Riley Exploration Permian Inc

Comparison for the three months ended March 31, 2024 and 2023.

The following table sets forth selected operating data for the three months ended March 31, 2024 and 2023:

(1)The Company's calculation of the effects of derivative settlements includes gains and losses on the settlement of its commodity derivative contracts. These gains and 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 as well as midstream counterparty fees and deducts. 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 the volume of production sold or changes in commodity prices. The Company’s total oil and natural gas revenue, net increased $33.0 million, or 50%, for the three months ended March 31, 2024 compared to the three months ended March 31, 2023.

Oil revenues

•For the three months ended March 31, 2024, oil revenues increased by $32.0 million, or 49%, compared to the three months ended March 31, 2023. Of the increase, $28.8 million was attributable to an increase in volume and $3.2 million to an increase in our realized price. Volumes increased by 44%, while realized prices increased by 3% compared to the three months ended March 31, 2023. The oil and natural gas properties acquired in the New Mexico Acquisition contributed $26.4 million to the Company's revenues for the three months ended March 31, 2024.

•Oil volumes increased during the three months ended March 31, 2024 due to oil and natural gas assets acquired in the New Mexico Acquisition, production from new wells, and workovers performed on existing wells. During the three months ended March 31, 2024, we brought online 6 gross (5.97 net) horizontal wells. The oil and natural gas properties acquired in the New Mexico Acquisition contributed oil volumes of approximately 350 MBbls for the three months ended March 31, 2024.

•The average WTI price increased by $1.57 per Bbl during the three months ended March 31, 2024 when compared to the three months ended March 31, 2023.

Natural gas revenues

•For the three months ended March 31, 2024, natural gas revenues increased by $0.2 million, compared to the three months ended March 31, 2023. Of the increase, $0.4 million was attributable to an increase in volumes, partially offset by a $0.2 million decrease attributable to lower realized price. Volumes increased by 72%, while realized prices decreased by 24%.

•Natural gas volumes increased during the three months ended March 31, 2024 due to oil and natural gas properties acquired in the New Mexico Acquisition, production from new wells, and workovers performed on existing wells. The oil and natural gas properties acquired in the New Mexico Acquisition contributed 862 MMcf to the Company's natural gas volumes for the three months ended March 31, 2024.

•The average Henry Hub price decreased by $0.49 per Mcf during the three months ended March 31, 2024 compared to the three months ended March 31, 2023.

NGL revenues

•For the three months ended March 31, 2024, NGL revenues increased by $0.8 million compared to the three months ended March 31, 2023. Of the increase, $1.1 million was attributable to an increase in volume, partially offset by a $0.3 million decrease attributable to lower realized price. Volumes increased by 119%, while realized prices decreased by 13%.

•NGL volumes increased during the three months ended March 31, 2024 due to oil and natural gas properties acquired in the New Mexico Acquisition, production from new wells, and workovers performed on existing wells. The oil and natural gas properties acquired in the New Mexico Acquisition contributed 155 MBbls to the Company's NGL volumes for the three months ended March 31, 2024.

Contract Services - Related Party

The following table presents the Company's revenue and costs associated with its contract services - related party transactions:

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

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

The MSA with Combo was terminated as of January 31, 2024. See Note 8 - Transactions with Related Parties for more information.

Costs and Expenses

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

Lease Operating Expenses ("LOE")

LOE are the costs incurred in the operation and maintenance of producing properties. Expenses for electricity, 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 saltwater disposal associated with produced 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 $7.9 million for the three months ended March 31, 2024 compared to the three months ended March 31, 2023. The increase was driven primarily by the oil and natural gas properties acquired in the New Mexico Acquisition which contributed $7.5 million to the Company's LOE for the three months ended March 31, 2024.

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 $3.1 million for the three months ended March 31, 2024 compared to the three months ended March 31, 2023. Production taxes increased primarily due to increases in our oil and natural gas sales, including revenues from production associated with the oil and natural gas properties acquired in the New Mexico Acquisition. Ad valorem taxes increased for the three months ended March 31, 2024 based on higher estimated property values for the current taxable period and higher tax rates for the current taxable period.

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 $8.7 million for the three months ended March 31, 2024 compared to the three months ended March 31, 2023. The increase for the three months ended March 31, 2024 was primarily due to depletion associated with the oil and natural gas properties acquired in the New Mexico Acquisition and a higher depletion rate on the historical properties.

General and Administrative Expense ("G&A")

G&A expenses include corporate overhead such as payroll and benefits for our corporate staff, share-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 $0.5 million for the three months ended March 31, 2024 compared to the three months ended March 31, 2023, primarily driven by higher share-based compensation expense.

Transaction Costs

Transaction costs represent costs incurred on successful or unsuccessful business combinations or unsuccessful property acquisitions. There were no transaction costs for the three months ended March 31, 2024. During the three months ended March 31, 2023, the transaction costs of $1.9 million primarily related to the New Mexico Acquisition that closed April 3, 2023.

Interest Expense

Interest expense increased by $8.1 million during the three months ended March 31, 2024 when compared to the three months ended March 31, 2023. The increase in interest expense was primarily due to higher debt balances, including the Senior Notes, as a result of financing for the New Mexico Acquisition, along with higher interest rates on borrowings under our Credit Facility, during the three months ended March 31, 2024 when compared to the three months ended March 31, 2023.

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, net for the three months ended March 31, 2024 and 2023:

Cash gains or losses on settled derivative contracts related to contracts that settle during the period and are a function of the difference in settled versus contractual prices and the associated hedged volumes for each underlying commodity. Non-cash gains or losses on derivatives relate to unsettled contracts and are a function of changes in derivative fair values associated with fluctuations in the forward price curves for the commodities relative to contractual pricing for our derivative contracts outstanding.

Income Tax Expense

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. See Note 11 - Income Taxes to the Company's accompanying condensed consolidated financial statements included herein for further discussion of income taxes.

The rise in our effective income tax rate was primarily due to the New Mexico Acquisition increasing our apportionment in New Mexico, which has a higher state tax rate than where we have historically operated.

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 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. In April 2023, the Company amended its Credit Facility to increase the borrowing base and issued Senior Notes to fund the New Mexico Acquisition. 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 March 31, 2024, we had a working capital deficit of $40.9 million compared to a deficit of $31.1 million as of December 31, 2023. The current portion of our Senior Notes, which includes our regularly scheduled principal payments of $5 million per quarter, accounts for $20 million of our working capital deficit as of March 31, 2024 and December 31, 2023. The working capital deficit at March 31, 2024 reflects $9.8 million in current derivative liabilities compared to $0.4 million in current derivative liabilities at December 31, 2023. We utilize our Credit Facility and cash on hand to manage the timing of cash flows and fund short-term working capital deficits. Our current derivative assets and liabilities represent the mark-to-market value as of March 31, 2024 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.

Cash Flows

The following table summarizes the Company’s cash flows:

Operating Activities

The Company’s net cash provided by operating activities increased by $23.1 million, or 70%, to $56.1 million for the three months ended March 31, 2024 from $33.0 million for the three months ended March 31, 2023. The increase was primarily driven by a $32.7 million increase in revenues and a $5.2 million decrease in payments to settle commodity derivative contracts, partially offset by a $9.3 million increase in certain expenses, including LOE and production and ad valorem taxes and a $7.1 million increase in interest paid.

Investing Activities

The Company's cash flows used in investing activities decreased by $27.3 million to $42.6 million for the three months ended March 31, 2024 from $69.9 million for the three months ended March 31, 2023. The decrease was primarily due to funds held in escrow associated with the Company's New Mexico Acquisition of $33.0 million for the three months ended March 31, 2023, partially offset by a $1.9 million deposit for the 2024 NM Asset Acquisition and an increase of $3.8 million in contributions to the equity method investment in RPC Power for the three months ended March 31, 2024.

Financing Activities

Net cash flow used in financing activities was $22.3 million for the three months ended March 31, 2024 compared to net cash flow provided by financing activities of $25.9 million for the three months ended March 31, 2023. During the three months ended March 31, 2024, the Company had repayments to its Credit Facility of $10.0 million and to its Senior Notes of $5.0 million, compared to a draw on its Credit Facility of $33.0 million for the three months ended March 31, 2023, used to fund the escrow for the New Mexico Acquisition.

Credit Facility and Senior Notes

The borrowing base under the Company's Credit Facility was $375 million with outstanding borrowings of $175 million on March 31, 2024, representing available borrowing capacity of $200 million.

On February 22, 2023, the Company amended its Credit Facility to, among other things, allow for the issuance of Senior Notes of up to $200 million. On April 3, 2023, the Company amended its Credit Facility to, among other things, increase the borrowing base from $225 million to $325 million. On November 14, 2023, through the semi-annual redetermination, the Company increased its borrowing base to $375 million.

During 2023, the Company issued $200 million in principal amount of Senior Notes with a maturity date of April 2028. The proceeds from the Senior Notes were used to finance the New Mexico Acquisition. The principal balance of the Senior Notes as of March 31, 2024 was $180 million.

See further discussion in Note 9 - Long-Term Debt to the Company's condensed consolidated financial statements included herein.

Distributions

For the three months ended March 31, 2024, the Company authorized and declared a quarterly dividend totaling approximately $7.3 million, with $7.2 million paid in cash and $0.1 million payable to restricted shareholders upon vesting.

Contractual Obligations

As of March 31, 2024, the Company has commitments with its primary midstream counterparty and has purchase commitments totaling $8.5 million related to its 2024 drilling program. In addition, the Company entered into an agreement in 2023 to form a joint venture and is committed to contributing its portion of capital expenditures into the joint venture company and further entered into a tolling agreement to commit to providing the natural gas needed for the joint venture. The Company has also committed to a CO 2 purchase agreement for a daily contracted quantity for an initial term that extends through December 2025. See Note 13 - Commitments and Contingencies in our notes to the condensed consolidated financial statements.

Critical Accounting Estimates

The Company's critical accounting policies and estimates are described in "Critical Accounting Estimates" within "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 1 of the Notes to the Consolidated Financial Statements in Riley Permian's Annual Report on Form 10-K for the year ended December 31, 2023. The accounting estimates used in preparing our interim condensed consolidated financial statements for thethree months ended March 31, 2024 are the same as those described in Riley Permian's Annual Report.

See Note 3 - Summary of Significant Accounting Policies in the Company's consolidated financial statements in "Item 15. Exhibits and Financial Statement Schedules" for a full discussion of our significant accounting policies.