10-Q 1 useg20230930_10q.htm FORM 10-Q useg20230930_10q.htm
0000101594 US ENERGY CORP false --12-31 Q3 2023 0.01 0.01 245,000,000 245,000,000 25,506,570 25,506,570 25,023,812 25,023,812 0.0225 0.0225 0.0225 0.0225 19,905,736 6.5 4 10 0 0 0 0 0 0 0 0 0 0 4,946 16,500 5,676 1,000 23,176 0.0225 6.5 Included in the above purchase price adjustments is settlement for oil in temporary storage in tank batteries at the leases. The Company does not separately account for oil in temporary storage until the oil is sold and title transfers to the purchaser. Consistent with the Company’s accounting policy and reporting of similar transactions this amount was recorded within Evaluated Properties on the Company’s condensed consolidated balance sheet. “Bbl” refers to one stock tank barrel, or 42 U.S. gallons liquid volume, used in this report in reference to crude oil or other liquid hydrocarbons. 00001015942023-01-012023-09-30 xbrli:shares 00001015942023-11-13 thunderdome:item iso4217:USD 00001015942023-09-30 00001015942022-12-31 iso4217:USDxbrli:shares 0000101594useg:OilMember2023-07-012023-09-30 0000101594useg:OilMember2022-07-012022-09-30 0000101594useg:OilMember2023-01-012023-09-30 0000101594useg:OilMember2022-01-012022-09-30 0000101594us-gaap:NaturalGasMidstreamMember2023-07-012023-09-30 0000101594us-gaap:NaturalGasMidstreamMember2022-07-012022-09-30 0000101594us-gaap:NaturalGasMidstreamMember2023-01-012023-09-30 0000101594us-gaap:NaturalGasMidstreamMember2022-01-012022-09-30 00001015942023-07-012023-09-30 00001015942022-07-012022-09-30 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Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

☒

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

  
 

For the Quarterly Period Ended September 30, 2023

  

or

  

☐

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

  
 

For the transition period from _____________ to _____________________

 

Commission File Number 000-06814

 

useg20230930_10qimg001.jpg

 

(Exact Name of Registrant as Specified in its Charter)

 

Delaware

 

83-0205516

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

1616 S. Voss Road, Suite 725, Houston, Texas

 

77057

(Address of principal executive offices)

 

(Zip Code)

 

(346) 509-8734

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading symbol(s)

 

Name of each exchange on which registered

Common stock, par value $0.01

 

USEG

 

NASDAQ Stock Market LLC
(Nasdaq Capital Market)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ☐

Accelerated filer ☐

Non-accelerated filer ☒

Smaller reporting company ☒

 

Emerging growth company ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

 

The registrant had 25,506,570 shares of its common stock, par value $0.01 per share, outstanding as of November 13, 2023.

 

 

 
Table of Contents

 

 

TABLE OF CONTENTS

 

   

Page

Cautionary Note About Forward-Looking Statements

3
     

Part I.

FINANCIAL INFORMATION

4
     

Item 1.

Financial Statements

4
 

Condensed Consolidated Balance Sheets (unaudited)

4
 

Condensed Consolidated Statements of Operations (unaudited)

5
 

Condensed Consolidated Statements of Changes in Shareholders’ Equity (unaudited)

6
 

Condensed Consolidated Statements of Cash Flows (unaudited)

7
 

Notes to Unaudited Condensed Consolidated Financial Statements

8

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

21

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

30

Item 4.

Controls and Procedures

30
     

Part II.

OTHER INFORMATION

31
     

Item 1.

Legal Proceedings

31

Item 1A.

Risk Factors

31

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

33

Item 3.

Defaults Upon Senior Securities

34

Item 4.

Mine Safety Disclosures

34

Item 5.

Other Information

34

Item 6.

Exhibits

35
     

Signatures

36
 

 

2
Table of Contents

 

 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q (this “Report” or “Form 10-Q”), including “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains “forward-looking statements” within the meaning of the federal securities laws, including Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical facts are forward-looking statements.

 

Examples of forward-looking statements in this Report include:

 

 

●

planned capital expenditures for oil and natural gas exploration and environmental compliance;
 

●

potential drilling locations and available spacing units, and possible changes in spacing rules;
 

●

cash expected to be available for capital expenditures and to satisfy other obligations;
 

●

recovered volumes and values of oil and natural gas approximating third-party estimates;
 

●

anticipated changes in oil and natural gas production;
 

●

drilling and completion activities and opportunities;
 

●

timing of drilling additional wells and performing other exploration and development projects;
 

●

expected spacing and the number of wells to be drilled with our oil and natural gas industry partners;
 

●

when payout-based milestones or similar thresholds will be reached for the purposes of our agreements with our partners;
 

●

expected working and net revenue interests, and costs of wells, relating to the drilling programs with our partners;
 

●

actual decline rates for producing wells;
 

●

future cash flows, expenses and borrowings;
 

●

pursuit of potential acquisition opportunities;
 

●

economic downturns, wars and increased inflation and interest rates, and possible recessions caused thereby;
 

●

the effects of global pandemics on our operations, properties, the market for oil and gas, and the demand for oil and gas;
 

●

our expected financial position;
 

●

our expected future overhead reductions;
 

●

our ability to become an operator of oil and natural gas properties;
 

●

our ability to raise additional financing and acquire attractive oil and natural gas properties; and
 

●

other plans and objectives for future operations.

 

These forward-looking statements are identified by their use of terms and phrases such as “may,” “expect,” “estimate,” “project,” “plan,” “believe,” “intend,” “achievable,” “anticipate,” “will,” “continue,” “potential,” “should,” “could,” “up to,” and similar terms and phrases. Though we believe that the expectations reflected in these statements are reasonable, they involve certain assumptions, risks and uncertainties. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in this Quarterly Report on Form 10-Q, and in particular, under and incorporated by reference in, “Risk Factors”, below, the risks discussed in Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, and those discussed in other documents we file with the Securities and Exchange Commission (the “SEC” or the “Commission”). Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.

 

All subsequent written and oral forward-looking statements attributable to the Company, or persons acting on its behalf, are expressly qualified in their entirety by the cautionary statements above.

 

All forward-looking statements speak only at the date of the filing of this Report. We do not undertake any obligation to update or revise publicly any forward-looking statements except as required by law, including the securities laws of the United States and the rules and regulations of the SEC.

 

3
Table of Contents
 

 

Part I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

U.S. ENERGY CORP. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share amounts)

 

  

September 30, 2023

  

December 31, 2022

 
         

ASSETS

        

Current assets:

        

Cash and equivalents

 $1,974  $4,411 

Oil and natural gas sales receivable

  3,486   3,193 

Marketable equity securities

  161   107 

Commodity derivative asset -current

  58   - 

Other current assets

  817   558 

Real estate assets held for sale, net of selling costs

  175   175 
         

Total current assets

  6,671   8,444 
         

Oil and natural gas properties under full cost method:

        

Unevaluated properties

  -   1,584 

Evaluated properties

  203,375   203,144 

Less accumulated depreciation, depletion and amortization

  (103,919)  (96,725)
         

Net oil and natural gas properties

  99,456   108,003 
         

Property and equipment, net

  964   651 

Right-of-use asset

  733   868 

Commodity derivative asset-noncurrent

  16   - 

Other assets

  317   354 
         

Total assets

 $108,157  $118,320 
         

LIABILITIES AND SHAREHOLDERS’ EQUITY

        

Current liabilities:

        

Accounts payable and accrued liabilities

 $8,836  $7,832 

Accrued compensation and benefits

  817   1,111 

Commodity derivative liability-current

  422   1,694 

Asset retirement obligations-current

  1,850   668 

Current lease obligation

  179   189 
         

Total current liabilities

  12,104   11,494 
         

Credit facility

  12,000   12,000 

Asset retirement obligations- noncurrent

  16,777   14,774 

Long-term lease obligation, net of current portion

  658   794 

Deferred tax liability

  446   898 

Other noncurrent liabilities

  -   6 
         

Total liabilities

  41,985   39,966 
         

Commitments and contingencies (Note 8)

          
         

Shareholders’ equity:

        

Common stock, $0.01 par value; 245,000,000 shares authorized; 25,506,570 and 25,023,812 shares issued and outstanding at September 30, 2023 and December 31, 2022, respectively

  255   250 

Additional paid-in capital

  218,245   216,690 

Accumulated deficit

  (152,328)  (138,586)
         

Total shareholders’ equity

  66,172   78,354 
         

Total liabilities and shareholders’ equity

 $108,157  $118,320 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

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U.S. ENERGY CORP. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE three and nine months ended September 30, 2023 and 2022

(In thousands, except share and per share amounts)

 

   

Three Months Ended September 30,

    

Nine Months Ended September 30,

  
   

2023

    

2022

    

2023

    

2022

  
                                 

Revenue:

                                

Oil

   $ 7,811     $ 8,979     $ 21,935     $ 28,146  

Natural gas and liquids

     930       2,820       3,057       6,005  

Total revenue

     8,741       11,799       24,992       34,151  
                                 

Operating expenses:

                                

Lease operating expenses

     3,999       5,204       12,147       12,349  

Gathering, transportation and treating

     167       119       419       356  

Production taxes

     596       817       1,654       2,302  

Depreciation, depletion, accretion and amortization

     2,868       2,528       8,181       6,985  

Impairment of oil and natural gas properties

     6,495       -       6,495       -  

General and administrative expenses

     2,824       2,708       8,964       8,296  

Total operating expenses

     16,949       11,376       37,860       30,288  
                                 

Operating income (loss)

     (8,208 )     423       (12,868 )     3,863  
                                 

Other income (expense):

                                

Commodity derivative gain (loss)

     (504 )     4,025       704       (4,944 )

Interest expense

     (306 )     (187 )     (864 )     (295 )

Other income (expense), net

     68       (122 )     46       (168 )

Total other income (expense)

     (742 )     3,716       (114 )     (5,407 )
                                 

Net income (loss) before income taxes

   $ (8,950 )   $ 4,139     $ (12,982 )   $ (1,544 )

Income tax (expense) benefit

     162       (29 )     432       2,392  

Net income (loss)

   $ (8,788 )   $ 4,110     $ (12,550 )   $ 848  

Basic weighted shares outstanding

     25,428,874       24,390,193       25,265,662       24,548,385  

Diluted weighted shares outstanding

     25,428,874       24,682,476       25,265,662       24,891,148  

Basic earnings (loss) per share

   $ (0.35 )   $ 0.16     $ (0.50 )   $ 0.03  

Diluted earnings (loss) per share

   $ (0.35 )   $ 0.16     $ (0.50 )   $ 0.03  

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

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U.S. ENERGY CORP. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES

IN SHAREHOLDERS’ EQUITY

FOR THE nine months ended September 30, 2023 and 2022

(in thousands, except share amounts)

 

          

Additional

         
  

Common Stock

  

Paid-in

  

Accumulated

     
  

Shares

  

Amount

  

Capital

  

Deficit

  

Total

 
                     

Balances, December 31, 2021

  4,676,301  $47  $149,276  $(135,888) $13,435 

Shares issued for acquired properties

  19,905,736   199   64,495   -   64,694 

Stock-based compensation

  -   -   1,500   -   1,500 

Shares issued upon vesting of restricted stock awards

  373,500   4   (4)  -   - 

Shares withheld to settle tax withholding obligations for restricted stock awards

  (81,725)  (1)  (306)  -   (307)

Exercise of warrants

  50,000   -   213   -   213 

Net loss

  -   -   -   (3,384)  (3,384)

Balances, March 31, 2022

  24,923,812  $249  $215,174  $(139,272) $76,151 

Cash dividends, $0.0225 per share

  -   -   -   (578)  (578)

Stock-based compensation

  -   -   609   -   609 

Net income

  -   -   -   122   122 

Balances, June 30, 2022

  24,923,812  $249  $215,783  $(139,728) $76,304 

Cash dividends, $0.0225 per share

  -   -   -   (578)  (578)

Shares issued upon vesting of restricted stock awards

  100,000   1   (1)  -   - 

Stock-based compensation

  -   -   485   -   485 

Net income

  -   -   -   4,110   4,110 

Balances, September 30, 2022

  25,023,812  $250  $216,267  $(136,196) $80,321 
                     

Balances, December 31, 2022

  25,023,812  $250  $216,690  $(138,586) $78,354 

Stock-based compensation

  -   -   727   -   727 

Shares issued upon vesting of restricted stock awards

  273,000   3   (3)  -   - 

Shares withheld to settle tax withholding obligations for restricted stock awards

  (62,140)  (1)  (149)  -   (150)

Cash dividends $0.0225 per share

            (596)  (596)

Net loss

  -   -   -   (1,247)  (1,247)

Balances, March 31, 2023

  25,234,672  $252  $217,265  $(140,429) $77,088 

Stock-based compensation

  -   -   607   -   607 

Cash dividends, $0.0225 per share

  -   -   -   (596)  (596)

Share repurchases

  (163,300)  (1)  (240)     (241)

Net loss

  -   -   -   (2,515)  (2,515)

Balances, June 30, 2023

  25,071,372  $251  $217,632  $(143,540) $74,343 

Stock-based compensation

  -   -   617   -   617 

Shares issued upon vesting of restricted stock awards

  435,198   4   (4)  -   - 

Net loss

  -   -   -   (8,788)  (8,788)

Balances, September 30, 2023

  25,506,570  $255  $218,245  $(152,328) $66,172 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

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U.S. ENERGY CORP. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE nine months ended September 30, 2023 and 2022

(in thousands)

 

   

2023

    

2022

  
                 

Cash flows from operating activities:

                

Net income (loss)

   $ (12,550 )   $ 848  

Adjustments to reconcile net loss to net cash used in operating activities:

                

Depreciation, depletion, accretion, and amortization

     8,181       6,985  

Impairment of oil and natural gas properties

     6,495       -  

Deferred income taxes

     (452 )     (2,460 )

Total commodity derivative (gains) losses, net

     (704 )     4,944  

Commodity derivative settlements paid

     (642 )     (6,099 )

Loss on marketable equity securities

     (54 )     85  

Impairment and loss on real estate held for sale

     -       75  

Amortization of debt issuance costs

     37       32  

Stock-based compensation

     1,951       2,594  

Right of use asset amortization

     135       140  

Changes in operating assets and liabilities:

     -       -  

Oil and natural gas sales receivable

     (292 )     (3,587 )

Other assets

     395       320  

Accounts payable and accrued liabilities

     1,047       5,456  

Accrued compensation and benefits

     (294 )     (479 )

Payments on operating lease liability

     (145 )     (68 )

Payments on asset retirement obligations

     (131 )     (289 )
                 

Net cash provided by operating activities

   $ 2,977     $ 8,497  
                 

Cash flows from investing activities:

                

Acquisition of proved properties

   $ -     $ (12,610 )

Oil and natural gas capital expenditures

     (2,878 )     (5,369 )

Property and equipment expenditures

     (487 )     (379 )

Proceeds from sale of oil and gas properties

     -       1,250  
                 

Net cash used in investing activities

   $ (3,365 )   $ (17,108 )
                 

Cash flows from financing activities:

                

Borrowings on credit facility

   $ 500     $ 15,200  

Repayment of debt

     (500 )     (6,047 )

Payment of fees for credit facility

     -       (207 )

Repayments of insurance premium finance note payable

     (465 )     (396 )

Exercise of warrant

     -       195  

Shares withheld to settle tax withholding obligations for restricted stock awards

     (151 )     (307 )

Dividends paid

     (1,192 )     (1,156 )

Repurchases of common stock

     (241 )     -  
                 

Net cash used in financing activities

   $ (2,049 )   $ 7,282  
                 

Net decrease in cash and equivalents

     (2,437 )     (1,329 )
                 

Cash and equivalents, beginning of period

     4,411       4,422  
                 

Cash and equivalents, end of period

   $ 1,974     $ 3,093  

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. Please see Note-15- Supplemental Disclosures of Cash Flow Information.

 

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U.S. ENERGY CORP. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

1. ORGANIZATION, OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES

 

Organization and Operations

 

U.S. Energy Corp. (collectively with its wholly-owned subsidiaries, Energy One LLC (“Energy One”) and New Horizon Resources LLC (“New Horizon Resources”), referred to as the “Company” in these notes to unaudited condensed consolidated financial statements) is incorporated in the State of Delaware. The Company’s principal business activities are focused on the acquisition and development of onshore oil and natural gas properties in the United States, which the Company considers a single operating segment. Our principal properties and operations are in the Rockies region (Montana, Wyoming and North Dakota), the Mid-Continent (Oklahoma, Kansas and North and East Texas), and the West Texas, South Texas, and Gulf Coast regions.

 

Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements are presented in accordance with U.S. generally accepted accounting principles (“GAAP”) and have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) regarding interim financial reporting. Accordingly, certain information and footnote disclosures required by GAAP for complete financial statements have been condensed or omitted in accordance with such rules and regulations. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of the condensed consolidated financial statements have been included.

 

For further information, refer to the consolidated financial statements and footnotes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2022, as filed with the SEC on April 13, 2023. Our financial condition as of September 30, 2023, and operating results for the three and nine months ended September 30, 2023, are not necessarily indicative of the financial condition and results of operations that may be expected for any future interim period or for the year ending December 31, 2023.

 

Use of Estimates

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include the fair value of oil and gas properties acquired, oil and natural gas reserves that are used in the calculation of depreciation, depletion, amortization, and impairment of the carrying value of evaluated oil and natural gas properties; realizability of unevaluated properties; production and commodity price estimates used to record accrued oil and natural gas sales receivables; future prices of commodities used in the valuation of commodity derivative contracts; and the cost and timing of future asset retirement obligations. The Company evaluates its estimates on an on-going basis and bases its estimates on historical experience and on various other assumptions the Company believes to be reasonable. Due to inherent uncertainties, including the future prices of oil and natural gas, these estimates could change in the near term and such changes could be material.

 

Recently Adopted Accounting Standards

 

On January 1, 2023, the Company adopted Accounting Standards Update (“ASU”) 2016-13 to Topic 326, Financial Instruments-Credit Losses, as amended by other related ASUs that provided targeted improvements. The standard changes the impairment model for trade receivables and other financial assets measured at amortized cost. This ASU requires the use of a new forward-looking “expected loss” model compared to the previous “incurred loss” model, resulting in accelerated recognition of credit losses. This ASU primarily applies to the Company’s accounts receivable balances, of which the majority are received within a short-term period of one to three months. The Company monitors the credit quality of its counterparties through review of collections, credit ratings, and other analyses. The Company develops its estimated allowance for credit losses primarily using an aging method and analyses of historical loss rates as well as consideration of current and future conditions that could impact its counterparties’ credit quality and liquidity. The adoption and implementation of this ASU did not have a material impact on the Company’s financial statements.

 

Principles of Consolidation

 

The accompanying financial statements have been prepared in conformity with GAAP and include the accounts of U.S. Energy Corp. and its wholly-owned subsidiaries Energy One and New Horizon Resources. U.S. Energy Corp. accounts for its share of oil and gas exploration and production activities, in which it has a direct working interest, by reporting its proportionate share of assets, liabilities, revenues, costs, and cash flows within the relevant lines on the balance sheets, statements of operations, and statements of cash flows. All inter-company balances and transactions have been eliminated in consolidation.

 

Reclassifications

 

Certain prior year amounts are reclassified to conform to the current year presentation.

 

Historically, the Company included gathering, transportation, and treating costs within lease operating expense on the condensed consolidated statement of operations. Effective July 1, 2023, the Company began classifying gathering, treating, and transportation costs in a separate line item, titled Gathering, transportation, and treating, on the condensed consolidated statement of operations and recast prior period results for this reclassification. This reclassification had no impact on the Company's net income, earnings per share, cash flows, or financial position. The Company revised historical periods to reflect this change in presentation.

 

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2. ACQUISITIONS

 

January 2022 Acquisition

 

On January 5, 2022 (the “Closing Date”), the Company closed the acquisitions (the “Acquisition”) contemplated by three separate Purchase and Sale Agreements (the “Purchase Agreements” and the “Closing”), entered into by the Company on October 4, 2021, with each of (a) Lubbock Energy Partners LLC (“Lubbock”); (b) Banner Oil & Gas, LLC, Woodford Petroleum, LLC and Llano Energy LLC (collectively, “Banner”), and (c) Synergy Offshore LLC (“Synergy”, and collectively with Lubbock and Banner, the “Sellers”). Pursuant to the Purchase Agreements, the Company acquired certain oil and gas properties from the Sellers, representing a diversified portfolio of primarily operated, producing, oil-weighted assets located across the Rockies, West Texas, Eagle Ford, and Mid-Continent. The acquisition also included certain wells, contracts, technical data, records, personal property and hydrocarbons associated with the acquired assets (collectively with the oil and gas properties acquired, the “Acquired Assets”).

 

The Company accounted for the acquisition of the Acquired Assets as an asset acquisition. The purchase price for the Acquired Assets was (a) $125,000 in cash and 6,568,828 shares of our common stock, as to Lubbock; (b) $1,000,000 in cash, the assumption of $3.3 million of debt, and 6,790,524 shares of common stock, as well as the novation of certain hedges which had a mark to market loss of approximately $3.1 million as of the Closing Date, as to Banner; and (c) $125,000 in cash and 6,546,384 shares of common stock, as to Synergy. The aggregate purchase price under all the Purchase Agreements was $66.4 million, representing $1.25 million in cash, the value of 19,905,736 shares of our common stock on the Closing Date of $64.7 million and purchase price adjustments of $0.5 million. In addition, we assumed various liabilities, including the repayment of $3.3 million in debt, as well as a derivative liability from the novation of the hedges discussed above of $3.1 million, suspense accounts and asset retirement obligations.

 

  

Amount

 
  

(in thousands)

 

Amounts incurred as of the Closing Date:

    

Cash

 $1,250 

Value of 19,905,736 shares issued

  64,694 

Purchase price adjustments

  487 

Transaction costs

  1,267 

Total consideration paid

  67,698 
     

Debt assumed

  3,347 

Commodity derivative liabilities assumed

  3,152 

Suspense accounts assumed

  1,276 

Employee obligations assumed

  100 

Asset retirement obligations assumed

  9,614 

Deferred tax liabilities

  2,819 

Total liabilities assumed

  20,308 
     

Total consideration paid and liabilities assumed

 $88,006 
     

Allocation to acquired assets:

    

Proved oil and gas properties(1)

  87,672 

Vehicles

  165 

Deposit account

  169 
     

Total allocation to acquired assets

 $88,006 

 

(1)

Included in the above purchase price adjustments is settlement for oil in temporary storage in tank batteries at the leases. The Company does not separately account for oil in temporary storage until the oil is sold and title transfers to the purchaser. Consistent with the Company’s accounting policy and reporting of similar transactions this amount was recorded within Evaluated Properties on the Company’s condensed consolidated balance sheet.

 

Liberty County, Texas Acquisition

 

On May 3, 2022, the Company acquired certain operated oil and gas producing properties in Liberty County, Texas, adjacent to its existing assets in the area, for $1.0 million in an all-cash transaction. The effective date of the transaction was April 1, 2022. The assets include approximately 1,022 acres, which are 100% held by production, a gas pipeline and associated infrastructure. In addition, the Company assumed suspense accounts of $0.2 million and asset retirement obligations of $0.5 million. The Company accounted for the acquisition as an asset acquisition.

 

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East Texas Acquisition

 

On July 27, 2022, the Company closed a purchase and sale agreement for the acquisition of properties from ETXENERGY, LLC (“ETXENERGY”). The properties are located in Henderson and Anderson Counties, Texas (the “East Texas Assets”). The properties consist of approximately 16,600 net acres, all of which are held by production and certain wells and gathering systems. The initial purchase price for the East Texas Assets was $11.9 million in cash. The effective date of the acquisition of the East Texas Assets was June 1, 2022. The Company accounted for the acquisition as an asset acquisition.

 

  

Amount

 
  

(in thousands)

 

Amounts incurred as of the closing date:

    

Cash

 $11,875 

Purchase price adjustments

  (1,048)

Transaction costs

  63 

Total consideration paid

  10,890 
     

Suspense accounts assumed

  380 

Asset retirement obligations assumed

  1,689 

Total liabilities assumed

  2,069 
     

Total consideration paid and liabilities assumed

 $12,959 
     

Allocation to acquired assets:

    

Proved oil and gas properties

 $12,959 

 
 

3. REVENUE RECOGNITION

 

The Company’s operated oil production is sold at the delivery point specified in the contract. The Company collects an agreed-upon index price, net of pricing differentials. The purchaser takes custody, title and risk of loss of the oil at the delivery point; therefore, control passes at the delivery point. The Company does not separately account for oil in temporary storage at the site of production prior to its transfer to the purchaser. The Company recognizes revenue at the net price received when control transfers to the purchaser. Natural gas and natural gas liquid (“NGL”) are sold at the lease location, which is generally when control of the natural gas and NGL transfers to the purchaser, and revenue is recognized as the amount received from the purchaser.

 

The Company does not disclose the values of unsatisfied performance obligations under its contracts with customers as it applies the practical exemption in accordance with Accounting Standards Codification (ASC) 606. The exemption applies to variable consideration that is recognized as control of the product is transferred to the customer. Since each unit of product represents a separate performance obligation, future volumes are wholly unsatisfied, and disclosure of the transaction price allocated to the remaining performance obligations is not required.

 

The Company reports revenue as its proportionate share of the gross amount received from the purchasers before taking into account gathering, transportation, and treating costs. Production taxes and gathering, transportation, and treating costs are reported separately on the accompanying condensed consolidated statements of operations.

 

The Company’s non-operated revenues are derived from its interest in the sales of oil and natural gas production. The sales of oil and natural gas are made under contracts that operators of the wells have negotiated with third-party customers. Oil and natural gas production is typically sold at delivery points to various purchasers under contract terms that are common in the oil and natural gas industry. Regardless of the contract type, the terms of these contracts compensate the well operators for the value of the oil and natural gas at specified prices, and then the well operators remit payment to the Company for its share in the value of the oil and natural gas sold. Variances between the Company’s estimated revenue and actual payments are recorded in the month the payment is received; however, differences have been, and are expected to be, insignificant. Accordingly, the variable consideration is not constrained. As a non-operator of its oil and natural gas properties, the Company records its share of the revenues and expenses based upon the information provided by the operators within the revenue statements.

 

The Company disaggregates revenues from its share of revenue from the sale of oil and natural gas and liquids by region. The Company’s revenues in its Rockies, West Texas, South Texas, and Gulf Coast, and Mid-Continent regions for the three and nine months ended September 30, 2023 and 2022, are presented in the following table:

 

   

Three Months Ended September 30,

    

Nine Months Ended September 30,

  
   

2023

    

2022

    

2023

    

2022

  
   

(in thousands)

  

Revenue:

                                

Rockies

                                

Oil

   $ 3,106     $ 3,407     $ 7,914     $ 11,385  

Natural gas and liquids

     44       343       260       879  

Total

   $ 3,150     $ 3,750     $ 8,174     $ 12,264  
                                 

West Texas, South Texas, and Gulf Coast

                                

Oil

   $ 3,138     $ 3,918     $ 9,116     $ 12,522  

Natural gas and liquids

     103       454       424       1,134  

Total

   $ 3,241     $ 4,372     $ 9,540     $ 13,656  
                                 

Mid-Continent

                                

Oil

   $ 1,567     $ 1,654     $ 4,905     $ 4,239  

Natural gas and liquids

     783       2,023       2,373       3,992  

Total

   $ 2,350     $ 3,677     $ 7,278     $ 8,231  
                                 

Combined Total

   $ 8,741     $ 11,799     $ 24,992     $ 34,151  

 

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Significant concentrations of credit risk

 

The Company has exposure to credit risk in the event of non-payment of oil and natural gas receivables by purchasers of its operated oil and natural gas properties and the joint interest operators of the Company’s non-operated oil and natural gas properties. The following table presents the purchasers that accounted for 10% or more of the Company’s total oil and natural gas revenue for at least one of the periods presented:

 

   

Nine Months Ended

  
   

September 30,

  
   

2023

    

2022

  

Purchaser A

     23 %     24 %

Purchaser B

     19 %     21 %

 
 

4. LEASES

 

The Company’s operating lease right-of-use assets and lease liabilities are recognized at their discounted present value under the following captions in the condensed consolidated balance sheets at September 30, 2023 and December 31, 2022:

 

   

September 30, 2023

    

December 31, 2022

  
   

(in thousands)

  

Right-of-use assets

   $ 733     $ 868  

Lease liabilities

                

Current lease obligation

   $ 179     $ 189  

Long-term lease obligation

     658       794  

Total lease liabilities

   $ 837     $ 983  

 

The Company recognizes lease expense on a straight-line basis excluding short-term and variable lease payments, which are recognized as incurred. Short-term lease cost represents payments for office leases with original terms less than one year. Beginning in March 2020, the Company subleased its Denver, Colorado office and recognized sublease income as a reduction of rent expense. The term of the sublease was through the term of the Company’s Denver office lease, which terminated on January 31, 2023. Following are the amounts recognized as components of rental expense for the three and nine months ended September 30, 2023 and 2022:

 

   

Three Months Ended September 30,

    

Nine Months Ended September 30,

  
   

2023

    

2022

    

2023

    

2022

  
   

(in thousands)

  

Operating lease cost

   $ 49     $ 77     $ 162     $ 177  

Short-term lease cost

     312       2       731       6  

Sublease income

     -       (21 )     -       (54 )

Total lease costs

   $ 361     $ 58     $ 893     $ 129  

 

The Company’s Houston office operating lease does not contain implicit interest rates that can be readily determined; therefore, the Company used the incremental borrowing rates in effect at the time the Company entered into the leases.

 

   

As of September 30,

  
   

2023

    

2022

  
   

(in thousands)

  

Weighted average lease term (years)

     4.2       5.0  

Weighted average discount rate

     4.25 %     4.47 %

 

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Maturity of operating lease liabilities with terms of one year or more as of September 30, 2023 are presented in the following table:

 

   

September 30, 2023

  
   

(in thousands)

  

2023

   $ 52  

2024

     213  

2025

     218  

2026

     224  

2027

     210  

Total lease payments

   $ 917  

Less: imputed interest

     (80 )

Total lease liability

   $ 837  

 
 

5. OIL AND NATURAL GAS PRODUCTION ACTIVITIES

 

Divestitures

 

During the nine months ended September 30, 2023 there were no divestitures of oil and gas properties. During the nine months ended September 30, 2022, the Company divested of the Wildhorse Waterflood Unit in Osage County, Oklahoma, which was part of the Acquired Assets acquired on January 5, 2022. Net proceeds from the sale of the Wildhorse Waterflood Unit were $1.2 million. In addition, in December 2022, the Company sold its approximately 30% interest in two non-operated wells in Zavala County, Texas and associated acreage of approximately 4,500 acres for $1.1 million. The proceeds from divestitures are recorded as reductions in the full cost pool.

 

Unevaluated Properties

 

As of September 30, 2023, the Company re-evaluated its use of capital relative to its portfolio and strategic initiatives and determined that it no longer intends to fund development activities required to develop its unevaluated acreage. Therefore, it impaired the $1.6 million book value of unevaluated properties by transferring them into evaluated properties subject to depletion and the full cost pool ceiling test as of September 30, 2023.

 

Ceiling Test and Impairment

 

The reserves used in the ceiling test incorporate assumptions regarding pricing and discount rates over which management has no influence in the determination of present value. In the calculation of the ceiling test as of September 30, 2023, the Company used $78.53 per barrel for oil and $3.43 per one million British Thermal Units (MMbtu) for natural gas (as further adjusted for property, specific gravity, quality, local markets and distance from markets) to compute the future cash flows of the Company’s producing properties. The discount factor used was 10%.

 

The Company recorded a $6.5 million ceiling test write-down of its oil and gas properties during the three and nine months ended September 30, 2023, primarily due to a reduction in the value of proved oil and natural gas reserves as a result of a decrease in crude oil and natural gas prices.  In addition, asset retirement obligation cost and life revisions and the transfer of unevaluated properties into the full cost pool increased the net book value of our oil and gas properties subject to the ceiling test.

 
 

6. DEBT

 

On January 5, 2022, the Company entered into a four-year credit agreement (“Credit Agreement”) with FirstBank Southwest (“FirstBank”) as administrative agent for one or more lenders (the “Lenders”), which provided for a revolving line of credit with an initial borrowing base of $15 million, and a maximum credit amount of $100 million. Borrowings under the Credit Agreement are collateralized by a first priority, perfected lien and security interests on substantially all assets of the Company (subject to permitted liens and other customary exceptions). On July 26, 2022, the Company, in anticipation of the closing of the ETXENERGY East Texas acquisition entered into a letter agreement with FirstBank whereby it increased the borrowing base under the Credit Agreement from $15 million to $20 million.

 

Under the Credit Agreement, revolving loans may be borrowed, repaid and re-borrowed until January 5, 2026, when all outstanding amounts must be repaid. Interest on the outstanding amounts under the Credit Agreement will accrue at an interest rate equal to the greater of (i) the prime rate in effect on such day, and (ii) the Federal Funds rate in effect on such day (as determined in the Credit Agreement) plus 0.50%, and an applicable margin that ranges between 0.25% to 1.25% depending on utilization of the amount of the borrowing base (the “Applicable Margin”). Interest expense recognized on the Credit Agreement and the weighted average interest rates for the three and nine months ended September 30, 2023 and 2022 are presented in the following table:

 

  

Three Months Ended September 30,

  

Nine Months Ended September 30,

 
  

2023

  

2022

  

2023

  

2022

 
  

(in thousands)

 

Interest expense

 $288  $170  $807  $248 

Weighted average interest rate

  9.1%  6.3%  8.8%  5.1%

 

The Credit Agreement contains various restrictive covenants and compliance requirements, which include: (i) maintenance of certain financial ratios, as defined in the Credit Agreement tested quarterly, that limit the Company’s ratio of total debt to EBITDAX (as defined in the Credit Agreement) to 3:1 and require its ratio of consolidated current assets to consolidated current liabilities (as each is described in the Credit Agreement) to remain at 1:1 or higher; (ii) restrictions on making restricted payments as defined in the Credit Agreement, including the payment of cash dividends and repurchases of equity interests (subject to certain limited rights to make restricted payments as long as no event of default has occurred, or would result from the restricted payment, certain financial ratios are met and the borrowing availability after giving pro forma effect to any borrowing to be made on the date of the restricted payment is greater than, or equal to, 20% of the then existing borrowing base); (iii) limits on the incurrence of additional indebtedness; (iv) a prohibition on the entry into commodity swap contracts exceeding a specified percentage of our expected production; and (v) restrictions on the disposition of assets. As of September 30, 2023, the borrowing base was $20 million, and the Company was in compliance with all financial covenants related to the Credit Agreement.

 

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The amount outstanding on the Credit Agreement as of September 30, 2023 and December 31, 2022, was $12.0 million.

 
 

7. COMMODITY DERIVATIVES

 

The Company’s results of operations and cash flows are affected by changes in market prices for crude oil and natural gas. To manage a portion of its exposure to price volatility from producing crude oil and natural gas, the Company may enter into commodity derivative contracts to protect against price declines in future periods. The Company does not enter into derivative contracts for speculative purposes. The Company does not currently apply hedge accounting. Accordingly, changes in the fair value of the derivative contracts are recorded in the condensed consolidated statements of operations and are included as a non-cash adjustment to net income in the operating activities section in the condensed consolidated statement of cash flows.

 

On January 5, 2022, the Company and NextEra Energy Marketing LLC (“NextEra”) entered into an International Swap Dealers Association, Inc. Master Agreement and Schedule (the “Master Agreement”), facilitating the Company to enter into derivative contracts to manage the risk associated with its business relating to commodity prices. The Company’s obligations to NextEra under the Master Agreement are secured by liens and security interests which also secure the loans under the Credit Agreement on a pari passu and pro rata basis with the principal of such loans. The structure of the derivative contacts may include swaps, caps, floors, collars, locks, forwards and options.

 

The Company’s entry into and the obligations of the Company under the Master Agreement were required conditions to the January 2022 acquisition closing, pursuant to which the Company was required to assume and novate certain hedges which had a mark to market loss of approximately $3.1 million as of the Closing Date. In addition, on January 12, 2022, the Company entered into additional NYMEX WTI crude oil commodity derivative contracts with NextEra for 2022 and 2023 production. On September, 12, 2023, the Company entered into crude oil swap agreements with EDF Trading, agreeing to pay fixed prices and receive the monthly average NYMEX WTI prices for the month of settlement. As of September 30, 2023, the Company had commodity derivative contracts outstanding through the fourth quarter of 2024 as summarized in the tables below:

 

      

Collars

  

Fixed Price Swaps

 
  

Quantity

  

Weighted

  

Quantity

  

Weighted

 
  

Crude oil

  

Average Prices

  

Crude oil

  

Average

 

Commodity/ Index/ Maturity Period

 

(Bbls)(1)

  

Floors

  

Ceilings

  

(Bbls)(1)

  

Price

 
                     

NYMEX WTI

                    

Crude Oil 2023 Contracts:

                    

Fourth quarter 2023

  51,200  $60.00  $81.04   18,000  $86.64 

Total 2023

  51,200  $60.00  $81.04   18,000  $86.64 
                     

Crude Oil 2024 Contracts:

                    

First quarter 2024

              53,300  $84.07 

Second quarter 2024

              48,600  $81.76 

Third quarter 2024

              45,000  $79.80 

Fourth quarter 2024

              40,720  $78.15 

Total 2024

              187,620  $81.16 

 

(1)

“Bbl” refers to one stock tank barrel, or 42 U.S. gallons liquid volume, used in this report in reference to crude oil or other liquid hydrocarbons.

 

The following table details the fair value of commodity derivative contracts recorded in the accompanying balance sheets by category:

 

  

September 30, 2023

  

December 31, 2022

 
  

(in thousands)

 

Derivative assets:

        

Current assets

 $58  $- 

Non-current assets

  16   - 

Total derivative assets

 $74  $- 
         

Derivative liabilities:

        

Current liabilities

 $422  $1,694 

Total derivative liabilities

 $422  $1,694 

 

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As of September 30, 2023, all commodity derivative contracts held by the Company were subject to master netting arrangements with its counterparty. The terms of the Company’s derivative agreements provide for the offsetting of amounts payable or receivable between it and the counterparty for contracts that settle on the same date. The Company’s agreements also provide that in the event of an early termination, the counterparty has the right to offset amounts owed or owing under that and any other agreement. The Company’s accounting policy is to offset positions when we have a right of offset or master netting arrangement. See Note 13-Fair Value Measurements for disclosure of the fair value of derivative assets and liabilities on a gross and net basis.

 

The following table summarizes the commodity components of the derivative settlement gain (loss) as well as the components of the net derivative (gain) loss line-item presentation in the accompanying condensed consolidated statement of operations:

 

  

Three Months Ended September 30,

  

Nine Months Ended September 30,

 
  

2023

  

2022

  

2023

  

2022

 
  

(in thousands)

 

Derivative settlement gains (losses):

                

Oil contracts

 $(148) $(1,291) $(614) $(5,428)

Gas contracts

  -   (321)  (28)  (671)

Total derivative settlement gains (losses)

 $(148) $(1,612) $(642) $(6,099)
                 

Total net derivative gains (losses):

                

Oil contracts

 $(504) $4,338  $644  $(4,026)

Gas contracts

  -   (313)  60   (918)

Total net derivative gains (losses)

 $(504) $4,025  $704  $(4,944)

 
 

8. COMMITMENTS AND CONTINGENCIES

 

Contingencies

 

The Company is subject to litigation and claims arising in the ordinary course of business. The Company accrues for such items when a liability is both probable and the amount can be reasonably estimated. In the opinion of management, the anticipated results of any pending litigation and claims are not expected to have a material effect on the results of operations, the financial position, or the cash flows of the Company.

 
 

9. SHAREHOLDERS’ EQUITY

 

At September 30, 2023, the Company had 25,506,570 shares of common stock outstanding and 245,000,000 authorized. In addition, as of September 30, 2023, the Company had 5,000,000 authorized but unissued shares of preferred stock. During the nine months ended September 30, 2023, the Company paid $241 thousand to repurchase 163,300 shares of common stock as part of a share repurchase plan. On January 5, 2022, the Company issued 19,905,736 shares of common stock in connection with the acquisition of the Acquired Assets.

 

Stock Options Plans

 

From time to time, the Company may grant stock options under its incentive plan covering shares of common stock to employees of the Company. Stock options, when exercised, are settled through the payment of the exercise price in exchange for new shares of stock underlying the option. These awards typically expire ten years from the grant date.

 

For the three and nine months ended September 30, 2023 and 2022, there was no compensation expense related to stock options. As of September 30, 2022, all stock options had vested. No stock options were granted or exercised during the three or nine months ended September 30, 2023 or 2022. Stock options for the purchase of 4,946 shares of common stock expired during the nine months ended September 30, 2022. The stock options had de minimis intrinsic values for the periods reported. Presented below is information for stock options outstanding and exercisable as of September 30, 2023, and December 31, 2022:

 

  

September 30, 2023

  

December 31, 2022

 
      Weighted      Weighted 
      Average      Average 
  Number of  Exercise  Number of  Exercise 
  

Shares

  

Price

  

Shares

  

Price

 
                 

Stock options outstanding and exercisable

  23,176  $38.92   28,122  $54.03 

 

 

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The following table summarizes information for stock options outstanding and for stock options exercisable at September 30, 2023:

 

Options Outstanding

  

Options Exercisable

 
   

Exercise

  

Weighted

  

Remaining

      

Weighted

 
   

Price

  

Average

  

Contractual

      

Average

 

Number of

  

Range

  

Exercise

  

Term

  

Number of

  

Exercise

 

Shares

  

Low

  

High

  

Price

  

(years)

  

Shares

  

Price

 
                          
16,500  $7.20  $11.60  $10.00   4.0   16,500  $10.00 
5,676   90.00   90.00   90.00   1.3   5,676   90.00 
1,000   226.20   226.20   226.20   1.0   1,000   226.20 
                          
23,176  $7.20  $226.20  $38.92   3.2   23,176  $38.92 

 

Restricted Stock

 

The Company grants restricted stock under its incentive plan covering shares of common stock to employees and directors of the Company. In January 2023, 796,434 restricted stock awards were granted to employees and directors from the 2021 Equity Incentive Plan and 2022 Equity Incentive Plan. In addition, in June 2023, per the terms of his employment agreement 100,000 restricted stock shares were issued to the Company’s new Chief Financial Officer, and in August 2023, 40,000 restricted stock shares were issued to the Company's new non-executive Controller. The restricted stock awards are time-based awards and are amortized ratably over the requisite two-year service period. Restricted stock vests ratably on each anniversary following the grant date provided the grantee is employed on the vesting date. Forfeitures of restricted stock awards are recognized as they occur. Restricted stock granted to employees, when vested, may be settled through the net issuance of shares, reduced by the number of shares required to pay withholding taxes. Non-vested shares of restricted stock are not included in common shares outstanding until vesting has occurred.

 

The following table presents the changes in non-vested, time-based restricted stock awards to all employees and directors for the nine months ended September 30, 2023:

 

      

Weighted-Avg.

 
      

Grant Date

 
      

Fair Value

 
  

Shares

  

Per Share

 
         

Non-vested restricted stock as of December 31, 2022

  687,000  $3.79 

Granted

  936,434   2.18 

Vested

  (544,198)  3.30 

Modifications (accelerated vesting)

  (164,000)  2.85 

Forfeited

  (60,000)  2.30 

Non-vested restricted stock as of September 30, 2023

  855,236  $2.63 

 

For the three and nine months ended September 30, 2023, the Company recognized $0.6 million and $2.0 million, respectively, of stock compensation expense related to restricted stock grants. For the three and nine months ended September 30, 2022, the Company recognized $0.5 million and $2.6 million, respectively, of stock compensation expense related to restricted stock grants. Total compensation cost related to non-vested time-based awards not yet recognized in the Company’s condensed consolidated statements of operations as of September 30, 2023 was $0.9 million. This cost is expected to be recognized over a weighted average period of 1.6 years.

 

Dividends

 

On February 23, 2023 and May 30, 2023, the Company paid a quarterly cash dividends of $0.0225 per share of common stock outstanding to stockholders of record at the close of business on February 10, 2023 and May 19, 2023, respectively.

 

For the nine months ended September 30, 2023 and 2022, the Company paid dividends of $1.2 million and $1.2 million, respectively. As an update to the existing shareholder returns program, on August 9, 2023, the Board of Directors suspended the Company’s dividend payment program, with the associated future capital resources expected to be allocated towards the Company’s share repurchase program and repayments of our credit facility’s outstanding balance.

 

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Share Repurchase Program

 

On April 26, 2023, the Board of Directors of the Company authorized and approved a share repurchase program for up to $5.0 million of the currently outstanding shares of the Company’s common stock. Subject to any future extensions, the repurchase program is scheduled to expire on the earlier of  June 30, 2024, or when a maximum of $5.0 million of the Company’s common stock has been repurchased, or when the program is discontinued by the Company.

 

Under the stock repurchase program, shares are repurchased from time to time in the open market or through negotiated transactions at prevailing market prices, or by other means in accordance with federal securities laws. Repurchases are made at management’s discretion at prices management considers to be attractive and in the best interests of both the Company and its stockholders, subject to the availability of stock, general market conditions, the trading price of the stock, alternative uses for capital, and the Company’s financial performance. The repurchase program is funded using the Company’s working capital. The repurchased shares are cancelled and therefore will not be held in treasury or reissued.

 

During the nine months ended September 30, 2023, the Company paid $0.2 million for the repurchase of 163,300 shares at a weighted average price of $1.48 per share.  There were no share repurchases during the three months ended September 30, 2023.

 
 

10. ASSET RETIREMENT OBLIGATIONS

 

The Company has asset retirement obligations (“ARO”) associated with the future plugging and abandonment of proved properties. Initially, the fair value of a liability for an ARO is recorded in the period in which the ARO is incurred with a corresponding increase in the carrying amount of the related asset. The liability is accreted to its present value each period and the capitalized cost is depleted over the life of the related asset. If the liability is settled for an amount other than the recorded amount, an adjustment to the full-cost pool is recognized. The Company had no assets that are restricted for the purpose of settling ARO.

 

The Company recorded $9.6 million of ARO related to the assets acquired in the January 5, 2022 acquisition, $0.5 million of ARO related to the assets acquired in the May 3, 2022 acquisition of Liberty County, Texas assets and $1.7 million of ARO related to the assets acquired in the July 27, 2022 acquisition. See Note 2- Acquisitions.

 

In the fair value calculation for the ARO there are numerous assumptions and judgments, including the ultimate retirement cost, inflation factors, credit-adjusted risk-free discount rates, timing of retirement and changes in legal, regulatory, environmental, and political environments. To the extent future revisions to assumptions and judgments impact the present value of the existing ARO, a corresponding adjustment is made to the oil and natural gas property balance.

 

The following is a reconciliation of the changes in the Company’s liabilities for asset retirement obligations as of September 30, 2023 and December 31, 2022:

 

  

September 30, 2023

  

December 31, 2022

 
  

(in thousands)

 

Balance, beginning of year

 $15,442  $1,461 

Acquired or incurred

  10   11,811 

Cost and life revisions

  2,494   1,825 

Plugged

  (131)  (407)

Sold

  -   (189)

Accretion

  812   941 

Balance, end of period

 $18,627  $15,442 

 

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11. INCOME TAXES

 

The Company’s tax provision or benefit from income taxes for interim periods is determined using an estimate of its annual effective tax rate, adjusted for discrete items, if any. Each quarter the Company updates its estimate of the annual effective tax rate and makes a year-to-date adjustment to the provision. The Company’s effective tax rate was approximately 3% and 155% for the nine months ended September 30, 2023 and 2022, respectively. The primary difference in the Company’s effective tax rate and the statutory rate for the nine months ended September 30, 2023 related to the movement in the valuation allowance against the Company’s net deferred tax assets.

 

The Company’s income tax benefit for the nine months ended September 30, 2022 includes a discrete income tax benefit of $2.4 million related to the release of a portion of the Company’s previously established valuation allowance to offset deferred tax liabilities arising from the January 5, 2022 transaction.

 

Deferred taxes are recognized for the expected future tax consequences of temporary differences between the financial statement and tax basis of assets, liabilities, net operating losses and tax credit carry-forwards. We review our deferred tax assets (“DTAs”) and valuation allowance on a quarterly basis. As part of our review, we consider positive and negative evidence, including cumulative results in recent years.  The January 5, 2022 transaction triggered an Internal Revenue Code ("IRC") Section 382 ownership change, and therefore placed additional limitations on the Company’s pre-transaction net operating lost ("NOL") and other tax attributes. As such, the Company is projecting that as of December 31, 2023 it will not have sufficient DTAs available to offset the expected future taxable income that will be generated by the realization of the Company’s deferred tax liabilities.

 

The Company recognizes, measures, and discloses uncertain tax positions whereby tax positions must meet a “more-likely-than-not” threshold to be recognized. During the nine months ended September 30, 2023 and 2022, no adjustments were recognized for uncertain tax positions.

 
 

12. INCOME (LOSS) PER SHARE

 

Basic net income (loss) per common share is calculated by dividing net income (loss) attributable to common shareholders by the weighted-average number of common shares outstanding for the respective period. Diluted net income (loss) per common share is calculated by dividing adjusted net income (loss) by the diluted weighted average number of common shares outstanding, which includes the effect of potentially dilutive securities. Potentially dilutive securities for this calculation consist of stock options and unvested shares of restricted common stock, which are measured using the treasury stock method. When the Company recognizes a net loss, as was the case for the three and nine months ended September 30, 2023, all potentially dilutive shares are anti-dilutive and are consequently excluded from the calculation of dilutive net loss per common share.

 

The following table sets forth the calculation of basic and diluted net income (loss) per share for the three and nine months ended September 30, 2023 and 2022:

 

   

Three Months Ended September 30,

    

Nine Months Ended September 30,

  
   

2023

    

2022

    

2023

    

2022

  
   

(in thousands except per share data)

  

Net income (loss)

   $ (8,788 )   $ 4,110     $ (12,550 )   $ 848  

Less: undistributed earnings allocated to participating securities

     -       (101 )     -       -  

Undistributed earnings (losses) attributable to common shareholders

   $ (8,788 )   $ 4,009     $ (12,550 )   $ 848  
                                 

Basic weighted average common shares outstanding

     25,429       24,390       25,266       24,548  

Dilutive effect of potentially dilutive securities

     -       292       -       343  

Diluted weighted average common shares outstanding

     25,429       24,682       25,266       24,891  
                                 

Basic net income (loss) per share

   $ (0.35 )   $ 0.16     $ (0.50 )   $ 0.03  

Diluted net income (loss) per share

   $ (0.35 )   $ 0.16     $ (0.50 )   $ 0.03  

 

For the three and nine months ended September 30, 2023 and 2022, potentially dilutive securities excluded from the calculation of weighted average shares because they were anti-dilutive are as follows:

 

   

Three Months Ended September 30,

    

Nine Months Ended September 30,

  
   

2023

    

2022

    

2023

    

2022

  
   

(in thousands)

  

Stock options

     23       28       23       28  

Unvested shares of restricted stock

     855       -       855       -  

Total

     878       28       878       28  

 

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13. FAIR VALUE MEASUREMENTS

 

The Company’s fair value measurements are estimated pursuant to a fair value hierarchy that requires us to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date, giving highest priority to quoted prices in active markets (Level 1) and the lowest priority to unobservable data (Level 3). In some cases, the inputs used to measure fair value might fall in different levels of the fair value hierarchy. The lowest level input that is significant to a fair value measurement in its entirety determines the applicable level in the fair value hierarchy. Assessing the significance of a particular input to the fair value measurement in its entirety requires judgment, considering factors specific to the asset or liability, and may affect the valuation of the assets and liabilities and their placement within the hierarchy level. The three levels of inputs that may be used to measure fair value are defined as:

 

Level 1 - Quoted prices for identical assets and liabilities traded in active exchange markets.

 

Level 2 - Observable inputs other than Level 1 that are directly or indirectly observable for the asset or liability, including quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in inactive markets, or other observable inputs that can be corroborated by observable market data.

 

Level 3 - Unobservable inputs supported by little or no market activity for financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

 

The Company has processes and controls in place to estimate fair value. The Company performs due diligence procedures over third-party pricing service providers in order to support their use in the valuation process. Where market information is not available to support internal valuations, independent reviews of the valuations are performed, and any material exposures are evaluated through a management review process.

 

While the Company believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. The following is a description of the valuation methodologies used for complex financial instruments measured at fair value:

 

Recurring Fair Value Measurements

 

Commodity Derivative Instruments

 

The Company measures the fair value of commodity derivative contracts using an income valuation technique based on the contract price of the underlying positions, crude oil and natural gas forward curves, discount rates, and Company or counterparty non-performance risk. The fixed-price swaps and collar derivative contracts are included in Level 2. The fair value of commodity derivative contracts and their presentation in our unaudited condensed consolidated balance sheet as of September 30, 2023 and December 31, 2022 are presented below:

 

As of September 30, 2023
                                           

Net Fair Value

  
   

Quoted Prices

                                    

Presented in the

  
   

in Active Markets

    

Significant Other

    

Significant

                    

Unaudited

  
   

for Identical

    

Observable

    

Unobservable

                    

Condensed

  
   

Assets

    

Inputs

    

Inputs

    

Total

    

Effect of

    

Consolidated

  
   

(Level 1)

    

(Level 2)

    

(Level 3)

    

Fair Value

    

Netting

    

Balance Sheet

  

(in thousands)

  

Assets

                                                

Current:

                                                

Commodity derivatives

   $ -     $ 102     $ -     $ 102     $ (44 )   $ 58  

Non-Current:

                                                

Commodity derivatives

   $ -     $ 16     $ -     $ 16     $ -     $ 16  
                                                 

Liabilities

                                                

Current:

                                                

Commodity derivatives

   $ -     $ (466 )   $ -     $ (466 )   $ 44     $ (422 )
                                                 

Net derivative instruments

   $ -     $ (348 )   $ -     $ (348 )   $ -     $ (348 )

 

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As of December 31, 2022
                                           

Net Fair Value

  
   

Quoted Prices

                                    

Presented in the

  
   

in Active Markets

    

Significant Other

    

Significant

                    

Unaudited

  
   

for Identical

    

Observable

    

Unobservable

                    

Condensed

  
   

Assets

    

Inputs

    

Inputs

    

Total

    

Effect of

    

Consolidated

  
   

(Level 1)

    

(Level 2)

    

(Level 3)

    

Fair Value

    

Netting

    

Balance Sheet

  

(in thousands)

  

Assets

                                                

Current:

                                                

Commodity derivatives

   $ -     $ 488     $ -     $ 488     $ (488 )   $ -  
                                                 

Liabilities

                                                

Current: