2023 | | 720,000 | | | $ | 53.27 | | | $ | — | | | $ | — | |
| | | | | | | | |
Natural Gas Swaps (Mcf) | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Q4 2022 | | 540,000 | | | $ | 3.26 | | | $ | — | | | $ | — | |
| | | | | | | | |
Oil Collars (Bbl) | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Q4 2022 | | 90,000 | | | $ | — | | | $ | 35.00 | | | $ | 42.63 | |
2023 | | — | | | $ | — | | | $ | — | | | $ | — | |
2024 | | 3,000 | | | $ | — | | | $ | 50.00 | | | $ | 88.00 | |
| | | | | | | | |
Oil Basis (Bbl) | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Q4 2022 | | 240,000 | | | $ | 0.41 | | | $ | — | | | $ | — | |
Interest Rate Contracts
The Company has entered into floating-to-fixed interest rate swaps, in which it receives a floating market rate equal to one-month LIBOR and pays a fixed interest rate, to manage interest rate exposure related to the Company's revolving credit facility.
The following table summarizes the open interest rate derivative positions as of September 30, 2022:
| | | | | | | | | | | | | | |
Open Coverage Period | | Notional Amount | | Fixed Rate |
| | (In thousands) | | |
Floating-to-Fixed Interest Rate Swaps | | | | |
| | | | |
| | | | |
October 2022 - September 2023 | | $ | 40,000 | | | 0.24 | % |
RILEY EXPLORATION PERMIAN, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
Balance Sheet Presentation of Derivatives
The following tables present the location and fair value of the Company’s derivative contracts included in the condensed consolidated balance sheets as of September 30, 2022 and December 31, 2021:
| | | | | | | | | | | | | | | | | | | | |
| | September 30, 2022 |
Balance Sheet Classification | | Gross Fair Value | | Amounts Netted | | Net Fair Value |
| | (In thousands) |
Current derivative assets | | $ | 1,611 | | | $ | (4) | | | $ | 1,607 | |
Non-current derivative assets | | 17 | | | (17) | | | — | |
Current derivative liabilities | | (22,533) | | | 4 | | | (22,529) | |
Non-current derivative liabilities | | (2,440) | | | 17 | | | (2,423) | |
Total | | $ | (23,345) | | | $ | — | | | $ | (23,345) | |
| | | | | | |
| | December 31, 2021 |
Balance Sheet Classification | | Gross Fair Value | | Amounts Netted | | Net Fair Value |
| | (In thousands) |
Current derivative assets | | $ | 281 | | | $ | (198) | | | $ | 83 | |
Non-current derivative assets | | 267 | | | — | | | 267 | |
Current derivative liabilities | | (31,182) | | | 198 | | | (30,984) | |
Non-current derivative liabilities | | (9,515) | | | — | | | (9,515) | |
Total | | $ | (40,149) | | | $ | — | | | $ | (40,149) | |
The following table presents the components of the Company's gain (loss) on derivatives for the three and nine months ended September 30, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| (In thousands) |
Settlements on derivative contracts | $ | (17,040) | | | $ | (11,171) | | | $ | (61,198) | | | $ | (21,477) | |
Non-cash gain (loss) on derivatives | 34,640 | | | (3,816) | | | 16,803 | | | (53,809) | |
Gain (loss) on derivatives | $ | 17,600 | | | $ | (14,987) | | | $ | (44,395) | | | $ | (75,286) | |
(7)Fair Value Measurements
The FASB has established a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy consists of three broad levels. Level 1 inputs are the highest priority and consist of unadjusted quoted prices in active markets for identical assets and liabilities. Level 2 are inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. Level 3 are unobservable inputs for an asset or liability.
The carrying values of financial instruments comprising cash and cash equivalents, payables, receivables, and advances from joint interest owners approximate fair values due to the short-term maturities of these instruments. The carrying value reported for the revolving credit facility approximates fair value because the underlying instruments are at interest rates which approximate current market rates. The revolving line of credit is considered a Level 3 measurement.
RILEY EXPLORATION PERMIAN, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
Assets and Liabilities Measured on a Recurring Basis
The fair value of commodity derivatives and interest rate swaps is estimated using discounted cash flow calculations based upon forward curves. The following table presents the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis as of September 30, 2022 and December 31, 2021, by level within the fair value hierarchy:
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2022 |
| Level 1 | | Level 2 | | Level 3 | | Total |
| (In thousands) |
Financial assets: | | | | | | | |
Commodity derivative assets | $ | — | | | $ | 21 | | | $ | — | | | $ | 21 | |
Interest rate assets | $ | — | | | $ | 1,607 | | | $ | — | | | $ | 1,607 | |
Financial liabilities: | | | | | | | |
Commodity derivative liabilities | $ | — | | | $ | (24,973) | | | $ | — | | | $ | (24,973) | |
Interest rate liabilities | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| | | | | | | |
| December 31, 2021 |
| Level 1 | | Level 2 | | Level 3 | | Total |
| (In thousands) |
Financial assets: | | | | | | | |
Commodity derivative assets | $ | — | | | $ | 187 | | | $ | — | | | $ | 187 | |
Interest rate assets | $ | — | | | $ | 361 | | | $ | — | | | $ | 361 | |
Financial liabilities: | | | | | | | |
Commodity derivative liabilities | $ | — | | | $ | (40,687) | | | $ | — | | | $ | (40,687) | |
Interest rate liabilities | $ | — | | | $ | (10) | | | $ | — | | | $ | (10) | |
(8)Transactions with Related Parties
Contract Services
RPOC provides certain administrative services to Combo Resources, LLC ("Combo") and is also the contract operator on behalf of Combo in exchange for a monthly fee of $100 thousand and reimbursement of all third party expenses pursuant to a contract services agreement. Additionally, RPOC provides certain administrative and operational services to Riley Exploration Group, LLC ("REG") in exchange for a monthly fee of $100 thousand pursuant to a contract services agreement.
The following table presents revenues from and related cost for contract services for related parties:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| (In thousands) |
Combo | $ | 300 | | | $ | 300 | | | $ | 900 | | | $ | 900 | |
REG | 300 | | | 300 | | | 900 | | | 900 | |
Contract services - related parties | $ | 600 | | | $ | 600 | | | $ | 1,800 | | | $ | 1,800 | |
| | | | | | | |
Cost of contract services | $ | 89 | | | $ | 147 | | | $ | 263 | | | $ | 329 | |
The Company had amounts due to Combo of $0.1 million and $0.2 million at September 30, 2022 and December 31, 2021, respectively, which are reflected in accounts payable - related parties on the accompanying condensed consolidated balance
RILEY EXPLORATION PERMIAN, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
sheets. Amounts due to Combo reflect the revenue, net of any expenditures for wells and fees due under the contract services agreement, for Combo's net working interest in wells that the Company operates on Combo's behalf.
Consulting and Legal Fees
On January 25, 2022, the Company and di Santo Law PLLC ("di Santo Law"), a law firm owned by a member of our Board of Directors, entered into an engagement letter that provides a monthly fixed fee in exchange for general corporate legal services. The agreement has an initial term of one year and provides for a monthly cash payment of $30 thousand and an aggregate one-time grant of 10,500 shares of restricted stock that vest in four equal installments at the end of each quarter in calendar year 2022. Prior to entry into this agreement, di Santo Law's attorneys provided legal services to the Company based on hourly rates. The Company incurred legal fees from di Santo Law of approximately $0.2 million and $0.5 million for the three months ended September 30, 2022 and 2021, respectively. The Company incurred legal fees from di Santo Law of approximately $0.5 million and $1.3 million for the nine months ended September 30, 2022 and 2021. As of September 30, 2022, there were no amounts due to di Santo Law. As of December 31, 2021, the Company had approximately $0.2 million accrued for di Santo Law. Such amounts were included in accrued liabilities in the accompanying condensed consolidated balance sheets.
(9)Revolving Credit Facility
On September 28, 2017, REP LLC entered into a credit agreement (the "Credit Agreement") to establish a senior secured revolving credit facility with a syndicate of banks including SunTrust Bank, now Truist Bank as successor by merger, as administrative agent. Substantially all of the Company’s assets are pledged to secure the revolving credit facility. The revolving credit facility had an initial borrowing base of $25 million with a maximum facility amount of $500 million. 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 maturity date to April 2026, replace LIBOR with SOFR and change the requirements for hedging to be based on utilization of the borrowing base and the Company's leverage ratio. On October 25, 2022, the Company amended its Credit Agreement to, among other things, increase the borrowing base from $200 million to $225 million and change the semi-annual redeterminations to April 1 and October 1 to align with the Company's new fiscal year end of December 31st..
The borrowing base is subject to periodic redeterminations, mandatory reductions and further adjustments from time to time. During these redetermination periods, the Company’s borrowing base may be increased or may be reduced in certain circumstances. The revolving credit facility allows for SOFR Loans and Base Rate Loans (each as defined in the Credit Agreement). The interest rate on each SOFR Loan will be the adjusted Term SOFR for the applicable interest period plus a margin between 2.75% and 3.75% (depending on the borrowing base utilization percentage). The annual interest rate on each Base Rate Loan will be the Base Rate for the applicable interest period plus a margin between 1.75% and 2.75% (depending on the borrowing base utilization percentage). The Company is also subject to an unused commitment fee of between 0.375% and 0.500% (depending on the borrowing base utilization percentage).
The Credit Agreement contains certain covenants, which, among other things, require the maintenance of (i) a total leverage ratio of not more than 3.25 to 1.0 and (ii) a minimum current ratio of not less than 1.0 to 1.0 as of the last day of any quarter. The Credit Agreement also contains a total leverage ratio for Restricted Payments, as defined in the Credit Agreement, after giving pro forma effect to such Restricted Payments, which includes payments to any holder of the Company's shares, would not exceed 2.50 to 1.0. If the Company's leverage ratio, after giving pro forma effect to such Restricted Payments (as defined in the Credit Agreement), is above 2.0 to 1.0, then an additional test of free cash flow is applied, and the Company will only be permitted to make such Restricted Payments if such payment does not exceed the Company's free cash flow. The Company is also required to limit its cash balance to less than $15 million or 10% of the borrowing base, whichever is greater. If the Company's cash balance exceeds this limit on the last business day of the month, the Company will be required to apply the excess to reduce its credit facility borrowings. The Credit Agreement also contains other customary affirmative and negative covenants and events of default. The Company's minimum hedging requirement is between 0% and 50% (depending on the borrowing base utilization percentage and leverage ratio as of the hedge evaluation date) of its proved developed producing ("PDP") volumes on a rolling 24-month basis. As of September 30, 2022, the Company's minimum hedging requirement was 0%.
RILEY EXPLORATION PERMIAN, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
The following table summarizes the Company's interest expense:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| (In thousands) |
Interest expense, net of capitalized interest | $ | 273 | | | $ | 728 | | | $ | 1,050 | | | $ | 2,645 | |
Amortization of deferred financing costs | 175 | | | 170 | | | 548 | | | 498 | |
Unused commitment fees | 137 | | | 65 | | | 362 | | | 156 | |
Total interest expense, net | $ | 585 | | | $ | 963 | | | $ | 1,960 | | | $ | 3,299 | |
As of September 30, 2022 and December 31, 2021, the weighted average interest rate on outstanding borrowings under the revolving credit facility was 5.88% and 3.10%, respectively.
As of September 30, 2022, the Company was in compliance with all covenants contained in the Credit Agreement and had $48 million of outstanding borrowings and $152 million available under the borrowing base.
(10) Members’/Shareholders' Equity
Public Offering of Common Stock
On June 30, 2021, the Company entered into an Underwriting Agreement (the "Underwriting Agreement") with Truist Securities, Inc., as the representative of the other several underwriters named in the Underwriting Agreement. 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 in accordance with the Underwriting Agreement. Net proceeds from the issuance were approximately $46.7 million, after deducting the underwriting fees and other offering costs incurred.
Dividends
For the three months ended September 30, 2022 and 2021, the Company declared quarterly dividends on its common stock totaling approximately $6.2 million and $5.5 million, respectively. See Note 9 - Revolving Credit Facility for discussion over the Company's restrictions on certain payments, including dividends.
Share-Based and Unit-Based Compensation
In connection with the Merger, the Company shareholders adopted an omnibus equity incentive plan, the 2021 LTIP, for the employees, consultants and the directors of the Company and its affiliates who perform services for the Company. The holders of unvested restricted units issued under the 2018 LTIP were issued substitute awards under the 2021 LTIP at the closing of the Merger. Upon the closing of the Merger and after giving effect to the adjustment resulting from the one-for-twelve reverse stock split, the 2021 LTIP had 1,387,022 shares of common stock available for issuance, of which 444,549 shares remained available as of September 30, 2022.
RILEY EXPLORATION PERMIAN, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
2021 Long-Term Incentive Plan
The following table presents the Company's restricted stock activity during the nine months ended September 30, 2022 under the 2021 LTIP:
| | | | | | | | | | | | | | |
2021 Long-Term Incentive Plan |
| | Restricted Shares | | Weighted Average Grant Date Fair Value |
Unvested at December 31, 2021 | | 366,789 | | | $ | 19.41 | |
Granted | | 366,669 | | | $ | 17.61 | |
Vested | | (96,838) | | | $ | 18.87 | |
Forfeited | | (3,625) | | | $ | 23.46 | |
Unvested at September 30, 2022 | | 632,995 | | | $ | 18.45 | |
| | | | |
For the three months ended September 30, 2022 and 2021, the total equity-based compensation expense is $0.8 million for both periods and is included in general and administrative costs on the Company's condensed consolidated statement of operations for the restricted share awards granted under the 2021 LTIP. For the nine months ended September 30, 2022 and 2021, the total equity-based compensation expense of $2.7 million and $6.1 million, respectively, is included in general and administrative costs on the Company's condensed consolidated statement of operations for the restricted share awards granted under the 2021 LTIP. Approximately $9.4 million of additional equity-based compensation expense will be recognized over the weighted average life of 30 months for the unvested restricted share awards as of September 30, 2022 granted under the 2021 LTIP.
2018 Long-Term Incentive Plan
In connection with the Merger and in accordance with the Merger Agreement, each unvested restricted unit outstanding under the 2018 LTIP was converted into restricted shares of the Company under the 2021 LTIP. The holders of unvested restricted units issued under the 2018 LTIP were issued substitute awards under the 2021 LTIP at the closing of the Merger.
Total unit-based compensation expense of $0.3 million is for all of the issuances outstanding during the period of January 2021 through the date of the merger, February 26, 2021. Unit-based compensation expense is included in general and administrative costs on the Company's condensed consolidated statement of operations.
(11)Income Taxes
REP LLC was organized as a limited liability company and treated as a flow-through entity for federal income tax purposes. As such, taxable income and any related tax credits were passed through to its members and included in their tax returns, even though such taxable income or tax credits may not have been distributed. In connection with the closing of the Merger, the Company's tax status changed from a limited liability company to a C-corporation. As a result, the Company is responsible for federal and state income taxes and must record deferred tax assets and liabilities for the tax effects of any temporary differences that exist.
RILEY EXPLORATION PERMIAN, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
The components of the Company's consolidated provision for income taxes from continuing operations are as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| (In thousands) |
| | | | | | | |
Current income tax expense: | | | | | | | |
Federal | $ | 142 | | | $ | 2 | | | $ | 1,442 | | | $ | 2 | |
State | 291 | | | 284 | | | 486 | | | 52 | |
Total current income tax expense | 433 | | | 286 | | | 1,928 | | | 54 | |
Deferred income tax expense (benefit): | | | | | | | |
Federal | 15,460 | | | (6,427) | | | 22,439 | | | 14,202 | |
State | 424 | | | 2,204 | | | 763 | | | (717) | |
Total deferred income tax expense (benefit) | 15,884 | | | (4,223) | | | 23,202 | | | 13,485 | |
Total income tax expense (benefit) | $ | 16,317 | | | $ | (3,937) | | | $ | 25,130 | | | $ | 13,539 | |
A reconciliation of the statutory federal income tax rate to the Company's effective income tax rate is as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| | | | | |
| | | | | | | |
Tax at statutory rate | 21.0 | % | | 21.0 | % | | 21.0 | % | | 21.0 | % |
Nondeductible compensation | 0.1 | % | | (32.1) | % | | 0.2 | % | | (1.3) | % |
Transaction costs | — | % | | (47.7) | % | | — | % | | (2.1) | % |
Stock compensation | — | % | | 0.2 | % | | (0.1) | % | | (0.1) | % |
State income taxes, net of federal benefit | 0.8 | % | | 22.9 | % | | 0.8 | % | | (1.6) | % |
Change in tax status | — | % | | (0.5) | % | | — | % | | (53.4) | % |
Income subject to taxation by REP LLC's unitholders | — | % | | — | % | | — | % | | (15.8) | % |
Other | (0.5) | % | | — | % | | (0.3) | % | | — | % |
Effective income tax rate | 21.4 | % | | (36.2) | % | | 21.6 | % | | (53.3) | % |
The Company's federal income tax returns for the years subsequent to December 31, 2018 remain subject to examination. The Company's income tax returns in major state income tax jurisdictions remain subject to examination for various periods subsequent to December 31, 2017. The Company currently believes that all other significant filing positions are highly certain and that all of its other significant income tax positions and deductions would be sustained under audit or the final resolution would not have a material effect on the consolidated financial statements. Therefore, the Company has not established any significant reserves for uncertain tax positions.
(12)Discontinued Operations and Assets Held For Sale
Kansas Reporting Unit
On March 10, 2021, the Company entered into a PSA to divest of the Kansas Reporting Unit for an agreed upon purchase price of $3.5 million before certain closing adjustments. In addition, the Company also agreed to assign to the buyer its lease associated with Tengasco's former corporate office in Greenwood Village, Colorado. With Tengasco qualifying as a business and the Kansas Reporting Unit making up a significant portion of the assets of Tengasco, the Company concluded that the transaction met the requirements of assets held for sale and discontinued operations upon the acquisition date. The sale closed on April 2, 2021 for an adjusted purchase price of $3.3 million, after customary closing adjustments.
RILEY EXPLORATION PERMIAN, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
The following table presents the components of the loss on discontinued operations reported in the condensed consolidated statements of operations for the periods ended September 30, 2021:
| | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, 2021 | | September 30, 2021 |
| (In thousands) |
Oil and natural gas sales | $ | — | | | $ | — | |
Total revenues | — | | | — | |
Lease operating expenses | — | | | 115 | |
Goodwill impairment | — | | | 18,516 | |
Total expenses | — | | | 18,631 | |
Other income (expenses) | 775 | | | (107) | |
Gain (loss) from discontinued operations before income taxes | 775 | | | (18,738) | |
Income tax benefit (expense) | 1 | | | (59) | |
Gain (loss) from discontinued operations, net of tax | $ | 776 | | | $ | (18,797) | |
| | | |
The Company did not have any discontinued operations during the three and nine months ended September 30, 2022.
(13)Net Income (Loss) Per Share/Unit
Net income (loss) per share/unit is calculated using a retroactive application of the Exchange Ratio and the one-for-twelve reverse stock split that occurred in conjunction with the Merger. The Company calculated net income or loss per share/unit using the treasury stock method.
The table below sets forth the computation of basic and diluted net income (loss) per share/unit for the three and nine months ended September 30, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | | | | 2022 | | 2021 | | 2022 | | 2021 |
| | | | | (In thousands, except per share/unit) |
Continuing Operations: | | | | | | | | | | | |
Net income (loss) - Diluted | | | | | $ | 59,817 | | | $ | 14,878 | | | $ | 91,204 | | | $ | (38,928) | |
Less: Dividends on preferred units | | | | | — | | | — | | | — | | | (574) | |
Net income (loss) attributable to common shareholders/unitholders - Basic(1) | | | | | $ | 59,817 | | | $ | 14,878 | | | $ | 91,204 | | | $ | (39,502) | |
| | | | | | | | | | | |
Basic weighted-average common shares/units outstanding | | | | | 19,546 | | | 19,434 | | | 19,530 | | | 17,218 | |
Effecting of dilutive securities: | | | | | | | | | | | |
| | | | | | | | | | | |
Restricted shares/units | | | | | 41 | | | 106 | | | 102 | | | — | |
Diluted weighted-average common shares/units outstanding | | | | | 19,587 | | | 19,540 | | | 19,632 | | | 17,218 | |
Continuing Operations: | | | | | | | | | | | |
Basic net income (loss) per common share/unit | | | | | $ | 3.06 | | | $ | 0.77 | | | $ | 4.67 | | | $ | (2.29) | |
Diluted net income (loss) per common share/unit | | | | | $ | 3.05 | | | $ | 0.76 | | | $ | 4.65 | | | $ | (2.29) | |
_____________________________________________________(1) Used in the basic and diluted net loss per share/unit calculation when the Company is in a net loss position.
RILEY EXPLORATION PERMIAN, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
For the three and nine months ended September 30, 2022 and 2021, the following shares/units were excluded from the calculation of diluted net income (loss) per share/unit due to their anti-dilutive effect:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| (In thousands) |
| | | | | | | |
Restricted shares/units | 293 | | | 127 | | | 232 | | | 228 | |
(14)Commitments and Contingencies
Legal Matters
The Company was named as a defendant in an adversary proceeding (the "Adversary Proceeding") commenced on October 25, 2021 in United States Bankruptcy Court for the Northern District of Texas, Dallas Division (the "Bankruptcy Court"), by the Trustee of the Chapter 7 bankruptcy of the Hoactzin Partners, L.P. ("Hoactzin"). The complaint in the Adversary Proceeding alleges that in October of 2018, one year prior to the Hoactzin bankruptcy filing in October of 2019, Peter Salas ("Salas"), Chairman of the Board of Tengasco during the period of the purported fraudulent transfers, caused Hoactzin to transfer its working interests in certain wells on its Kansas acreage (the “Kansas Working Interests”) to the Company for an amount the complaint alleges was purportedly less than the reasonable equivalent value of such Kansas Working Interests. The complaint includes avoidance actions and other causes of action in connection with the transfer of the Kansas Working Interests, as well as other causes of action alleged related to certain transactions to which the Company was not a party.
The complaint also alleges that Salas, Dolphin Direct Equity Partners, L.P. ("DDEP"), an entity substantially owned by Salas, and the Company are jointly and severally liable for the damages incurred by Hoactzin. In connection with the Company’s merger in February 2021, Salas resigned his position from the Company’s Board and no longer holds any position as an officer or director of the Company. On April 2, 2021, the Company closed on the sale of all the assets it held in Kansas (of which the Kansas Working Interests were a small part) to a third party for an agreed upon purchase price of $3.3 million.
On October 13, 2022, the Company entered into a Compromise Settlement Agreement and Mutual General Release (the “Settlement Agreement”) with the Trustee for the bankruptcy estate for Hoactzin to resolve certain claims against the Company in the Adversary Proceeding. Under the terms of the Settlement Agreement, the Company will pay $80 thousand to the Trustee in full settlement and satisfaction of (a) all claims, causes of action, and damages that have been asserted against the Company or could be asserted against the Company in the Adversary Proceeding; and (b) all claims which might arise from or relate to any actions taken by the Company while acting in connection with Debtor.
The effectiveness of the Settlement Agreement is contingent upon its approval by the Bankruptcy Court. On October 13, 2022, the Trustee filed a motion to approve the Settlement Agreement with the Bankruptcy Court (the “Settlement Motion”). A hearing will be held on November 16, 2022 on the Settlement Motion. Should the Court decline to approve the proposed settlement, the Trustee's claims against Riley Permian would proceed to trial, absent a subsequent settlement approved by the Court. If the Bankruptcy Court grants the Settlement Motion, after Riley Permian makes the settlement payment contemplated under the Settlement Agreement, Riley Permian and the Trustee intend to file a joint motion requesting dismissal of the Adversary Proceeding with prejudice, as contemplated by the Settlement Agreement. The Settlement Agreement will have no effect on the Trustee’s claims against any of the other defendants in the Adversary Proceeding, including without limitation, those claims against Peter Salas, our former Chief Executive Officer.
Environmental Matters
The Company is subject to various federal, state and local laws and regulations relating to the protection of the environment. These laws, which are often changing, regulate the discharge of materials into the environment and may require the Company to remove or mitigate the environmental effects of the disposal or release of petroleum or chemical substances at various sites. The Company had no material environmental liabilities as of September 30, 2022 or December 31, 2021.
Contractual Commitments
RILEY EXPLORATION PERMIAN, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
In October 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 that has a primary term extending through the earlier of the total contract quantity delivered or December 31, 2025. The agreement also has a daily contract quantity for Kinder Morgan to deliver CO2 to the Company. The second agreement is a connection agreement that also established a delivery point for the purchased CO2 with the Cortez Pipeline Company.
In April 2022, the Company entered into a purchase agreement for pipe related to its 2023 drilling program. Under the agreement, the Company has commitments to purchase an additional approximately $10.1 million of pipe by first quarter of 2023.
In August 2022, the Company entered into a second amendment on its gas gathering and processing agreement with its primary midstream counterparty, Stakeholder Midstream LLC (“Stakeholder”). Stakeholder committed to expand their gathering and processing system with a commitment from the Company to deliver an annual minimum volume to Stakeholder’s gathering system for a minimum of seven years beginning on the in-service date of the expanded plant.
(15)Subsequent Events
On October 10, 2022, the Board of Directors of the Company declared a cash dividend of $0.34 per share of common stock payable on November 7, 2022 to its shareholders of record at the close of business on October 24, 2022.
On October 25, 2022, the Company amended its Credit Agreement to, among other things, increase the borrowing base from $200 million to $225 million and change the semi-annual redetermination dates to April 1 and October 1 to align with the Company's new fiscal year end of December 31st.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
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 and the Company's Transition Report on Form 10-QT for the period ended December 31, 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 33% to 12.7 MBoe/d for the three months ended September 30, 2022, as compared to the same period in 2021 and 21% to 10.9 MBoe/d for the nine months ended September 30, 2022, as compared to the same period in 2021
•During the three and nine months ended September 30, 2022, 7 gross (4.2 net) and 14 gross (10.8 net) horizontal wells brought online to production, respectively
•Realized average combined price on production sold of $74.76 per Boe, before derivative settlements, during the three months ended September 30, 2022, including $92.40 per barrel for oil
•Generated cash flow from operations of $130.4 million for the nine months ended September 30, 2022
•Total accrued capital expenditures of $36.7 million and $96.5 million for the three and nine months ended September 30, 2022, respectively
•Paid cash dividends on common shares of $6.1 million during the three months ended September 30, 2022, and announced latest dividend of $0.34 per share with a record date of October 24, 2022, which was paid on November 7, 2022, for a total of $6.7 million
•Exited the third quarter with $17.9 million in cash and $48.0 million drawn on our revolving credit facility
Recent Developments
Fiscal Year Change
On August 16, 2022, the Company's Board acting by written consent resolved to amend and restate the Company's Second Amended and Restated Bylaws to change the Company's fiscal year period from October 1st through September 30th each year to January 1st through December 31st each year commencing with the 2022 calendar year. On August 19, 2022, the holders of approximately 75% of our outstanding Common Stock acting by written consent approved Bylaws Restatement and adopted the Third Amended and Restated Bylaws. In accordance with Rule 14c-2 under the Exchange Act, the aforementioned actions taken by written consent became effective on September 23, 2022. As a result, the Company's 2022 fiscal year will now be the period from January 1, 2022 to December 31, 2022.
Market Conditions, Commodity Prices and Interest Rates
U.S. and global markets are experiencing heightened volatility following impactful geopolitical events, consistent evidence of widespread inflation, as well as increased fears of an economic recession. However, commodity prices have continued to remain high during the first nine months of 2022 due to OPEC+ and other oil and natural gas producers not rapidly increasing production levels, as well as from the recovery in demand related to the COVID-19 pandemic. The full-scale military invasion of Ukraine by Russian troops has continued unabated since February 2022 coupled with related economic sanctions imposed on Russia further exacerbating supply shortages, leading to disruptions in the credit and capital markets, including significant uncertainty in commodity prices, during the first nine months of 2022.
In addition, global markets are experiencing significant inflation attributable to a number of factors. Certain of our capital expenditures and expenses are affected by general inflation and we expect costs for the remainder of 2022 to continue to be a function of supply and demand. Specifically, costs for oilfield equipment and services continue to experience impacts from significant inflation, which we expect to continue for the foreseeable future.
In response to inflation concerns, the U.S. Federal Reserve initiated a monetary tightening policy in 2022, sharply increasing interest rates in June, July, September and November 2022 with public estimates of potential further increases in the future. The Company's floating-rate credit facility will be impacted by such rate increases.
The combination of geopolitical events, inflation and the rising rate environment has led to increasing forecasts of a U.S. or global recession. Any such recession could prolong market volatility or cause a decline in commodity prices, among other potential impacts.
The Company cannot estimate the length or gravity of the future impact these events will have on the Company's results of operations, financial position, liquidity and the value of oil and natural gas reserves.
Results of Operations
Comparison for the three and nine months ended September 30, 2022 and 2021
The following table sets forth selected operating data for the three and nine months ended September 30, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
Revenues (in thousands): |
Oil sales | | $ | 80,017 | | | $ | 44,026 | | | $ | 224,895 | | | $ | 114,314 | |
Natural gas sales | | 4,216 | | | 1,908 | | | 8,855 | | | 7,381 | |
Natural gas liquids sales | | 3,238 | | | 2,080 | | | 8,147 | | | 4,527 | |
Oil and natural gas sales, net | | $ | 87,471 | | | $ | 48,014 | | | $ | 241,897 | | | $ | 126,222 | |
| | | | | | | | |
Production Data, net: | | | | | | | | |
Oil (MBbls) | | 866 | | | 639 | | | 2,301 | | | 1,793 | |
Natural gas (MMcf) | | 985 | | | 807 | | | 2,239 | | | 2,141 | |
Natural gas liquids (MBbls) | | 140 | | | 109 | | | 303 | | | 306 | |
Total (MBoe) | | 1,170 | | | 882 | | | 2,977 | | | 2,456 | |
| | | | | | | | |
Daily combined volumes (Boe/d) | | 12,717 | | 9,581 | | 10,903 | | 8,997 |
Daily oil volumes (Bbls/d) | | 9,413 | | 6,940 | | 8,428 | | 6,569 |
| | | | | | | | |
Average Realized Prices: | | | | | | | | |
Oil ($ per Bbl) | | $ | 92.40 | | | $ | 68.95 | | | $ | 97.74 | | | $ | 63.76 | |
Natural gas ($ per Mcf) | | 4.28 | | | 2.36 | | | 3.95 | | | 3.45 | |
Natural gas liquids ($ per Bbl) | | 23.13 | | | 19.16 | | | 26.89 | | | 14.79 | |
Combined ($ per Boe) | | $ | 74.76 | | | $ | 54.46 | | | $ | 81.26 | | | $ | 51.39 | |
| | | | | | | | |
Average Realized Prices, including derivative settlements:(1) | | | | | | | | |
Oil ($ per Bbl) | | $ | 75.80 | | | $ | 52.30 | | | $ | 73.63 | | | $ | 51.97 | |
Natural gas ($ per MMBtu) | | 1.57 | | | 1.69 | | | 1.40 | | | 3.28 | |
Natural gas liquids ($ per Bbl) | | 23.13 | | | 19.16 | | | 26.89 | | | 14.79 | |
Combined ($ per Boe) | | $ | 60.20 | | | $ | 41.79 | | | $ | 60.69 | | | $ | 42.65 | |
_____________________
(1)The Company's calculation of the effects of derivative settlements includes losses on the settlement of its commodity derivative contracts. These losses are included under other income (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 $39.5 million and $115.7 million, or 82% and 92%, for the three and nine months ended September 30, 2022, respectively, compared to the same periods in 2021. The Company’s realized average combined price on its production for the three and nine months ended September 30, 2022 increased by $20.30 and $29.87, or 37% and 58%, respectively, compared to the same periods in 2021.
Oil revenues
•For the three months ended September 30, 2022, oil revenues increased by $36.0 million, or 82%, compared to the same period in 2021. Of the increase, $20.3 million was attributable to an increase in our realized price and $15.7 million was attributable to an increase in volume. Volumes increased by 36%, while realized prices increased by 34% compared to the same period in 2021.
•For the nine months ended September 30, 2022, oil revenues increased by $110.6 million, or 97%, compared to the same period in 2021. Of the increase, $78.2 million was attributable to an increase in our realized price and $32.4 million was attributable to an increase in volume. Volumes increased by 28%, while realized prices increased by 53% compared to the same period in 2021.
•Oil volumes increased during the three and nine months ended September 30, 2022 due to production from new wells and workovers performed on existing wells. During the three and nine months ended September 30, 2022, we brought online 7 gross (4.2 net) and 14 gross (10.8 net) horizontal wells, respectively.
•The average WTI price increased by $22.48 and $33.91 per Bbl during the three and nine months ended September 30, 2022, respectively, compared to the same periods in 2021.
Natural gas revenues
•For the three months ended September 30, 2022, natural gas revenues increased by $2.3 million, compared to the same period in 2021, to $4.2 million from $1.9 million. Volumes increased by 22%, while realized prices increased by $1.92 per Mcf compared to the same period in 2021.
•For the nine months ended September 30, 2022, natural gas revenues increased by $1.5 million, compared to the same period in 2021, to $8.9 million from $7.4 million. Volumes increased by 5%, while realized prices increased by $0.50 per Mcf compared to the same period in 2021.
•Natural gas sales volumes increased during the three months ended September 30, 2022 compared to the same period in 2021 due to production from new wells and workovers performed on existing wells.
•The average Henry Hub price increased by $3.67 and $3.14 per Mcf during the three and nine months ended September 30, 2022, respectively, compared to the same periods in 2021.
Natural gas liquids revenues
•For the three months ended September 30, 2022, NGL revenues increased by $1.1 million, compared to the same period in 2021, to $3.2 million from $2.1 million. Volumes increased by 29%, while realized prices increased $3.97 per Bbl compared to the same period in 2021.
•For the nine months ended September 30, 2022, NGL revenues increased by $3.6 million, compared to the same period in 2021, to $8.1 million from $4.5 million. Volumes remained flat, while realized prices increased $12.10 per Bbl compared to the same period in 2021.
•NGL sales volumes increased during the three months ended September 30, 2022 compared to the same period in 2021 due to production from new wells and workovers performed on existing wells.
Contract Services - Related Party
The following table presents the Company's revenue and costs associated with its contract services - related party transactions:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| (In thousands) |
Contract services - related parties(1) | $ | 600 | | | $ | 600 | | | $ | 1,800 | | | $ | 1,800 | |
Cost of contract services - related parties(2) | 89 | | | 147 | | | 263 | | | 329 | |
Contract services revenues, net of costs | $ | 511 | | | $ | 453 | | | $ | 1,537 | | | $ | 1,471 | |
| | | | | | | |
_____________________(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.
Costs and Expenses
The following table presents the Company's operating costs and expenses and other (income) expenses:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Costs and Expenses: | (In thousands) |
Lease operating expenses | $ | 8,813 | | | $ | 5,686 | | | $ | 23,705 | | | $ | 17,407 | |
Production and ad valorem taxes | $ | 5,826 | | | $ | 2,575 | | | $ | 14,854 | | | $ | 7,347 | |
Exploration costs | $ | 20 | | | $ | 884 | | | $ | 1,540 | | | $ | 9,142 | |
Depletion, depreciation, amortization and accretion | $ | 8,346 | | | $ | 6,692 | | | $ | 22,167 | | | $ | 20,025 | |
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Administrative costs | $ | 5,154 | | | $ | 4,790 | | | $ | 13,567 | | | $ | 11,516 | |
Equity-based compensation | 704 | | | 751 | | | 2,274 | | | 6,377 | |
General and administrative expense | $ | 5,858 | | | $ | 5,541 | | | $ | 15,841 | | | $ | 17,893 | |
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Transaction costs | $ | — | | | $ | 198 | | | $ | 2,638 | | | $ | 2,683 | |
Interest expense, net | $ | 585 | | | $ | 963 | | | $ | 1,960 | | | $ | 3,299 | |
(Gain) loss on derivatives | $ | (17,600) | | | $ | 14,987 | | | $ | 44,395 | | | $ | 75,286 | |
Income tax expense (benefit) | $ | 16,317 | | | $ | (3,937) | | | $ | 25,130 | | | $ | 13,539 | |
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 $3.1 million for the three months ended September 30, 2022 compared to the same period in 2021. For the three months ended September 30, 2022, $1.7 million of the increase was due to higher workover expense as additional workovers were performed in the 2022 period and $2.3 million of the increase was attributable to costs
associated with new wells and additional production volumes, partially offset by a $0.9 million decrease attributable to efficiencies on existing wells.
The Company’s LOE increased by $6.3 million for the nine months ended September 30, 2022 compared to the same period in 2021. For the nine months ended September 30, 2022, $4.3 million of the increase was attributable to costs associated with new wells and additional production volume and $4.0 million of the increase was due to higher workover expense as additional workovers were performed in the 2022 period, partially offset by a $2.0 million decrease attributable to efficiencies on existing wells.
Production and Ad Valorem Tax Expense
Production taxes are paid on produced oil, natural gas and NGLs based on a percentage of revenues at fixed rates established by federal, state or local taxing authorities. In general, the production taxes we pay correlate to changes in our oil, natural gas and NGL revenues. We are also subject to ad valorem taxes in the counties where our production is located. Ad valorem taxes are generally based on the valuation of our oil and natural gas properties, which also trend with oil and natural gas prices and vary across the different counties in which we operate.
Production and ad valorem taxes increased by $3.3 million and $7.5 million for the three and nine months ended September 30, 2022, respectively, compared to the same periods in 2021. Production taxes increased primarily due to increases in our oil and natural gas sales, net, as discussed above. Ad valorem taxes increased for the three and nine months ended September 30, 2022 based on higher estimated property values for the current taxable period.
Exploration Expense
Exploration expense consists of expiration of unproved leasehold and geological and geophysical costs which include seismic survey costs. The following table presents exploration expense by area for the three and nine months ended September 30, 2022 and 2021:
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| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| (In thousands, except acreage data) |
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Exploration expense(1) | $ | — | | | $ | 732 | | | $ | 1,465 | | | $ | 8,923 | |
Geological and geophysical costs | 20 | | | 152 | | | 75 | | | 219 | |
Total exploration expense | $ | 20 | | | $ | 884 | | | $ | 1,540 | | | $ | 9,142 | |
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Expired net acres - Texas | — | | | 25 | | | 626 | | | 1,552 | |
Expired net acres - New Mexico | — | | | 2,171 | | | 518 | | | 15,334 | |
Net acres renewed after expiration(2) | 21 | | | 19 | | | 38 | | | 417 | |
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(1)For the nine months ended September 30, 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 nine months ended September 30, 2021, exploration expense included $3.3 million and $5.6 million related to expiration of unproved leasehold costs in Texas and New Mexico, respectively.
(2)The Company did not renew any net acreage after expiration in New Mexico during the three and nine months ended September 30, 2022 and 2021.
Depletion, Depreciation, Amortization and Accretion Expense
Depletion, depreciation and amortization is the systematic expensing of the capitalized costs incurred to acquire, explore and develop oil, natural gas and NGLs. All costs incurred in the acquisition, exploration and development of properties (excluding costs of surrendered and abandoned leaseholds, delay lease rentals, dry holes and overhead related to exploration activities) are capitalized. Capitalized costs are depleted using the units of production method.
Accretion expense relates to ARO. We record the fair value of the liability for ARO in the period in which the liability is incurred (at the time the wells are drilled or acquired) with the offset to property cost. The liability accretes each period until it is settled or the well is sold, at which time the liability is removed.
Depletion, depreciation, amortization and accretion expense increased by $1.7 million and $2.1 million for the three and nine months ended September 30, 2022, respectively, compared to the same periods for 2021. The increase for the three and
nine months ended September 30, 2022 was primarily due to higher production, partially offset by a lower depletion rate. The depletion rate is a function of capitalized cost and related underlying reserves. The lower depletion rate was primarily driven by an increase in reserves as a result of the Company's drilling activity and improved commodity prices.
General and Administrative Expense ("G&A")
G&A expenses include corporate overhead such as payroll and benefits for our corporate staff, equity-based compensation expense, office rent for our headquarters, audit and other fees for professional services and legal compliance. G&A expenses are reported net of overhead recoveries.
Total G&A expense increased by $0.3 million and decreased by $2.1 million for the three and nine months ended September 30, 2022, respectively, compared to the same periods for 2021. Administrative costs, which include payroll, benefits and non-payroll costs, increased by $0.4 million and $2.1 million for the three and nine months ended September 30, 2022, respectively, compared to the same periods for 2021. The increase in administrative costs was primarily attributable to increased professional services, insurance, technology and investor relations costs. Equity-based compensation expense decreased by $4.1 million for the nine months ended September 30, 2022 compared to the same period in 2021. The higher equity-based compensation during the nine months ended September 30, 2021 relates to restricted shares awarded to certain employees following completion of the Merger that immediately vested.
Transaction Costs
Transaction costs represent costs incurred on successful or unsuccessful business combinations or unsuccessful property acquisitions. The transaction costs of $2.6 million for the nine months ended September 30, 2022 primarily relate to a potential business combination and related financing that the Company pursued but ultimately chose not to consummate due to changing market conditions. During the nine months ended September 30, 2021, the transaction costs of $2.7 million primarily relate to costs incurred on the Merger with Tengasco in February 2021.
Interest Expense
Interest expense decreased by $0.4 million and $1.3 million during the three and nine months ended September 30, 2022, respectively, when compared to the same periods for 2021. Interest expense decreased due to a lower outstanding average balance on the Company's revolving credit facility as well as the capitalized interest related to the Company's EOR project, partially offset by an increase in interest rates, during the three and nine months ended September 30, 2022 when compared to the same periods for 2021.
Gain/Loss on Derivatives
The Company recognizes settlements and changes in the fair value of its derivative contracts as a single component within other income (expense) on its condensed consolidated statements of operations. We have oil and natural gas derivative contracts, including fixed price swaps, basis swaps and collars, that settle against various indices. The following table presents the components of the Company's gain (loss) on derivatives for the three and nine months ended September 30, 2022 and 2021:
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| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| (In thousands) |
Settlements on derivative contracts | $ | (17,040) | | | $ | (11,171) | | | $ | (61,198) | | | $ | (21,477) | |
Non-cash gain (loss) on derivatives | 34,640 | | | (3,816) | | | 16,803 | | | (53,809) | |
Gain (loss) on derivatives | $ | 17,600 | | | $ | (14,987) | | | $ | (44,395) | | | $ | (75,286) | |
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 gain on derivatives for the three months ended September 30, 2022 was $17.6 million, which increased from a loss position by $32.6 million compared to the same period in 2021. The loss on derivatives for the nine months ended September 30, 2021 was $44.4 million, which decreased by $30.9 million compared to the same period in 2021. The change in the non-cash gain (loss) on derivatives was impacted by the decrease in total contract volumes for our open derivative contracts and the change in the estimated forward-looking oil and natural gas prices used at the end of the period to calculate the fair value of the open derivative contracts for the three and nine months ended September 30, 2022 compared to the same periods in 2021. The increase in the loss on settlements on derivatives was due to the increase in oil and natural gas prices for the three and nine months ended September 30, 2022 compared to the same periods in 2021. For example, the average WTI price was $93.06 per Bbl for the three months ended September 30, 2022 compared to $70.58 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 beginning February 27, 2021 in the accompanying condensed consolidated financial statements. Deferred income taxes are provided to reflect the future tax consequences or benefits of differences between the tax basis of assets and liabilities and their reported amounts in the financial statements using enacted tax rates. Upon consummation of the Merger in February 2021, the Company established a $13.6 million provision for deferred income taxes with the conversion to a C-corporation. The majority of this deferred tax liability was established by a change in tax status which primarily was attributable to the oil and natural gas properties. See Note 11 - Income Taxes to the Company's condensed consolidated financial statements included herein for further discussion of income taxes.
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| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| (In thousands) |
Current income tax expense | $ | 433 | | | $ | 286 | | | $ | 1,928 | | | $ | 54 | |
Deferred income tax expense (benefit) | 15,884 | | | (4,223) | | | 23,202 | | | 13,485 | |
Total income tax expense (benefit) | $ | 16,317 | | | $ | (3,937) | | | $ | 25,130 | | | $ | 13,539 | |
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Effective income tax rate | 21.4 | % | | (36.2) | % | | 21.6 | % | | (53.3) | % |
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 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 September 30, 2022, we had a working capital deficit of $32.7 million compared to a deficit of $32.8 million as of December 31, 2021. The working capital deficit at September 30, 2022 reflects $22.5 million in current derivative liabilities compared to $31.0 million in current derivative liabilities at December 31, 2021. As of September 30, 2022, we had an additional $9.3 million in accrued capital expenditures, $2.4 million in accrued ad valorem taxes due to the projected increase in property taxes in 2022, and $3.1 million in accrued G&A and LOE. 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 September 30, 2022 of future commodity production which will settle on a monthly basis through the end of their contractual terms. This aligns with the receipt of oil and natural gas revenues on a monthly basis.