8-K
US ENERGY CORP (USEG)
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
8-K
CURRENT
REPORT
Pursuant
to Section 13 or 15(d) of the
Securities
Exchange Act of 1934
Date of Report (Date of earliest event reported): June 10, 2022
U.S.
ENERGY CORP.
(Exact name of registrant as specified in its charter)
| Wyoming | 000-06814 | 83-0205516 |
|---|---|---|
| (State<br> or other jurisdiction<br><br> <br>of<br> incorporation) | (Commission<br><br> <br>File<br> Number) | (IRS<br> Employer<br><br> <br>Identification<br> No.) |
| 675 Bering Drive, Suite 100, Houston, Texas | 77057 | |
| --- | --- | |
| (Address of principal executive<br> offices) | (Zip Code) |
Registrant’s telephone number, including area code: (303) 993-3200
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2 below):
| ☐ | Written communications<br> pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
|---|---|
| ☐ | Soliciting material pursuant<br> to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |
| ☐ | Pre-commencement communications<br> pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
| ☐ | Pre-commencement communications<br> pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
Securities registered pursuant to Section 12(b) of the Act:
| Title<br> of each class | Trading<br> Symbol(s) | Name<br> of exchange on which registered |
|---|---|---|
| Common Stock, $0.01 par value | USEG | NASDAQ Capital Market |
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
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. ☐
EXPLANATION
NOTE
U.S. Energy Corp. (the “Company”, “we” and “us”) previously filed a Current Report on Form 8-K with the Securities and Exchange Commission on January 10, 2022 (the “Initial Report”) disclosing among other things, the closing, on January 5, 2022, of the transactions contemplated by those certain three separate Purchase and Sale Agreements (as amended to date, the “Purchase Agreements”), previously entered into by the Company on October 4, 2021, with each of (a) Lubbock Energy Partners LLC (“Lubbock”); (b) Banner Oil & Gas, LLC (“Banner”), Woodford Petroleum, LLC (“Woodford”) and Llano Energy LLC (“Llano”, and together with Banner and Woodford, collectively, “Sage Road”), and (c) Synergy Offshore LLC (“Synergy”, and collectively with Lubbock and Sage Road, the “Sellers”). Pursuant to the Purchase Agreements, U.S. Energy acquired certain oil and gas properties from the Sellers, representing a diversified, conventional portfolio of operated, producing, oil-weighted assets located across the Rockies, West Texas, Eagle Ford, and Mid-Continent. The acquisitions 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” and the “Acquisitions”).
On
March 1, 2022, the Company filed an Amendment No. 2 to the Initial Report, amending Item 9.01 thereof to include the required financial statements and pro forma financial information relating to the Acquisitions.
This Current Report on Form 8-K updates the financial statements relating to the Acquisitions through December 31, 2021, and includes pro forma financial information, for the year ended December 31, 2021.
Item9.01 Financial Statements and Exhibits.
AuditedFinancial Statements
(i) Lubbock Energy Partners LLC’s audited financial statements, which comprise Lubbock Energy Partners LLC’s balance sheets as of December 31, 2021 and 2020 and the related statements of operations, changes in members’ equity, and cash flows for the years then ended, and the related notes to the financial statements, are filed as Exhibit 99.1 to this Current Report on Form 8-K, and are incorporated herein by reference.
(ii) Banner Oil & Gas, LLC’s audited financial statements, which comprise Banner Oil & Gas, LLC’s consolidated balance sheets as of December 31, 2021 and 2020, and the related consolidated statements of operations, cash flows, and members’ equity for the years then ended, and the related notes to the financial statements, are filed as Exhibit 99.2 to this Current Report on Form 8-K, and are incorporated herein by reference.
(iii) Woodford Petroleum LLC’s audited financial statements, which comprise Woodford Petroleum LLC’s balance sheets as of December 31, 2021 and 2020, and the related statements of operations, changes in members’ equity, and cash flows for the years then ended, and the related notes to financial statements, are filed as Exhibit 99.3 to this Current Report on Form 8-K, and are incorporated herein by reference.
(iv) Llano Energy LLC’s audited financial statements, which comprise Llano Energy LLC’s balance sheets as of December 31, 2021 and 2020, the related statements of operations, members’ equity, and cash flows for the years then ended, and the related notes to financial statements, are filed as Exhibit 99.4 to this Current Report on Form 8-K, and are incorporated herein by reference.
(v) Synergy Offshore LLC’s audited financial statements, which comprise Synergy Offshore LLC’s balance sheets as of December 31, 2021 and 2020 and the related statements of operations, changes in members’ equity (deficit), and cash flows for the years then ended, and the related notes to the financial statements, are filed as Exhibit 99.5 to this Current Report on Form 8-K, and are incorporated herein by reference.
The consents of Plante & Moran, PLLC, HSPG & Associates, PC, Weaver and Tidwell, L.L.P., and HoganTaylor LLP, are filed herewith as Exhibits 23.1 and 23.2, 23.3, 23.4 and 23.5.
ProForma Financial Information
The unaudited pro forma consolidated financial information of U.S. Energy Corp. for the year ended December 31, 2021, as well as the accompanying notes thereto, are filed as Exhibit 99.6 to this Current Report on Form 8-K and are incorporated herein by reference. The unaudited pro forma consolidated financial statements are based on the historical consolidated financial statements of the Company and adjusts such information to give effect of the Acquisitions.
* Filed herewith.
CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Current Report on Form 8-K and Exhibits 99.1 through 99.6 hereto contain forward-looking statements that are made pursuant to the safe harbor provisions of the federal securities laws, including within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended and the Private Securities Litigation Reform Act, as amended. Forward-looking statements are based on management’s current expectations and are subject to risks and uncertainties, many of which are beyond our control, that may cause actual results or events to differ materially from those projected. These risks and uncertainties, many of which are beyond our control, include risks described in the section entitled “Risk Factors” and elsewhere in our Annual Reports on Form 10-K and in our other filings with the SEC, including, without limitation, our reports on Forms 8-K and 10-Q, all of which can be obtained on the SEC website at www.sec.gov. Readers are cautioned not to place undue reliance on the forward-looking statements, which speak only as of the date on which they are made and reflect management’s current estimates, projections, expectations and beliefs. We expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in our expectations or any changes in events, conditions or circumstances on which any such statement is based, except as required by law.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
| U.S. ENERGY CORP. | |
|---|---|
| By: | /s/ Ryan Smith |
| Ryan Smith | |
| Chief Executive Officer | |
| Dated: | June 10, 2022 |
Exhibit23.1
CONSENTOF INDEPENDENT AUDITOR
We consent to the incorporation by reference of our report dated May 13, 2022 on the financial statements of Lubbock Energy Partners LLC as of and for the years ended December 31, 2021 and 2020 in U.S. Energy Corp.’s Registration Statements on Form S-3 (No. 333-248906), Form S-1 (Nos. 333-249738 and 333-220363) and Form S-8 (Nos. 333-108979, 333-166638, 333-180735, 333-183911 and 333-261600), appearing in Form 8-K of U.S. Energy Corp., dated June 10, 2022.
| /s/ Plante & Moran, PLLC |
|---|
| Denver, Colorado |
| June 10, 2022 |
Exhibit23.2
CONSENTOF INDEPENDENT AUDITOR
We consent to the incorporation by reference of our report dated May 13, 2022 on the financial statements of Synergy Offshore LLC as of and for the years ended December 31, 2021 and 2020 in U.S. Energy Corp.’s Registration Statements on Form S-3 (No. 333-248906), Form S-1 (Nos. 333-249738 and 333-220363) and Form S-8 (Nos. 333-108979, 333-166638, 333-180735, 333-183911 and 333-261600), appearing in Form 8-K of U.S. Energy Corp., dated June 10, 2022.
| /s/ Plante & Moran, PLLC |
|---|
| Denver, Colorado |
| June 10, 2022 |
Exhibit23.3
CONSENTOF INDEPENDENT AUDITOR
We hereby consent to the incorporation by reference in U.S. Energy Corp.’s Registration Statements on Form S-3 (No. 333-248906), Form S-1 (Nos. 333-249738 and 333-220363) and Form S-8 (Nos. 333-108979, 333-166638, 333-180735, 333-183911 and 333-261600), of our report dated June 3, 2022, relating to the consolidated financial statements of Banner Oil & Gas, LLC (a limited liability company), and subsidiaries, which comprise the consolidated balance sheets as of December 31, 2021 and 2020, and the related consolidated statements of operations, cash flows, and members’ equity for the years then ended, and the related notes to the financial statements, that appear in, and/or are incorporated by reference in, the Current Report on Form 8-K of U.S. Energy Corp., as filed with the Securities and Exchange Commission on June 10, 2022.
Oklahoma City, Oklahoma
June 10, 2022
Exhibit23.4
Consentof Independent Public Accounting Firm
We hereby consent to the incorporation by reference in U.S. Energy Corp.’s Registration Statements on Form S-3 (No. 333-248906), Form S-1 (Nos. 333-249738 and 333-220363) and Form S-8 (Nos. 333-108979, 333-166638, 333-180735, 333-183911 and 333-261600), of our report dated June 10, 2022, relating to balance sheets as of December 31, 2021 and 2020, and the related statements of operations, changes in members’ equity, and cash flows for the years then ended, and the related notes to financial statements, of Woodford Petroleum LLC, that appear in, and/or are incorporated by reference in, the Current Report on Form 8-K of U.S. Energy Corp., as filed with the Securities and Exchange Commission on June 10, 2022.
WEAVERAND TIDWELL, L.L.P.
Houston, Texas
June 10, 2022
Exhibit23.5
We hereby consent to the incorporation by reference in U.S. Energy Corp.’s Registration Statements on Form S-3 (No. 333-248906), Form S-1 (Nos. 333-249738 and 333-220363) and Form S-8 (Nos. 333-108979, 333-166638, 333-180735, 333-183911 and 333-261600), of our report dated March 29, 2022, relating to the audited financial statements of Llano Energy LLC, which comprise the balance sheets of Llano Energy LLC as of December 31, 2021 and 2020, the related statements of operations, members’ equity, and cash flows for the years then ended, and the related notes to the financial statements, that appear in, and/or are incorporated by reference in, the Current Report on Form 8-K of U.S. Energy Corp., as filed with the Securities and Exchange Commission on June 10, 2022.
| /s/ HoganTaylor LLP |
|---|
| Oklahoma City, Oklahoma |
June 10, 2022
Exhibit99.1
LubbockEnergy Partners LLC
Financial Statements
As of and for the years ended December 31, 2021 and 2020
LubbockEnergy Partners LLC
INDEXTO FINANCIAL STATEMENTS
| Independent Auditor’s Report | 3 |
|---|---|
| Balance Sheets | 5 |
| Statements of Operations | 6 |
| Statements of Changes in Members’ Equity | 7 |
| Statements of Cash Flows | 8 |
| Notes to Financial Statements | 9 |
| Supplemental Oil and Gas Information (Unaudited) | 13 |
Independent Auditor’s Report
To the Members
Lubbock Energy Partners LLC
Opinion
We have audited the financial statements of Lubbock Energy Partners LLC (the “Company”), which comprise the balance sheets as of December 31, 2021 and 2020 and the related statements of operations, changes in members’ equity, and cash flows for the years then ended, and the related notes to the financial statements.
In our opinion, the accompanying financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020 and the results of its operations and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.
Basis for Opinion
We conducted our audits in accordance with auditing standards generally accepted in the United States of America (GAAS). Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audits of the Financial Statements section of our report. We are required to be independent of the Company and to meet our ethical responsibilities in accordance with the relevant ethical requirements relating to our audits. We believe the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Emphasisof Matter
As described in Note 6 to the financial statements, the Company completed the sale of all of its oil and gas properties on January 5, 2022. Our opinion is not modified with respect to this matter.
Responsibilities of Management for the Financial Statements
Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America and the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the financial statements, management is required to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the financial statements are issued or available to be issued.
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Auditor’sResponsibilities for the Audits of the Financial Statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance but is not absolute assurance and, therefore, is not a guarantee that audits conducted in accordance with GAAS will always detect a material misstatement when it exists. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Misstatements are considered material if there is a substantial likelihood that, individually or in the aggregate, they would influence the judgment made by a reasonable user based on the financial statements.
In performing audits in accordance with GAAS, we:
| ● | Exercise<br> professional judgment and maintain professional skepticism throughout the audits. |
|---|---|
| ● | Identify<br> and assess the risks of material misstatement of the financial statements, whether due to<br> fraud or error, and design and perform audit procedures responsive to those risks. Such procedures<br> include examining, on a test basis, evidence regarding the amounts and disclosures in the<br> financial statements. |
| ● | Obtain<br> an understanding of internal control relevant to the audits in order to design audit procedures<br> that are appropriate in the circumstances but not for the purpose of expressing an opinion<br> on the effectiveness of the Company’s internal control. Accordingly, no such opinion<br> is expressed. |
| ● | Evaluate<br> the appropriateness of accounting policies used and the reasonableness of significant accounting<br> estimates made by management, as well as evaluate the overall presentation of the financial<br> statements. |
| ● | Conclude<br> whether, in our judgment, there are conditions or events, considered in the aggregate, that<br> raise substantial doubt about the Company’s ability to continue as a going concern<br> for a reasonable period of time. |
We are required to communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audits, significant audit findings, and certain internal control-related matters that we identified during the audits.
/s/Plante & Moran, PLLC
Denver, Colorado
May 13, 2022
| 4 |
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LubbockEnergy Partners LLC
BalanceSheets
| December 31, | ||||||
|---|---|---|---|---|---|---|
| 2021 | 2020 | |||||
| Assets | ||||||
| Current assets: | ||||||
| Cash | $ | 120,664 | $ | 194,130 | ||
| Oil and gas sales receivable | 665,214 | 237,281 | ||||
| Other receivables | 244 | 152,473 | ||||
| Prepaid expenses | 27,000 | - | ||||
| Total current assets | 813,122 | 583,884 | ||||
| Oil and gas properties: | ||||||
| Oil and gas properties, at cost, using the full cost method | 17,281,094 | 17,281,094 | ||||
| Less accumulated depreciation, depletion, amortization and impairment | (10,037,188 | ) | (8,665,806 | ) | ||
| Net oil and gas properties | 7,243,906 | 8,615,288 | ||||
| Total assets | $ | 8,057,028 | $ | 9,199,172 | ||
| Liabilities and members’ equity | ||||||
| Current liabilities: | ||||||
| Accounts payable | $ | 210,217 | $ | 222,359 | ||
| Accrued liabilities | 142,734 | 16,707 | ||||
| Payable to related parties | 74,729 | 22,717 | ||||
| Total current liabilities | 427,680 | 261,783 | ||||
| Asset retirement obligations | 3,871,096 | 3,584,349 | ||||
| Total liabilities | 4,298,776 | 3,846,132 | ||||
| Commitments and contingencies (Note 4) | - | - | ||||
| Members’ equity | 3,758,252 | 5,353,040 | ||||
| Total liabilities and members’ equity | $ | 8,057,028 | $ | 9,199,172 |
Theaccompanying notes are an integral part of these financial statements.
| 5 |
| --- |
LubbockEnergy Partners LLCStatements of Operations
| For the year ended December 31, | |||||
|---|---|---|---|---|---|
| 2021 | 2020 | ||||
| Revenue - Oil and gas (Note 5) | $ | 8,471,882 | $ | 1,771,202 | |
| Operating expenses: | |||||
| Lease operating expense (Note 5) | 2,725,331 | 1,087,297 | |||
| Production taxes and transportation costs (Note 5) | 468,314 | 106,830 | |||
| Depreciation, depletion and amortization | 1,371,382 | 369,168 | |||
| Accretion | 286,747 | 211,425 | |||
| Impairment | - | 2,406,109 | |||
| General and administrative - related parties | 294,010 | 181,686 | |||
| General and administrative | 557,882 | 69,689 | |||
| Total costs and expenses | 5,703,666 | 4,432,204 | |||
| Income (loss) before income tax | 2,768,216 | (2,661,002 | ) | ||
| Income tax provision | 44,043 | 5,555 | |||
| Net income (loss) | $ | 2,724,173 | $ | (2,666,557 | ) |
Theaccompanying notes are an integral part of these financial statements.
| 6 |
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LubbockEnergy Partners LLC
Statementsof Changes in Members’ Equity
| Balance at January 1, 2020 | $ | 3,765,844 | |
|---|---|---|---|
| Equity contributions | 4,823,753 | ||
| Equity distributions | (570,000 | ) | |
| Net loss | (2,666,557 | ) | |
| Balance at December 31, 2020 | 5,353,040 | ||
| Equity distributions | (4,318,961 | ) | |
| Net income | 2,724,173 | ||
| Balance at December 31, 2021 | $ | 3,758,252 |
Theaccompanying notes are an integral part of these financial statements.
| 7 |
| --- |
LubbockEnergy Partners LLC
Statementsof Cash Flows
| For the year ended December 31, | ||||||
|---|---|---|---|---|---|---|
| 2021 | 2020 | |||||
| Cash flows from operating activities: | ||||||
| Net income (loss) | $ | 2,724,173 | $ | (2,666,557 | ) | |
| Adjustments to reconcile net income (loss) to net cash from operating activities: | ||||||
| Depreciation, depletion and amortization | 1,371,382 | 369,168 | ||||
| Accretion | 286,747 | 211,425 | ||||
| Impairment | - | 2,406,109 | ||||
| Changes in assets and liabilities: | ||||||
| Accounts receivable | (275,704 | ) | 324 | |||
| Prepaid expenses | (27,000 | ) | - | |||
| Accounts payable | 7,826 | 138,855 | ||||
| Payable to related parties | 32,044 | (11,629 | ) | |||
| Accrued liabilities | 126,027 | (81,894 | ) | |||
| Net cash from operating activities | 4,245,495 | 365,801 | ||||
| Cash flows from investing activities: | ||||||
| Purchases of oil and gas properties | - | (4,676,523 | ) | |||
| Cash flows from financing activities: | ||||||
| Equity contributions | - | 4,823,753 | ||||
| Distributions to members | (4,318,961 | ) | (570,000 | ) | ||
| Net cash from financing activities | (4,318,961 | ) | 4,253,753 | |||
| Net change in cash | (73,466 | ) | (56,969 | ) | ||
| Cash at beginning of year | 194,130 | 251,099 | ||||
| Cash at end of year | $ | 120,664 | $ | 194,130 | ||
| Supplemental cash flow information: | ||||||
| Cash paid for taxes | $ | 2,746 | $ | 30,037 | ||
| Non-cash investing and financing activities: | ||||||
| Oil and gas properties acquired for settlement of note receivable | - | 1,100,000 | ||||
| Asset retirement obligations assumed in acquisitions | - | 2,146,152 |
Theaccompanying notes are an integral part of these financial statements.
| 8 |
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LubbockEnergy Partners LLC
Notesto Financial Statements
1.Organization and Significant Accounting Policies
Organization– Lubbock Energy Partners LLC (the “Company”) was formed as a Texas Limited Liability Company on January 17, 2017. The Company’s principal business activities are focused on the acquisition and development of oil and gas properties in the United States. Our fiscal year-end is December 31.
Basisof Presentation – The financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).
Useof 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 (i) oil and gas reserves that are used in the calculation of depreciation, depletion, amortization and impairment of the carrying value of oil and gas properties; (ii) production and commodity price estimates used to record oil and gas sales receivables; and (iii) the cost 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 we believe to be reasonable. Due to inherent uncertainties, including the future prices of oil and gas, these estimates could change in the near term and such changes could be material.
Cash– The Company maintains its deposits of cash primarily in financial institutions, which may at times exceed amounts covered by insurance provided by the U.S. Federal Deposit Insurance Corporation (“FDIC”). The Company has not experienced any losses related to amounts in excess of FDIC limits.
Receivables– Accounts receivable consists primarily of accrued oil and gas production receivables and joint interest receivables from outside working interest owners. Generally, our oil and gas sales receivables are collected within one month. Management routinely assesses accounts receivable balances to determine their collectability and accrues an allowance for uncollectible receivables, when, based on the judgment of management, it is probable that a receivable will not be collected. Receivables are not collateralized. As of December 31, 2021, and 2020, the Company had not provided an allowance for doubtful accounts on its accounts receivable.
Oiland Gas Properties – The Company follows the full cost method of accounting for its oil and gas properties. Under the full cost method, all costs associated with the acquisition, exploration and development of oil and gas properties are capitalized and accumulated in a country-wide cost center. This includes any internal costs that are directly related to development and exploration activities but does not include any costs related to production, general corporate overhead or similar activities. Proceeds received from property disposals are credited against accumulated cost except when the sale represents a significant disposal of reserves, in which case a gain or loss is recognized. The sum of net capitalized costs and estimated future development and dismantlement costs for each cost center are subject to depreciation, depletion and amortization (“DD&A”) using the equivalent unit-of-production method, based on total proved oil and gas reserves. Excluded from amounts subject to DD&A are costs associated with unevaluated properties. The Company had no unevaluated properties as of or during the years ended December 31, 2021 or 2020.
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Under the full cost method, net capitalized costs are limited to the lower of unamortized cost, or the cost center ceiling (the “Ceiling Test”). The cost center ceiling is defined as the sum of (i) estimated future net revenue, discounted at 10% per annum, from proved reserves, based on average prices per barrel of oil and per Mcf of natural gas at the first day of each month in the 12-month period prior to the end of the reporting period; and costs, adjusted for contract provisions and financial derivatives qualifying as accounting hedges and asset retirement obligations, (ii) the cost of unevaluated properties not being amortized, and (iii) the lower of cost or market value of unproved properties included in the cost being amortized, reduced by (iv) the income tax effects related to differences between the book and tax basis of the oil and gas properties, if any. If the net book value reduced by the related net deferred income tax liability (if any) exceeds the cost center ceiling limitation, a non-cash impairment charge is required in the period in which the impairment occurs. Since all of the Company’s oil and gas properties are located within the United States, the Company only has one cost center for which a quarterly Ceiling Test is performed.
Acquisitions– We account for acquisitions as business combinations if the acquired assets meet the definition of a business. If substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar assets, the acquisition is not considered a business and is accounted for as an asset acquisition. This determination of whether the gross assets acquired are concentrated in a group of similar assets is based on whether the risks associated with managing and creating outputs from the assets are similar.
AssetRetirement Obligations – The Company recognizes a liability for the plugging, abandonment and remediation of its properties at the end of their productive lives. We compute the liability for asset retirement obligations (“ARO”) by calculating the present value of estimated future cash flows related to each property. This requires use of significant assumptions, including current estimates of plugging and abandonment costs, annual inflation of these costs, the productive lives of wells, and our credit-adjusted risk-free interest rate (all Level 3 inputs within the fair value hierarchy). Changes in any of these assumptions can result in significant revisions to the estimated asset retirement obligations.
Initially, the fair value of the ARO is recognized in the period in which it 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 and subject to the Ceiling Test. If the liability is settled for an amount other than the recognized liability, an adjustment to the full-cost pool is recognized. The Company had no assets that are restricted for the purpose of settling AROs.
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RevenueRecognition – Our revenues are primarily derived from the sales of oil and gas production and are primarily of oil. The Company’s oil and gas production is typically sold at delivery points to third-party purchasers under contract terms that are common in the oil and gas industry. These contracts typically provide for an agreed-upon index price, net of pricing differentials. The purchaser takes custody and possession, title and risk of loss of the oil at the delivery point; therefore, control passes at the delivery point. The Company recognizes revenue when control transfers to the purchaser. We receive payment from the sale of oil and gas production between one to three months after delivery. For property interests where we are not the operator, we record our share of the revenues and expenses based upon the information provided by the operators.
The Company reports revenue as the gross amount received before production taxes and transportation costs. Production taxes and transportation costs are reported separately in the accompanying statements of operations.
FairValue Measurement – Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The three levels related to fair value measurements are as follows:
| Level<br> 1 – | Observable inputs such as quoted prices in active<br>markets for identical assets or liabilities. |
|---|---|
| Level 2<br> – | Observable inputs other than quoted prices included<br>in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets<br>and liabilities in markets that are not active or other inputs that are observable or can be corroborated by observable market data. |
| Level 3<br> – | Unobservable inputs that are supported by little<br>or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models,<br>discounted cash flow methodologies, and similar techniques that use significant unobservable inputs. |
The estimated fair value of cash, accounts receivable, and accounts payable approximate the carrying amount due to the relatively short maturity of these instruments.
We evaluate the fair value on a non-recurring basis of properties acquired in business combinations, asset acquisitions and the related asset retirement obligations. The fair value of the oil and gas properties is determined based upon estimated future discounted cash flow, a Level 3 input, using estimated production which we reasonably expect, and estimated prices adjusted for differentials. Unobservable inputs include estimated future oil and gas production, prices, operating and development costs, and a discount rate of 10%, all Level 3 inputs within the fair value hierarchy.
IncomeTaxes – The Company is taxed as a partnership under the Internal Revenue Code. Consequently, federal income taxes are not payable, or provided for, by the Company. Members are taxed individually on their proportionate share of our earnings.
The state of Texas margin tax applies to legal entities conducting business in Texas. The tax is calculated by applying a tax rate to a base that considers both revenues and expenses and, therefore, has the characteristics of an income tax.
| 11 |
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Uncertain tax positions are recognized in the financial statements only if that position is reasonably determined to be more-likely-than-not of being sustained upon examination by taxing authorities, based on the technical merits of the position. We recognize interest and penalties related to uncertain tax positions in income tax expense. As of December 31, 2021 and 2020, there were no uncertain tax positions.
2.Oil and Gas Properties
We own oil and gas properties within the Permian and Eagle Ford Basins in Texas presently operated on our behalf by entities owned by our Members. Our interests in these properties varies by project.
2020Asset Acquisitions – During 2020, we made acquisitions of two property interests for cash totaling $4.7 million. We recognized associated asset retirement obligations of $2.1 million for these acquisitions. The acquisitions consisted of interests in properties located in Karnes and Cochran Counties, Texas.
Separately in 2020, we acquired an additional property interest located in Karnes County, Texas by foreclosure of the $1.1 million note receivable from a third-party issued to us in 2019.
CeilingTest Impairments – We recognized impairments totaling $2.4 million in 2020 for the excess of the net capitalized cost of our oil and gas properties above the cost center ceiling limitations.
3.Asset Retirement Obligations
The following table summarizes the changes in ARO (in thousands):
| Balance at January 1, 2020 | $ | 1,227 |
|---|---|---|
| ARO assumed in acquisitions | 2,146 | |
| Accretion | 211 | |
| Balance at December 31, 2020 | 3,584 | |
| Accretion | 287 | |
| Balance at December 31, 2021 | $ | 3,871 |
4.Commitments and Contingencies
Litigation***–*** From time to time, the Company may be subject to litigation or other claims in the normal course of business.
Environmental Matters – Due to the nature of the oil and gas industry, we are exposed to environmental risks. We have various policies and procedures to minimize and mitigate the risks from environmental contamination. We are not aware of any material environmental claims existing as of December 31, 2021; however, there can be no assurance that current regulatory requirements will not change or that unknown potential past non-compliance with environmental laws or other environmental liabilities will not be discovered on our properties.
5. Related Party Transactions
Our oil and gas properties within the Eagle Ford Basin are operated on our behalf by Caldera Operating Company LLC (“Caldera”), an entity controlled by a Member. Our oil and gas properties within the Permian Basin are operated on our behalf by Extex Operating Company (“Extex”), an entity controlled by another Member. All revenues, lease operating expenses, and production taxes and transportation costs are processed by Caldera or Extex and settled monthly.
We pay Caldera and Extex administrative fees as operators of our properties. In 2021, Caldera was paid administrative fees totaling $179 thousand and Extex was paid $115 thousand. In 2020, Caldera was paid administrative fees totaling $93 thousand and Extex was paid $89 thousand.
At December 31, 2021 and 2020, payable to related parties included $75 thousand and $22 thousand, respectively, for reimbursement of expenses related to our oil and gas properties.
6. Subsequent Events
The Company has evaluated events and transactions subsequent to the balance sheet date and through May 13, 2022, the date the financial statements were available to be issued.
On October 4, 2021, we entered into Purchase and Sale Agreement with U.S. Energy Corp. (“U.S. Energy”) for the sale of all of our oil and gas properties. The transaction also included certain wells, contracts, technical data, records, personal property and hydrocarbons associated with the assets being sold. This transaction was completed on January 5, 2022 for a total purchase price of $125,000 in cash and 6,568,828 shares of U.S. Energy’s common stock.
* * * * *
| 12 |
| --- |
SupplementalOil and Gas Information
(Unaudited)
Oiland Gas Reserve Information
Proved oil and gas reserves are those quantities of crude oil and natural gas which by analysis of geoscience and engineering data, can be estimated with reasonable certainty to be economically producible from a given date forward, from known reservoirs, and under existing economic conditions, operating methods, and government regulations. Estimated proved developed oil and gas reserves can be expected to be recovered through existing wells with existing equipment and operating methods. The Company reports all estimated proved reserves held under production-sharing arrangements utilizing the “economic interest” method.
Proved oil and gas reserves have been estimated by independent, third-party petroleum engineers, Onpoint Resources, LLC. These reserve estimates have been prepared in compliance with the Securities and Exchange Commission rules and accounting standards based on the unweighted average prices per barrel of oil and per Mcf of natural gas at the first day of each month in the 12-month period prior to the end of the reporting period.
There are numerous uncertainties inherent in estimating quantities of proved reserves and projecting future rates of production and timing of development expenditures. The reserve data in the following tables only represent estimates and should not be construed as being exact.
The following reserves schedule sets forth the changes in estimated quantities of proved crude oil reserves**:**
| **** | Crude Oil (Bbls) | **** | Gas (mcf) | **** | Total (Boe) | **** | |||
|---|---|---|---|---|---|---|---|---|---|
| Total proved reserves: | |||||||||
| Balance at December 31, 2019 | 428,857 | 1,254,270 | 637,902 | ||||||
| Revisions of previous estimates | (285,151 | ) | (1,027,090 | ) | (456,333 | ) | |||
| Purchases of minerals in-place | 1,653,051 | 943,499 | 1,810,301 | ||||||
| Production | (37,629 | ) | (54,405 | ) | (46,697 | ) | |||
| Balance at December 31, 2020 | 1,759,128 | 1,116,274 | 1,945,174 | ||||||
| Revisions of previous estimates | 605,139 | 2,241,228 | 978,677 | ||||||
| Production | (111,497 | ) | (134,732 | ) | (133,952 | ) | |||
| Balance at December 31, 2021 | 2,252,770 | 3,222,770 | 2,789,898 | ||||||
| Proved developed reserves as of: | |||||||||
| December 31, 2019 | 176,976 | 175,454 | 206,218 | ||||||
| December 31, 2020 | 1,011,363 | 604,863 | 1,112,174 | ||||||
| December 31, 2021 | 1,030,450 | 606,290 | 1,131,498 | ||||||
| Proved undeveloped reserves as of: | |||||||||
| December 31, 2019 | 251,881 | 1,078,816 | 431,684 | ||||||
| December 31, 2020 | 747,765 | 511,411 | 833,000 | ||||||
| December 31, 2021 | 1,222,320 | 2,616,480 | 1,658,400 |
| 13 |
| --- |
The increase in proved quantities for the year ended December 31, 2020 was due principally to acquisitions made in Karnes and Cochran Counties, Texas which added 1.8 million barrels of oil equivalent (“BOE”).
Our proved reserve quantities at December 31, 2021 increased significantly as compared with December 31, 2020 principally as a result of increases in the average prices per barrel of oil and per Mcf of natural gas.
CostsIncurred in Oil and Natural Gas Property Acquisitions and Development Activities
Costs incurred by the Company in oil and natural gas acquisitions and development are presented below:
| For the year ended December 31, | ||||
|---|---|---|---|---|
| 2021 | 2020 | |||
| Acquisitions: | $ | - | $ | 4,676,523 |
| Proved | - | - | ||
| Unproved | - | - | ||
| Exploration | - | - | ||
| Development | - | - | ||
| Costs incurred | $ | - | $ | 4,676,523 |
CapitalizedCosts
The following table sets forth the capitalized costs and associated accumulated depreciation, depletion, and amortization relating to the Company’s oil and gas acquisition, exploration, and development activities:
| December 31, | ||||||
|---|---|---|---|---|---|---|
| 2021 | 2020 | |||||
| Proved properties | $ | 17,281,094 | $ | 17,281,094 | ||
| Unproved properties | - | - | ||||
| 17,281,094 | 17,281,094 | |||||
| Accumulated DD&A and impairment | (10,037,188 | ) | (8,665,806 | ) | ||
| Total | $ | 7,243,906 | $ | 8,615,288 |
FutureNet Cash Flows
Future cash inflows as of December 31, 2021 and 2020 were calculated using an unweighted arithmetic average prices per barrel of oil and per Mcf of natural gas at the first day of each month in the 12-month period prior to the end of the reporting period, except where prices are defined by contractual arrangements. Operating costs, production and ad valorem taxes and future development costs are based on current costs with no escalation.
| 14 |
| --- |
The following table sets forth unaudited information concerning future net cash flows for proved oil and gas reserves. The standardized measure presented does not include the effects of income taxes as the Company is taxed as a partnership and not subject to federal income taxes. This information does not purport to present the fair market value of the Company’s oil and gas assets, but does present a standardized disclosure concerning possible future net cash flows that would result under the assumptions used.
| December 31, | ||||||
|---|---|---|---|---|---|---|
| 2021 | 2020 | |||||
| Future cash inflows | $ | 157,775,830 | $ | 68,501,906 | ||
| Future production costs | (53,749,780 | ) | (28,458,712 | ) | ||
| Future development costs | (27,784,380 | ) | (13,134,375 | ) | ||
| Future net cash flows | 76,241,670 | 26,908,819 | ||||
| 10% annual discount for estimated timing of cash flows | (35,213,920 | ) | (13,103,859 | ) | ||
| Discounted future net cash flows | $ | 41,027,750 | $ | 13,804,960 |
The following table sets forth the principal sources of change in the discounted future net cash flows:
| December 31, | ||||||
|---|---|---|---|---|---|---|
| 2021 | 2020 | |||||
| Balance, beginning of period | $ | 13,804,960 | $ | 3,467,890 | ||
| Sales, net of production costs | (5,278,237 | ) | (577,075 | ) | ||
| Net change in prices and production costs | 20,342,357 | (1,071,098 | ) | |||
| Revision of quantities | 11,332,611 | (470,086 | ) | |||
| Purchases of minerals in-place | - | 12,623,358 | ||||
| Accretion of discount | 1,380,496 | 346,789 | ||||
| Other | (554,437 | ) | (514,818 | ) | ||
| Balance, end of period | $ | 41,027,750 | $ | 13,804,960 |
* * * * *
| 15 |
| --- |
Exhibit99.2
BANNEROIL & GAS, LLC
CONSOLIDATEDFINANCIAL STATEMENTS
ASOF AND FOR THE YEARS ENDED
DECEMBER31, 2021 AND 2020
TOGETHERWITH
INDEPENDENTAUDITOR’S REPORT
BannerOil & Gas, LLC
Tableof Contents
December31, 2021 and 2020
| AuditedConsolidated Financial Statements | |
|---|---|
| Independent Auditor’s Report. | 1-2 |
| Consolidated Balance Sheets. | 3 |
| Consolidated Statements of Operations. | 4 |
| Consolidated Statements of Cash Flows. | 5 |
| Consolidated Statements of Members’ Equity. | 6 |
| Notes to Consolidated Financial Statements. | 7-18 |
| Supplemental Information (Unaudited) | |
| Supplemental Oil and Gas Information (Unaudited). | 19-21 |
INDEPENDENT AUDITOR’S REPORT
Board of Managers
Banner Oil & Gas, LLC
Oklahoma City, Oklahoma
Opinion
We have audited the accompanying consolidated financial statements of Banner Oil & Gas, LLC (a limited liability company), and subsidiaries, which comprise the consolidated balance sheets as of December 31, 2021 and 2020, and the related consolidated statements of operations, cash flows, and members’ equity for the years then ended, and the related notes to the financial statements.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Banner Oil & Gas, LLC as of December 31, 2021 and 2020, and the results of its operations and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.
Basis for Opinion
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Statements section of our report. We are required to be independent of Banner Oil & Gas, LLC and to meet our other ethical responsibilities in accordance with the relevant ethical requirements relating to our audits. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Responsibilities of Management for the Financial Statements
Management is responsible for the preparation and fair presentation of the financial statements in accordance with accounting principles generally accepted in the United States of America, and for the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the financial statements, management is required to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about Banner Oil & Gas, LLC’s ability to continue as a going concern within one year after the date that the financial statements are available to be issued.
Auditor’s Responsibilities for the Audit of the Financial Statements
Our objectives are to obtain reasonable assurance about whether thefinancial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance but is not absolute assurance and therefore is not a guarantee that an audit conducted in accordance with generally accepted auditing standards will always detect a material misstatement when it exists. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Misstatements are considered material if thereis asubstantiallikelihood that, individually or in the aggregate, they would influence the judgment made by a reasonable user based on the financial statements.
In performing an audit in accordance with generally accepted auditing standards, we:
| ● | Exercise<br> professional judgment and maintain professional skepticism throughout the audit. |
|---|---|
| ● | Identify<br> and assess the risks of material misstatement of the financial statements, whether due to fraud or error, and design and perform<br> audit procedures responsive to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and<br> disclosures in the financial statements. |
| ● | Obtain<br> an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances,<br> but not for the purpose of expressing an opinion on the effectiveness of Banner Oil & Gas, LLC ‘s internal control. Accordingly,<br> no such opinion is expressed. |
| ● | Evaluate<br> the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as<br> well as evaluate the overall presentation of the financial statements. |
| ● | Conclude<br> whether, in our judgment, there are conditions or events, considered in the aggregate, that raise substantial doubt about Banner<br> Oil & Gas, LLC’s ability to continue as a going concern for a reasonable period of time. |
We are required to communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit, significant audit findings, and certain internal control related matters that we identified during the audit.
June 3, 2022
| 2 |
| --- |
BANNEROIL & GAS, LLC
CONSOLIDATEDBALANCE SHEETS
ASOF DECEMBER 31, 2021 AND 2020
| 2021 | 2020 | |||
|---|---|---|---|---|
| ASSETS | ||||
| Current Assets | ||||
| Cash and cash equivalents | $ | 186,896 | $ | 228,676 |
| Accounts receivable: | ||||
| Accrued oil and natural gas sales | 1,458,293 | 697,504 | ||
| Joint interest billings | 110,400 | 87,821 | ||
| Oil inventory in tanks | 132,485 | 178,259 | ||
| Prepaid expenses | 44,628 | 32,786 | ||
| Total current assets | 1,932,702 | 1,225,046 | ||
| Oil and natural gas properties, at cost, based on full cost method of accounting, net of accumulated depreciation, depletion, amortization and impairment | 31,352,535 | 30,211,426 | ||
| Other property and equipment, net | 95,420 | 129,707 | ||
| Deposits | 298,606 | 289,343 | ||
| Unamortized debt issuance cost | 87,185 | 117,077 | ||
| TOTAL ASSETS | $ | 33,766,448 | $ | 31,972,599 |
| LIABILITIES AND MEMBERS’ EQUITY | ||||
| Current liabilities | ||||
| Accounts payable | $ | 2,612,151 | $ | 1,432,041 |
| Current portion of notes payable | 5,230 | 14,424 | ||
| Current portion of derivative obligation | 2,557,530 | 224,780 | ||
| Other accrued liabilities | 591,523 | 439,042 | ||
| Total current liabilities | 5,766,434 | 2,110,287 | ||
| Notes payable | 3,016,976 | 1,650,800 | ||
| Non current derivative obligation | 355,885 | 38,170 | ||
| Asset retirement obligations | 4,604,924 | 4,155,724 | ||
| Members’ equity | 20,022,229 | 24,017,618 | ||
| TOTAL LIABILITIES AND MEMBERS’ EQUITY | $ | 33,766,448 | $ | 31,972,599 |
See accompanying notes to consolidated financial statements.
| 3 |
| --- |
BANNEROIL & GAS, LLC
CONSOLIDATED STATEMENTS OF OPERATIONS
FORTHE YEARS ENDED DECEMBER 31, 2021 AND 2020
| 2021 | 2020 | |||||
|---|---|---|---|---|---|---|
| OPERATING REVENUES | ||||||
| Oil sales | $ | 9,200,110 | $ | 3,539,301 | ||
| Natural gas sales | 2,660,304 | 457,804 | ||||
| Total operating revenue | 11,860,414 | 3,997,105 | ||||
| OPERATING COSTS AND EXPENSES | ||||||
| Lease operating | 6,181,385 | 3,319,671 | ||||
| Production taxes and other expense | 748,483 | 245,628 | ||||
| Adjustment to production tax rebate | - | (89,523 | ) | |||
| Other production costs | 218,093 | 158,782 | ||||
| Ad valorem taxes | 44,444 | 90,255 | ||||
| General and administrative | 1,859,730 | 1,481,000 | ||||
| Depreciation, depletion and amortization | 1,870,327 | 1,358,119 | ||||
| Oil and natural gas property impairment | - | 9,111,083 | ||||
| Accretion of asset retirement obligations | 254,590 | 212,944 | ||||
| Total operating costs and expenses | 11,177,052 | 15,887,959 | ||||
| Income / (Loss) from operations | 683,362 | (11,890,854 | ) | |||
| OTHER (EXPENSE) INCOME | ||||||
| Contract operator income from related parties | - | 33,500 | ||||
| Other income | 633,063 | 99,025 | ||||
| Interest expense | (109,199 | ) | (8,015 | ) | ||
| Paid in kind interest | - | (349,335 | ) | |||
| Amortization of loan costs | (29,892 | ) | (15,736 | ) | ||
| Letter of credit fees | (36,942 | ) | (34,097 | ) | ||
| Risk management settlements | (2,485,316 | ) | (20,853 | ) | ||
| Risk management change in fair value | (2,650,465 | ) | (262,950 | ) | ||
| Total other (expenses) income | (4,678,751 | ) | (558,461 | ) | ||
| NET LOSS | $ | (3,995,389 | ) | $ | (12,449,315 | ) |
See accompanying notes to consolidated financial statements.
| 4 |
| --- |
BANNEROIL & GAS, LLC
CONSOLIDATEDSTATEMENTS OF CASH FLOWS
FORTHE YEARS ENDED DECEMBER 31, 2021 AND 2020
| 2021 | 2020 | |||||
|---|---|---|---|---|---|---|
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||
| Net loss | $ | (3,995,389 | ) | $ | (12,449,315 | ) |
| Adjustments to reconcile net loss to net cash provided by (used in) operations: | ||||||
| Depreciation, depletion and amortization | 1,870,327 | 1,358,118 | ||||
| Oil and natural gas property impairment | - | 9,111,083 | ||||
| (Gain) loss on sale of assets | - | (31,684 | ) | |||
| Non-cash interest expense | - | 349,335 | ||||
| Accretion expense | 254,590 | 212,944 | ||||
| Amortization of loan costs | 29,892 | 15,736 | ||||
| Unrealized (gain) loss on derivative instruments | 2,650,465 | 262,950 | ||||
| Gain on forgiveness of payroll protection program loan | (610,675 | ) | - | |||
| Change in assets and liabilities: | ||||||
| Accrued oil and gas sales | (760,789 | ) | (148,843 | ) | ||
| Joint interest billings | (22,579 | ) | (78,754 | ) | ||
| Oil inventory in tanks | 45,774 | 44,799 | ||||
| Prepaid expenses and other assets | (21,105 | ) | 16,091 | |||
| Accounts payable | 1,180,110 | 373,917 | ||||
| Other accrued liabilities | 152,481 | 105,191 | ||||
| Net cash provided by (used in) operating activities | 773,102 | (858,432 | ) | |||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||
| Proceeds from sale of assets | - | 522,803 | ||||
| Oil and natural gas property costs | (2,767,984 | ) | (1,550,194 | ) | ||
| Other asset additions | (14,555 | ) | - | |||
| Net cash used in investing activities | (2,782,539 | ) | (1,027,391 | ) | ||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||
| Payment of loan costs | - | (119,568 | ) | |||
| Payment on notes payable | (12,118 | ) | (16,246 | ) | ||
| Borrowings on notes payable | 1,979,775 | 1,650,800 | ||||
| Members’ contributions | - | 321,067 | ||||
| Net cash provided by financing activities | 1,967,657 | 1,836,053 | ||||
| NET CHANGE IN CASH AND CASH EQUIVALENTS | (41,780 | ) | (49,770 | ) | ||
| CASH AND CASH EQUIVALENTS, Beginning of year | 228,676 | 278,446 | ||||
| CASH AND CASH EQUIVALENTS, End of year | $ | 186,896 | $ | 228,676 | ||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | ||||||
| Cash paid for interest | $ | 118,501 | $ | 152 | ||
| NONCASH INVESTING AND FINANCING ACTIVITIES: | ||||||
| Capital costs in accounts payable and accrued liabilities | $ | 408,494 | $ | 356,764 | ||
| Oil and gas properties acquired through merger with K3 and 2W | - | 3,563,510 | ||||
| Other noncash activity from merger with K3 and 2W | - | 21,067 |
See accompanying notes to consolidated financial statements.
| 5 |
| --- |
BANNER OIL & GAS, LLC
CONSOLIDATEDSTATEMENTS OF MEMBERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2021 AND 2020
| Series A Preferred | Capital Interests | Members’ Equity | |||||||
|---|---|---|---|---|---|---|---|---|---|
| Balance at January 1, 2020 | $ | 6,825,000 | $ | 5,306,096 | 12,131,096 | ||||
| Cash<br> capital contribution From Sage Road | 271,067 | 271,067 | |||||||
| Cash Capital contribution from Michael Richardson | 50,000 | 50,000 | |||||||
| Debt assumed by parent | (6,825,000 | ) | 20,472,327 | 13,647,327 | |||||
| Conversion of series A preferred to capital interests | 6,825,000 | 6,825,000 | |||||||
| Property contribution by K3 | 1,914,600 | 1,914,600 | |||||||
| Property contribution by 2W | 1,627,843 | 1,627,843 | |||||||
| Net Loss | - | (12,449,315 | ) | (12,449,315 | ) | ||||
| Balance at December 31, 2020 | - | 24,017,618 | 24,017,618 | ||||||
| Net Loss | - | (3,995,389 | ) | (3,995,389 | ) | ||||
| Balance at December 31, 2021 | $ | - | $ | 20,022,229 | $ | 20,022,229 |
See accompanying notes to consolidated financial statements.
| 6 |
| --- |
BANNEROIL & GAS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FORTHE YEARS ENDED DECEMBER 31, 2021 AND 2020
| 1. | NATURE<br> OF OPERATIONS, PRINCIPLES OF CONSOLIDATION AND SIGNIFICANT TRANSACTIONS |
|---|
Banner Oil & Gas, LLC (“Banner”) was formed as a limited liability company in the state of Oklahoma on December 13, 2010. Its major operations consist of the exploration for and acquisition, production, and sale of crude oil and natural gas with an area of concentration in Oklahoma, Texas, Kansas and Mississippi. Banner will continue perpetually until terminated pursuant to statute or any provision of the limited liability company agreement. No member shall be liable for the expenses, liabilities or obligations of Banner.
On November 23, 2020, Banner’s board of managers approved a plan of division whereby Banner Holdings, LLC (“Banner Holdings”) was formed and became the sole member of Banner. All existing capital interests and incentive units of Banner were exchanged for an equal amount of capital interests and incentive units in Banner Holdings. Banner Holdings assumed all obligations regarding the prior revolving credit facility. Additionally, oil and gas assets of two companies under common control were merged with Banner effective October 1, 2020 (K3 AssetCo, LLC and 2W AssetCo, LLC). (See Note 4).
The consolidated financial statements include the accounts of Banner and its wholly owned subsidiaries, Pennant Oil & Gas, LLC, Banner Oilfield Services, LLC, BOG-Osage, LLC, K3 AssetCo, LLC and 2W AssetCo, LLC (collectively referred to as the “Company” or “Banner”). All significant intercompany accounts and transactions have been eliminated in consolidation.
| 2. | SUMMARY<br> OF SIGNIFICANT ACCOUNTING POLICIES |
|---|
Useof Estimates - In preparing financial statements in conformity with accounting principles generally accepted in the United States of America (US GAAP), management makes estimates and assumptions in determining the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates, and changes in these estimates are recorded when known. Significant estimates, which are subject to change in the near term, affecting these financial statements include estimates for quantities of proved oil and natural gas reserves and future cash flows, which is used to compute depreciation, depletion and amortization and impairment of oil and natural gas properties, period end oil and natural gas sales and accruals, and asset retirement obligations.
Cashand Cash Equivalents - The Company considers all highly liquid debt instruments purchased with a maturity of three months or less and money market funds to be cash equivalents. The Company maintains its cash and cash equivalents in bank deposit accounts and money market funds which may not be fully federally insured. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on such accounts.
| 7 |
| --- |
AccountsReceivable - The Company’s accounts receivables are primarily from companies in the oil and natural gas industry located in the southwestern part of the United States. Credit for oil and natural gas sales is extended based on evaluation of a customer’s financial condition and, generally, collateral is not required. Accounts receivable from working interest owners also does not require collateral, although the Company generally has the right to apply their portion of oil and natural gas sales to their accounts receivable balance. Accounts receivable are due within 30 days and are stated at amounts due from customers, net of an allowance for doubtful accounts when the Company believes collection is doubtful. Accounts outstanding longer than the contractual payment terms are considered past due.
The Company determines its allowance by considering a number of factors, including the length of time accounts receivable are past due, the Company’s previous loss history, the customer’s current ability to pay its obligation to the Company, amounts which may be obtained by an offset against production proceeds due the customer and the condition of the general economy as a whole. The Company writes off specific accounts receivable when they become uncollectible, and payments subsequently received on such receivables are credited to the allowance for doubtful accounts. At December 31, 2021 and 2020, management considers accounts receivable to be fully collectible; accordingly, no allowance for doubtful accounts is required.
OilInventory - At December 31, 2021 and 2020 inventory consisted of crude oil produced and stored in tanks prior to delivery to the purchaser in the amount of approximately $132,000 and $178,000, respectively. Inventory is presented on the balance sheet at the lower of cost to produce or market.
Oiland Natural Gas Properties - The full cost method of accounting is used to account for oil and natural gas properties. Under this method of accounting, all costs incident to the acquisition, exploration, and development of properties (both developed and undeveloped), including costs of abandoned leaseholds, delay lease rentals, unproductive wells, and well drilling and equipment costs, are capitalized. The Company capitalizes internal costs that can be directly identified with acquisition, exploration and development activities, but does not include any costs related to production, general corporate overhead or similar activities. Capitalized costs include geological and geophysical work, seismic, delay rentals, drilling and completing and equipping oil and natural gas wells, including salaries, benefits and other internal costs directly attributable to these activities.
Capitalized costs as well as future development costs on proved undeveloped properties are amortized using the units-of-production method, based on estimates of proved oil and natural gas reserves and production, which are converted to a common unit of measure based upon their relative energy content. The computation of depreciation, depletion and amortization takes into consideration restoration, dismantlement and abandonment costs and the anticipated proceeds from salvaging equipment. Due to uncertainties inherent in this estimation process, it is at least reasonably possible that reserve quantities will be revised significantly in the near term. If the Company’s unamortized costs exceed the cost center ceiling (defined as the sum of the present value, discounted at 10%, of estimated future net revenues from proved reserves plus the lower of cost or estimated fair value of unproved properties), the excess is charged to expense in the year in which the excess occurs.
Generally, no gains or losses are recognized on the sale or disposition of oil and natural gas properties unless such dispositions involve a significant alteration in the depletion rate. Management’s evaluation concluded that due to the decline in oil prices during 2020, there was an impairment required for the year ended December 31, 2020 of approximately $9,111,000. There was no impairment for the year ended December 31, 2021.
| 8 |
| --- |
OtherProperty and Equipment - Other property and equipment is recorded at cost. Upon retirement or disposition of assets, the cost and related accumulated depreciation are removed from the consolidated balance sheet with the resulting gain or loss, if any, reflected in the consolidated statement of operations. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets, typically from 3 to 10 years. Depreciation expense related to other property and equipment was approximately $49,000 and $56,000 for the years ended December 31, 2021 and 2020, respectively.
RevenueRecognition - Oil and natural gas revenues are recognized when production is sold to a purchaser at a fixed or determinable price, delivery has occurred, title has transferred and collectability of the revenue is probable. Delivery occurs and title is transferred when production has been delivered to a pipeline or picked up by the purchaser. Taxes assessed by governmental authorities on oil and natural gas revenues are presented separately from such revenues as production taxes in the consolidated statements of operations. Well supervision fees and overhead reimbursements associated with producing properties are recognized as expense reimbursements when the services are performed.
IncomeTaxes - The Company is a limited liability company and therefore substantially all taxes are passed through to the individual members. There is no provision for income taxes provided for in these financial statements. The Company’s 2018 through 2020 federal income tax and state income tax returns remain open to examination by various tax jurisdictions which include Oklahoma.
Additionally, the Company’s state margin tax returns for 2018 through 2020 remain open to examination for the state of Texas.
Management has evaluated the Company’s tax positions and concluded that there are no uncertain tax positions that require adjustment to the financial statements to comply with the provisions of authoritative guidance.
Concentrationsof Credit Risk and Major Customers - The Company extends credit to purchasers of oil and natural gas, which are primarily large energy companies. The Company had five purchasers during the year ended December 31, 2021 whose individual purchases exceeded 10% of oil and natural gas sales and collectively accounted for approximately 73% of total oil and natural gas sales. The Company had three purchasers during the year ended December 31, 2020 whose individual purchases exceeded 10% of oil and natural gas sales and collectively accounted for approximately 63% of total oil and natural gas sales.
The Company had six purchasers whose outstanding balance was approximately 85% of accounts receivable from oil and natural gas sales at December 31, 2021, and five purchasers whose outstanding balance was approximately 67% of accounts receivable from oil and natural gas sales at December 31, 2020.
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| --- |
GasBalancing - In certain instances, the owners of the natural gas produced from a well will select different purchasers for their respective ownership interest in the wells. If one purchaser takes more than its ratable portion of the natural gas, the owners selling to that purchaser will be required to satisfy the imbalance in the future by cash payments or by allowing the other owners to sell more than their share of production. To the extent future reserves exist to enable the other owners to sell more than their ratable share of natural gas, no liability is recorded for the Company’s obligation for natural gas taken by its purchasers which exceeds the Company’s ownership interest of the well’s total production. The Company has no significant imbalances at December 31, 2021 and 2020.
DebtIssuance Costs - The Company amortizes loan origination fees for financing agreements over the life of the loan using the straight-line method, which does not differ significantly from the effective interest method. Amortization expense totaled approximately $30,000 and $16,000 for December 31, 2021 and 2020, respectively.
Accounting standards require debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The standards allow companies to report debt issuance costs related to line of credit agreements as unamortized costs on the balance sheet. The Company reports debt issuance costs related to its revolving credit facility as unamortized debt issuance costs on the consolidated balance sheets.
DerivativeInstruments and Hedge Transactions - The Company recognizes derivatives as either an asset or a liability measured at fair value. The accounting for changes in the fair value of a derivative depends on the use of the derivative and the resulting designation. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is designated as a hedge, depending on the nature of the hedge, changes in the fair value of derivatives will either be offset against the change in fair value of the hedged assets, liabilities or firm commitments through income or recognized in other comprehensive income until the hedged item is recognized in income. The ineffective portion of a hedge’s change in fair value will be immediately recognized in income. The Company has not designated its derivative financial instruments for hedge accounting, and as such, changes in fair value are reported in earnings as a component of risk management income (expense) (See Note 6).
FairValue of Financial Instruments - The carrying value of items comprising current assets and current liabilities approximate fair values due to the short-term maturities of these instruments. The carrying value of the long-term debt approximates fair value as a result of the long-term debt having a variable interest rate, or the current rates offered to the Company for long-term debt are substantially the same. The Company’s derivative financial instruments are reported at fair value.
Accountingfor Asset Retirement Obligations - The Company records the fair value of a liability for an asset retirement obligation in the period in which it is incurred and a corresponding increase in the carrying amount of the related long-lived asset. The Company’s asset retirement obligations relate to estimated future plugging and abandonment costs on its oil and natural gas properties and related facilities disposal. These obligations to abandon and restore properties are based upon estimated future costs which may change based upon future inflation rates and changes in statutory remediation rules or changes in future cost estimates.
At December 31, 2021, the Company has cash held in escrow with a fair market value of $169,264 that is legally restricted for potential plugging and abandonment liability in the Wildhorse Unit located in Osage County, Oklahoma. The cash held related to this escrow account is included in deposits on the consolidated balance sheets.
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| --- |
The activities incurred in the asset retirement obligations are as follows for the years ended December 31, 2021 and 2020:
| 2021 | 2020 | |||||
|---|---|---|---|---|---|---|
| Balance at beginning of year | $ | 4,155,724 | $ | 2,761,519 | ||
| Liabilities incurred in current year | 214,511 | 1,761,821 | ||||
| Revisions | - | (340,498 | ) | |||
| Liabilities settled current year | (19,901 | ) | (240,062 | ) | ||
| Accretion Expense | 254,590 | 212,944 | ||||
| Balance at end of year | $ | 4,604,924 | $ | 4,155,724 |
Recentaccounting pronouncements – In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02 “Leases (Topic 842).” The purpose of the guidance is to increase the transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet as well as providing additional disclosure requirements related to leasing arrangements. On April 8, 2020, the FASB voted to defer the effective date for ASU 2016-02 for private companies. As such the new guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2021, though early adoption is permitted. Management is currently evaluating the impact adopting this recent accounting pronouncement will have on the Company’s financial statements in future reporting periods.
| 3. | NOTES<br> PAYABLE |
|---|
| 2020 | |||
|---|---|---|---|
| Revolving credit facility with Firstbank Southwest as administrative agent, bearing<br> interest at a weighted average adjusted rate as defined in the agreement (4.86% at December 31, 2021). Principal and any unpaid<br> interest is due November 24, 2024. Collateralized by the Company’s oil and natural gas properties. | 2,870,000 | $ | 1,200,000 |
| Unsecured, forgivable loan from Prosperity Bank as part of the Small Business Administration Paycheck Protection Program (PPP). | - | 300,900 | |
| Small Business Administration Economic Injury Disaster Loan bearing interest of 3.75%. Monthly<br> principal and interest payments of 731 for 348 months starting September 2022 with remaining Principal and interest due September<br> 2050. Loan is secured generally by all assets of the Company. | 149,900 | 149,900 | |
| Other | 2,306 | 14,424 | |
| 3,022,206 | $ | 1,665,224 |
All values are in US Dollars.
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| --- |
Revolving Credit Facility with Firstbank Southwest
In November 2020, the Company entered into a four-year credit agreement with Firstbank Southwest as administrative agent, which provides for a revolving line of credit with an initial borrowing base of $5,000,000. The maximum amount available is subject to semi-annual redeterminations of the borrowing base in April and October of each year until maturity, based on the value of the Company’s proved oil and natural gas reserves in accordance with the lenders’ customary procedures and practices. Both the Company and the lenders have the right to request one additional redetermination each year.
Interest on the outstanding amounts under the credit facility will accrue at an interest rate equal to either (i) the Alternate Base Rate (as defined in the credit agreement) plus an applicable margin (as defined in the credit agreement) that ranges between 1.00% to 2.00% depending on utilization or (ii) the Adjusted LIBO Rate (as defined in the credit agreement) plus an applicable margin that ranges between 4.00% to 5.00% depending on utilization. In the case that an event of default (as defined under the credit agreement) occurs, the outstanding amounts will bear an additional 2.00% interest plus the applicable Alternate Base Rate or Adjusted LIBO Rate and corresponding applicable margin.
As of December 31, 2021, outstanding borrowings were accruing interest at the Alternate Base Rate plus the applicable margin which resulted in an interest rate of 4.86%. A commitment fee of 0.500%, accrues on the average daily amount of the unused portion of the borrowing base and is included as a component of interest expense. The Company generally has the right to make prepayments of the borrowings at any time without penalty or premium. Letter of credit fees will accrue at 0.125% plus the Applicable Margin used to determine the interest rate applicable to borrowings that are based on Adjusted LIBO Rate.
Small Business Administration Loans
In May 2020 Banner applied for and received an unsecured forgivable loan guaranteed by the federal government as part of the Small Business Administration (SBA) Paycheck Protection Program in the amount of $300,900 bearing interest at 1%. Principal and interest of this loan can be fully forgiven based on the Company incurring qualifying expenses during the defined covered period as well as meeting other criteria related to employee retention. The Company applied for forgiveness of this loan in November 2020, which was subsequently approved and forgiven in May 2021.
In September 2020, the Company applied for and received a loan from the federal government as part of the SBA Economic Injury Disaster Loan in the amount of $149,900 bearing interest of 3.75% per annum. Repayment of this loan begins in September 2022 with 348 monthly payments of $731 of principal and interest with a final payment due in September 2050 for all remaining unpaid principal and interest. This loan is secured generally by all assets of the Company.
In January 2021 Banner applied for and received a second unsecured forgivable loan guaranteed by the federal government as part of the Small Business Administration (SBA) Paycheck Protection Program in the amount of $309,775 bearing interest at 1%. Principal and interest of this loan can be fully forgiven based on the Company incurring qualifying expenses during the defined covered period as well as meeting other criteria related to employee retention. The Company applied for forgiveness of this loan in October 2021, which was subsequently approved and forgiven in October 2021.
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| --- | | 4. | EQUITY<br> TRANSACTIONS | | --- | --- |
Fourth Amended Operating Agreement
Effective January 17, 2019, the Company adopted the Fourth Amended Operating Agreement. This operating agreement, among other things, updated sharing ratios and further defined management incentive units as follows:
| a) | Series A Preferred Sharing Ratio: | ||
|---|---|---|---|
| i. | Sage<br> Road: 64.47% | ||
| ii. | Wells<br> Fargo Energy Capital (“WFEC”) 35.53% | ||
| b) | Management Incentive Units (by type): | ||
| i. | Pennant<br> MIU: 5,000 units outstanding | ||
| ii. | 2019<br> MIU: 87,000 units outstanding | ||
| c) | Generally, distribution was allocated as follows: | ||
| i. | Members<br> of Non-Management Group and holders of MIUs at determined sharing ratios based on distribution thresholds; | ||
| ii. | Members<br> holding Series A Preferred Interests in accordance to their Series A Preferred Sharing Ratio; | ||
| iii. | Preference<br> Threshold Group, (Sage Road 97.22% and Pennant Energy, LLC 2.78%) | ||
| iv. | Preference<br> Threshold Group and Pennant MIU at determined sharing ratios based on return on investment. |
In October, 2019, Sage Road purchased the Series A Preferred Interests from WFEC.
Management incentive units were administered under two separate plans by the Company’s Board of Managers. The first plan, the Management Incentive Units Plan includes units awarded to members of Pennant (“Pennant MIU Plan”) and the second plan, the 2018 Management Incentive Pool Plan (“2018 MIU Plan”) were each authorized to issue 100,000 units. The Pennant MIU Plan calls for units to vest at 20% on each of the first four anniversaries of the date of the grant with any unvested units fully vesting on the date of a Vesting Event, as defined. The 2018 MIU Plan calls for units to vest at 25% on each of the first three anniversaries of the date of the grant with any unvested units fully vesting on the date of a Vesting Event, as defined. Additionally, all management incentive units lack voting rights and are subject to transfer restrictions unless waived by the board of managers. Both plans and their corresponding units were cancelled in 2020 as discussed below.
Fifth Amended and Restated Operating Agreement
Effective November 24, 2020, the Company adopted the Fifth Amended and Restated Operating Agreement. This operating agreement amends and restates the previous agreement in its entirety. This agreement, among other things, confirmed the Plan of Division approved by the Company’s board of managers on November 23, 2020, whereby Banner Holdings was formed becoming Banner’s parent company. All existing capital interests and incentive units of Banner were exchanged by Banner’s existing members for an equal amount of capital interests and incentive units in Banner Holdings.
Banner Holdings received 100% of Banner’s capital interests in exchange for assuming all of Banner’s obligations regarding the revolving credit facility formerly held by Wells Fargo Bank, N.A. and subsequently purchased by Sage Road. As a result, Banner eliminated the note payable of $18,892,165, and the related paid-in-kind interest payable of $1,580,162 and recorded a capital contribution of $20,472,327.
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The new operating agreement cancelled all previously issued management incentive units (“MIU’s”), converted all previous Series A Preferred Interests and Capital Interests into new Capital Interests, admitted new members through receipt of capital contributions, and issued new MIU’s under the 2020 Incentive Pool Plan (“2020 MIU Plan”). The 2020 MIU Plan allows a maximum of 100,000 authorized units to be issued, and calls for units to vest at 25% on each of the first three anniversaries of the date of the grant with any unvested units fully vesting on the date of a vesting event, as defined. Additionally, all management incentive units lack voting rights and are subject to transfer restrictions unless waived by the board of managers. A total of 75,000 shares were issued and outstanding at December 31, 2021.
Transactions Between Entities Under Common Control
Effective October 1, 2020, capital contributions were received primarily in the form of oil and gas assets from two commonly controlled companies, K3 Oil, LLC (“K3”) and 2W Energy Partners, LLC (“2W”) and were recorded as an exchange between entities under common control. Both companies created subsidiaries to contain the assets contributed, K3 AssetCo, LLC and 2W AssetCo, LLC. The subsidiaries were contributed to Banner in exchange for Banner capital interests. Sage Road owned approximately, 97%, 92% and 94% of Banner Holdings, K3 and 2W, respectively prior to the transactions. In accordance with accounting guidance, Banner recorded the assets and liabilities contributed by K3 and 2W at historical cost with operations recorded prospectively from the effective contribution date.
The following amounts were recorded on October 1, 2020 as a result of this activity:
K3 AssetCo, LLC:
| Financial Statement Line Item | Amount | |
|---|---|---|
| Oil and gas properties | $ | 3,217,463 |
| Accounts payable | 5,685 | |
| Asset retirement obligations | 797,178 | |
| Members’ equity | 1,914,600 |
2W AssetCo, LLC:
| Financial Statement Line Item | Amount | |
|---|---|---|
| Cash | $ | 20,033 |
| Accrued oil & natural gas sales | 15,770 | |
| Oil and gas properties | 2,448,071 | |
| Accounts payable | 51,185 | |
| Asset retirement obligations | 604,846 | |
| Members’ equity | 1,627,843 |
Banner also paid $500,000 and $200,000 to K3 and 2W, respectively in lieu of assuming certain liabilities.
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| --- |
Capital interest sharing ratios are as follows at December 31, 2021 and 2020:
| Member | Capital Interests<br> <br>Sharing<br> Ratio | ||
|---|---|---|---|
| Banner Holdings, LLC | 65.88 | % | |
| K3 Oil LLC | 13.19 | % | |
| 2W Energy Partners, LLC | 20.41 | % | |
| Michael Richardson | 0.52 | % | |
| 100.00 | % | ||
| 5. | OIL<br> AND NATURAL GAS INFORMATION | ||
| --- | --- |
Costs related to the oil and natural gas activities of the Company, including those related to property acquisitions, were incurred as follows for the years ended December 31, 2021 and 2020:
| 2021 | 2020 | |||
|---|---|---|---|---|
| Acquisition Costs | $ | 2,556 | $ | 49,246 |
| Development Costs | 2,667,622 | 775,837 |
The Company had the following aggregate capitalized costs relating to the Company’s oil and natural gas activities at December 31, 2021 and 2020:
| 2021 | 2020 | |||||
|---|---|---|---|---|---|---|
| Proved oil and gas properties | $ | 115,833,099 | $ | 112,870,506 | ||
| Less Accumulated DD&A and impairment | (84,480,564 | ) | (82,659,080 | ) | ||
| Total oil and gas properties | $ | 31,352,535 | $ | 30,211,426 |
For the years ended December 31, 2021 and 2020, there were no unproved properties excluded from the amortization base.
Depreciation, depletion and amortization expense was $1,821,483 and $1,301,774 for the years ended December 31, 2021 and 2020, respectively.
| 6. | DERIVATIVE<br> TRANSACTIONS |
|---|
The results of operations and operating cash flows are impacted by changes in market prices for oil and natural gas. To mitigate a portion of this exposure, the Company has entered into certain derivative instruments, none of which were elected to be designated as cash flow hedges for accounting purposes. As of December 31, 2021, the Company’s derivative instruments were comprised of fixed price swaps and/or collars.
In fixed-price swap instruments, the Company receives a fixed-price for the hedged commodity and pays a floating market price to the counterparty. The fixed-price payment and the floating-price payment are netted, resulting in a net amount due to or from the counterparty.
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| --- |
Collars contain a fixed floor price (put) and ceiling price (call). If the market price exceeds the call strike price or falls below the put strike price, the Company receives the fixed price and pays the market price. If the market price is between the call and the put strike price, no payments are due from either party.
As of December 31, 2021, the Company had the following hedging transactions with one counterparty consisting of both fixed price swaps and collars.
| Fixed price per Bbl | ||||||||
|---|---|---|---|---|---|---|---|---|
| Period and type of contract | Volume (Bbls) | Swaps | Purchase Puts | Sold Calls | ||||
| 2022 | ||||||||
| Oil swaps | 36,000 | $ | 49.99 | |||||
| Oil collars | 60,000 | $ | 40.00 | $ | 46.02 | |||
| 2023 | ||||||||
| Oil swaps | 12,000 | $ | 59.02 | |||||
| Oil collars | 12,000 | $ | 47.50 | $ | 53.23 | |||
| Period and type of contract | Volume (Mcf) | Swaps | Purchase Puts | Sold Calls | ||||
| --- | --- | --- | --- | --- | --- | --- | --- | |
| 2022 | ||||||||
| Natural gas swaps | 180,000 | $ | 2.96 | |||||
| Natural gas collars | 60,000 | $ | 2.95 | $ | 3.33 | |||
| 2023 | ||||||||
| Natural gas swaps | 60,000 | $ | 2.96 |
These instruments are recorded at fair value and changes in fair value, including settlements, have been reported as risk management income (expense) in the consolidated statements of operations. Settlements on these instruments occur every month. The following table provides a summary of the components (cash and non-cash) of risk management income (expense) for the years ended December 31, 2021 and 2020:
| 2021 | 2020 | |||||
|---|---|---|---|---|---|---|
| Gain (losses) from: | ||||||
| Settlement with counterparty | $ | (2,485,316 | ) | $ | (20,853 | ) |
| Change in fair value (non-cash) | (2,650,465 | ) | (262,950 | ) | ||
| Total risk management income (loss) | $ | (5,135,781 | ) | $ | (283,803 | ) |
| 7. | FAIR<br> VALUE MEASUREMENTS | |||||
| --- | --- |
FASB Accounting Standards Codification Topic 820, Fair Value Measurements and Disclosures (as amended) (“ASC 820”), defines fair value, establishes a framework for measuring fair value, outlines a fair value hierarchy based on inputs used to measure fair value and enhances disclosure requirements for fair value measurements.
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| --- |
Fair value is defined as the price at which an asset could be exchanged in a current transaction between knowledgeable, willing parties. A liability’s fair value is defined as the amount that would be paid to transfer the liability to a new obligor, not the amount that would be paid to settle the liability with the creditor. Where available, fair value is based on observable market prices or parameters or derived from such prices or parameters. Where observable prices or inputs are not available, use of unobservable prices or inputs are used to estimate the current fair value, often using an internal valuation model. These valuation techniques involve some level of management estimation and judgment, the degree of which is dependent on the item being valued.
Assets and liabilities recorded at fair value in the consolidated balance sheets are categorized based upon the level of judgment associated with the inputs used to measure their fair value. Hierarchical levels—defined by ASC 820 and directly related to the amount of subjectivity associated with the inputs to fair valuation of these assets and liabilities—are as follows:
Level I—Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.
Level II—Inputs (other than quoted prices included in Level I) are either directly or indirectly observable for the asset or liability through correlation with market data at the measurement date and for the duration of the instrument’s anticipated life.
Level III—Inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.
The fair value of derivative contracts is measured using Level II inputs and is determined by either market prices on an active market for similar assets or by prices quoted by a broker or other market- corroborated prices, including analysis of formal pricing curves on national exchanges. The Company also utilizes credit information about counterparties, as well as a credit rating factor derived from yields on the debt of peers in the industry, in order to adjust derivative valuations for credit risk.
Additions to asset retirement obligations are measured using primarily Level III inputs. The significant unobservable inputs to this fair value measurement include estimates of plugging and abandonment costs, inflation rate and well life. The inputs are calculated based on historical data as well as current estimated costs. See Note 2 for a roll forward of the asset retirement obligation.
The estimated fair values of assets and liabilities included in the consolidated balance sheets are summarized below as of December 31, 2021 and 2020:
| Fair Value | Fair Value | ||||||
|---|---|---|---|---|---|---|---|
| Oil and natural gas derivative instruments: | 2021 | 2020 | |||||
| Derivative Assets: | Balance sheet location | (Level 2) | (Level 2) | ||||
| Current portion of derivative obligation | $ | - | $ | - | |||
| Non current derivative obligation | - | - | |||||
| Total derivative asset | - | - | |||||
| Derivative Liabilities: | Balance sheet location | ||||||
| - Settlements | Accounts Payable | 208,920 | 33,476 | ||||
| - Open contracts | Current portion of derivative obligation | 2,557,530 | 224,780 | ||||
| Non current derivative obligation | 355,885 | 38,170 | |||||
| Total liability on open contracts | 2,913,415 | 262,950 | |||||
| Net<br> derivative asset (liability) | $ | (3,122,335 | ) | $ | (296,426 | ) |
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| --- | | 8. | COMMITMENTS<br> AND CONTINGENCIES | | --- | --- |
Due to the nature of the oil and natural gas business, the Company is exposed to possible environmental risks. The Company has implemented various policies and procedures to avoid environmental contamination and risks from environmental contamination. The Company conducts periodic reviews to identify changes in its environmental risk profile. These reviews evaluate whether there is a contingent liability, its amount, and the likelihood that the liability will be incurred.
The amount of any potential liability is determined by considering, among other matters, incremental direct costs of any likely remediation. The Company manages its exposure to environmental liabilities on properties to be acquired by identifying existing problems and assessing the potential liability.
Depending on the extent of an identified environmental problem, the Company may exclude a property from the acquisition, require the seller to remediate the property, or agree to assume liability for the remediation of the property. The Company has historically not experienced any significant environmental liability and is not aware of any potential material environmental issues or claims at December 31, 2021.
The Company is periodically subject to lawsuits, investigations and disputes, including matters relating to commercial transactions, environmental and health and safety matters. A liability is recognized for any contingency that is probable of occurrence and reasonably estimable. The Company continually assesses the likelihood of adverse judgements of outcomes in these matters, as well as potential ranges of possible losses (taking into consideration any insurance recoveries), based on a careful analysis of each matter with the assistance of outside legal counsel and, if applicable, other experts. None of these actions are expected to have a material adverse impact on the Company. The Company will continue to monitor the impact that litigation could have on the Company and will assess the impact of future events on the Company’s financial position, results of operations and cash flows. As of December 31, 2021, the Company does not have any litigation liabilities that require an accrual.
| 9. | SUBSEQUENT<br> EVENTS |
|---|
The Company has evaluated subsequent events through June 3, 2022, the date the financial statements were available to be issued. On January 5, 2022 (the Closing Date), the Company closed on the sale of certain oil and gas interests in Kansas, Mississippi, Oklahoma and Texas to U.S. ENERGY CORPORATION (USEG) pursuant to a purchase and sale agreement entered into on October 4, 2021. The Company received $1,000,000 in cash, and 5,668,121 shares of USEG common stock. In addition, USEG assumed the Company’s revolving credit facility of $2,870,000 plus accrued interest, and its Small Business Administration Economic Injury Disaster Loan of $149,900 plus accrued interest, and assumed and novated all of the Company’s current derivative obligation and the Company’s non-current derivative obligation as of December 31, 2021 totaling $2,913,415. The assets sold to USEG represented approximately 75% and 26% of the Company’s total proved PV-10 and proved developed PV-10 value at December 31, 2021, respectively, approximately 68% of the operating revenue and approximately 54% of lease operating costs for the year ended December 31, 2021 and approximately 33% of the asset retirement obligations at December 31, 2021.
On the Closing Date, the Company entered into a transition services agreement (‘TSA’) with USEG for the Company to provide services in connection with the assets sold to USEG, including land and lease administration, accounting, tax and other transition services. The TSA provides for payment of $90,000 per month plus reimbursement for reasonable and documented expenses incurred by the Company, including the cost to maintain insurance. The TSA will remain in place for six months (through June 30, 2022), and is extendable on a month-to-month basis thereafter at USEG’s request.
After the closing date and as a result of the transaction, Sage Road, the Company’s majority member, owned approximately 27% of the stock of USEG and appointed a member to the board of directors of USEG. The Company is currently evaluating the accounting and valuation considerations for the divestiture and expects to report a gain or loss on sale of assets for the periods ending after December 31, 2021.
Subsequent to January 5, 2022 the Company entered into oil swaps totaling 38,000 barrels in 2022 and 18,000 barrels in 2023 all at a price of $81.21 per barrel.
* * * * * *
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Supplemental Oil and Gas Information
(Unaudited)
Oil and Gas Reserve Information
Proved oil and gas reserves are those quantities of crude oil and natural gas which by analysis of geoscience and engineering data, can be estimated with reasonable certainty to be economically producible from a given date forward, from known reservoirs, and under existing economic conditions, operating methods, and government regulations. Estimated proved developed oil and gas reserves can be expected to be recovered through existing wells with existing equipment and operating methods. The Company reports all estimated proved reserves held under production-sharing arrangements utilizing the “economic interest” method.
Proved oil and gas reserves have been prepared in compliance with the Securities and Exchange Commission rules and accounting standards based on the unweighted average prices per barrel of oil and per Mcf of natural gas at the first day of each month in the 12-month period prior to the end of the reporting period.
There are numerous uncertainties inherent in estimating quantities of proved reserves and projecting future rates of production and timing of development expenditures. The reserve data in the following tables only represent estimates and should not be construed as being exact.
The following reserves schedule sets forth the changes in estimated quantities of proved crude oil and natural gas reserves:
| 2021 | 2020 | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Oil | Gas | Oil | Gas | |||||||||
| (bbls) | (mcf) | (bbls) | (mcf) | |||||||||
| Total<br> proved reserves: | ||||||||||||
| Reserve quantities, beginning of year | 5,391,162 | 3,940,905 | 9,457,416 | 594,180 | ||||||||
| Revisions of previous estimates | 2,387,446 | 552,052 | (4,405,958 | ) | (26,705 | ) | ||||||
| Discoveries and extensions | - | - | - | - | ||||||||
| Purchases of minerals in place | - | - | 454,638 | 3,564,661 | ||||||||
| Sale of minerals in place | - | - | (9,413 | ) | - | |||||||
| Production | (147,842 | ) | (577,427 | ) | (105,521 | ) | (191,231 | ) | ||||
| Reserve quantities, end of year | 7,630,766 | 3,915,530 | 5,391,162 | 3,940,905 | ||||||||
| Proved developed reserves | 2,453,948 | 3,915,530 | 2,164,010 | 3,940,905 | ||||||||
| Proved undeveloped reserves | 5,176,818 | - | 3,227,152 | - |
Our proved reserve quantities at December 31, 2021 increased significantly as compared with December 31, 2020 principally as a result of increases in the average prices per barrel of oil and per Mcf of natural gas.
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Costs Incurred in Oil and Natural Gas Property Acquisitions and Development Activities
Costs incurred by the Company in crude oil and natural gas acquisitions and development are presented below:
| 2021 | 2020 | |||
|---|---|---|---|---|
| (in<br> thousands) | ||||
| Proved property acquisition | $ | - | $ | 3,592 |
| Unproved property acquisition | - | - | ||
| Development | 2,668 | 776 | ||
| Exploration | - | - | ||
| Total | $ | 2,668 | $ | 4,368 |
Capitalized Costs
The following table sets forth the capitalized costs and associated accumulated depreciation, depletion, and amortization relating to the Company’s oil and gas acquisition, exploration, and development activities:
| 2021 | 2020 | |||||
|---|---|---|---|---|---|---|
| (in thousands) | ||||||
| Oil and Natural Gas Prope rties: | ||||||
| Proved properties in full cost pool | $ | 115,833 | $ | 112,871 | ||
| Unproved properties | - | - | ||||
| 115,833 | 112,871 | |||||
| Less accumulated depletion and ceiling test impairment | (84,480 | ) | (82,660 | ) | ||
| Net capitalized costs | $ | 31,353 | $ | 30,211 |
FutureNet Cash Flows
Future cash inflows as of December 31, 2021 and 2020 were calculated using an unweighted arithmetic average prices per barrel of oil and per Mcf of natural gas at the first day of each month in the 12-month period prior to the end of the reporting period, except where prices are defined by contractual arrangements. Operating costs, production and ad valorem taxes and future development costs are based on current costs with no escalation.
The following table sets forth unaudited information concerning future net cash flows for proved oil and gas reserves. The standardized measure presented does not include the effects of income taxes as the Company is taxed as a partnership and not subject to federal income taxes. This information does not purport to present the fair market value of the Company’s oil and gas assets, but does present a standardized disclosure concerning possible future net cash flows that would result under the assumptions used.
| 20 |
| --- | | | 2021 | | | 2020 | | | | --- | --- | --- | --- | --- | --- | --- | | | | (in<br> thousands) | | | | | | Future cash inflows | $ | 461,888 | | $ | 195,780 | | | Future cash outflows: | | | | | | | | Production costs | | (225,705 | ) | | (107,110 | ) | | Development costs | | (35,115 | ) | | (21,281 | ) | | Future net cash flows | | 201,068 | | | 67,389 | | | 10% annual discount factor | | (105,000 | ) | | (41,333 | ) | | Standardized measure of discounted future net cash flows | $ | 96,068 | | $ | 26,056 | |
The following table sets forth the principal sources of change in the discounted future net cash flows:
| 2021 | 2020 | |||||
|---|---|---|---|---|---|---|
| (in<br> thousands) | ||||||
| Standardized measure, beginning of year | $ | 26,056 | $ | 68,855 | ||
| Sales of oil and natural gas, net of production costs | (4,712 | ) | (272 | ) | ||
| Net changes in prices and production costs | 39,760 | (48,189 | ) | |||
| Changes in estimated future development costs | (13,833 | ) | 25,352 | |||
| Extensions and discoveries | - | - | ||||
| Purchases of minerals in place | - | 4,588 | ||||
| Sale of minerals in place | - | (163 | ) | |||
| Revisions in previous quantity estimates | 33,632 | (31,777 | ) | |||
| Previously estimated development costs incurred | 6,428 | 776 | ||||
| Accretion of discount | 3,274 | 6,886 | ||||
| Changes in timing and other | 5,463 | - | ||||
| Standardized measure, end of year | $ | 96,068 | $ | 26,056 |
| 21 |
| --- |
Exhibit99.3
WoodfordPetroleum LLC
Financial Statements
December 31, 2021
CO N T E N T S
| Page | |
|---|---|
| Independent Auditor’s Report | 1 |
| Financial<br> Statements | |
| Balance Sheets | 3 |
| Statements of Operations | 4 |
| Statements of Changes in Members’ Equity | 5 |
| Statements of Cash Flows | 6 |
| Notes to Financial Statements | 7 |
Independent Auditor’s Report
To the Board of Managers and Members of
Woodford Petroleum LLC
Opinion
We have audited the financial statements of Woodford Petroleum LLC (the Company), which comprise the balance sheets as of December 31, 2021 and 2020, and the related statements of operations, changes in members’ equity, and cash flows for each of the years then ended, and the related notes to the financial statements.
In our opinion, the accompanying financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.
Basis for Opinion
We conducted our audits in accordance with auditing standards generally accepted in the United States of America (GAAS). Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Statements section of our report. We are required to be independent of the Company, and to meet our other ethical responsibilities, in accordance with the relevant ethical requirements relating to our audits. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Emphasis of a Matter – Significant Subsequent Event
As discussed in Note 1 to the financial statements, in January 2022, the company sold all its assets and intends to file for a certificate of dissolution with the Secretary of State of the State of Delaware. The Company intends to return capital to its members, subject to an analysis of the net cash available for distribution to its members and the amount of net cash that must be retained to satisfy the Company’s ongoing liabilities during the winding-up process. Our opinion is not modified with respect to this matter.
Responsibilities of Management for the Financial Statements
Management is responsible for the preparation and fair presentation of the financial statements in accordance with accounting principles generally accepted in the United States of America, and for the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the financial statements, management is required to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern for one year after the date that the financial statements are issued (or when applicable, one year after the date that the financial statements are available to be issued).
Auditor’s Responsibilities for the Audit of the Financial Statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance but is not absolute assurance and therefore is not a guarantee that an audit conducted in accordance with GAAS will always detect a material misstatement when it exists. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Misstatements are considered material if there is a substantial likelihood that, individually or in the aggregate, they would influence the judgment made by a reasonable user based on the financial statements.
| Weaver<br>and Tidwell, L.L.P. | |
|---|---|
| 24<br> Greenway Plaza, Suite 1800 | Houston, Texas 77046 |
| Main:<br> 713.850.8787 | |
| CPAs AND ADVISORS | WEAVER.COM |
| 1 |
| --- |
The Board of Managers and Members of
Woodford Petroleum LLC
In performing an audit in accordance with GAAS, we:
| ● | Exercise<br> professional judgment and maintain professional skepticism throughout the audit. |
|---|---|
| ● | Identify<br> and assess the risks of material misstatement of the financial statements, whether due to fraud or error, and design and perform<br> audit procedures responsive to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and<br> disclosures in the financial statements. |
| ● | Obtain<br> an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances,<br> but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control. Accordingly, no such<br> opinion is expressed. |
| ● | Evaluate<br> the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as<br> well as evaluate the overall presentation of the financial statements. |
| ● | Conclude<br> whether, in our judgment, there are conditions or events, considered in the aggregate, that raise substantial doubt about the Company’s<br> ability to continue as a going concern for a reasonable period of time. |
We are required to communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit, significant audit findings, and certain internal control–related matters that we identified during the audit.
WEAVER AND TIDWELL, L.L.P.
Houston, Texas
June 10, 2022
| 2 |
| --- |
FinancialStatements
WoodfordPetroleum LLC
Balance Sheets
December 31, 2021 and 2020
| ` | 2021 | 2020 | ||
|---|---|---|---|---|
| ASSETS | ||||
| CURRENT ASSETS | ||||
| Cash and cash equivalents | $ | 45,128 | $ | 1,969 |
| Accounts receivable - oil and gas sales | 49,989 | 27,586 | ||
| Total current assets | 95,117 | 29,555 | ||
| OIL AND GAS PROPERTIES, full cost method, net | - | 1,817,830 | ||
| ASSETS HELD FOR SALE | 1,408,557 | - | ||
| TOTAL ASSETS | $ | 1,503,674 | $ | 1,847,385 |
| LIABILITIES AND MEMBERS’ EQUITY | ||||
| CURRENT LIABILITIES | ||||
| Accounts payable | $ | 49,536 | $ | 11,912 |
| Accounts payable - related party | 5,487 | 118,248 | ||
| Liabilities held for sale - current | 10,747 | - | ||
| Note payable - current | 2,098 | - | ||
| Total current liabilities | 67,868 | 130,160 | ||
| NON-CURRENT LIABILITIES | ||||
| Note payable | 148,802 | 150,900 | ||
| Liabilities held for sale - non-current | 68,420 | - | ||
| Asset retirement obligations | - | 75,925 | ||
| Total non-current liabilities | 217,222 | 226,825 | ||
| Total liabilities | 285,090 | 356,985 | ||
| MEMBERS’ EQUITY | 1,218,584 | 1,490,400 | ||
| TOTAL LIABILITIES AND MEMBERS’ EQUITY | $ | 1,503,674 | $ | 1,847,385 |
The Notes to Financial Statements
are an integral part of these statements.
| 3 |
| --- |
WoodfordPetroleum LLC
Statements of Operations
Years Ended December 31, 2021 and 2020
| 2021 | 2020 | |||||
|---|---|---|---|---|---|---|
| REVENUES | ||||||
| Oil and gas sales | $ | 499,718 | $ | 400,562 | ||
| OPERATING EXPENSES<br> <br>Lease operating | 170,639 | 130,622 | ||||
| Production tax | 30,534 | 25,314 | ||||
| General and administrative | 307,694 | 640,509 | ||||
| Accretion | 3,242 | 3,109 | ||||
| Depreciation, depletion and amortization | 223,748 | 245,521 | ||||
| Impairment | 192,923 | 907,235 | ||||
| Total<br> expenses | 928,780 | 1,952,310 | ||||
| Loss<br> from operations | (429,062 | ) | (1,551,748 | ) | ||
| OTHER INCOME | ||||||
| Interest income | 14 | 206 | ||||
| NET LOSS | $ | (429,048 | ) | $ | (1,551,542 | ) |
The Notes to Financial Statements
are an integral part of these statements.
| 4 |
| --- |
WoodfordPetroleum LLC
Statements of Changes in Members’ Equity
Years Ended December 31, 2021 and 2020
| BALANCE, January 1, 2020 | $ | 2,339,991 | |
|---|---|---|---|
| Members’ contributions | 701,951 | ||
| Net loss | (1,551,542 | ) | |
| BALANCE, December 31, 2020 | 1,490,400 | ||
| Members’ contributions | 157,232 | ||
| Net loss | (429,048 | ) | |
| BALANCE, December 31, 2021 | $ | 1,218,584 |
The Notes to Financial Statements
are an integral part of these statements.
| 5 |
| --- |
WoodfordPetroleum LLC
Statements of Cash Flows
Years Ended December 31, 2021 and 2020
| 2021 | 2020 | |||||
|---|---|---|---|---|---|---|
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||
| Net loss | $ | (429,048 | ) | $ | (1,551,542 | ) |
| Adjustments to reconcile net loss to net cash used in operating activities | ||||||
| Depreciation, depletion and amortization | 223,748 | 245,521 | ||||
| Impairment | 192,923 | 907,235 | ||||
| Accretion expense | 3,242 | 3,109 | ||||
| Change in operating assets and liabilities | ||||||
| Accounts receivable - oil and gas sales | (22,403 | ) | 31,554 | |||
| Settlement of asset retirement obligations | - | (14,918 | ) | |||
| Accounts payable | 37,624 | 221 | ||||
| Accounts payable - related party | (112,761 | ) | (1,007,926 | ) | ||
| Net cash used in operating activities | (106,675 | ) | (1,386,746 | ) | ||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||
| Capital expenditures | (7,398 | ) | (102,812 | ) | ||
| Net cash used in investing activities | (7,398 | ) | (102,812 | ) | ||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||
| Proceeds from Note payable | - | 150,900 | ||||
| Members’ contributions | 157,232 | 701,951 | ||||
| Net cash provided by financing activities | 157,232 | 852,851 | ||||
| Net increase (decrease) in cash and cash equivalents | 43,159 | (636,707 | ) | |||
| CASH AND CASH EQUIVALENTS, beginning of year | 1,969 | 638,676 | ||||
| CASH AND CASH EQUIVALENTS, end of year | $ | 45,128 | $ | 1,969 |
The Notes to Financial Statements
are an integral part of these statements.
| 6 |
| --- |
WoodfordPetroleum LLC
Notes to Financial Statements
Note
- Organization and Business
Woodford Petroleum LLC (the Company) is a limited liability company organized on February 3, 2017 in the State of Delaware. The Company is an independent oil and natural gas company engaged in acquisition, exploration, production, and development of reserves in the Mid-Continent region, including Oklahoma, Colorado, Kansas and Texas. The Company’s strategy is to target areas near existing production that have not been produced.
The rights and obligations of the equity holders of the Company (the Members) are governed by the Limited Liability Company Agreement of Woodford Petroleum LLC (the Agreement). According to the Agreement, Members shall not be liable for the debts, obligations, or liabilities of the Company.
The Company has two classes of member units, Class A and Class B. Class A Members have the preferential position in the distributions of available cash and the authorization to appoint the Members of the Board of Managers under the terms of the Agreement. At December 31, 2021, 7,851 Class A units and 1,000 Class B units were issued. In accordance with the Agreement, Class A Members have committed to contribute up to $20,700,000 to the Company. Capital calls through December 31, 2021 from Class A Members totaled $8,008,086.
According to the Agreement, the Company shall dissolve and cease to exist upon the first to occur of the following: (a) election of the Board of Managers to dissolve the Company, (b) the occurrence of any other event causing dissolution of the Company, or (c) December 31, 2022 (or later date as approved by a majority vote of the Board of Managers).
The Company operates one reportable segment engaged in the development and production of oil and natural gas properties, and all of its operations are located in the United States. In order to maximize the Members’ value, the Company intends to divest all of its remaining oil and gas assets. As of December 31, 2021, the remaining oil and natural gas properties and their related asset retirement obligations, which the Company intends to divest or plug and abandon in 2022, were reported as Assets and Liabilities held for sale.
In 2022, the Company intends to file a Certificate of Dissolution with the Secretary of State of the State of Delaware. The Company intends to return capital to its members, subject to an analysis of the net cash available for distribution to its members and the amount of net cash that must be retained to satisfy the Company’s ongoing liabilities during the winding-up process.
Note 2. Summary of Significant Accounting Policies
The Company maintains its accounts on the accrual method of accounting in accordance with accounting principles generally accepted in the United States of America (GAAP). Accounting principles followed and the methods of applying those principles which materially affect the determination of financial position, results of operations, and cash flows are summarized below.
Management Estimates
The preparation of the Company’s financial statements in conformity with accounting principles generally accepted in the United States of America requires the Company’s management to make estimates and assumptions that affect the amounts reported in these financial statements and accompanying notes. Actual results could differ from those estimates. Significant assumptions are required in the valuation of proved oil and gas reserves which, as described below, may affect the amount at which oil and gas properties are recorded.
Estimation of asset retirement obligations also requires significant assumptions. It is possible these estimates could be revised in the near term and such revisions could be material.
Cash and Cash Equivalents
The Company considers all highly liquid instruments with an original maturity of three months or less at the time of issuance to be cash equivalents.
| 7 |
| --- |
WoodfordPetroleum LLC
Notes to Financial Statements
Accounts Receivable – Oil and Gas Sales
Accounts receivable – oil and gas sales include amounts due from oil and gas purchasers. Accounts receivable include accrued revenues due under normal trade terms, generally requiring payment within 30 – 60 days of production. No interest was charged in 2021 and 2020 on past-due balances. The Company’s allowance for doubtful accounts is determined based upon reviews of individual accounts, historical losses, existing economic conditions and other pertinent factors. The Company did not provide an allowance for doubtful accounts at December 31, 2021 and 2020, based upon management’s expectation that all receivables will be collected.
Oil and Gas Properties
The Company follows the full cost method of accounting for oil and gas properties. Accordingly, all costs associated with acquisition, exploration and development of oil and gas reserves, including costs directly related to overhead and related asset retirement obligations, are capitalized. Costs incurred to maintain producing wells and related equipment and lease and well operating costs are charged to expense as incurred.
All capitalized costs of oil and gas properties, including the estimated future costs to develop proved reserves are amortized on the unit-of-production method using estimates of proved reserves. Investments in unevaluated properties and major development projects are not amortized until proved reserves associated with the projects can be determined or until impairment occurs. If the results of an assessment indicate that the unevaluated properties are impaired, the related costs are added to the capitalized costs to be amortized.
Unevaluated oil and gas properties consist principally of the Company’s acquisition costs in undeveloped leases net of transfers to depletable oil and gas properties. When leases are developed, expire, or are abandoned, the related costs are transferred from unevaluated oil and gas properties to depletable oil and gas properties. Additionally, the Company reviews the carrying costs of unevaluated properties for the purpose of determining probable future lease expirations and abandonments, and prospective discounted future economic benefit attributable to the leases. The Company records an allowance for impairment based on the review with the corresponding charge being made to depletable oil and gas properties.
In addition, the capitalized costs are subject to a “ceiling test,” which limits such costs to the aggregate of the estimated present value (discounted at ten percent) of future net revenues from proved reserves, using the first of the month un-weighted average pricing for the year, based on current operating conditions, plus the fair market value of unevaluated properties. The Company recognized an impairment expense of $192,923 and $907,235 during the years ended December 31, 2021 and 2020, respectively.
Sales of proved and unproved properties are accounted for as adjustments of capitalized costs with no gain or loss recognized, unless such adjustments would significantly alter the relationship between capitalized costs and proved reserves, in which case the gain or loss is recognized in the operating results of the Company. Abandoned properties are accounted for as adjustments of capitalized costs with no loss recognized.
| 8 |
| --- |
WoodfordPetroleum LLC
Notes to Financial Statements
Asset Retirement Obligations
The Company accounts for its asset retirement obligations in accordance with FASB Accounting Standards Codification (ASC) Topic 410, AssetRetirement and Environmental Obligations (ASC Topic 410). ASC Topic 410 establishes accounting requirements for retirement obligations associated with tangible long-lived assets, including: 1) the timing of liability recognition, 2) initial measurement of the liability, 3) allocation of asset retirement costs to expense, 4) subsequent measurement of the liability, and 5) related financial statement disclosure. ASC Topic 410 requires that an asset retirement cost be capitalized as part of the cost of the related long-lived asset and subsequently allocated to expense using a systematic and rational method.
The Company’s asset retirement obligations relate to future plugging and abandonment costs of its oil and gas properties. Under the provisions of ASC Topic 410, the fair value of a liability for an asset retirement obligation is recorded in the period in which it is incurred with a corresponding increase in the carrying amount of the related long-lived asset. The liability is accreted each period, and the capitalized cost is depreciated over the useful life of the related asset. If the liability is settled for an amount other than the recorded amount, the difference is recorded as an adjustment to the full cost pool.
Revenue Recognition
The Company’s revenues are primarily derived from its interests in the sale of oil and natural gas production. The Company recognizes revenue from its interests in the sales of oil and natural gas in the period that its performance obligations are satisfied. Performance obligations are satisfied when the customer obtains control of product, when the Company has no further obligations to perform related to the sale, when the transaction price has been determined and when collectability is probable. The sales of oil and gas are made under contracts which the related-party operators of the wells have negotiated with customers, which typically include variable consideration that is based on pricing tied to local indices and volumes delivered in the current month. The Company receives payment from the sale of oil and natural gas production from one to two months after delivery. At the end of each month when the performance obligation is satisfied, the variable consideration can be reasonably estimated and amounts due from customers are accrued in accounts receivable, net in the balance sheets. 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 insignificant. Accordingly, the variable consideration is not constrained.
The Company’s oil is typically sold at delivery points under contract terms that are common in the industry. The Company’s natural gas produced is delivered to various purchasers at agreed upon delivery points under a limited number of contract types that are also common in the industry. Regardless of the contract type, the terms of these contracts compensate the well operators for the value of the oil and gas at specified prices, and then the well operators will remit payment to the Company for its share in the value of the oil and gas.
| 9 |
| --- |
WoodfordPetroleum LLC
Notes to Financial Statements
The Company’s disaggregated revenue has two revenue sources which are oil sales and natural gas sales and only operates in one geographic area.
| 2021 | 2020 | |||
|---|---|---|---|---|
| Oil sales | $ | 498,389 | $ | 396,062 |
| Gas sales | 1,329 | 4,500 | ||
| $ | 499,718 | $ | 400,562 |
IncomeTaxes
The Company is organized as a Delaware limited liability company and is treated as a flow-through entity for federal income tax purposes. As a result, the net taxable income or loss of the Company and any related tax credits, for federal income tax purposes, are deemed to pass to the members of the Company even though such net taxable income or tax credits may not have actually been distributed. Accordingly, no tax provision has been made in the financial statements of the Company since the federal income tax is an obligation of the members.
The Company follows the provisions of FASB ASC Topic 740, Income Taxes (ASC Topic 740), related to accounting for uncertainties in income taxes. ASC Topic 740 provides the accounting for uncertainties in income taxes by prescribing a minimum recognition threshold that a tax position is required to meet before being recognized in the financial statements. ASC Topic 740 requires that the Company recognize in its financial statements the financial effects of a tax position, if that position is more likely than not of being sustained upon examination, including resolution of any appeals or litigation processes, based upon the technical merits of the position.
ASC Topic 740 also provides guidance on measurement, classification, interest and penalties and disclosure. Tax positions taken related to the Company’s pass-through status and those taken in determining its state income tax liability, including deductibility of expenses, have been reviewed and management is of the opinion that material positions taken by the Company would more likely than not be sustained upon examination. Accordingly, the Company has not recorded an income tax liability for uncertain tax positions.
The Company did not incur any penalties or interest related to its state tax returns during the years ended December 31, 2021 and 2020.
Under the new centralized partnership audit rules effective for tax years beginning after 2018, the Internal Revenue Service (IRS) assesses and collects underpayments of tax from the Company instead of from each member. The Company may be able to pass the adjustments through to its members by making a push-out election or, if eligible, by electing out of the centralized partnership audit rules.
The collection of tax from the Company is only an administrative convenience for the IRS to collect any underpayment of income taxes including interest and penalties. Income taxes on Member income, regardless of who pays the tax or when the tax is paid, is attributed to the members. Any payment made by the Company as a result of an IRS examination will be treated as a distribution from the Company to the members in the financial statements.
Significant Concentrations
At times, the Company maintains its cash and cash equivalents in bank deposit accounts which, may exceed federally insured limits. The Company has not experienced any losses with respect to the related risks to cash and cash equivalents and does not believe its exposure to such risk to be more than nominal.
The Company had revenues from two and three purchasers which accounted for 100% of oil and gas revenues for the years ended December 31, 2021 and 2020, respectively. This concentration of customers may impact the Company’s overall business risk, either positively or negatively, in that these entities may be similarly affected by changes in economic or other conditions. The Company believes this risk is mitigated by the size, reputation and nature of its purchasers. The Company generates 100% of its revenues from oil and gas production in Oklahoma.
| 10 |
| --- |
WoodfordPetroleum LLC
Notes to Financial Statements
Note 3. Oil and Gas Properties - Assets Held For Sale
Assets held for sale and oil and gas properties consist of the following at December 31, 2021 and 2020, respectively:
| 2021 | 2020 | |||||
|---|---|---|---|---|---|---|
| Proved properties | $ | 5,423,391 | $ | 5,415,992 | ||
| Accumulated depreciation, depletion, amortization and impairment | (4,014,834 | ) | (3,598,162 | ) | ||
| Assets Held for sale / Oil and gas properties, net | $ | 1,408,557 | $ | 1,817,830 |
Depreciation, depletion and amortization expense was $223,748 and $245,521 during the years ended December 31, 2021 and 2020, respectively.
Note 4. Long-term Debt
On May 22, 2020, the Company entered into a note payable agreement for $150,900, with the United States Federal Government under the Economic Injury Disaster Loan (EIDL) administered by the United States Small Business Administration (SBA). The note payable bears interest of 3.75% per year and is payable in monthly payments beginning a year from the effective date, which was later extended for an additional year. As such, monthly payments will begin in May of 2022. The note matures on May 22, 2050.
Note 5. Asset Retirement Obligations - Liabilities Held For Sale
The following is a reconciliation of the asset retirement obligations at December 31, 2021 and 2020, respectively which are included in liabilities held for sale:
| 2021 | 2020 | ||||
|---|---|---|---|---|---|
| Balance, beginning of year | $ | 75,925 | $ | 87,734 | |
| Liabilities settled | - | (14,918 | ) | ||
| Accretion expense | 3,242 | 3,109 | |||
| Balance, end of year | $ | 79,167 | $ | 75,925 |
The Company has recorded $10,747 as current in the balance sheet as of December 31, 2021 based upon the expected timing of the related retirement activities. The Company had no current amount as of December 31, 2020.
Note 6. Related Party Transactions
One of the Class A members of the Company holds 100% of the ownership in K3 Oil and Gas Operating Company (K3 Operating). K3 Operating is the operator for the Company, and pays the majority of expenditures, including capital and operating expenses, on the Company’s behalf. The Company then reimburses K3 Operating for its portion of the expenditures. As of December 31, 2021 and 2020, the Company had a payable to K3 Operating related to these expenditures in the amounts of $5,487 and $118,248, respectively. Substantially all of the general and administrative expenses were incurred by and charged to the Company by K3 Operating.
| 11 |
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WoodfordPetroleum LLC
Notes to Financial Statements
Note 7. Fair Value Measurements
FASB ASC Topic 820, Fair Value Measurements and Disclosures (ASC Topic 820) defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles and enhances disclosures about fair value measurement. The three-level fair value hierarchy for disclosure of fair value measurements defined by ASC Topic 820 is as follows:
| Level<br> 1 | Unadjusted,<br> quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. An<br> active market is defined as a market where transactions for the financial instrument occur with sufficient frequency and volume to<br> provide pricing information on an ongoing basis. |
|---|---|
| Level<br> 2 | Inputs,<br> other than quoted prices within Level 1, that are either directly or indirectly observable for the asset or liability through correlation<br> with market data at the measurement date and for the duration of the instrument’s anticipated life. |
| Level<br> 3 | Prices<br> or valuations that require unobservable inputs that are both significant to the fair value measurement and unobservable. Valuation<br> under Level 3 generally involves a significant degree of judgment from management. |
A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.
Fair Value on a Nonrecurring Basis
AssetRetirement Obligations
The asset retirement obligations estimates are derived from historical costs and management’s expectation of future cost environments and, therefore, the Company has designated these liabilities as Level 3 measurements. The significant inputs to this fair value measurement include estimates of plugging, abandonment and remediation costs, well life, inflation and credit-adjusted risk free rate. See Note 5 for a reconciliation of the beginning and ending balances of the liability for the Company’s asset retirement obligations.
Note 8. Members’ Equity Accounts
Capital contributions will be based on capital calls, to be determined by the Board of Managers. Contribution requests to the Members will be based on their commitment and any items in nature of income or gain will be applied to the Members’ capital accounts in accordance with their earnings interest, as defined by the Agreement.
The Company has two classes of members’ equity; Class A Units and Class B Units. Class A Units have all the rights, privileges, preferences and obligations provided for in the Agreement, which are consistent with an ordinary equity ownership interest. Class B Units, otherwise referred to as management incentive units (MIUs), do not have voting rights. Class B unit holders will only be entitled to share in distributions and allocations if and to the extent applicable thresholds have been met. Class B Units are discussed further in Note 9.
| 12 |
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WoodfordPetroleum LLC
Notes to Financial Statements
Note 9. Management Incentive Units
The Company has a Management Incentive Plan (the Incentive Plan) to award management incentive units (in the form of Class B units) to key employees and independent contractors of the Company. The Incentive Plan is administered by the Company’s Board of Managers (the Board) and is subject to termination, at any time, as determined by the Board. The Agreement states that these Class B units are Profits Interests and are subject to vesting and achievement of a performance hurdle.
The MIUs fall under the guidance of FASB ASC topic 718, Compensation – Stock Compensation (ASC Topic 718). ASC Topic 718 addresses the accounting for share-based payment transactions in which a company receives goods or services in exchange for: (a) equity instruments of the company, or (b) liabilities that are based on the fair value of the company’s equity instruments or that may be settled by the issuance of such equity instruments. ASC Topic 718 focuses primarily on accounting for transactions in which a company obtains employee services in share-based payment transactions and generally requires that such transactions be accounted for using a fair value based method.
The Company was required to implement the provisions of ASC Topic 718 when the Board of Managers issued Management Incentive Interests to certain key employees of Management. Management Incentive Interests entitle holders to the contractual distribution of profits of the Company if certain targeted investment returns are achieved, with no investment required to become a Management Incentive Interest Member.
The Management Incentive Interests will be accounted for consistent with the requirements of ASC Topic 718, due to the payouts being consistent with equity ownership of the Company based on the substantive terms of the instruments. The Management Incentive Interests represent non-voting equity interests and do not have an exercise price. Members holding these interests shall be subject in all respects to the LLC Agreement, including provisions relating to the distribution of such profits, information rights with respect to the Company, competition and confidentiality.
Based on the relevant terms that define the Management Incentive Interests, these instruments should be treated as an equity ownership interest of the Company. An immaterial value was attributed to and no expense was recognized on these Units during the year of issuance. A total of 1,000 Management Incentive Interests were issued during the years ended December 31, 2021 or 2020.
Note 10. Commitments and Contingencies
Contingencies
In the course of its business affairs and operations, the Company is subject to possible loss contingencies arising from third party litigation, federal, state and local environmental and health and safety laws and regulations. There are no matters which, in the opinion of management, will have a material adverse effect on the financial position, results of operations or cash flows of the Company.
Environmental Issues
The Company’s operations are subject to risks normally incident to the exploration for and the production of oil and gas, including blowouts, fires, and environmental risks such as oil spills or gas leaks that could expose the Company to liabilities associated with these risks. In the Company’s acquisition of existing or previously drilled well bores, the Company may not be aware of what environmental safeguards were taken at the time such wells were drilled or during such time the wells were operated. The Company maintains comprehensive insurance coverage that it believes is adequate to mitigate the risk of any adverse financial effects associated with these risks.
| 13 |
| --- |
WoodfordPetroleum LLC
Notes to Financial Statements
However, should it be determined that a liability exists with respect to any environmental cleanup or restoration, the liability to cure such a violation could still fall upon the Company. No claim has been made, nor is the Company aware of the assertion of any liability which the Company may have, as it relates to any environmental cleanup, restoration or the violation of any rules or regulations relating thereto. In addition, the Company is subject to extensive regulation at the federal and state levels that may materially affect its operations.
Note 11. Subsequent Events
The Company evaluates events and transactions occurring after the balance sheet date but before the financial statements are available to be issued. The Company evaluated such events and transactions through June 10, 2022, the date the financial statements were available for issuance and determined the following subsequent events that require recognition or disclosure in the financial statements:
| ● | Due<br> to the recent events in Europe and around the globe, the Company has taken a number of measures to monitor and mitigate the effects<br> of U.S. sanctions, and any other global actions that could have an impact on the Company’s operations. At this stage, any negative<br> impact on the Company’s business and results has not been significant and based on management’s<br> experience to date the Company expects this to remain the case. |
|---|---|
| ● | In<br> January 2022, the Company sold all assets to US Energy Corporation in exchange for shares of common stock in<br> US Energy Corporation. |
Note 12. Supplemental Information on Oil and Gas Producing Activities (Unaudited)
Proved oil and gas reserves are those quantities of crude oil and natural gas which by analysis of geoscience and engineering data, can be estimated with reasonable certainty to be economically producible from a given date forward, from known reservoirs, and under existing economic conditions, operating methods, and government regulations. Estimated proved developed oil and gas reserves can be expected to be recovered through existing wells with existing equipment and operating methods. The Company reports all estimated proved reserves held under production-sharing arrangements utilizing the “economic interest” method.
Proved oil and gas reserves have been estimated by in-house petroleum engineers. These reserve estimates have been prepared in compliance with the Securities and Exchange Commission rules and accounting standards based on the unweighted average prices per barrel of oil and per Mcf of natural gas at the first day of each month in the 12-month period prior to the end of the reporting period.
There are numerous uncertainties inherent in estimating quantities of proved reserves and projecting future rates of production and timing of development expenditures. The reserve data in the following tables only represent estimates and should not be construed as being exact.
| 14 |
| --- |
WoodfordPetroleum LLC
Notes to Financial Statements
The following reserves schedule sets forth the changes in estimated quantities of proved crude oil and natural gas reserves:
| 2021 | 2020 | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Oil | Gas | Oil | Gas | |||||||||||||||
| bbl | mcf | BOE | bbl | mcf | BOE | |||||||||||||
| Total proved reserves: | ||||||||||||||||||
| Reserve quantities, beginning of year | 154,160 | 42,610 | 161,262 | 163,890 | 51,020 | 172,393 | ||||||||||||
| Revisions of previous estimates | (51,436 | ) | (12,398 | ) | (53,502 | ) | 1,156 | (6,649 | ) | 48 | ||||||||
| Discoveries and extensions | - | - | - | - | ||||||||||||||
| Purchases of minerals in place | - | - | - | - | - | - | ||||||||||||
| Sale of minerals in place | - | - | - | - | - | - | ||||||||||||
| Production | (48,934 | ) | (16,822 | ) | (51,738 | ) | (10,886 | ) | (1,761 | ) | (11,180 | ) | ||||||
| Reserve quantities, end of year | 53,790 | 13,390 | 56,022 | 154,160 | 42,610 | 161,262 | ||||||||||||
| Proved developed reserves, end of year | 53,790 | 13,390 | 56,022 | 70,650 | 3,250 | 71,192 | ||||||||||||
| Proved undeveloped reserves, end of year | - | - | - | 83,510 | 39,360 | 90,070 |
Costs Incurred in Oil and Natural Gas Property Acquisitions and Development Activities
The Company did not incur any costs related to oil and natural gas acquisitions and development for the years ended December 31, 2021 and 2020:
| 2021 | 2020 | |||
|---|---|---|---|---|
| Proved property acquisition | $ | - | $ | - |
| Unproved property acquisition | - | - | ||
| Development | - | - | ||
| Exploration | - | - | ||
| Total | $ | - | $ | - |
Capitalized Costs
The following table sets forth the capitalized costs and associated accumulated depreciation, depletion, and amortization relating to the Company’s oil and gas acquisition, exploration, and development activities:
| 2021 | 2020 | |||||
|---|---|---|---|---|---|---|
| Proved properties | $ | 5,423,391 | $ | 5,415,992 | ||
| Accumulated depreciation, depletion, amortization and impairment | (4,014,834 | ) | (3,598,162 | ) | ||
| Assets Held for sale / Oil and gas properties, net | $ | 1,408,557 | $ | 1,817,830 |
| 15 |
| --- |
WoodfordPetroleum LLC
Notes to Financial Statements
Future Net Cash Flows
Future cash inflows as of December 31, 2021 and 2020 were calculated using an unweighted arithmetic average prices per barrel of oil and per Mcf of natural gas at the first day of each month in the 12-month period prior to the end of the reporting period, except where prices are defined by contractual arrangements. Operating costs, production and ad valorem taxes and future development costs are based on current costs with no escalation.
The following table sets forth unaudited information concerning future net cash flows for proved oil and gas reserves. The standardized measure presented does not include the effects of income taxes as the Company is taxed as a partnership and not subject to federal income taxes. This information does not purport to present the fair market value of the Company’s oil and gas assets, but does present a standardized disclosure concerning possible future net cash flows that would result under the assumptions used.
| 2021 | 2020 | |||||
|---|---|---|---|---|---|---|
| Future cash inflows | $ | 3,395,290 | $ | 6,022,980 | ||
| Future cash outflows: | ||||||
| Production costs | (1,519,110 | ) | (2,618,680 | ) | ||
| Development costs | (117,500 | ) | (816,670 | ) | ||
| Income taxes | - | - | ||||
| Future net cash flows | 1,758,680 | 2,587,630 | ||||
| 10% annual discount factor | (429,290 | ) | (769,800 | ) | ||
| Standardized measure of discounted future net cash flows | $ | 1,329,390 | $ | 1,817,830 |
The following table sets forth the principal sources of change in the discounted future net cash flows:
| 2021 | 2020 | |||||
|---|---|---|---|---|---|---|
| Standardized measure of discounted future net cash flows, beginning of year | $ | 1,817,830 | $ | 2,842,000 | ||
| Sales of oil and gas, net of production costs and taxes | (1,498,688 | ) | (245,000 | ) | ||
| Net changes in prices and production costs | 1,426,480 | (1,187,000 | ) | |||
| Changes in estimated future development costs | 699,170 | 20,000 | ||||
| Extensions and discoveries | - | - | ||||
| Revision in previous quantity estimates | (1,354,420 | ) | 1,000 | |||
| Previously estimated development costs incurred | 103,000 | |||||
| Purchases of minerals in place | - | - | ||||
| Sale of minerals in place | - | - | ||||
| Net change in income taxes | - | - | ||||
| Accretion of discount | 231,858 | 284,000 | ||||
| Changes in timing and other | 7,160 | - | ||||
| Standardized measure of discounted future net cash flows, end of year | $ | 1,329,390 | $ | 1,818,000 |
| 16 |
| --- |
Exhibit99.4
LLANOENERGY LLC
FINANCIALSTATEMENTS
DECEMBER31, 2021 and 2020
WITH
INDEPENDENTAUDITOR’S REPORT
CONTENTS
| Independent<br> Auditor’s Report | 1 |
|---|---|
| Balance<br> Sheets | 3 |
| Statements<br> of Operations | 4 |
| Statements<br> of Members’ Equity | 5 |
| Statements<br> of Cash Flows | 6 |
| Notes<br> to Financial Statements | 7 |
INDEPENDENT AUDITOR’S REPORT
To the Members
Llano Energy LLC
Opinion
We have audited the financial statements of Llano Energy LLC (the Company), which comprise the balance sheets as of December 31, 2021 and 2020, the related statements of operations, members’ equity, and cash flows for the years then ended, and the related notes to the financial statements.
In our opinion, the accompanying financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.
Basis for Opinion
We conducted our audits in accordance with auditing standards generally accepted in the United States of America (GAAS). Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Statements section of our report. We are required to be independent of the Company and to meet our other ethical responsibilities, in accordance with the relevant ethical requirements relating to our audits. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Emphasisof Matter
As discussed in Note 3 to the financial statements, the Company has significant transactions with a related party. Our opinion is not modified with respect to this matter.
Responsibilities of Management for the Financial Statements
Management is responsible for the preparation and fair presentation of the financial statements in accordance with accounting principles generally accepted in the United States of America, and for the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the financial statements, management is required to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date the financial statements are issued.
Auditor’s Responsibilities for the Audit of the Financial Statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance but is not absolute assurance and therefore is not a guarantee that an audit conducted in accordance with GAAS will always detect a material misstatement when it exists. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Misstatements are considered material if there is a substantial likelihood that, individually or in the aggregate, they would influence the judgment made by a reasonable user based on the financial statements.
| 1 |
| --- |
In performing an audit in accordance with GAAS, we:
| ● | Exercise<br> professional judgment and maintain professional skepticism throughout the audit. |
|---|---|
| ● | Identify<br> and assess the risks of material misstatement of the financial statements, whether due to fraud or error, and design and perform<br> audit procedures responsive to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and<br> disclosures in the financial statements. |
| ● | Obtain<br> an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances,<br> but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control. Accordingly, no such<br> opinion is expressed. |
| ● | Evaluate<br> the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as<br> well as evaluate the overall presentation of the financial statements. |
| ● | Conclude<br> whether, in our judgment, there are conditions or events, considered in the aggregate, that raise substantial doubt about the Company’s<br> ability to continue as a going concern for a reasonable period of time. |
We are required to communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit, significant audit findings, and certain internal control-related matters that we identified during the audit.
Oklahoma City, Oklahoma
March 29, 2022
| 2 |
| --- |
LLANO ENERGY LLC
BALANCESHEETS
December 31, 2021 and 2020
| 2020 | |||||
|---|---|---|---|---|---|
| Assets | |||||
| Current<br> assets: | |||||
| Cash | 332,972 | $ | 100,549 | ||
| Accounts<br> receivable - oil and gas sales | 174,853 | 178,001 | |||
| Total<br> current assets | 507,825 | 278,550 | |||
| Oil<br> and gas properties and equipment, at cost, based on successful efforts accounting: | |||||
| Proved<br> properties | 14,522,286 | 14,350,516 | |||
| Unproved<br> properties, less accumulated impairment of 1,300,000 in 2021, and 1,200,000 in 2020 | 875,405 | 1,589,244 | |||
| Total<br> oil and gas properties and equipment | 15,397,691 | 15,939,760 | |||
| Accumulated<br> depreciation, depletion, and amortization and impairment | (12,713,192 | ) | (9,411,287 | ) | |
| Oil<br> and gas properties and equipment, net | 2,684,499 | 6,528,473 | |||
| Other<br> properties and equipment, net of 2,046 and 1,227 of accumulated depreciation at December 31, 2021 and 2020, respectively | 59,859 | 60,680 | |||
| Total<br> assets | 3,252,183 | $ | 6,867,703 | ||
| Liabilities<br> and Members’ Equity | |||||
| Current<br> liabilities: | |||||
| Accounts<br> payable: | |||||
| Affiliate | 88,468 | $ | 34,826 | ||
| Other | 143,226 | 42,079 | |||
| Current<br> maturities of long-term debt | 72 | - | |||
| Total<br> current liabilities | 231,766 | 76,905 | |||
| Long-term<br> debt, less current maturities | 149,928 | 150,000 | |||
| Asset<br> retirement obligations | 415,063 | 286,509 | |||
| Members’<br> equity | 2,455,426 | 6,354,289 | |||
| Total<br> liabilities and members’ equity | 3,252,183 | $ | 6,867,703 |
All values are in US Dollars.
See notes to financial statements.
| 3 |
| --- |
LLANO ENERGY LLC
STATEMENTSOF OPERATIONS
Years ended December 31, 2021 and 2020
| 2021 | 2020 | |||||
|---|---|---|---|---|---|---|
| Revenues: | ||||||
| Oil<br> and gas sales | $ | 1,448,155 | $ | 1,247,281 | ||
| Other | - | 39,305 | ||||
| Total<br> revenues | 1,448,155 | 1,286,586 | ||||
| Costs<br> and expenses: | ||||||
| Lease<br> operating | 809,975 | 672,825 | ||||
| Production<br> taxes | 124,265 | 105,234 | ||||
| Exploration<br> costs: | ||||||
| Provision<br> for impairment of unproved properties | 100,000 | 700,000 | ||||
| Dry<br> hole costs | 613,839 | 1,209,880 | ||||
| Depreciation,<br> depletion, and amortization | 3,431,279 | 2,834,430 | ||||
| General<br> and administrative: | ||||||
| Management<br> fees charged by affiliate | 210,000 | 307,500 | ||||
| Other | 57,660 | 107,378 | ||||
| Total<br> costs and expenses | 5,347,018 | 5,937,247 | ||||
| Net<br> loss | $ | (3,898,863 | ) | $ | (4,650,661 | ) |
See notes to financial statements.
| 4 |
| --- |
LLANO ENERGY LLC
STATEMENTSOF MEMBERS’ EQUITY
Years ended December 31, 2021 and 2020
| 2021 | 2020 | |||||
|---|---|---|---|---|---|---|
| Balance,<br> beginning of year | $ | 6,354,289 | $ | 10,896,283 | ||
| Members’<br> contributions | - | 108,667 | ||||
| Net<br> loss | (3,898,863 | ) | (4,650,661 | ) | ||
| Balance,<br> end of year | $ | 2,455,426 | $ | 6,354,289 |
See notes to financial statements.
| 5 |
| --- |
LLANO ENERGY LLC
STATEMENTSOF CASH FLOWS
Years ended December 31, 2021 and 2020
| 2021 | 2020 | |||||
|---|---|---|---|---|---|---|
| Cash<br> Flows from Operating Activities | ||||||
| Net<br> loss | $ | (3,898,863 | ) | $ | (4,650,661 | ) |
| Adjustments<br> to reconcile net loss to net cash provided by operating activities: | ||||||
| Exploration<br> costs | 713,839 | 1,909,880 | ||||
| Depreciation,<br> depletion, and amortization | 3,431,279 | 2,834,430 | ||||
| Changes<br> in assets and liabilities: | ||||||
| Accounts<br> receivable - oil and gas sales | 3,148 | 225,277 | ||||
| Other<br> current assets | - | 8,429 | ||||
| Accounts<br> payable | 92,601 | (306,977 | ) | |||
| Net<br> cash provided by operating activities | 342,004 | 20,378 | ||||
| Cash Flows from Investing Activities | ||||||
| Capital<br> expenditures | (109,581 | ) | (122,726 | ) | ||
| Acquisition<br> of oil and gas properties and equipment | - | (100,000 | ) | |||
| Purchases<br> of other properties and equipment | - | (32,731 | ) | |||
| Net<br> cash used in investing activities | (109,581 | ) | (255,457 | ) | ||
| Cash Flows from Financing Activities | ||||||
| Members’<br> cash contributions | - | 108,667 | ||||
| Proceeds<br> from Economic Injury Disaster Loan | - | 150,000 | ||||
| Net<br> cash provided by financing activities | - | 258,667 | ||||
| Net<br> change in cash | 232,423 | 23,588 | ||||
| Cash,<br> beginning of year | 100,549 | 76,961 | ||||
| Cash,<br> end of year | $ | 332,972 | $ | 100,549 | ||
| Noncash<br> Investing and Financing Activities | ||||||
| Additions<br> and disposals, net, to asset retirement obligations | $ | 128,554 | $ | 31,220 | ||
| Increase<br> (decrease) in accounts payable for oil and gas properties and equipment additions | $ | 62,188 | $ | (38,301 | ) |
See notes to financial statements.
| 6 |
| --- |
LLANO ENERGY LLC
NOTESTO FINANCIAL STATEMENTS
December31, 2021 and 2020
Note1 – Nature of Operations and Summary of Significant Accounting Policies
Organization
Llano Energy LLC (the Company) is a limited liability company (LLC) organized on March 31, 2017. As an LLC, members are not liable for the debts, obligations or liabilities of the Company. The Company will continue in existence until it is dissolved in accordance with the Limited Liability Company Agreement dated June 9, 2017, and amended on August 1, 2020 (the LLC Agreement). Net income and loss and distributions are allocated to members according to the LLC Agreement.
Description of the business
The Company is engaged in the acquisition, exploration, development and production of oil and gas. The Company’s operations are in the state of New Mexico. An affiliate serves as the operator for a portion of the Company’s properties (see Note 3). Remaining properties are operated by a third party.
Use of estimates
The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual amounts could differ from these estimates, and changes in these estimates are recorded when known. Significant items subject to such estimates and assumptions include proved oil and gas reserves and related present value of future net revenues, carrying amounts of oil and gas properties, and asset retirement obligations.
Cash
The Company maintains cash in bank deposit accounts which at times exceeds federally insured limits. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on cash held in such banks.
Revenue recognition
The Company recognizes revenue in accordance with Accounting Standards Codification (ASC) 606, Revenue from Contracts with Customers. In determining the appropriate amount to recognize, the Company applies the following five-step model: (i) identify contracts with customers; (ii) identify performance obligations in the contracts; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations per the contracts; and (v) recognize revenue when (or as) the Company satisfies a performance obligation.
The Company’s revenues are primarily derived from payments received from the operators of properties based on the sale of oil and gas production. Taxes assessed by governmental authorities on oil and gas sales are presented separately from such revenues. Each barrel of oil or thousand cubic feet of gas delivered is considered a separate performance obligation. The Company recognizes revenue from its interests in the sale of oil and gas in the period that its performance obligations to provide oil and gas to customers are satisfied. Performance obligations are satisfied when the Company has no further obligations to perform related to the sale and the customer obtains control of product. The sales of oil and gas are made under contracts which the operators of the wells have negotiated with customers, which typically include variable consideration that is based on pricing tied to local indices and volumes delivered in the current month. The Company receives payment from the sale of oil and gas production from one to four months after delivery. At the end of each month, as performance obligations are satisfied, the variable consideration can be reasonably estimated and amounts due from customers are accrued in accounts receivable in the balance sheets. 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 insignificant. Accordingly, the variable consideration is not constrained. A portion of oil and gas sales recorded in the statements of operations are the result of estimated volumes and pricing for oil and gas production not yet received for the period. For the years ended December 31, 2021 and 2020, that estimate represented $174,853 and $178,001, respectively, of oil and gas sales included in the statements of operations. Historically, the Company has had little, if any, uncollectible receivables; therefore, the Company did not recognize an allowance for doubtful accounts receivable at December 31, 2021 or 2020.
| 7 |
| --- |
The Company’s contracts with customers originate at or near the time of delivery and transfer of control of oil and gas to the purchasers. As such, the Company does not have significant unsatisfied performance obligations.
The Company’s oil is typically sold at delivery points under contracts that are common in the industry. The Company’s gas produced is delivered by the well operators to various purchasers at agreed upon delivery points under a limited number of contract types that are also common in the industry. However, under these contracts, gas may be sold to a single purchaser or may be sold to separate purchasers. Regardless of the contract type, the terms of these contracts compensate the well operators for the value of the oil and gas at specified prices, and then the well operators will remit payment to the Company for its share in the value of the oil and gas sold.
Revenues and the amount of cash available for distribution may vary significantly from period to period as a result of changes in volumes of production sold or changes in commodity prices. For the years ended December 31, the Company’s revenues consisted of the following:
| 2021 | 2020 | |||
|---|---|---|---|---|
| Oil | $ | 1,414,039 | $ | 1,226,280 |
| Gas | 34,116 | 21,001 | ||
| Total<br> oil and gas sales | $ | 1,448,155 | $ | 1,247,281 |
Oil and gas producing activities
The Company follows the successful efforts method of accounting for oil and gas producing activities. Intangible drilling and other costs of successful wells and development dry holes are capitalized and amortized. The costs of exploratory wells are initially capitalized, but charged to expense, if the well is determined to be nonproductive. Leasehold costs are capitalized when incurred.
Unproved properties are assessed for impairment on a property-by-property basis for individually significant properties and on an aggregate basis for individually insignificant properties. If the assessment indicates impairment, a loss is recognized by providing a valuation allowance at the level at which impairment was assessed. The impairment assessment is affected by economic factors such as the results of exploration activities, commodity price outlooks, remaining lease terms and potential shifts in business strategy employed by management. In the case of individually insignificant balances, the amount of the impairment loss recognized is determined by amortizing the portion of these properties’ costs, which the Company believes will not be transferred to proved properties over the remaining lives of the leases. Impairment loss is charged to exploration costs when recognized.
It is common business practice in the petroleum industry for drilling costs to be prepaid before spudding a well. The Company frequently fulfills these prepayment requirements with cash payments, but at times will utilize letters of credit to meet these obligations. At December 31, 2021 and 2020, the Company had no outstanding letters of credit.
| 8 |
| --- |
All costs related to production activities, including workover costs incurred solely to maintain or increase levels of production from an existing completion interval, are charged to expense as incurred.
The Company recognizes liabilities for retirement obligations associated with tangible long-lived assets, such as well sites when there are legal obligations associated with the retirement of such assets and the amounts can be reasonably estimated. The initial measurement of asset retirement obligations is recorded as a liability at its fair value, with an offsetting asset retirement cost recorded as an increase to the associated property and equipment on the balance sheets. When the assumptions used to estimate a recorded asset retirement obligation change, a revision is recorded to both the asset retirement obligation and the asset retirement cost. The asset retirement cost is depreciated using a systematic and rational method similar to that used for the associated property and equipment.
Depreciation, depletion, amortization and impairment
Depreciation, depletion and amortization of the costs of proved properties are computed using the unit-of-production method on a property-by-property basis using proved or proved developed reserves, as applicable, as estimated by the Company’s independent consulting petroleum engineer. The Company’s capitalized costs of drilling and equipping all development wells and those exploratory wells that have found proved reserves are amortized on a unit-of-production basis over the remaining life of associated proved developed reserves. Lease costs are amortized on a unit-of-production basis over the remaining life of associated total proved reserves.
The Company recognizes impairment losses for long-lived assets when indicators of impairment are present and the undiscounted cash flows are not sufficient to recover the assets’ carrying amount. The impairment loss is measured by comparing the fair value of the asset to its carrying amount. Fair values are based on discounted cash flow as estimated by the Company’s independent consulting petroleum engineer. The Company’s estimate of fair value of its proved properties at the balance sheet dates, is based on the best information available as of those dates, including estimates of forward prices and costs. The Company’s proved properties are reviewed for impairment on a property-by-property basis. Reductions in prices or a decline in reserve volumes would likely lead to impairment in future periods that may be material to the Company.
The process of estimating proved reserves is very complex, requiring significant judgment in the evaluation of all available geological, geophysical, engineering and economic data. The data may change substantially over time because of numerous factors, including the historical 12-month weighted average prices, additional development costs and activity, evolving production history and a continual reassessment of the viability of production under changing economic conditions. As a result, material revisions to existing reserve estimates could occur from time-to-time. Such changes could trigger an impairment of the Company’s proved properties and have an impact on depreciation, depletion and amortization expense prospectively.
Environmental costs
As the Company is directly involved in the extraction and use of natural resources, it is subject to various federal, state and local provisions regarding environmental and ecological matters. Compliance with these laws may necessitate significant capital outlays; however, to date the Company’s cost of compliance has been insignificant. The Company does not believe the existence of current environmental laws, or interpretations thereof, will materially hinder or adversely affect the Company’s business operations; however, there can be no assurances of future effects on the Company of new laws or interpretations thereof. Since the Company does not operate any wells where it owns an interest, actual compliance with environmental laws is controlled by the operators, with the Company being responsible for its proportionate share of the costs involved. The Company carries liability insurance and pollution control coverage. However, all risks are not insured due to the availability and cost of insurance.
Environmental liabilities are recognized when it is probable that a loss has been incurred and the amount of that loss is reasonably estimable. Environmental liabilities, when accrued, are based upon estimates of expected future costs. At December 31, 2021 and 2020, there were no such costs accrued.
Income tax status
As an LLC, the Company’s federal taxable income or loss is allocated to members in accordance with their respective percentage ownerships. Therefore, no provision or liability for federal income taxes has been included in the financial statements. The Company could be subject to income taxes in certain states which do not recognize LLCs as disregarded entities.
| 9 |
| --- |
Reclassifications
Certain reclassifications have been made to the 2020 financial statements to conform with the 2021 presentation. These reclassifications had no impact on the previously reported net loss.
Subsequent events
Management has evaluated subsequent events through March 29, 2022, the date the financial statements were available to be issued. See Note 5.
Note2 – Members’ Equity
In 2020, the Company issued Series A Capital Interests to Capital Members in exchange for cash contributions of $108,667. There were no contributions in 2021. The Company expects to only issue Series A Capital Interests for future capital calls, and all Capital Members will have the right to participate. Capital Interest distributions are first allocated to Capital Members holding Series A Capital Interests and then to Capital Members holding Ordinary Capital Interests. The LLC Agreement provides that no Capital Member is required to make aggregate capital contributions to the Company in excess of its capital commitment. At December 31, 2021, the unfunded capital commitments of all Capital Members totaled $32,717,778.
Pursuant to an Incentive Pool Plan (the Plan), the Company is authorized to award up to 100,000 Management Incentive Interests (nonvoting). The Plan is intended to provide incentives to participants by providing them with Management Incentive Interests in the Company. Awards of Management Incentive Interests are subject to vesting, transferability, and forfeiture provisions specified in the Plan. Management Incentive Members are allocated a share in distributions, if any, in varying ratios based upon the amount of cumulative distributions paid to Capital Members. On June 9, 2017, the Company awarded 80,000 Management Incentive Interests which vest 20% on each of the first four anniversaries of the date of the award, subject to possible accelerated vesting upon specified events occurring as provided in the Plan. Effective August 30, 2019, 28,000 Management Incentive Interests were forfeited to the Company. Awards under the Plan are accounted for as a profit-sharing arrangement and future distributions to Management Incentive Members are accrued and accounted for as compensation expense when the appropriate profit thresholds have been reached.
Note3 – Related Party Transactions
An affiliate of a member of the Company (the Affiliate) serves as contract operator under certain joint operating agreements. The Company’s oil and gas sales, net of production taxes, and related accounts receivable, for the properties operated by the Affiliate, are collected from the Affiliate. The Company’s lease operating expenses and related accounts payable are paid to the Affiliate. The Company does not have any employees. The personnel supporting the management, administration and operation of the business of the Company are employees of the Affiliate. The Company has a services agreement with the Affiliate, which specifies that the Affiliate will provide specified services to the Company for a monthly management fee. The Company incurred $210,000 and $307,500 of management fees during the years ended December 31, 2021 and 2020, respectively.
| 10 |
| --- |
Note4 – Long-Term Debt
Long-term debt consists of the following as of December 31:
| 2021 | 2020 | ||||
|---|---|---|---|---|---|
| Note<br> payable to the U.S. Small Business Administration, payable in monthly principal and interest payments of $731 beginning May 2021<br> through May 2050 bearing interest at a fixed rate of 3.75%, and secured by the Company’s assets. | $ | 150,000 | $ | 150,000 | |
| Less<br> current maturities | (72 | ) | - | ||
| $ | 149,928 | $ | 150,000 |
Scheduled maturities by year are as follows as of December 31, 2021:
| Year<br> Ending | Amount | |
|---|---|---|
| 2022 | $ | 72 |
| 2023 | 3,205 | |
| 2024 | 3,311 | |
| 2025 | 3,453 | |
| 2026 | 3,585 | |
| Thereafter | 136,374 | |
| $ | 150,000 |
Note5 – Subsequent Events
In January 2022, the Company sold a portion of its proved oil and gas properties and equipment to a publicly traded company in exchange for total consideration of approximately $2.5 million, which included stock in the purchaser’s company and settlement of the Company’s long-term debt.
| 11 |
| --- |
Note 6 – Supplemental Oil and Gas Information (Unaudited)
Oil and gas reserve information
Proved oil and gas reserves are those quantities of oil and gas which by analysis of geoscience and engineering data, can be estimated with reasonable certainty to be economically producible from a given date forward, from known reservoirs, and under existing economic conditions, operating methods, and government regulations. Estimated proved developed oil and gas reserves can be expected to be recovered through existing wells with existing equipment and operating methods. The Company reports all estimated proved reserves held under production-sharing arrangements utilizing the “economic interest” method.
Proved oil and gas reserves have been estimated by independent, third-party petroleum engineers, Cawley, Gillespie & Associates, Inc. These reserve estimates have been prepared in compliance with the Securities and Exchange Commission rules and accounting standards based on the unweighted average prices per barrel of oil and per Mcf of gas at the first day of each month in the 12-month period prior to the end of the reporting period.
There are numerous uncertainties inherent in estimating quantities of proved reserves and projecting future rates of production and timing of development expenditures. The reserve data in the following tables only represents estimates and should not be construed as being exact.
The following reserves schedule sets forth the changes in estimated quantities of proved oil and gas reserves:
| **** | 2021 | **** | 2020 | **** | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Oil | Gas | Oil | Gas | |||||||||
| **** | (bbls) | **** | (mcf) | **** | (bbls) | **** | (mcf) | **** | ||||
| Total proved reserves: | ||||||||||||
| Reserve<br> quantities, beginning of year | 243,808 | 68,033 | 444,199 | 93,980 | ||||||||
| Revisions<br> of previous estimates | (63,457 | ) | (6 | ) | (169,613 | ) | (18,189 | ) | ||||
| Discoveries<br> and extensions | - | - | - | - | ||||||||
| Purchases<br> of minerals in place | - | - | - | - | ||||||||
| Sale<br> of minerals in place | - | - | - | - | ||||||||
| Production | (21,161 | ) | (5,567 | ) | (30,778 | ) | (7,758 | ) | ||||
| Reserve<br> quantities, end of year | 159,190 | 62,460 | 243,808 | 68,033 | ||||||||
| Proved<br> developed reserves | 159,190 | 62,460 | 155,919 | 68,033 | ||||||||
| Proved<br> undeveloped reserves | - | - | 87,889 | - |
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Costs incurred in oil and gas property acquisitions and development activities
Costs incurred by the Company in oil and gas acquisitions and development are presented below:
| **** | 2021 | 2020 | ||
|---|---|---|---|---|
| **** | (in thousands) | |||
| Proved property acquisition | $ | - | $ | 100 |
| Unproved property acquisition | - | - | ||
| Development | 172 | 123 | ||
| Exploration | - | - | ||
| Total | $ | 172 | $ | 223 |
Capitalized costs
The following table sets forth the capitalized costs and associated accumulated depreciation, depletion, and amortization and impairment relating to the Company’s oil and gas acquisition, exploration, and development activities:
| **** | 2021 | **** | 2020 | **** | ||
|---|---|---|---|---|---|---|
| **** | (in thousands) | **** | ||||
| Oil and gas properties and equipment: | ||||||
| Proved properties | $ | 14,522 | $ | 14,351 | ||
| Unproved<br> properties | 876 | 1,589 | ||||
| Total oil and gas properties and equipment | 15,398 | 15,940 | ||||
| Less accumulated<br> depreciation, depletion and amortization and impairment | (12,713 | ) | (9,411 | ) | ||
| Net capitalized<br> costs | $ | 2,685 | $ | 6,529 |
Future net cash flows
Future cash inflows as of December 31, 2021 and 2020, were calculated using unweighted arithmetic average prices per barrel of oil and per Mcf of gas at the first day of each month in the 12-month period prior to the end of the reporting period, except where prices are defined by contractual arrangements. Operating costs, production and ad valorem taxes and future development costs are based on current costs with no escalation.
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| --- |
The following table sets forth unaudited information concerning future net cash flows for proved oil and gas reserves. The standardized measure presented does not include the effects of income taxes as the Company is taxed as a partnership and not subject to federal income taxes. This information does not purport to present the fair market value of the Company’s oil and gas assets, but does present a standardized disclosure concerning possible future net cash flows that would result under the assumptions used.
| **** | 2021 | **** | 2020 | **** | ||
|---|---|---|---|---|---|---|
| **** | (in thousands) | **** | ||||
| Future cash inflows | $ | 10,614 | $ | 9,118 | ||
| Future cash outflows: | ||||||
| Production costs | (4,844 | ) | (4,364 | ) | ||
| Development costs | (68 | ) | (1,332 | ) | ||
| Future net cash flows | 5,702 | 3,422 | ||||
| 10% annual discount factor | (2,494 | ) | (1,558 | ) | ||
| Standardized measure of discounted future<br> net cash flows | $ | 3,208 | $ | 1,864 |
The following table sets forth the principal sources of change in the discounted future net cash flows:
| **** | 2021 | **** | 2020 | **** | ||
|---|---|---|---|---|---|---|
| **** | (in thousands) | **** | ||||
| Standardized measure, beginning<br> of year | $ | 1,864 | $ | 5,953 | ||
| Sales of oil and gas, net of production<br> costs | (514 | ) | (469 | ) | ||
| Net changes in prices and production costs | 1,503 | (3,491 | ) | |||
| Changes in estimated future development<br> costs | 1,189 | 1,387 | ||||
| Extensions and discoveries | - | - | ||||
| Purchases of minerals in place | - | - | ||||
| Sales of minerals in place | - | - | ||||
| Revisions in previous quantity estimates | (1,214 | ) | (2,235 | ) | ||
| Previously estimated development costs incurred | 172 | 123 | ||||
| Accretion of discount | 224 | 596 | ||||
| Changes in timing and other | (16 | ) | - | |||
| Standardized measure, end of year | $ | 3,208 | $ | 1,864 |
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Exhibit 99.5
Synergy Offshore LLC
d/b/aSOG Resources, LLC
Financial Statements
As of and for the years ended December 31, 2021 and 2020
SynergyOffshore LLC
d/b/aSOG Resources, LLC
INDEXTO FINANCIAL STATEMENTS
| Independent Auditor’s Report | 3 |
|---|---|
| Balance Sheets | 5 |
| Statements of Operations | 6 |
| Statements of Changes in Members’ Equity (Deficit) | 7 |
| Statements of Cash Flows | 8 |
| Notes to Financial Statements | 9 |
| Supplemental Oil and Gas Information (Unaudited) | 15 |
Independent Auditor’s Report
To the Board of Managers
Synergy Offshore LLC
Opinion
We have audited the financial statements of Synergy Offshore LLC (the “Company”), which comprise the balance sheets as of December 31, 2021 and 2020 and the related statements of operations, members’ equity (deficit), and cash flows for the years then ended, and the related notes to the financial statements.
In our opinion, the accompanying financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020 and the results of its operations and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.
Basis for Opinion
We conducted our audits in accordance with auditing standards generally accepted in the United States of America (GAAS). Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audits of the Financial Statements section of our report. We are required to be independent of the Company and to meet our ethical responsibilities in accordance with the relevant ethical requirements relating to our audits. We believe the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Emphasisof Matter
As described in Note 7 to the financial statements, the Company completed the sale of substantially all of its oil and gas properties on January 5, 2022. Our opinion is not modified with respect to this matter.
Responsibilities of Management for the Financial Statements
Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America and the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the financial statements, management is required to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the financial statements are issued or available to be issued.
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| --- |
Auditor’sResponsibilities for the Audits of the Financial Statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance but is not absolute assurance and, therefore, is not a guarantee that audits conducted in accordance with GAAS will always detect a material misstatement when it exists. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Misstatements are considered material if there is a substantial likelihood that, individually or in the aggregate, they would influence the judgment made by a reasonable user based on the financial statements.
In performing audits in accordance with GAAS, we:
| ● | Exercise<br> professional judgment and maintain professional skepticism throughout the audits. |
|---|---|
| ● | Identify<br> and assess the risks of material misstatement of the financial statements, whether due to fraud or error, and design and perform<br> audit procedures responsive to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and<br> disclosures in the financial statements. |
| ● | Obtain<br> an understanding of internal control relevant to the audits in order to design audit procedures that are appropriate in the circumstances<br> but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control. Accordingly, no such<br> opinion is expressed. |
| ● | Evaluate<br> the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as<br> well as evaluate the overall presentation of the financial statements. |
| ● | Conclude<br> whether, in our judgment, there are conditions or events, considered in the aggregate, that raise substantial doubt about the Company’s<br> ability to continue as a going concern for a reasonable period of time. |
We are required to communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audits, significant audit findings, and certain internal control-related matters that we identified during the audits.
/s/Plante & Moran, PLLC
Denver, Colorado
May 13, 2022
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| --- |
SynergyOffshore LLC
d/b/aSOG Resources, LLC
BalanceSheets
| December 31, | ||||||
|---|---|---|---|---|---|---|
| 2021 | 2020 | |||||
| Assets | ||||||
| Current assets: | ||||||
| Cash and cash equivalents | $ | 1,774,893 | $ | 360,196 | ||
| Oil and gas sales receivable | 750,763 | 615,637 | ||||
| Other receivables | 69,900 | 77,905 | ||||
| Prepaids and other current assets | 112,594 | 311,920 | ||||
| Total current assets | 2,708,150 | 1,365,658 | ||||
| Oil and gas properties, successful efforts method: | ||||||
| Proved | 23,847,327 | 24,941,480 | ||||
| Unproved | 2,932,691 | 2,842,906 | ||||
| Less accumulated depreciation, depletion and amortization | (15,889,729 | ) | (15,209,980 | ) | ||
| Net oil and gas properties | 10,890,289 | 12,574,406 | ||||
| Restricted cash | 126,688 | 126,688 | ||||
| Other assets | 34,238 | 34,238 | ||||
| Total assets | $ | 13,759,365 | $ | 14,100,990 | ||
| Liabilities and members’ equity (deficit) | ||||||
| Current liabilities: | ||||||
| Accounts payable | $ | 259,222 | $ | 510,787 | ||
| Accrued liabilities | 1,381,075 | 1,103,927 | ||||
| Total current liabilities | 1,640,297 | 1,614,714 | ||||
| Asset retirement obligations | 14,386,791 | 14,915,271 | ||||
| Total liabilities | 16,027,088 | 16,529,985 | ||||
| Commitments and contingencies (Note 4) | ||||||
| Members’ equity (deficit) | (2,267,723 | ) | (2,428,995 | ) | ||
| Total liabilities and members’ equity (deficit) | $ | 13,759,365 | $ | 14,100,990 |
Theaccompanying notes are an integral part of these financial statements.
| 5 |
| --- |
SynergyOffshore LLC
d/b/aSOG Resources, LLC
Statementsof Operations
| For the year ended December 31, | |||||
|---|---|---|---|---|---|
| 2021 | 2020 | ||||
| Revenue - | |||||
| Oil and gas | $ | 8,434,386 | $ | 4,581,764 | |
| Operating expenses: | |||||
| Lease operating expense | 3,175,808 | 3,193,527 | |||
| Production taxes and transportation costs | 617,884 | 95,388 | |||
| Depreciation, depletion and amortization | 679,749 | 999,139 | |||
| Accretion | 750,208 | 777,599 | |||
| Impairment | - | 368,630 | |||
| General and administrative | 2,518,864 | 1,978,295 | |||
| Total costs and expenses | 7,742,513 | 7,412,578 | |||
| Operating income (loss) | 691,873 | (2,830,814 | ) | ||
| Other income, net | 569,399 | 397,333 | |||
| Net income (loss) | $ | 1,261,272 | $ | (2,433,481 | ) |
Theaccompanying notes are an integral part of these financial statements.
| 6 |
| --- |
SynergyOffshore LLC
d/b/aSOG Resources, LLC
Statementsof Changes in Members’ Equity (Deficit)
| Balance at January 1, 2020 | $ | 50,486 | |
|---|---|---|---|
| Equity distributions | (46,000 | ) | |
| Net loss | (2,433,481 | ) | |
| Balance at December 31, 2020 | (2,428,995 | ) | |
| Equity distributions | (1,100,000 | ) | |
| Net income | 1,261,272 | ||
| Balance at December 31, 2021 | $ | (2,267,723 | ) |
Theaccompanying notes are an integral part of these financial statements.
| 7 |
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SynergyOffshore LLC
d/b/aSOG Resources, LLC
Statementsof Cash Flows
| For the year ended December 31, | ||||||
|---|---|---|---|---|---|---|
| 2021 | 2020 | |||||
| Cash flows from operating activities: | ||||||
| Net income (loss) | $ | 1,261,272 | $ | (2,433,481 | ) | |
| Adjustments to reconcile net income (loss) to net cash from operating activities: | ||||||
| Depreciation, depletion and amortization | 679,749 | 999,139 | ||||
| Accretion | 750,208 | 777,599 | ||||
| Impairment | - | 368,630 | ||||
| PPP loan forgiveness | (424,800 | ) | (424,800 | ) | ||
| Changes in assets and liabilities: | ||||||
| Accounts receivable | (127,121 | ) | 204,881 | |||
| Prepaids and other assets | 199,326 | (32,321 | ) | |||
| Accounts payable | (251,565 | ) | (52,586 | ) | ||
| Accrued liabilities | 277,148 | 112,059 | ||||
| Net cash from operating activities | 2,364,217 | (480,880 | ) | |||
| Cash flows from investing activities - | ||||||
| Capital expenditures | (274,320 | ) | - | |||
| Cash flows from financing activities: | ||||||
| Proceeds from issuance of note payable | 424,800 | 424,800 | ||||
| Distributions to members | (1,100,000 | ) | (46,000 | ) | ||
| Net cash from financing activities | (675,200 | ) | 378,800 | |||
| Net change in cash and cash equivalents and restricted cash | 1,414,697 | (102,080 | ) | |||
| Cash and cash equivalents and restricted cash, beginning of year | 486,884 | 588,964 | ||||
| Cash and cash equivalents and restricted cash, end of year | $ | 1,901,581 | $ | 486,884 | ||
| Supplemental cash flow information: | ||||||
| Asset retirement obligations revisions of estimate | $ | (1,278,688 | ) | $ | (1,201,292 | ) |
Theaccompanying notes are an integral part of these financial statements.
| 8 |
| --- |
SynergyOffshore LLC
d/b/aSOG Resources, LLC
Notesto Financial Statements
1.Organization and Significant Accounting Policies
Organization– Synergy Offshore LLC d/b/a SOG Resources, LLC (the “Company”), a Texas limited liability company, was formed on March 18, 2010, as a limited partnership, and converted to a limited liability company on October 21, 2010. The Company is engaged primarily in the development of oil and natural gas properties in Montana and Wyoming. The Company is located in Houston, Texas and its fiscal year-end is December 31.
Basisof Presentation – The financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).
Useof 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 (i) oil and gas reserves that are used in the calculation of depreciation, depletion, amortization and impairment of the carrying value of oil and gas properties; (ii) production and commodity price estimates used to record oil and gas sales receivables; and (iii) the cost 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 we believe to be reasonable. Due to inherent uncertainties, including the future prices of oil and gas, these estimates could change in the near term and such changes could be material.
Cashand Cash Equivalents – The Company considers cash and unrestricted interest-bearing deposits with original maturities of three months or less to be cash equivalents. The Company maintains its deposits of cash primarily in financial institutions, which may at times exceed amounts covered by insurance provided by the U.S. Federal Deposit Insurance Corporation (“FDIC”). The Company has not experienced any losses related to amounts in excess of FDIC limits.
RestrictedCash – Restricted cash consists of money market accounts and certificates of deposit which are held to cover the costs of future plugging and abandonment liabilities mandated by the states of Montana and Wyoming.
Receivables– Accounts receivable consist primarily of accrued oil and gas production receivables and joint interest receivables from outside working interest owners. Generally, our oil and gas sales receivables are collected within one month. Management routinely assesses accounts receivable balances to determine their collectability and accrues an allowance for uncollectible receivables, when, based on the judgment of management, it is probable that a receivable will not be collected. Receivables are not collateralized. As of December 31, 2021, and 2020, the Company had not provided an allowance for doubtful accounts on its accounts receivable.
Oiland Gas Properties – The Company follows the successful efforts method of accounting for its oil and gas properties, and, accordingly, exploration costs, other than the costs of drilling exploratory wells, are expensed as incurred. The costs of drilling exploratory wells are capitalized pending determination of whether the wells have discovered proved commercial reserves. If proved commercial reserves are not discovered, such drilling costs are expensed. The costs of all development wells and related equipment used in the production of crude oil and natural gas are capitalized. A gain or a loss is recognized when a property is sold or an entire field ceases to produce and is abandoned.
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Depletion, depreciation and amortization (“DD&A”) of oil and natural gas properties is computed using the units-of-production method based on the ratio of current production to estimated proved oil and natural gas reserves as estimated by independent petroleum engineers.
The Company reviews its oil and natural gas properties for impairment whenever events or changes in circumstances indicate that the carrying value of such properties may not be recoverable. When it is determined that an oil and natural gas property’s estimated future net cash flows will not be sufficient to recover its carrying amount, an impairment charge is recorded to reduce its carrying value to its estimated fair value (Level 3). The fair value of oil and natural gas properties is determined using valuation techniques consistent with the income and market approach. The factors used to determine fair value are subject to management’s judgment and expertise and include, but are not limited to, recent sales prices of comparable properties, the present value of future net cash flows, and various discount rates commensurate with the risk and current market conditions associated with the expected cash flow.
The Company recognized impairment losses of approximately $369 thousand for the year ended December 31, 2020. These impairments were caused by declines in crude oil and natural gas prices. In estimating reserves and future production volumes, estimated future commodity prices are the largest driver in variability of undiscounted pre-tax cash flows. Expected cash flows were estimated based on management’s views of published West Texas Intermediate (WTI) and Henry Hub forward pricing. Other significant assumptions and inputs used to calculate estimated future cash flows include estimates for future development activity, exploration plans and remaining lease terms. The proved properties impaired had aggregate fair values as of the most recent date of impairment of $457 thousand as of December 31, 2020. There was no impairment recognized during the year ended December 31, 2021.
Oil and gas lease acquisition costs are capitalized when incurred. If the unproved properties are determined to be productive, the appropriate related costs are transferred to proved oil and natural gas properties. Unproved properties are assessed periodically on a property-by-property basis. Any impairment in value is expensed. Delay lease rentals are expensed as incurred.
OtherProperty and Equipment – Other property and equipment consists of office furniture and fixtures, vehicles and leasehold improvements, which are carried at cost. Depreciation and amortization is provided using the straight-line method over estimated useful lives ranging from three to seven years. Leasehold improvements are amortized over the shorter of their estimated useful lives or the term of the underlying lease. Depreciation and amortization expense for the years ended December 31, 2021 and 2020 was $0 and $86 thousand, respectively. Gain or loss on retirement, sale, or other disposition of these assets is included in the statement of operations in the period of disposition. Costs of major repairs that extend the useful life of these assets are capitalized. Other costs for maintenance and repairs are expensed as incurred.
The Company reviews its other property and equipment for impairment whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. When it is determined that an asset’s estimated future net cash flows will not be sufficient to recover its carrying amount, an impairment charge is recorded to reduce its carrying value to its estimated fair value. No impairment loss was recognized during 2021 or 2020.
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AssetRetirement Obligations – The Company recognizes a liability for the plugging, abandonment and remediation of its properties at the end of their productive lives. We compute the liability for asset retirement obligations (“ARO”) by calculating the present value of estimated future cash flows related to each property. This requires use of significant assumptions, including current estimates of plugging and abandonment costs, annual inflation of these costs, the productive lives of wells, and our credit-adjusted risk-free interest rate (all Level 3 inputs within the fair value hierarchy). Changes in any of these assumptions can result in significant revisions to the estimated asset retirement obligations.
Initially, the fair value of the ARO is recognized in the period in which it 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.
RevenueRecognition – Our revenues are primarily derived from the sales of oil and gas production. The Company’s oil and gas production is typically sold at delivery points to third-party purchasers under contract terms that are common in the oil and gas industry. These contracts typically provide for an agreed-upon index price, net of pricing differentials. The purchaser takes custody and possession, title and risk of loss of the oil at the delivery point; therefore, control passes at the delivery point. The Company recognizes revenue when control transfers to the purchaser. We receive payment from the sale of oil and gas production between one to three months after delivery. For property interests where we are not the operator, we record our share of the revenues and expenses based upon the information provided by the operators.
The Company reports revenue as the gross amount received before production taxes and transportation costs. Production taxes and transportation costs are reported separately in the accompanying statements of operations.
FairValue Measurement – Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The three levels related to fair value measurements are as follows:
Level 1 – Observable inputs such as quoted prices in active markets for identical assets or liabilities.
Level 2 – Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active or other inputs that are observable or can be corroborated by observable market data.
Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies, and similar techniques that use significant unobservable inputs.
The estimated fair value of cash, accounts receivable, and accounts payable approximate the carrying amount due to the relatively short maturity of these instruments.
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We evaluate the fair value on a non-recurring basis of properties acquired in business combinations, asset acquisitions, impairments of oil and gas properties and the related asset retirement obligations. The fair value of the oil and gas properties is determined based upon estimated future discounted cash flow, a Level 3 input, using estimated production which we reasonably expect, and estimated prices adjusted for differentials. Unobservable inputs include estimated future oil and gas production, prices, operating and development costs, and a discount rate of 10%, all Level 3 inputs within the fair value hierarchy. We recognized impairments of our oil and gas properties in 2020. These are discussed in Oil and Gas Properties above.
Unit-BasedCompensation – Unit-based compensation awards to management are accounted for at their fair value. No amounts were recognized during the periods presented as the fair value of outstanding awards were de minimus.
IncomeTaxes – The Company is taxed as a partnership under the Internal Revenue Code. Consequently, federal income taxes are not payable, or provided for, by the Company. Members are taxed individually on their proportionate share of our earnings.
For state taxes, all of the revenues and properties of the Company are attributable to Montana and Wyoming.
Montana taxes the income of its resident and non-resident partners, but not the partnership doing business in the state. Wyoming does not have a corporate or personal income tax. Texas does tax the entity in a calculation based on gross receipts. However, for the years ended December 31, 2021 and 2020, the Texas liability was calculated to be zero because all revenues were attributable to Montana and Wyoming in these years.
Uncertain tax positions are recognized in the financial statements only if that position is reasonably determined to be more-likely-than-not of being sustained upon examination by taxing authorities, based on the technical merits of the position. We recognize interest and penalties related to uncertain tax positions in income tax expense. As of December 31, 2021 and 2020, there were no uncertain tax positions.
Recent Accounting Pronouncements – In February 2016, the FASB issued ASU 2016-02, Leases as amended. This new standard requires organizations recognize assets and liabilities on the balance sheet for the rights and obligations created by leases. In July 2018, the FASB issued ASU 2018-11, Targeted Improvements to ASC 842, which provides a transition method that permits changes to be applied by means of a cumulative-effect adjustment recorded in retained earnings as of the beginning of the fiscal year of adoption. We plan to adopt this new guidance effective January 1, 2022 using the transition option provided under ASU 2018-11. We are currently evaluating the impact this standard will have on our financial statements based on our lease portfolio. We plan to elect to exclude short-term contracts of one year or less and plan to elect the package of practical expedients allowed under the new standard.
| 12 |
| --- |
2.Asset Retirement Obligations
The following table summarizes the changes in ARO (in thousands):
| Balance at January 1, 2020 | $ | 15,339 | |
|---|---|---|---|
| Revisions of estimate | (1,202 | ) | |
| Accretion | 778 | ||
| Balance at December 31, 2020 | 14,915 | ||
| Revisions of estimate | (1,278 | ) | |
| Accretion | 750 | ||
| Balance at December 31, 2021 | $ | 14,387 |
Revisions in estimated liabilities during 2021 and 2020 result from changes in service and equipment costs and changes in the estimated timing of an asset’s retirement.
3.Note Payable
In the second quarter of 2020, the Company received proceeds from a SBA Paycheck Protection Program Loan (“PPP Loan”) of approximately $425 thousand pursuant to the Paycheck Protection Program (“PPP”) of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The purpose of the PPP was to encourage the continued employment of workers. The Company used all of the PPP Loan proceeds for eligible payroll expenses, lease and utility payments.
The PPP Loan and accrued interest thereon may be forgiven by the SBA upon documentation of expenditures in accordance with the SBA requirements and proper application by the Company. The Company’s application for forgiveness was approved by the SBA in the fourth quarter of 2020. Accordingly, the Company recognized approximately $425 thousand as other income in the statement of operations for this forgiveness.
In the first quarter of 2021, the Company received proceeds from a 2^nd^ round PPP Loan of approximately $425 thousand pursuant. This 2^nd^ round PPP Loan was forgiven by the SBA in the third quarter of 2021.
4.Commitments and Contingencies
Litigation***–*** From time to time, the Company may be subject to litigation or other claims in the normal course of business.
Surety Bonds – As of December 31, 2021 and 2020, the Company had surety bonds of $1.4 million issued to the Montana Board of Oil and Gas Conservation, the Wyoming Oil and Gas Conservation Commission and the Wyoming Bureau of Land Management. The surety bonds are meant to cover certain plugging and abandonment liabilities related to the Company’s oil and natural gas properties in Montana and Wyoming.
Office Lease – The Company holds an operating lease for office space in Houston, Texas, expiring in January 2023. This lease may be extended at the Company’s option for an additional three years. The Company incurred rent expense of $136 thousand and $100 thousand during the years ended December 31, 2021 and 2020, respectively.
| 13 |
| --- |
Non-cancellable minimum rent payments under this lease are as follows (in thousands):
| 2022 | $ | 117 |
|---|---|---|
| 2023 | 10 | |
| Total minimum lease payments | $ | 127 |
Environmental Matters – Due to the nature of the oil and gas industry, we are exposed to environmental risks. We have various policies and procedures to minimize and mitigate the risks from environmental contamination. We are not aware of any material environmental claims existing as of December 31, 2021; however, there can be no assurance that current regulatory requirements will not change or that unknown potential past non-compliance with environmental laws or other environmental liabilities will not be discovered on our properties.
5. Employee Benefit Plans
Substantially all employees are eligible to participate in the Company’s 401(k) defined contribution plan. This plan permits eligible employees to make contributions up to certain limits. The Company makes a 4% contribution which is immediately vested to the employee. Employer contributions totaled approximately $57 thousand during 2021 and $53 thousand during 2020.
6. Members’ Equity
The Company’s LLC agreement was amended and restated effective December 31, 2019 and reorganized the Company’s equity interests to consist of Senior Preferred Units owned 100% by Synergy Producing Partners, LLC and authorized Management Participations Units. Net income (loss) is allocated to the members in accordance with the LLC Agreement. Distributions are at the discretion of the Board of Managers and amounts distributed to each member are allocated and distributed (a) first, to holders of Senior Preferred Units in an amount equal to the sum of $3 million plus any other future capital contributions made by them plus a return thereon computed at a rate of eight percent (8%) per annum compounded monthly, (b) second, 80% to the holders of the Senior Preferred Units and 20% to Management Participation Unit holders (if any) until the holders of Senior Preferred Units receive a total of $6 million of cumulative distributions; and, (c) third, 70% to the holders of Senior Preferred Units and 30% to the Management Participation Unit holders.
As of December 31, 2021 and 2020, there were one million Senior Preferred Units issued and outstanding. The Company had no Management Participation Units issued or outstanding at December 31, 2021 or 2020.
7. Subsequent Events
The Company has evaluated events and transactions subsequent to the balance sheet date and through May 13, 2022, the date the financial statements were available to be issued.
On October 4, 2021, we entered into Purchase and Sale Agreement with U.S. Energy Corp. (“U.S. Energy”) for the sale of substantially all of our oil and gas properties. The transaction also included certain wells, contracts, technical data, records, personal property and hydrocarbons associated with the assets being sold. This transaction was completed on January 5, 2022 for a total purchase price of $125,000 in cash and 6,546,384 shares of U.S. Energy’s common stock.
* * * * *
| 14 |
| --- |
SupplementalOil and Gas Information
(Unaudited)
Oiland Gas Reserve Information
Proved oil and gas reserves are those quantities of crude oil and condensate and natural gas, which by analysis of geoscience and engineering data, can be estimated with reasonable certainty to be economically producible from a given date forward, from known reservoirs, and under existing economic conditions, operating methods, and government regulations. Estimated proved developed oil and gas reserves can be expected to be recovered through existing wells with existing equipment and operating methods. The Company reports all estimated proved reserves held under production-sharing arrangements utilizing the “economic interest” method.
Proved oil and gas reserves have been estimated by the Company’s internal petroleum engineers. These reserve estimates have been prepared in compliance with the Securities and Exchange Commission rules and accounting standards based on the unweighted average prices per barrel of oil and per Mcf of natural gas at the first day of each month in the 12-month period prior to the end of the reporting period.
There are numerous uncertainties inherent in estimating quantities of proved reserves and projecting future rates of production and timing of development expenditures. The reserve data in the following tables only represent estimates and should not be construed as being exact.
The following reserves schedule sets forth the changes in estimated quantities of proved crude oil reserves**:**
| Crude Oil & Condensate (Bbls) | Gas (mcf) | Total (Boe) | |||||||
|---|---|---|---|---|---|---|---|---|---|
| Total proved reserves: | |||||||||
| Balance at December 31, 2019 | 2,515,921 | 416,021 | 2,585,258 | ||||||
| Revisions of previous estimates | (151,429 | ) | (141,984 | ) | (175,093 | ) | |||
| Production | (140,056 | ) | (43,366 | ) | (147,284 | ) | |||
| Balance at December 31, 2020 | 2,224,436 | 230,671 | 2,262,881 | ||||||
| Revisions of previous estimates | 265,706 | 157,309 | 291,924 | ||||||
| Production | (138,220 | ) | (41,411 | ) | (145,122 | ) | |||
| Balance at December 31, 2021 | 2,351,922 | 346,569 | 2,409,684 | ||||||
| Proved developed reserves as of: | |||||||||
| December 31, 2019 | 2,515,921 | 416,021 | 2,585,258 | ||||||
| December 31, 2020 | 2,224,436 | 230,671 | 2,262,881 | ||||||
| December 31, 2021 | 2,351,922 | 346,569 | 2,409,684 | ||||||
| Proved undeveloped reserves as of: | |||||||||
| December 31, 2019 | - | - | - | ||||||
| December 31, 2020 | - | - | - | ||||||
| December 31, 2021 | - | - | - |
The changes in proved reserve quantities for the years ended December 31, 2021 and 2020 was due primarily to the impact of production and revisions of previous estimates caused by changes in the average prices per barrel of oil and per Mcf of natural gas.
| 15 |
| --- |
CostsIncurred in Oil and Natural Gas Property Acquisitions and Development Activities
Costs incurred by the Company in oil and natural gas acquisitions and development are presented below:
| For the year ended December 31, | ||||
|---|---|---|---|---|
| 2021 | 2020 | |||
| Acquisitions: | ||||
| Proved | $ | - | $ | - |
| Unproved | - | - | ||
| Exploration | - | - | ||
| Development | 274,320 | - | ||
| Costs incurred | $ | 274,320 | $ | - |
CapitalizedCosts
The following table sets forth the capitalized costs and associated accumulated depreciation, depletion, and amortization relating to the Company’s oil and gas acquisition, exploration, and development activities:
| December 31, | ||||||
|---|---|---|---|---|---|---|
| 2021 | 2020 | |||||
| Proved properties | $ | 23,847,327 | $ | 24,941,480 | ||
| Unproved properties | 2,932,691 | 2,842,906 | ||||
| 26,780,018 | 27,784,386 | |||||
| Accumulated DD&A | (15,889,729 | ) | (15,209,980 | ) | ||
| Total | $ | 10,890,289 | $ | 12,574,406 |
FutureNet Cash Flows
Future cash inflows as of December 31, 2021 and 2020 were calculated using an unweighted arithmetic average price per barrel of oil and per Mcf of natural gas at the first day of each month in the 12-month period prior to the end of the reporting period, except where prices are defined by contractual arrangements. Operating costs, production and ad valorem taxes and future development costs are based on current costs with no escalation.
The following table sets forth unaudited information concerning future net cash flows for proved oil and gas reserves. The standardized measure presented here does not include the effects of federal income taxes as the Company is taxed as a partnership and not subject to federal or state income taxes. This information does not purport to present the fair market value of the Company’s oil and gas assets, but does present a standardized disclosure concerning possible future net cash flows that would result under the assumptions used.
| December 31, | ||||||
|---|---|---|---|---|---|---|
| 2021 | 2020 | |||||
| Future cash inflows | $ | 129,119,370 | $ | 70,447,008 | ||
| Future production costs | (54,118,747 | ) | (42,094,250 | ) | ||
| Future net cash flows | 75,000,623 | 28,352,758 | ||||
| 10% annual discount for estimated timing of cash flows | (43,127,000 | ) | (16,743,552 | ) | ||
| Discounted future net cash flows | $ | 31,873,623 | $ | 11,609,206 |
| 16 |
| --- |
The following table sets forth the principal sources of change in the discounted future net cash flows:
| December 31, | ||||||
|---|---|---|---|---|---|---|
| 2021 | 2020 | |||||
| Balance, beginning of period | $ | 11,609,206 | $ | 18,006,169 | ||
| Sales, net of production costs | (4,640,694 | ) | (1,292,849 | ) | ||
| Net change in prices and production costs | 20,689,691 | (4,606,842 | ) | |||
| Revision of quantities | 1,497,652 | (1,266,562 | ) | |||
| Accretion of discount | 1,160,921 | 1,083,992 | ||||
| Change in timing of production | 1,312,436 | 648,995 | ||||
| Other | 244,411 | (963,697 | ) | |||
| Balance, end of period | $ | 31,873,623 | $ | 11,609,206 |
* * * * *
| 17 |
| --- |
Exhibit99.6
UnauditedPro Forma Consolidated Financial Statements
On January 5, 2022, U.S. Energy Corp. (“we”, “us”, “U.S. Energy” or the “Company”) closed the acquisitions contemplated by those certain three separate Purchase and Sale Agreements (as amended to date, the “Purchase Agreements”), previously entered into by the Company on October 4, 2021, with each of (a) Lubbock Energy Partners LLC (“Lubbock”); (b) Banner Oil & Gas, LLC (“Banner”), Woodford Petroleum, LLC (“Woodford”) and Llano Energy LLC (“Llano”, and together with Banner and Woodford, collectively, “Sage Road”), and (c) Synergy Offshore LLC (“Synergy”, and collectively with Lubbock and Sage Road, the “Sellers”). Pursuant to the Purchase Agreements, U.S. Energy acquired certain oil and gas properties from the Sellers, representing a diversified, conventional portfolio of 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 following unaudited pro forma condensed combined financial information is derived from the historical consolidated financial statements of U.S. Energy, Lubbock, Synergy, Banner, Woodford and Llano and has been adjusted to reflect the following:
| ● | U.S.<br> Energy’s acquisition of substantially all of Lubbock’s oil and gas properties (the “Lubbock Acquisition”)<br> for aggregate consideration of approximately $21.5 million, based on the closing price of a share of the Company’s common stock<br> on January 5, 2022 (the “Closing Date”), consisting of (i) $125,000 of cash (the “Lubbock Unadjusted<br> Cash Purchase Price”) and (ii) 6,568,828 unregistered shares of the Company’s common stock. The Lubbock Unadjusted<br> Cash Purchase Price was subject to certain customary closing adjustments set forth in the Lubbock purchase agreement. |
|---|---|
| ● | U.S.<br> Energy’s acquisition of substantially all of Synergy’s oil and gas properties (the “Synergy Acquisition”)<br> for aggregate consideration of approximately $21.4 million, based on the closing price of a share of the Company’s common stock<br> on the Closing Date, consisting of (i) $125,000 of cash (the “Synergy Unadjusted Cash Purchase Price”) and (ii)<br> 6,546,384 unregistered shares of the Company’s common stock. The Synergy Unadjusted Cash Purchase Price was subject to certain<br> customary closing adjustments set forth in the Synergy purchase agreement. |
| ● | U.S.<br> Energy’s acquisition of certain of Sage Road’s oil and gas properties (the “Sage Road Acquisition”<br> and, together with the Lubbock Acquisition and the Synergy Acquisition, the “Acquisitions”) for aggregate consideration<br> of approximately $23.1 million, based on the closing price of a share of the Company’s common stock on January 5, 2022, consisting<br> of (i) $1.0 million of cash (the “Sage Road Unadjusted Cash Purchase Price”), and (ii) 6,790,524 unregistered<br> shares of the Company’s common stock. The Sage Road Unadjusted Cash Purchase Price was subject to certain customary closing<br> adjustments set forth in the Sage Road purchase agreement. |
| ● | The<br> aggregate purchase price under all the Purchase Agreements was $67.4 million, representing $1.25 million in cash, the value of 19,905,736<br> shares of the Company’s common stock on the Closing Date of $64.7 million and purchase price adjustments on the Closing Date<br> of $1.5 million. In addition, the Company assumed various liabilities, including the repayment of $3.3 million in debt, as well as<br> a derivative liability from the novation of certain hedges with a mark to market loss of $3.1 million as of the Closing Date, suspense<br> accounts, deferred tax obligation and asset retirement obligations. |
The unaudited pro forma condensed combined statement of operations below for the year ended December 31, 2021 gives effect to the Acquisitions as if they had occurred on January 1, 2021.
Certain of Lubbock’s, Synergy’s and Sage Road’s historical amounts have been reclassified to conform to the financial statement presentation of U.S. Energy. Additionally, adjustments have been made to Lubbock’s, Synergy’s and Sage Road’s historical financial information to remove activity related to certain assets and liabilities retained by Lubbock, Synergy and Sage Road, respectively.
The results of operations presented herein as relating to the Acquired Assets were derived from the historical financial statements of the Acquired Assets included in this Current Report on Form 8-K/A (the “Current Report”).
The unaudited pro forma condensed consolidated financial statement data should be read in conjunction with the historical consolidated financial statements and accompanying notes thereto of the Company for the three months ended March 31, 2022 and 2021 (unaudited), included in the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2022, filed with the Securities and Exchange Commission on May 12, 2022 and the years ended December 31, 2021 and 2020, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, filed with the Securities and Exchange Commission on March 28, 2022; and the audited financial statements of the Sellers for the years ended December 31, 2021 and 2020, each included in this Current Report.
An unaudited pro forma condensed combined statement of operations for the three months ended March 31, 2022 has not been presented because the Company’s historical consolidated financial statements for the three months ended March 31, 2022 reflect the Acquisitions for the period from January 5, 2022 through March 31, 2022 and the financial impact of four days of operations from January 1, 2022 through January 4, 2022, is immaterial.
The pro forma financial information has been prepared based on information currently available to us, using assumptions that our management believes are reasonable. The pro forma financial information does not purport to represent the actual results of operations that would have occurred if the Acquisitions had taken place on the date specified. The pro forma financial information is not necessarily indicative of the results of operations that may be achieved in the future. The pro forma financial information includes certain reclassifications to conform the historical results of operations of the Acquired Assets to our results of operations. The unaudited pro forma financial information is presented for informational purposes only. In the opinion of management, all adjustments necessary to present fairly the unaudited pro forma condensed combined financial information have been made.
The pro forma adjustments are based on preliminary estimates, available information, and certain assumptions, all as more fully described in the notes to the unaudited pro forma financial statements.
U.S.Energy Corp.
ProForma Condensed Combined Statement of Operations
Forthe Year Ended December 31, 2021
(Unaudited)
| Historical | Transaction<br> Accounting Adjustments | |||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| U.S. Energy<br> - As Reported | Lubbock<br> - As Reported | Synergy<br> - As Reported | Banner<br> - As Reported | Llano<br> - As Reported | Woodford<br> - As Reported | Reclassifications<br> & Eliminations | Acquisition | Pro Forma<br> Combined | ||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||
| Revenue: | ||||||||||||||||||||||||||
| Oil | $ | 5,956 | $ | - | $ | - | $ | 9,200 | $ | - | $ | - | $ | (4,325 | )(a) | $ | - | $ | 28,334 | |||||||
| 17,503 | (b) | |||||||||||||||||||||||||
| Natural gas and liquids | 702 | - | - | 2,660 | - | - | (1 | )(a) | - | 4,712 | ||||||||||||||||
| 1,351 | (b) | |||||||||||||||||||||||||
| Oil and gas | - | 8,472 | 8,434 | - | 1,448 | 500 | (18,854 | )(b) | - | - | ||||||||||||||||
| Total revenue | 6,658 | 8,472 | 8,434 | 11,860 | 1,448 | 500 | (4,326 | ) | - | 33,046 | ||||||||||||||||
| Operating expenses: | ||||||||||||||||||||||||||
| Oil and natural gas operations: | ||||||||||||||||||||||||||
| Lease operating expense | 2,421 | 2,725 | 3,176 | 6,443 | 810 | 171 | (3,139 | )(a) | - | 12,607 | ||||||||||||||||
| Production taxes | 471 | 468 | 618 | 749 | 124 | 31 | (314 | )(a) | - | 2,147 | ||||||||||||||||
| Depreciation, depletion, accretion and amortization | 566 | 1,658 | 1,430 | 2,125 | 3,431 | 227 | (1,434 | )(a) | 7,560 | (c) | 15,563 | |||||||||||||||
| Impairment of oil and natural gas properties | - | - | - | - | - | 193 | (113 | )(a) | - | 80 | ||||||||||||||||
| General and administrative - related parties | - | 294 | - | - | - | - | (294 | )(a) | - | - | ||||||||||||||||
| General and administrative | - | 559 | 2,518 | 1,860 | 268 | 307 | (5,512 | )(a) | - | - | ||||||||||||||||
| Compensation and benefits | 2,622 | - | - | - | - | - | - | - | 2,622 | |||||||||||||||||
| Professional fees, insurance and other | 2,013 | - | - | - | - | - | - | - | 2,013 | |||||||||||||||||
| Exploration expense | - | - | - | - | 714 | - | (714 | )(a) | - | - | ||||||||||||||||
| Total operating expenses | 8,093 | 5,704 | 7,742 | 11,177 | 5,347 | 929 | (11,520 | ) | 7,560 | 35,032 | ||||||||||||||||
| Operating loss | (1,435 | ) | 2,768 | 692 | 683 | (3,899 | ) | (429 | ) | 7,194 | (7,560 | ) | (1,986 | ) | ||||||||||||
| Other income (expense): | ||||||||||||||||||||||||||
| Loss on real estate held for sale | (151 | ) | - | - | - | - | - | - | - | (151 | ) | |||||||||||||||
| Commodity derivative loss | (260 | ) | - | - | (5,135 | ) | - | - | - | - | (5,395 | ) | ||||||||||||||
| Gain (loss) on marketable equity securities | 10 | - | - | - | - | - | - | - | 10 | |||||||||||||||||
| Warrant revaluation loss | 76 | - | - | - | - | - | - | - | 76 | |||||||||||||||||
| Rental and other gain (loss), net | 8 | - | - | (37 | ) | - | - | 37 | (a) | - | 8 | |||||||||||||||
| Recovery of deposit | - | - | - | - | - | - | - | - | - | |||||||||||||||||
| Other income | 39 | - | 569 | 633 | - | - | (1,202 | )(a) | - | 39 | ||||||||||||||||
| Interest expense, net | (57 | ) | - | - | (139 | ) | - | - | - | - | (196 | ) | ||||||||||||||
| Total other (expense) income | (335 | ) | - | 569 | (4,678 | ) | - | - | (1,165 | ) | - | (5,609 | ) | |||||||||||||
| Loss before income taxes | (1,770 | ) | 2,768 | 1,261 | (3,995 | ) | (3,899 | ) | (429 | ) | 6,029 | (7,560 | ) | (7,595 | ) | |||||||||||
| Income tax benefit (expense) | - | (44 | ) | - | - | - | - | - | 1,639 | (d) | 1,595 | |||||||||||||||
| Net loss | $ | (1,770 | ) | $ | 2,724 | $ | 1,261 | $ | (3,995 | ) | $ | (3,899 | ) | $ | (429 | ) | $ | 6,029 | $ | (5,921 | ) | $ | (6,000 | ) | ||
| Preferred stock dividends | - | - | - | - | - | - | - | - | - | |||||||||||||||||
| Net loss applicable to common<br> shareholders | $ | (1,770 | ) | $ | 2,724 | 1,261 | (3,995 | ) | (3,899 | ) | (429 | ) | 6,029 | (5,921 | ) | $ | (6,000 | ) | ||||||||
| Basic and diluted weighted average shares outstanding | 4,492 | 19,906 | (e) | 24,398 | ||||||||||||||||||||||
| Basic and diluted net loss per share | $ | (0.39 | ) | $ | (0.25 | ) |
See notes to unaudited pro forma condensed combined financial information.
U.S.Energy Corp.
Notesto Pro Forma Condensed Combined Financial Information
(Unaudited)
Note1. Unaudited Pro Forma Condensed Combined Statements of Operations
Adjustmentsto the Unaudited Pro Forma Condensed Combined Statement of Operations for the year ended December 31, 2021
The following adjustments have been made to the accompanying unaudited pro forma condensed combined statement of operations for the year ended December 31, 2021 to reflect the Acquisitions:
| a) | Represents<br> adjustments to eliminate the effects of assets and liabilities retained by Lubbock, Synergy and Sage Road and not associated with<br> the oil and natural gas properties acquired. |
|---|---|
| b) | Represents<br> a reclassification of $17.5 million and $1.4 million to oil revenue and natural gas and liquids revenue, respectively, from Lubbock’s,<br> Synergy’s, Llano’s, and Woodford’s oil and gas revenue to conform to U.S. Energy’s presentation. |
| c) | Reflects<br> adjustments to depreciation, depletion, accretion and amortization expense resulting from the change in basis of property, plant<br> and equipment acquired. |
| d) | Reflects<br> the income tax benefit related to the combined pro forma pretax loss during the year ended December 31, 2021, based on the statutory<br> tax rate of 21%. |
| e) | Reflects<br> 19.9 million shares of U.S. Energy common stock issued to Lubbock, Synergy and Sage Road as a portion of the consideration for the<br> Acquisitions. |
Note2. Supplemental Pro Forma Oil and Gas Information
The following tables present the estimated pro forma combined net proved developed and undeveloped oil and natural gas reserves as of December 31, 2021 for U.S. Energy, Lubbock, Synergy and Sage Road, along with a summary of changes in the quantities of net remaining proved reserves during the year ended December 31, 2021. The pro forma reserve information set forth below gives effect to the Acquisitions as if they had been completed on January 1, 2021.
| Oil | ||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (Barrels) | ||||||||||||||||||||||||
| Historical | ||||||||||||||||||||||||
| U.S. Energy<br> - As Reported | Lubbock<br> - As Reported | Synergy<br> - As Reported | Banner<br> - As Reported | Llano<br> - As Reported | Woodford<br> - As Reported | Eliminations | Pro Forma<br> Combined | |||||||||||||||||
| Proved developed and undeveloped reserves: | ||||||||||||||||||||||||
| Balance as of January 1, 2021 | 975,745 | 1,759,128 | 2,224,436 | 5,391,162 | 243,808 | 154,160 | (7,539,559 | ) | 3,208,880 | |||||||||||||||
| Revisions of previous estimates | 128,232 | 605,139 | 265,706 | 2,387,446 | (63,457 | ) | (51,436 | ) | (966,099 | ) | 2,305,531 | |||||||||||||
| Discoveries and extensions | - | - | - | - | - | - | - | - | ||||||||||||||||
| Purchases of minerals in place | 11,365 | - | - | - | - | - | - | 11,365 | ||||||||||||||||
| Sale of minerals in place | - | - | - | - | - | - | - | - | ||||||||||||||||
| Production | (93,722 | ) | (111,497 | ) | (138,220 | ) | (147,842 | ) | (21,161 | ) | (48,934 | ) | 106,480 | (454,896 | ) | |||||||||
| Balance as of December 31, 2021 | 1,021,620 | 2,252,770 | 2,351,922 | 7,630,766 | 159,190 | 53,790 | (8,399,178 | ) | 5,070,880 | |||||||||||||||
| Proved developed reserves: | ||||||||||||||||||||||||
| Balance as of January 1, 2021 | 975,745 | 1,011,363 | 2,224,436 | 2,164,010 | 155,919 | 70,650 | (3,393,243 | ) | 3,208,880 | |||||||||||||||
| Balance as of December 31, 2021 | 1,021,620 | 1,030,450 | 2,351,922 | 2,453,948 | 159,190 | 53,790 | (2,000,040 | ) | 5,070,880 | |||||||||||||||
| Proved undeveloped reserves: | ||||||||||||||||||||||||
| Balance as of January 1, 2021 | - | 747,765 | - | 3,227,152 | 87,889 | 83,510 | (4,146,316 | ) | - | |||||||||||||||
| Balance as of December 31, 2021 | - | 1,222,320 | - | 5,176,818 | - | - | (6,399,138 | ) | - | |||||||||||||||
| Gas | ||||||||||||||||||||||||
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| (Thousands of Cubic Feet Equivalent) ^(1)^ | ||||||||||||||||||||||||
| Historical | ||||||||||||||||||||||||
| U.S. Energy<br> - As Reported | Lubbock<br> - As Reported | Synergy<br> - As Reported | Banner<br> - As Reported | Llano<br> - As Reported | Woodford<br> - As Reported | Eliminations | Pro Forma<br> Combined | |||||||||||||||||
| Proved developed and undeveloped reserves: | ||||||||||||||||||||||||
| Balance as of January 1, 2021 | 1,676,948 | 1,116,274 | 230,671 | 3,940,905 | 68,033 | 42,610 | (2,604,451 | ) | 4,470,990 | |||||||||||||||
| Revisions of previous estimates | 437,757 | 2,241,228 | 157,309 | 552,052 | (6 | ) | (12,398 | ) | 1,619,160 | 4,995,102 | ||||||||||||||
| Discoveries and extensions | - | - | - | - | - | - | - | - | ||||||||||||||||
| Purchases of minerals in place | - | - | - | - | - | - | - | - | ||||||||||||||||
| Sale of minerals in place | - | - | - | - | - | - | - | - | ||||||||||||||||
| Production | (176,657 | ) | (134,732 | ) | (41,411 | ) | (577,427 | ) | (5,567 | ) | (16,822 | ) | (3,546 | ) | (956,162 | ) | ||||||||
| Balance as of December 31, 2021 | 1,938,048 | 3,222,770 | 346,569 | 3,915,530 | 62,460 | 13,390 | (988,837 | ) | 8,509,930 | |||||||||||||||
| Proved developed reserves: | ||||||||||||||||||||||||
| Balance as of January 1, 2021 | 1,676,948 | 604,863 | 230,671 | 3,940,905 | 68,033 | 3,250 | (2,053,680 | ) | 4,470,990 | |||||||||||||||
| Balance as of December 31, 2021 | 1,938,048 | 606,290 | 346,569 | 3,915,530 | 62,460 | 13,390 | 1,627,643 | 8,509,930 | ||||||||||||||||
| Proved undeveloped reserves: | ||||||||||||||||||||||||
| Balance as of January 1, 2021 | - | 511,411 | - | - | - | 39,360 | (550,771 | ) | - | |||||||||||||||
| Balance as of December 31, 2021 | - | 2,616,480 | - | - | - | - | (2,616,480 | ) | - |
(1) Thousands of cubic feet equivalent consist of natural gas reserves in thousands of cubic feet plus NGLs converted to thousands of cubic feet using a factor of 6 thousands of cubic feet for each barrel of NGL.
| Total<br> Equivalent Reserves | ||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (Barrels) | ||||||||||||||||||||||||
| Historical | ||||||||||||||||||||||||
| U.S. Energy<br> - As Reported | Lubbock<br> - As Reported | Synergy<br> - As Reported | Banner<br> - As Reported | Llano<br> - As Reported | Woodford<br> - As Reported | Eliminations | Pro Forma<br> Combined | |||||||||||||||||
| Proved developed and undeveloped reserves: | ||||||||||||||||||||||||
| Balance as of January 1, 2021 | 1,255,236 | 1,945,174 | 2,262,881 | 6,047,980 | 255,147 | 161,262 | (7,973,634 | ) | 3,954,046 | |||||||||||||||
| Revisions of previous estimates | 201,192 | 978,677 | 291,924 | 2,479,455 | (63,458 | ) | (53,502 | ) | (696,239 | ) | 3,138,049 | |||||||||||||
| Discoveries and extensions | - | - | - | - | - | - | - | - | ||||||||||||||||
| Purchases of minerals in place | 11,365 | - | - | - | - | - | - | 11,365 | ||||||||||||||||
| Sale of minerals in place | - | - | - | - | - | - | - | - | ||||||||||||||||
| Production | (123,165 | ) | (133,952 | ) | (145,122 | ) | (244,080 | ) | (22,089 | ) | (51,738 | ) | 105,889 | (614,257 | ) | |||||||||
| Balance as of December 31, 2021 | 1,344,628 | 2,789,899 | 2,409,683 | 8,283,355 | 169,600 | 56,022 | (8,563,984 | ) | 6,489,203 | |||||||||||||||
| Proved developed reserves: | ||||||||||||||||||||||||
| Balance as of January 1, 2021 | 1,255,236 | 1,112,174 | 2,262,881 | 2,820,828 | 167,258 | 71,192 | (3,735,523 | ) | 3,954,046 | |||||||||||||||
| Balance as of December 31, 2021 | 1,344,628 | 1,131,499 | 2,409,683 | 3,106,537 | 169,600 | 56,022 | (1,728,766 | ) | 6,489,203 | |||||||||||||||
| Proved undeveloped reserves: | ||||||||||||||||||||||||
| Balance as of January 1, 2021 | - | 833,000 | - | 3,227,152 | 87,889 | 90,070 | (4,238,111 | ) | - | |||||||||||||||
| Balance as of December 31, 2021 | - | 1,658,400 | - | 5,176,818 | - | - | (6,835,218 | ) | - |
The pro forma standardized measure of discounted future net cash flows relating to proved oil and natural gas reserves as of December 31, 2021 is as follows:
| Historical | |||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| U.S. Energy<br> - As Reported | Lubbock<br> - As Reported | Synergy<br> - As Reported | Banner<br> - As Reported | Llano<br> - As Reported | Woodford<br> - As Reported | Eliminations | Acquisition | Pro Forma<br> Combined | |||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||||||
| Future cash inflows | $ | 76,041 | $ | 157,776 | $ | 129,119 | $ | 461,888 | $ | 10,614 | $ | 3,395 | $ | (483,031 | ) | $ | - | $ | 355,802 | ||||||||
| Future cash outflows: | |||||||||||||||||||||||||||
| Production costs | (40,350 | ) | (53,750 | ) | (54,119 | ) | (225,705 | ) | (4,844 | ) | (1,519 | ) | 216,586 | - | (163,701 | ) | |||||||||||
| Development costs | - | (27,784 | ) | - | (35,115 | ) | (68 | ) | (118 | ) | 60,850 | - | (2,235 | ) | |||||||||||||
| Income taxes | (2,818 | ) | - | - | - | - | - | - | (22,868 | ) | (25,686 | ) | |||||||||||||||
| Future net cash flows | 32,873 | 76,242 | 75,000 | 201,068 | 5,702 | 1,758 | (205,595 | ) | (22,868 | ) | 164,180 | ||||||||||||||||
| 10% annual discount factor | (13,706 | ) | (35,214 | ) | (43,127 | ) | (105,000 | ) | (2,494 | ) | (429 | ) | 112,935 | 13,703 | (73,332 | ) | |||||||||||
| Standardized measure of discounted future net cash<br> flows | $ | 19,167 | $ | 41,028 | $ | 31,873 | $ | 96,068 | $ | 3,208 | $ | 1,329 | $ | (92,660 | ) | $ | (9,165 | ) | $ | 90,848 |
The changes in the pro forma standardized measure of discounted future net cash flows relating to proved oil and natural gas reserves for the year ended December 31, 2021 are as follows:
| Historical | |||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| U.S. Energy<br> - As Reported | Lubbock<br> - As Reported | Synergy<br> - As Reported | Banner<br> - As Reported | Llano<br> - As Reported | Woodford<br> - As Reported | Eliminations | Acquisition | Pro Forma<br> Combined | |||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||||||
| Standardized measure, beginning of year | $ | 8,586 | $ | 13,805 | $ | 11,609 | $ | 26,056 | $ | 1,864 | $ | 1,818 | $ | (27,066 | ) | $ | - | $ | 36,672 | ||||||||
| Sales of oil and natural gas, net of production costs | (3,766 | ) | (5,278 | ) | (4,641 | ) | (4,712 | ) | (514 | ) | (1,499 | ) | 1,875 | - | (18,535 | ) | |||||||||||
| Net changes in prices and production costs | 11,675 | 20,342 | 20,690 | 39,760 | 1,503 | 1,426 | (61,728 | ) | - | 33,668 | |||||||||||||||||
| Changes in estimated future development costs | 302 | - | - | (13,833 | ) | 1,189 | 699 | 11,443 | - | (200 | ) | ||||||||||||||||
| Extensions and discoveries | - | - | - | - | - | - | - | - | - | ||||||||||||||||||
| Purchases of minerals in place | 216 | - | - | - | - | - | - | - | 216 | ||||||||||||||||||
| Sales of minerals in place | - | - | - | - | - | - | - | - | - | ||||||||||||||||||
| Revisions in previous quantity estimates | 3,080 | 11,333 | 1,498 | 33,632 | (1,214 | ) | (1,354 | ) | (2,265 | ) | - | 44,710 | |||||||||||||||
| Previously estimated development costs incurred | (302 | ) | - | - | 6,428 | 172 | - | (6,428 | ) | - | (130 | ) | |||||||||||||||
| Net changes in income taxes | (1,389 | ) | - | - | - | - | - | - | (9,165 | ) | (10,554 | ) | |||||||||||||||
| Accretion of discount | 674 | 1,380 | 1,161 | 3,274 | 224 | 232 | (4,302 | ) | - | 2,643 | |||||||||||||||||
| Changes in timing and other | 91 | (554 | ) | 1,556 | 5,463 | (16 | ) | 7 | (4,189 | ) | - | 2,358 | |||||||||||||||
| Standardized measure, end of year | $ | 19,167 | $ | 41,028 | $ | 31,873 | $ | 96,068 | $ | 3,208 | $ | 1,329 | $ | (92,660 | ) | $ | (9,165 | ) | $ | 90,848 |