HNR Acquisition Corp

Previous wording

Our average daily production for the three months ended March 31, 2024 was 880 barrel of oil equivalent (“BOE”) per day. Our average daily production for the year ended December 31, 2023, was 1,022 BOE per day. The decrease in production is due to an increase in well downtime and the conveyance of the 10% Override royalty interest to Pogo Royalty.

Current wording

Our average daily production for the six months ended June 30, 2024 was 814 barrel of oil equivalent (“BOE”) per day. Our average daily production for the year ended December 31, 2023, was 1,022 BOE per day. The decrease in production is due to an increase in well downtime, water injection flowlines that needed repair or replacement, and the conveyance of the 10% Override royalty interest to Pogo Royalty.

Previous wording

The price at which our oil and natural gas production are sold typically reflects either a premium or discount to the New York Mercantile Exchange (“NYMEX”) benchmark price. Thus, our operating results are also affected by changes in the oil price differentials between the applicable benchmark and the sales prices we receive for our oil production. Our oil price differential to the NYMEX benchmark price during the three months ended March 31, 2024 and 2023, was $(5.51) and $(0.81) per barrel, respectively. Our natural gas price differential during the three months ended March 31, 2024 and 2023, was $0.54 and $0.32 per one thousand cubic feet (“Mcf”), respectively. Fluctuations in our price differentials and realizations are due to several factors such as gathering and transportation costs, takeaway capacity relative to production levels, regional storage capacity, gain/loss on derivative contracts and seasonal refinery maintenance temporarily depressing demand.

Current wording

The price at which our oil and natural gas production are sold typically reflects either a premium or discount to the New York Mercantile Exchange (“NYMEX”) benchmark price. Thus, our operating results are also affected by changes in the oil price differentials between the applicable benchmark and the sales prices we receive for our oil production. Our oil price differential to the NYMEX benchmark price during the six months ended June 30, 2024 and 2023, was $(1.41) and $(0.76) per barrel, respectively. Our natural gas price differential during the six months ended June 30, 2024 and 2023, was $0.35 and $0.09 per one thousand cubic feet (“Mcf”), respectively. Fluctuations in our price differentials and realizations are due to several factors such as gathering and transportation costs, takeaway capacity relative to production levels, regional storage capacity, gain/loss on derivative contracts and seasonal refinery maintenance temporarily depressing demand.

Previous wording

Prices for various quantities of natural gas and oil that we produce significantly impact our revenues and cash flows. The following table lists average NYMEX prices for oil and natural gas for the three months ended March 31, 2024 and 2023.

Current wording

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

Previous wording

For the three months ended March 31, 2024, the average NYMEX oil pricing was $77.56 per barrel of oil or 2% higher than the average NYMEX price per barrel for the three months ended March 31, 2023. Our settled derivatives decreased our realized oil price per barrel by $1.99 and $1.82 in the three months ended March 31, 2024, and 2023, respectively. Our average realized oil price per barrel after reflecting settled derivatives and location differentials was $70.06 and $73.45 for the three months ended March 31, 2024 and 2023, respectively.

Current wording

For the six months ended June 30, 2024, the average NYMEX oil pricing was $79.64 per barrel of oil or 6% higher than the average NYMEX price per barrel for the six months ended June 30, 2023. Our settled derivatives decreased our realized oil price per barrel by $3.16 and $1.64 in the six months ended June 30, 2024, and 2023, respectively. Our average realized oil price per barrel after reflecting settled derivatives and location differentials was $75.81 and $71.57 for the three months ended June 30, 2024 and 2023, respectively. Our average realized oil price per barrel after reflecting settled derivatives and location differentials was $75.07 and $72.52 for the six months ended June 30, 2024 and 2023, respectively.

Previous wording

The average NYMEX natural gas pricing for the three months ended March 31, 2024, was $2.13 per Mcf, or 20% lower than the average NYMEX price of $2.65 per Mcf for the three months ended March 31, 2023.

Current wording

The average NYMEX natural gas pricing for the six months ended June 30, 2024, was $2.11 per Mcf, or 13% lower than the average NYMEX price of $2.41 per Mcf for the six months ended June 30, 2023.

Previous wording

Our revenues vary from year to year primarily as a result of changes in realized commodity prices and production volumes. For the three months ended March 31, 2024, our oil and natural gas sales decreased 58% from the three months ended March 31, 2023, driven by a 5% decrease in realized prices, excluding the effect of settled commodity derivatives, and a 24% decrease in production volumes, and approximately $1,997,247 in derivative instrument losses in the three months ended March 31, 2024. Realized production from oil and gas properties decreased due to the sale of the ORRI of 10% by the Predecessor in July 2023.

Current wording

Our revenues vary from year to year primarily as a result of changes in realized commodity prices and production volumes. For the three months ended June 30, 2024, our oil and natural gas sales decreased 26% from the three months ended June 30, 2023, driven by a 7% increase in realized prices, excluding the effect of settled commodity derivatives, and a 34% decrease in production volumes, and $83,478 in derivative instrument losses in the three months ended June 30, 2024. Realized production from oil and gas properties decreased due to the sale of the ORRI of 10% by the Predecessor in July 2023 and actual decrease in production due to an increase in well downtime, and the impact of water injection flowlines that needed repair or replacement.

Previous wording

We enter into commodity derivatives instruments to manage the price risk attributable to future oil production. We recorded a loss on derivative contracts of $1,997,247 for the three months ended March 31, 2024, compared to a gain of $417,034 for the three months ended March 31, 2023. Higher commodity prices in the three months ended March 31, 2024, resulted in realized losses of $137,154 compared to realized losses of $166,990 for the three months ended March 31, 2023. For the three months ended March 31, 2024, unrealized losses were $1,860,093 compared to unrealized gains of $584,024 for the three months ended March 31, 2023.

Current wording

We enter into commodity derivatives instruments to manage the price risk attributable to future oil production. We recorded a loss on derivative contracts of $83,478 for the three months ended June 30, 2024, compared to a gain of $346,009 for the three months ended June 30, 2023. Higher commodity prices in the three months ended June 30, 2024, resulted in realized losses of $261,448 compared to realized losses of $131,665 for the three months ended June 30, 2023. For the three months ended June 30, 2024, unrealized gains were $177,970 compared to unrealized gains of $477,674 for the three months ended June 30, 2023.

Previous wording

For the three months ended March 31, 2024, our average realized oil price per barrel after reflecting settled derivatives was $70.06 compared to $73.45, for the three months ended March 31, 2023. For the three months ended March 31, 2024, our settled derivatives decreased our realized oil price per barrel by $1.99 compared to decreasing the price per barrel by $1.82 for the three months ended March 31, 2023. As of March 31, 2024, we ended the period with a $1,392,406 net derivative liability compared to a net asset of $467,687 as of December 31, 2023.

Current wording

For the three months ended June 30, 2024, our average realized oil price per barrel after reflecting settled derivatives was $75.81 compared to $71.57, for the three months ended June 30, 2023. For the three months ended June 30, 2024, our settled derivatives decreased our realized oil price per barrel by $4.29 compared to decreasing the price per barrel by $1.46 for the three months ended June 30, 2023. As of June 30, 2024, we ended the period with a $1,214,436 net derivative liability compared to a net asset of $467,687 as of December 31, 2023.

Previous wording

Other revenue was $130,588 for the three months ended March 31, 2024, compared to $169,743 for the three months ended March 31, 2023. The revenue is related to providing water services to a third party. The contract is for one year starting on September 1, 2022, and can be renewed by mutual agreement.

Current wording

Other revenue was $130,230 for the three months ended June 30, 2024, compared to $147,978 for the three months ended June 30, 2023. The revenue is related to providing water services to a third party. The contract is for one year starting on September 1, 2022, and can be renewed by mutual agreement.

Previous wording

Lease operating expenses were $3,123,525 for the three months ended March 31, 2023, compared to $2,923,802 for the three months ended March 31, 2023. On a per unit basis, production expenses increased 42% from $27.50 per BOE for the three months ended March 31, 2023, to $38.96 per BOE for the three months ended March 31, 2024, due primarily to increases in proactive maintenance activities.

Current wording

Lease operating expenses were $2,094,181 for the three months ended June 30, 2024, compared to $1,981,362 for the three months ended June 30, 2023. On a per unit basis, production expenses increased 59% from $18.60 per BOE for the three months ended June 30, 2023, to $29.50 per BOE for the three months ended June 30, 2024, due primarily to increases in proactive maintenance activities.

Previous wording

We pay production taxes, transportation and processing costs based on realized oil and natural gas sales. Production taxes, transportation and processing costs were $428,280 for the three months ended March 31, 2024, compared to $581,019 for the three months ended March 31, 2023. As a percentage of oil and natural gas sales, these costs were 8% and 8% in the three months ended March 31, 2024, and 2023, respectively. Production taxes, transportation, and processing as a percent of total oil and natural gas sales are consistent with historical trends.

Current wording

We pay production taxes, transportation and processing costs based on realized oil and natural gas sales. Production taxes, transportation and processing costs were $408,985 for the three months ended June 30, 2024, compared to $590,842 for the three months ended June 30, 2023. As a percentage of oil and natural gas sales, these costs were 8% and 9% in the three months ended June 30, 2024, and 2023, respectively. Production taxes, transportation, and processing as a percent of total oil and natural gas sales are consistent with historical trends.

Previous wording

Depletion, depreciation and amortization (“DD&A”) was $476,074 for the three months ended March 31, 2024, compared to $417,381 for the three months ended March 31, 2023. DD&A was $5.94 per BOE for the three months ended March 31, 2024 compared to $3.92 per BOE for the three months ended March 31, 2023. The aggregate increase in DD&A expense for the three months ended March 31, 2024, compared to the three months ended March 31, 2023, was driven by the increase in the oil and gas properties balance due the recognition of the reserves at fair value as a result of the acquisition of the Pogo business by the Company on November 15, 2023.

Current wording

Depletion, depreciation and amortization (“DD&A”) was $522,542 for the three months ended June 30, 2024, compared to $441,611 for the three months ended June 30, 2023. DD&A was $7.36 per BOE for the three months ended June 30, 2024 compared to $4.15 per BOE for the three months ended June 30, 2023. The aggregate increase in DD&A expense for the three months ended June 30, 2024, compared to the three months ended June 30, 2023, was driven by the increase in the oil and gas properties balance due the recognition of the reserves at fair value as a result of the acquisition of the Pogo business by the Company on November 15, 2023.

Previous wording

Accretion expense was $33,005 for the three months ended March 31, 2024, compared to $341,066 for the three months ended March 31, 2023. Accretion expense was $0.41 per BOE for the three months ended March 31, 2024, compared to $3.21 per BOE for the three months ended March 31, 2023. The aggregate increase in accretion expense for the three months ended March 31, 2024, compared to the three months ended March 31, 2023, was driven by changes in certain assumptions, specifically the inflation factor and discount rate as a result of the acquisition date where we revised our estimates as part of its fair value estimates for the acquired business on November 15, 2023

Current wording

Accretion expense was $40,526 for the three months ended June 30, 2024, compared to $267,568 for the three months ended June 30, 2023. Accretion expense was $0.57 per BOE for the three months ended June 30, 2024, compared to $2.51 per BOE for the three months ended June 30, 2023. The aggregate decrease in accretion expense for the three months ended June 30, 2024, compared to the three months ended June 30, 2023, was driven by changes in certain assumptions, specifically the inflation factor and discount rate as a result of the acquisition date where we revised our estimates as part of its fair value estimates for the acquired business on November 15, 2023

Previous wording

General and administrative expenses were $2,309,824 for the three months ended March 31, 2024, compared to $1,271,416 for the three months ended March 31, 2023. The increase for general and administrative expenses is primarily due to increased cost of outsourced legal, professional, and accounting services from being a public company, and stock-based compensation in the current period of $699,248.

Current wording

General and administrative expenses were $2,323,662 for the three months ended June 30, 2024, compared to $857,963 for the three months ended June 30, 2023. The increase in general and administrative expenses is primarily due to increased cost of outsourced legal, professional, and accounting services from being a public company, and stock-based compensation in the current period of $490,720.

Previous wording

Interest Expense and amortization of debt discount

Current wording

Interest Expense and amortization of financing costs

Previous wording

Interest expense was $1,860,582 for the three months ended March 31, 2024, compared to $315,092 for the three months ended March 31, 2023. The Successor period interest expense is driven by the Senior Secured Term loan entered into as part of the Closing, and the Private Notes Payable. The Predecessor interest expense for the three months ended March 31, 2023 relates to the Predecessor’s revolving credit facility outstanding and an increase in the weighted average interest rate. This revolving credit facility was not assumed in the Acquisition. Amortization of debt discount was $813,181 and was primarily associated with discount on the Company’s Private Notes Payable.

Current wording

Interest expense was $2,030,317 for the three months ended June 30, 2024, compared to $559,846 for the three months ended June 30, 2023. The Successor period interest expense is driven by the Senior Secured term loan entered into as part of the Closing, and the Private Notes Payable. The Predecessor interest expense for the three months ended June 30, 2023 relates to the Predecessor’s revolving credit facility outstanding and an increase in the weighted average interest rate. This revolving credit facility was not assumed in the Acquisition. Amortization of financing costs was $662,076 and was primarily associated with discount on the Company’s Private Notes Payable.

Previous wording

The change in fair value of forward purchase agreement consisted of a loss of $349,189 for the three months ended March 31, 2024 for the Successor related to the inputs used in the Company’s fair value estimate of the FPA Put Option. The key inputs to the fair value estimate include the Company’s stock price, which declined during the Successor period, and the likelihood, timing and price of a potential dilutive offering.

Current wording

The change in fair value of forward purchase agreement consisted of a loss of $23,717 for the three months ended June 30, 2024 for the Successor related to the inputs used in the Company’s fair value estimate of the FPA Put Option. The key inputs to the fair value estimate include the Company’s stock price, which declined during the Successor period, and the likelihood, timing and price of a potential dilutive offering.

Previous wording

The change in fair value of warrant liabilities consisted of a loss of $624,055 for the three months ended March 31, 2024 related to fluctuations in the trading price of the Company’s warrants, a portion of which are accounted for as liabilities due to the redemption provisions in those issued to Private Note holders.

Current wording

The change in fair value of warrant liabilities consisted of a loss of $277,167 for the three months ended June 30, 2024 related to fluctuations in the trading price of the Company’s warrants, a portion of which are accounted for as liabilities due to the redemption provisions in those issued to Private Note holders.

Previous wording

As of March 31, 2024, we had outstanding debt of $26,793,529 under our Senior Secured Term Loan, $15,000,000 under the Seller Promissory Note, and $3,594,500 of outstanding private notes payable. A total of $13,098,952 of this is due within one year, including a $5,000,000 estimated excess cash flow payment under the terms of the Senior Secured Term Loan. As of March 31, 2024, we had $3,363,372 of cash and cash equivalents on hand, of which $2,600,000 is in an escrow account pursuant to the requirements of the Senior Secured Term Loan, and had a working capital deficit of $24,263,954. These conditions raise substantial doubt about our ability to continue as a going concern within one year after the date that the financial statements are issued.

Current wording

As of June 30, 2024, we had outstanding debt of $25,789,250 under our Senior Secured Term Loan, $15,000,000 under the Seller Promissory Note, and $3,881,750 of outstanding private notes payable. A total of $13,663,823 of this is due within one year, including a $5,000,000 estimated excess cash flow payment under the terms of the Senior Secured Term Loan. As of June 30, 2024, we had $3,063,748 of cash and cash equivalents on hand, of which $2,600,000 is in an escrow account pursuant to the requirements of the Senior Secured Term Loan, and had a working capital deficit of $32,552,654. These conditions raise substantial doubt about our ability to continue as a going concern within one year after the date that the financial statements are issued.

Previous wording

The Company had positive cash flow from operations of $1,526,558 for the three months ended March 31, 2024 and $8,675,037 for the year ended December 31, 2023 on a pro forma basis of the combined Successor and Predecessor periods. Additionally, management’s plans to alleviate this substantial doubt include improving profitability through streamlining costs, maintaining active hedge positions for its proven reserve production, and the issuance of additional shares of Class A common stock through. We have a three-year Common Stock Purchase Agreement with a maximum funding limit of $150,000,000 that can fund our operations and production growth, and be used to reduce liabilities, subject the Company’s Form S-1 Registration Statement, which is in the review process, being declared effective by the Securities and Exchange Commission (“SEC”). However, we may seek additional access to capital and liquidity. We cannot assure you, however, that any additional capital will be available to us on favorable terms or at all. Our capital expenditures could be curtailed if our cash flows decline from expected levels.

Current wording

The Company had positive cash flow from operations of $2,250,267 for the six months ended June 30, 2024 and $8,675,037 for the year ended December 31, 2023 on a pro forma basis of the combined Successor and Predecessor periods. Additionally, management’s plans to alleviate this substantial doubt include improving profitability through streamlining costs, maintaining active hedge positions for its proven reserve production, and the issuance of additional shares of Class A common stock through. We have a three-year Common Stock Purchase Agreement with a maximum funding limit of $150,000,000 that can fund our operations and production growth, and be used to reduce liabilities, subject the Company’s Form S-1 Registration Statement, which is in the review process, being declared effective by the Securities and Exchange Commission (“SEC”). However, we may seek additional access to capital and liquidity. We cannot assure you, however, that any additional capital will be available to us on favorable terms or at all. Our capital expenditures could be curtailed if our cash flows decline from expected levels.

Previous wording

Sources and uses of cash for the three months ended March 31, 2024 and 2023, are as follows:

Current wording

Sources and uses of cash for the six months ended June 30, 2024 and 2023, are as follows:

Previous wording

The decrease in net cash flow provided by operating activities for the three months ended March 31, 2024, as compared to 2023 is primarily due to decreased production volumes, and higher general and administrative and acquisition costs associated with public filings.

Current wording

The decrease in net cash flow provided by operating activities for the six months ended June 30, 2024, as compared to 2023 is primarily due to decreased production volumes, and higher general and administrative and acquisition costs associated with public filings.

Previous wording

Net cash used in investing activities for the three months ended March 31, 2024 was primarily related to $977,716 in development costs for the Company’s reserves. Cash flows used in investing activities in the Predecessor period for the three months ended March 31, 2023 consisted primarily of $3,106,261of cash paid for oil and gas property costs.

Current wording

Net cash used in investing activities for the six months ended June 30, 2024 was primarily related to $1,192,769 in development costs for the Company’s reserves. Cash flows used in investing activities in the Predecessor period for the six months ended June 30, 2023 consisted primarily of $4,551,624 of cash paid for oil and gas property costs.

Previous wording

Net cash used by financing activities during the Successor period were primarily related to repayments of the Senior Secured Term Loan of $887,174 and Private Notes Payable of $33,750, partially offset by an additional $250,000 in cash proceeds from the Private Notes Payable issued during the three months ended March 31, 2024

Current wording

Net cash used by financing activities during the Successor period were primarily related to repayments of the Senior Secured Term Loan of $1,891,454 and Private Notes Payable of $37,750, partially offset by an additional $450,000 in cash proceeds from the Private Notes Payable issued during the six months ended June 30, 2024 Cash flows used in financing activities in the Predecessor period for the six months ended June 30, 2023 consisted primarily of $500,000 in long-term debt repayments.