Riley Exploration Permian Inc

Previous wording

Financial and operating results reflect the following:

Current wording

Inflation continues to be an ongoing concern. Although inflation moderated somewhat, inflationary pressures remain elevated, which in turn may cause our capital expenditures and operating costs to increase. During inflationary periods, interest rates have historically increased. Increased interest rates could have the effects of raising our cost of capital and the potential for depressing economic growth, either of which (or the combination thereof) could hurt the financial and operating results of our business.

Previous wording

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.

Current wording

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

Previous wording

(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 consolidated statements of operations.

Current wording

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

Previous wording

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, 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 $53.3 million, or 17%, for the year ended December 31, 2023 compared to the year ended December 31, 2022. The Company’s realized average combined price on its production for the year ended December 31, 2023 decreased by $21.14 per Boe, or 28% compared to the year ended December 31, 2022.

Current wording

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. Realized prices and revenues from product sales are a function of the volumes produced, product quality, market prices, gas Btu content, as well as gathering, processing and transportation costs. Gathering, processing and transportation costs are allocated across natural gas and NGLs based on revenue, which leads to heightened fluctuations in such cost allocations across periods. 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 sales, net increased $37.2 million, or 10%, for the year ended December 31, 2024, compared to the year ended December 31, 2023. The following table presents the Company's oil and natural gas sales prior to and net of gathering, processing and transportation costs:

Previous wording

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

Current wording

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

Previous wording

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

Current wording

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

Previous wording

(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.

Current wording

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

Previous wording

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.

Current wording

LOE are the costs incurred in the operation and maintenance of producing properties. 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 water disposal increases or decreases.

Previous wording

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.

Current wording

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. In addition, the Company became subject to a waste emissions charge in 2024 related to methane emissions in excess of specified limits under new legislation from the EPA. This amount was recorded in production taxes for 2024.

Previous wording

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.

Current wording

DD&A expense 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.

Previous wording

During the year ended December 31, 2023, the Company recognized an impairment loss on proved properties of $9.8 million relating to certain properties in Texas outside of the Company's acreage in the Champions Field. This impairment was primarily driven by notably lower commodity pricing at the time of measurement of fair value at year-end 2023. The Company recognized an impairment loss on proved properties of $7.3 million for the year ended December 31, 2022, which related to a decrease in fair value of its historical properties in New Mexico.

Current wording

During the year ended December 31, 2024, the Company recognized a non-cash impairment loss on proved properties of $11.3 million relating to certain properties in Texas outside of the Company's acreage in the Champions field, in addition to historical properties in New Mexico outside of Red Lake. These impairments were primarily driven by a reduction in reserve volume due to lower well performance assessments based on historical trends. The affected areas included nine operated producing wells. The Company recognized a non-cash impairment loss on proved properties of $9.8 million for the year ended December 31, 2023, which related to a decrease in fair value of certain properties in Texas outside of the Company's acreage in the Champions field.

Previous wording

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.

Current wording

G&A expenses consist of administrative costs and share-based compensation expense. Administrative costs include corporate overhead such as payroll and benefits for our staff, office costs, fees for professional services such as audit and legal services, technology costs, insurance and other. Share-based compensation expense reflects costs associated with our stock granted to employees and members of our board of directors. G&A expenses are reported net of overhead recoveries.

Previous wording

Total G&A expense increased by $11.5 million for the year ended December 31, 2023 compared to the year ended December 31, 2022. Administrative costs, which include payroll, benefits and non-payroll costs, increased by $8.1 million for the year ended December 31, 2023 compared to the year ended December 31, 2022. The increase in administrative costs was primarily attributable to increased employee count, professional services, insurance, technology and office costs, which were impacted by additional needs as a result of the New Mexico Acquisition. Share-based compensation expense increased by $3.4 million for the year ended December 31, 2023 compared to the year ended December 31, 2022. The increase in share-based compensation expense resulted from the increase in outstanding equity awards due in part to higher employee count as well as expense associated with equity awards attributable to a separation agreement with a former Company executive.

Current wording

Total G&A expense increased by $1.3 million for the year ended December 31, 2024, compared to the year ended December 31, 2023. Administrative costs remained flat for the year ended December 31, 2024, compared to the year ended December 31, 2023. Share-based compensation expense increased by $1.3 million for the year ended December 31, 2024, compared to the year ended December 31, 2023. The increase in share-based compensation expense was primarily due to a higher employee count and an increase in outstanding equity awards.

Previous wording

Transaction costs represent costs incurred on successful or unsuccessful business combinations or unsuccessful property acquisitions. The transaction costs of $5.8 million for the year ended December 31, 2023 relate to the New Mexico Acquisition. During the year ended December 31, 2022, the transaction costs of $2.6 million primarily related to a potential business combination and related financing that the Company pursued but ultimately chose not to consummate due to changing market conditions.

Current wording

Transaction costs represent costs incurred on successful or unsuccessful commercial transactions, business combinations or unsuccessful acquisitions. The transaction costs of $1.6 million for the year ended December 31, 2024, primarily relate to the RPC Power Joint Venture, costs associated with the negotiation and closing of our new gas purchase agreement in addition to potential transactions that the Company evaluated but decided not to pursue further. During the year ended December 31, 2023, the transaction costs of $5.8 million related to the 2023 New Mexico Acquisition.

Previous wording

The Company recognizes settlements and changes in the fair value of its derivative contracts as a single component within other income (expense) on its 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 years ended December 31, 2023 and 2022:

Current wording

The Company recognizes settlements and changes in the fair value of our derivative contracts as a single component within other income (expense) in our 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 years ended December 31, 2024, and 2023:

Previous wording

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 in the Company's consolidated financial statements in "Item 15. Exhibits and Financial Statement Schedules for a full discussion of income taxes.

Current wording

Current income taxes represent the amount the Company expects to owe to federal and state tax authorities in the current period, based on our taxable income. 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 12 - Income Taxes in the Company's consolidated financial statements in "Item 15. Exhibits and Financial Statement Schedules for a full discussion of income taxes.

Previous wording

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, borrowings under our Credit Facility and the issuance of our Senior Notes. 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.

Current wording

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 our operations, fund capital expenditures and acquisitions, pay dividends 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, borrowings under our Credit Facility and the issuance of our Senior Notes. 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 2024, the Company issued equity securities and used the proceeds to finance an acquisition, repay outstanding debt and for general corporate purposes. 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.

Previous wording

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."

Current wording

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, debt 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.

Previous wording

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 December 31, 2023, we had a working capital deficit of $31.1 million compared to a deficit of $25.3 million as of December 31, 2022. The current portion of our Senior Notes, which includes our regularly scheduled principal payments of $5 million per quarter, accounts for $20.0 million of our working capital deficit at December 31, 2023. Additionally, increases in our revenue payable, resulting from revenue suspense associated with oil and natural gas properties acquired in the New Mexico Acquisition, contributed to the working capital deficit. Partially offsetting these higher current liabilities was an increase of $5.0 million in current derivative assets and higher accounts receivable associated with increased oil and natural gas sales. 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 December 31, 2023 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.

Current wording

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 December 31, 2024, we had a working capital deficit of $54.6 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 at December 31, 2024, and 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. At December 31, 2024, we had cash on hand of $13.1 million and $285 million of undrawn capacity under our Credit Facility.

Previous wording

The Company's borrowing base on its Credit Facility was $375 million with outstanding borrowings of $185 million on December 31, 2023, representing available borrowing capacity of $190 million.

Current wording

The Company's borrowing base on our Credit Facility was $400 million with outstanding borrowings of $115 million at December 31, 2024, representing available borrowing capacity of $285 million.

Previous wording

On February 22, 2023, the Company amended its Credit Facility to, among other things, allow for the issuance of unsecured Senior Notes of up to $200 million. On April 3, 2023, and concurrent with the closing of the New Mexico Acquisition, the Company entered into the fourteenth amendment to the Credit Facility to, among other things, increase the maximum facility amount to $1.0 billion and the borrowing base from $225 million to $325 million, resulting in the addition of new lenders to the lending group. On November 14, 2023, through the semi-annual redetermination, the Company increased its borrowing base to $375 million, resulting in the addition of two new lenders and the exit of one lender. The Credit Facility is set to mature in April 2026. Substantially all of the Company’s assets are pledged to secure the Credit Facility.

Current wording

On February 22, 2023, the Company amended our Credit Facility to, among other things, allow for the issuance of unsecured Senior Notes of up to $200 million. On April 3, 2023, and concurrent with the closing of the 2023 New Mexico Acquisition, the Company entered into the fourteenth amendment to the Credit Facility to, among other things, increase the maximum facility amount to $1.0 billion and the borrowing base from $225 million to $325 million, resulting in the addition of new lenders to the lending group. On November 14, 2023, through the semi-annual redetermination process and fifteenth amendment, the Company increased our borrowing base from $325 million to $375 million, resulting in the addition of two new lenders and the exit of one lender. On December 13, 2024, the Company entered into the sixteenth amendment to the Credit Facility to, among other things, extend the stated maturity date from April 2026 to December 2028 (or if any Senior Notes are then outstanding, the date that is 181 days prior to the earliest stated maturity date of such Senior Notes, in this case October 2027) and increase the borrowing base from $375 million to $400 million, resulting in the addition of one new lender to the lending group. Substantially all of the Company’s assets are pledged to secure the Credit Facility.

Previous wording

During the year ended December 31, 2023, the Company issued $200 million in principal amount of Senior Notes with a maturity date of April 2026. The proceeds from the Senior Notes were used to finance the New Mexico Acquisition. The principal balance of the Senior Notes as of December 31, 2023 was $185 million.

Current wording

During the year ended December 31, 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 2023 New Mexico Acquisition. The principal balance of the Senior Notes as of December 31, 2024, was $165 million.

Previous wording

For the year ended December 31, 2023, the Company authorized and declared quarterly dividends totaling approximately $27.9 million, with $27.3 million paid in cash and $0.6 million payable to holders of restricted stock upon vesting. For the years ended December 31, 2023 and 2022, the Company paid cash dividends of approximately $0.5 million and $0.2 million, respectively, to holders of restricted stock upon vesting.

Current wording

For the year ended December 31, 2024, the Company authorized and declared quarterly dividends totaling approximately $31.0 million, with $30.8 million paid in cash and $0.2 million accrued for the holders of restricted stock upon vesting. For the years ended December 31, 2024, and 2023, the Company paid cash dividends of approximately $0.7 million and $0.5 million, respectively, to holders of restricted stock upon vesting.

Previous wording

Similar to the evaluation of suspended exploratory well costs, costs for unproved leasehold, for which reserves have not been proven, must also be evaluated for continued capitalization or impairment. At the end of each quarter, unproved leasehold costs are assessed for impairment by considering future drilling plans, drilling activity results, commodity price outlooks, planned future sales or expiration of all or a portion of such projects. At December 31, 2023, the Company had approximately $100.2 million of unproved leasehold. Of the remaining unproved leasehold costs at December 31, 2023, approximately $2.3 million is scheduled to expire in 2024. The Company expects to renew or extend these leases in 2024. If our drilling is not successful, this leasehold could become partially or entirely impaired.

Current wording

Similar to the evaluation of suspended exploratory well costs, costs for unproved leasehold, for which reserves have not been proven, must also be evaluated for continued capitalization or impairment. At the end of each quarter, unproved leasehold costs are assessed for impairment by considering future drilling plans, drilling activity results, commodity price outlooks, planned future sales or expiration of all or a portion of such projects. At December 31, 2024, the Company had approximately $101.0 million of unproved leasehold. Of the remaining unproved leasehold costs at December 31, 2024, approximately $2.2 million is scheduled to expire in 2025. The Company expects to renew or extend these leases in 2025. If our drilling is not successful, this leasehold could become partially or entirely impaired.

Previous wording

Once a well is drilled, capitalized well costs for drilling and completion activities must be evaluated at least yearly or whenever facts and circumstances indicate a decline in the recoverability of their carrying value may have occurred. At the end of each year, the undiscounted future cash flows are compared to the carrying value on a field basis to evaluate if the carrying value is recoverable. If the carrying value is not recoverable, the Company will compare the carrying value of the asset to its fair value and recognize any impairment loss in the period. Significant inputs and judgements are used in determining the fair value of the assets. The Company utilizes a discounted cash flow model in order to estimate fair value by modeling the present value of future cash flows, net of estimated operating and development costs using estimates of reserves, future commodity pricing, future production estimates, anticipated capital expenditures, and various discount rates commensurate with the risk and current market conditions associated with the expected cash flow projected. During the year ended December 31, 2023, the Company recognized a proved property impairment of $9.8 million relating to certain properties in Texas outside of the Company's acreage in the Champions Field. The Company recognized an impairment loss on proved properties of $7.3 million for the year ended December 31, 2022, which related to a decrease in fair value of its historical properties in New Mexico.

Current wording

Once a well is drilled, capitalized well costs for drilling and completion activities must be evaluated at least yearly or whenever facts and circumstances indicate a decline in the recoverability of their carrying value may have occurred. At the end of each year, the undiscounted future cash flows are compared to the carrying value on a field basis to evaluate if the carrying value is recoverable. If the carrying value is not recoverable, the Company will compare the carrying value of the asset to its fair value and recognize any impairment loss in the period. Significant inputs and judgements are used in determining the fair value of the assets. The Company utilizes a discounted cash flow model in order to estimate fair value by modeling the present value of future cash flows, net of estimated operating and development costs using estimates of reserves, future commodity pricing, future production estimates, anticipated capital expenditures, and various discount rates commensurate with the risk and current market conditions associated with the expected cash flow projected. During the year ended December 31, 2024, the Company recognized a proved property impairment of $11.3 million relating to certain properties in Texas outside of the Company's acreage in the Champions field and certain historical properties in New Mexico outside of the Company's acreage in the Red Lake field. The Company recognized an impairment loss on proved properties of $9.8 million for the year ended December 31, 2023, relating to certain properties in Texas outside of the Company's acreage in the Champions field.

Previous wording

The Company periodically acquires assets and assumes liabilities in transactions accounted for as business combinations, such as the New Mexico Acquisition. In connection with the New Mexico Acquisition, we allocated the purchase price consideration of $324.7 million to the assets acquired and liabilities assumed based on estimated fair values as of the date of the acquisition.

Current wording

The Company periodically acquires assets and assumes liabilities in transactions accounted for as business combinations, such as the 2023 New Mexico Acquisition. In connection with the 2023 New Mexico Acquisition, we allocated the purchase price consideration of $324.7 million to the assets acquired and liabilities assumed based on estimated fair values as of the date of the acquisition.

Previous wording

We made a number of assumptions in estimating the fair value of assets acquired and liabilities assumed in the New Mexico Acquisition. The most significant assumptions relate to the estimated fair values of proved and unproved oil and gas properties. The fair value of identifiable assets acquired and liabilities assumed is determined based on various valuation techniques, including market prices, discounted cash flow analysis, and independent appraisals. Significant judgments and assumptions are inherent in these valuation techniques and include, among other things, estimates of reserves, estimates of future commodity prices, expected development costs, lease operating costs and the discount rate that reflects the risk of the underlying cash flow estimates.

Current wording

We made a number of assumptions in estimating the fair value of assets acquired and liabilities assumed in the 2023 New Mexico Acquisition. The most significant assumptions relate to the estimated fair values of proved and unproved oil and gas properties. The fair value of identifiable assets acquired and liabilities assumed is determined based on various valuation techniques, including market prices, discounted cash flow analysis, and independent appraisals. Significant judgments and assumptions are inherent in these valuation techniques and include, among other things, estimates of reserves, estimates of future commodity prices, expected development costs, lease operating costs and the discount rate that reflects the risk of the underlying cash flow estimates.