# Riley Exploration Permian, Inc. (REPX) FY 2023 MD&A

Verbatim Item 7 Management's Discussion and Analysis from Riley Exploration Permian, Inc.'s 10-K for fiscal year 2023.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1001614/000100161424000010/rep-20231231.htm
Accession: 0001001614-24-000010
Filing date: 2024-03-06
Report date: 2023-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Published MD&A gate trimmed front/tail over-capture.
Confidence: high

Company profile: /company/REPX/
All MD&A years: /company/REPX/mda/
Previous year: /company/REPX/mda/fy2022/ (FY 2022)
Next year: /company/REPX/mda/fy2024/ (FY 2024)

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of the Company’s financial condition and results of operations should be read in conjunction with the Company’s consolidated financial statements and related notes thereto presented in this Annual Report. The following discussion contains “forward-looking statements” that reflect the Company’s future plans, estimates, beliefs and expected performance. The Company’s actual results could differ materially from those discussed in these forward-looking statements. See "Cautionary Statement Regarding Forward-Looking Statements" and "Part I. Item 1A. Risk Factors."

Overview

We operate in the upstream segment of the oil and natural gas industry and are focused on steadily growing conventional reserves, production and cash flow through the acquisition, exploration, development and production of oil, natural gas and NGLs primarily in the Permian Basin in West Texas and Southeastern New Mexico. We intend to continue to develop our reserves and increase production through development drilling and exploration activities and through acquisitions that meet our strategic and financial objectives.

Financial and Operating Highlights

Financial and operating results reflect the following:

•Increased total net equivalent production by 62% to 18.6 MBoe/d for the year ended December 31, 2023, as compared to the year ended December 31, 2022

•During the year ended December 31, 2023, 24 gross (18.2 net) horizontal wells were brought online to production

•Realized average combined price on production sold of $54.91 per Boe, before derivative settlements, during the year ended December 31, 2023, including $75.62 per barrel for oil

•Generated cash flow from operations of $207.2 million for the year ended December 31, 2023

•Incurred total accrual (activity based) capital expenditures before acquisitions of $135.8 million for the year ended December 31, 2023 as compared to $123.1 million for the year ended December 31, 2022

•Paid cash dividends on common shares of $27.7 million during the year ended December 31, 2023

•$15.3 million in cash and $356.0 million in total debt as of December 31, 2023

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Recent Developments

Market Conditions, Commodity Prices and Interest Rates

The U.S. and global economies and markets have experienced heightened volatility following impactful geopolitical events, the effects of widespread inflation and the impact of significantly higher interest rates. Prices for oil and natural gas are determined primarily by prevailing market conditions, which have been and could continue to be volatile.

The combination of geopolitical events, inflation and the rising interest rate environment has led to increasing forecasts of a U.S. or global recession. Any such recession could prolong market volatility or cause a decline in commodity prices, among other potential impacts.

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

New Mexico Acquisition

On April 3, 2023, the Company completed the New Mexico Acquisition from Pecos for an adjusted purchase price of $325 million. The New Mexico Acquisition was funded through a combination of borrowings under the Company's Credit Facility and proceeds from the issuance of $200 million of Senior Notes.

Power Joint Venture

In January 2023, the Company entered into an agreement to form a joint venture created for the purpose of constructing a new power infrastructure for onsite, baseload power generation using produced natural gas for its Champions Field. The Company has an initial 30% investment in the joint venture company, RPC Power LLC, and is committed to providing its portion of capital. Construction of the onsite power generation facility was predominately completed during 2023 with temporary power generation beginning in November 2023 and the onsite power generation facility expected to be operational in spring of 2024.

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Results of Operations

Comparison for the years ended December 31, 2023 and 2022

The following table sets forth selected operating data for the years ended December 31, 2023 and 2022:

[[GREPCENT_TABLE]]
[["","","Years Ended December 31,"],["","","2023","","2022"],["Revenues (in thousands):"],["Oil sales","","$","363,125","","","$","298,723"],["Natural gas sales","","2,612","","","10,755"],["NGLs","","6,910","","","9,865"],["Oil and natural gas sales, net","","$","372,647","","","$","319,343"],["Production Data, net:"],["Oil (MBbls)","","4,802","","","3,217"],["Natural gas (MMcf)","","5,865","","","3,229"],["NGLs (MBbls)","","1,006","","","444"],["Total (MBoe)","","6,786","","","4,199"],["Daily combined volumes (Boe/d)","","18,590","","11,505"],["Daily oil volumes (Bbls/d)","","13,156","","8,814"],["Average Realized Prices:"],["Oil ($ per Bbl)","","$","75.62","","","$","92.86"],["Natural gas ($ per Mcf)","","0.45","","","3.33"],["NGLs ($ per Bbl)","","6.87","","","22.22"],["Combined ($ per Boe)","","$","54.91","","","$","76.05"],["Average Realized Prices, including derivative settlements:(1)"],["Oil ($ per Bbl)","","$","71.93","","","$","71.75"],["Natural gas ($ per Mcf)","","0.53","","","1.06"],["NGLs ($ per Bbl)","","6.87","","","22.22"],["Combined ($ per Boe)","","$","52.38","","","$","58.13"]]
[[/GREPCENT_TABLE]]

_____________________

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

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Oil and Natural Gas Revenues

Our revenues are derived from the sale of our oil and natural gas production, including the sale of NGLs that are extracted from our natural gas during processing. Revenues from product sales are a function of the volumes produced, product quality, market prices, gas Btu content, as well as midstream counterparty fees and deducts. Our revenues from oil, natural gas and NGL sales do not include the effects of derivatives. Our revenues may vary significantly from period to period as a result of changes in the volume of production sold or changes in commodity prices. The Company’s total oil and natural gas revenue, net increased $53.3 million, or 17%, for the year ended December 31, 2023 compared to the year ended December 31, 2022. The Company’s realized average combined price on its production for the year ended December 31, 2023 decreased by $21.14 per Boe, or 28% compared to the year ended December 31, 2022.

Oil revenues

•For the year ended December 31, 2023, oil revenues increased by $64.4 million, or 22%, compared to the year ended December 31, 2022. Of the increase, $147.2 million was attributable to an increase in volume, which was partially offset by $82.7 million attributable to a decrease in our realized price. Volumes increased by 49%, while realized prices decreased by 19% as compared to the year ended December 31, 2022. The oil and natural gas properties acquired in the New Mexico Acquisition contributed $71.9 million to the Company's oil revenues for the 2023 period.

•Oil volumes increased during the year ended December 31, 2023 due to oil and natural gas assets acquired in the New Mexico Acquisition, production from new wells and workovers performed on existing wells. During the year ended December 31, 2023, we brought online 24 gross (18.2 net) horizontal wells. The New Mexico Acquisition contributed oil volumes of approximately 931 MBbls for the 2023 period.

•The average WTI price decreased by $17.32 per Bbl during the year ended December 31, 2023 when compared to the year ended December 31, 2022.

Natural gas revenues

•For the year ended December 31, 2023, natural gas revenues decreased by $8.1 million, or 76%, compared to the year ended December 31, 2022. Realized natural gas prices decreased by 87% partially offset by an increase in volumes of 82% as compared to the year ended December 31, 2022. The oil and natural gas properties acquired in the New Mexico Acquisition contributed $2.1 million to the Company's natural gas revenues for the 2023 period.

•Natural gas sales volumes increased during the year ended December 31, 2023 compared to the year ended December 31, 2022 due to oil and natural gas properties acquired in the New Mexico Acquisition, production from new wells and workovers performed on existing wells. The New Mexico Acquisition contributed 2,179 MMcf to the Company's natural gas volumes for the 2023 period.

•The average Henry Hub price decreased by $3.92 per Mcf during the year ended December 31, 2023 compared to the year ended December 31, 2022.

NGLs revenues

•For the year ended December 31, 2023, NGL revenues decreased by $3.0 million, or 30%, compared to the year ended December 31, 2022. Realized prices decreased by 69%, partially offset by an increase in volumes of 126% as compared to the year ended December 31, 2022. The oil and natural gas properties acquired in the New Mexico Acquisition contributed $5.3 million to the Company's NGL revenues for the 2023 period.

•NGL sales volumes increased during the year ended December 31, 2023 compared to the year ended December 31, 2022 due to the New Mexico Acquisition, production from new wells and workovers performed on existing wells. The oil and natural gas properties acquired in the New Mexico Acquisition contributed 451 MBbls to the Company's NGL volumes for the 2023 period.

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Contract Services - Related Party

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

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2023","","2022"],["","(In thousands)"],["Contract services - related parties(1)","$","2,400","","","$","2,400"],["Cost of contract services - related parties(2)","579","","","450"],["Gross profit from contract services","$","1,821","","","$","1,950"]]
[[/GREPCENT_TABLE]]
_____________________

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

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

Costs and Expenses

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

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2023","","2022"],["Costs and Expenses:","(In thousands)"],["Lease operating expenses","$","58,817","","","$","32,458"],["Production and ad valorem taxes","$","25,559","","","$","19,273"],["Exploration costs","$","4,165","","","$","2,032"],["Depletion, depreciation, amortization and accretion","$","65,055","","","$","32,113"],["Impairment of oil and natural gas properties","$","9,760","","","$","7,325"],["Administrative costs","$","26,569","","","$","18,496"],["Share-based compensation","6,833","","","3,439"],["General and administrative expense","$","33,402","","","$","21,935"],["Transaction costs","$","5,817","","","$","2,638"],["Interest expense, net","$","31,816","","","$","1,090"],["(Gain) loss on derivatives, net","$","(6,193)","","","$","51,574"],["Income tax expense","$","34,461","","","$","32,844"]]
[[/GREPCENT_TABLE]]

Lease Operating Expenses ("LOE")

LOE are the costs incurred in the operation and maintenance of producing properties. Expenses for electricity, compression, direct labor, saltwater disposal and materials and supplies comprise the most significant portion of our lease operating expenses. Certain operating cost components, such as direct labor and materials and supplies, generally remain relatively fixed across broad production volume ranges, but can fluctuate depending on activities performed during a specific period. For instance, repairs to our pumping equipment or surface facilities or subsurface maintenance result in increased production expenses in periods during which they are performed. Certain operating cost components, such as saltwater disposal associated with produced water, are variable and increase or decrease as hydrocarbon production levels and the volume of completion water disposal increases or decreases.

The Company’s LOE increased by $26.4 million for the year ended December 31, 2023 compared to the year ended December 31, 2022. For the year ended December 31, 2023, the increase was driven by a $20.0 million increase due to higher production, including $13.3 million attributable to the New Mexico Acquisition, and a $10.1 million increase due to higher

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workover expense, including $7.6 million attributable to the New Mexico Acquisition, partially offset by a $3.7 million decrease primarily related to lower utility rates.

Production and Ad Valorem Tax Expense

Production taxes are paid on produced oil, natural gas and NGLs based on a percentage of revenues at fixed rates established by federal, state or local taxing authorities. In general, the production taxes we pay correlate to changes in our oil, natural gas and NGL revenues. We are also subject to ad valorem taxes in the counties where our production is located. Ad valorem taxes are generally based on the valuation of our oil and natural gas properties, which also trend with oil and natural gas prices and vary across the different counties in which we operate.

Production and ad valorem taxes increased by $6.3 million for the year ended December 31, 2023 compared to the year ended December 31, 2022. Production taxes increased primarily due to increases in our oil and natural gas sales, net, including revenues from production associated with the oil and natural gas properties acquired in the New Mexico Acquisition, partially offset by lower commodity prices. Ad valorem taxes increased for the year ended December 31, 2023 based on higher estimated property values and higher tax rates for the current taxable period.

Exploration Costs

Exploration costs consist of exploratory well expense, expiration of unproved leasehold, and geological and geophysical costs which include seismic survey costs. The following table presents exploration costs for the years ended December 31, 2023 and 2022:

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2023","","2022"],["","(In thousands)"],["Exploratory well expense(1)","$","3,447","","","$","\u2014"],["Expiration of unproved leasehold","696","","","1,953"],["Geological and geophysical costs","22","","","79"],["Total exploration costs","$","4,165","","","$","2,032"]]
[[/GREPCENT_TABLE]]

_____________________

(1)The Company determined that an exploratory well was not capable of producing commercial quantities and expensed the associated drilling costs during the year ended December 31, 2023,

Depletion, Depreciation, Amortization and Accretion Expense

Depletion, depreciation and amortization is the systematic expensing of the capitalized costs incurred to acquire, explore and develop oil, natural gas and NGLs. All costs incurred in the acquisition, exploration and development of properties (excluding costs of surrendered and abandoned leaseholds, delay lease rentals, dry holes and overhead related to exploration activities) are capitalized. Capitalized costs are depleted using the units-of-production method.

Accretion expense relates to ARO. We record the fair value of the liability for ARO in the period in which the liability is incurred (at the time the wells are drilled or acquired) with the offset to property cost. The liability accretes each period until it is settled or the well is sold, at which time the liability is removed.

Depletion, depreciation, amortization and accretion expense increased by $32.9 million for the year ended December 31, 2023, compared to the year ended December 31, 2022. The increase for the year ended December 31, 2023 was primarily due to depletion associated with the oil and natural gas acquired in the New Mexico Acquisition and higher production on historical properties along with a higher depletion rate on the historical properties.

Impairment of Oil and Natural Gas Properties

The cost of proved oil and natural gas properties are assessed on a field-by-field basis for impairment at least annually or whenever events and circumstances indicate that a decline in the recoverability of their carrying value may have occurred. We compare the expected undiscounted future cash flows of the oil and natural gas properties to the carrying amount of the oil, natural gas and NGL properties to determine if the carrying amount is recoverable. If the carrying amount exceeds the estimated undiscounted future cash flows, we adjust the carrying amount of the oil and natural gas properties to estimated fair value.

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

General and Administrative Expense ("G&A")

G&A expenses include corporate overhead such as payroll and benefits for our corporate staff, share-based compensation expense, office rent for our headquarters, audit and other fees for professional services and legal compliance. G&A expenses are reported net of overhead recoveries.

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

Transaction Costs

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

Interest Expense

Interest expense increased by $30.7 million during the year ended December 31, 2023 when compared to the year ended December 31, 2022. The increase in interest expense was primarily due to the higher debt balances as a result of financing for the New Mexico Acquisition, along with higher interest rates on borrowings under our Credit Facility for the year ended December 31, 2023 when compared to rates for the year ended December 31, 2022. Additionally, interest expense decreased during 2022 as a result of the Company settling the remaining open position on its previous interest rate swap resulting in a settlement benefit of $1.5 million.

Gain/Loss on Derivatives

The Company recognizes settlements and changes in the fair value of its derivative contracts as a single component within other income (expense) on its consolidated statements of operations. We have oil and natural gas derivative contracts, including fixed price swaps, basis swaps and collars, that settle against various indices. The following table presents the components of the Company's gain (loss) on derivatives, net for the years ended December 31, 2023 and 2022:

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2023","","2022"],["","(In thousands)"],["Settlements on derivative contracts","$","(17,221)","","","$","(75,257)"],["Non-cash gain on derivatives","23,414","","","23,683"],["Gain (loss) on derivatives, net","$","6,193","","","$","(51,574)"]]
[[/GREPCENT_TABLE]]

Our earnings are affected by the changes in value of our derivative portfolio between periods and the related cash received or paid upon settlement of our derivatives. To the extent the future commodity price outlook declines between periods, we will have mark-to-market gains, while future commodity price increases between measurement periods result in mark-to-market losses.

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The gain on derivatives for the year ended December 31, 2023 was $6.2 million compared to a loss on derivatives of $51.6 million for the year ended December 31, 2022. The change was primarily driven by a $58.0 million decrease in the cash payments on settlements of derivatives due to the decrease in oil and natural gas prices for the year ended December 31, 2023 compared to the year ended December 31, 2022.

Income Tax Expense

Deferred income taxes are provided to reflect the future tax consequences or benefits of differences between the tax basis of assets and liabilities and their reported amounts in the financial statements using enacted tax rates. See Note 11 - Income Taxes in the Company's consolidated financial statements in "Item 15. Exhibits and Financial Statement Schedules for a full discussion of income taxes.

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2023","","2022"],["","(In thousands)"],["Current income tax expense","$","6,872","","","$","4,472"],["Deferred income tax expense","27,589","","","28,372"],["Total income tax expense","$","34,461","","","$","32,844"],["Effective income tax rate","23.6","%","","21.7","%"]]
[[/GREPCENT_TABLE]]

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

Liquidity and Capital Resources

The business of exploring for, developing and producing oil and natural gas is capital intensive. Because oil, natural gas and NGL reserves are a depleting resource, like all upstream operators, we must make capital investments to grow and even sustain production. The Company’s principal liquidity requirements are to finance its operations, fund capital expenditures and acquisitions, make cash distributions and satisfy any indebtedness obligations. Cash flows are subject to a number of variables, including the level of oil and natural gas production and prices, and the significant capital expenditures required to more fully develop the Company’s oil and natural gas properties. Historically, our primary sources of capital funding and liquidity have been our cash on hand, cash flow from operations, borrowings under our Credit Facility and the issuance of our Senior Notes. At times and as needed, we may also issue debt or equity securities, including through transactions under our shelf registration statement filed with the SEC. We estimate the combination of the sources of capital discussed above will continue to be adequate to meet our short and long-term liquidity needs.

Cash on hand and operating cash flow can be subject to fluctuations due to trends and uncertainties that are beyond our control. Likewise, our ability to issue equity and obtain credit facilities on favorable terms may be impacted by a variety of market factors as well as fluctuations in our results of operations. For further discussion of risks related to our liquidity and capital resources, see "Item 1A. Risk Factors."

Working Capital

Working capital is the difference in our current assets and our current liabilities. Working capital is an indication of liquidity and potential need for short-term funding. The change in our working capital requirements is driven generally by changes in accounts receivable, accounts payable, commodity prices, credit extended to, and the timing of collections from customers, the level and timing of spending for expansion activity, and the timing of debt maturities. As of December 31, 2023, we had a working capital deficit of $31.1 million compared to a deficit of $25.3 million as of December 31, 2022. The current portion of our Senior Notes, which includes our regularly scheduled principal payments of $5 million per quarter, accounts for $20.0 million of our working capital deficit at December 31, 2023. Additionally, increases in our revenue payable, resulting from revenue suspense associated with oil and natural gas properties acquired in the New Mexico Acquisition, contributed to the working capital deficit. Partially offsetting these higher current liabilities was an increase of $5.0 million in current derivative assets and higher accounts receivable associated with increased oil and natural gas sales. We utilize our Credit Facility and cash on hand to manage the timing of cash flows and fund short-term working capital deficits. Our current derivative assets and liabilities represent the mark-to-market value as of December 31, 2023 of future commodity production

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which will settle on a monthly basis through the end of their contractual terms. This aligns with the receipt of oil and natural gas revenues on a monthly basis.

Cash Flows

The following table summarizes the Company’s cash flows for the years ended December 31, 2023 and 2022:

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["","","2023","","2022"],["","","(In thousands)"],["Net cash provided by operating activities","","$","207,195","","","$","170,288"],["Net cash used in investing activities","","$","(469,556)","","","$","(128,256)"],["Net cash provided by (used in) financing activities","","$","264,379","","","$","(37,048)"]]
[[/GREPCENT_TABLE]]

Operating Activities

The Company’s net cash provided by operating activities increased by $36.9 million, or 22%, to $207.2 million for the year ended December 31, 2023 from $170.3 million for the year ended December 31, 2022. The increase was primarily driven by a decrease of $58.0 million in payments to settle commodity derivative contracts and an increase in revenues, partially offset by an increase in operating expenses.

Investing Activities

The Company's cash flows used in investing activities increased by $341.3 million to $469.6 million for the year ended December 31, 2023 from $128.3 million for the year ended December 31, 2022. The increase was primarily due to the $324.7 million for the New Mexico Acquisition. Investing activities also increased due to higher year-over-year capital spending for additions to oil and natural gas properties of $23.1 million, or 21%, related to the Company's increased drilling and completion activity during the year ended December 31, 2023 compared to the year ended December 31, 2022, partially attributable to the larger asset base following the New Mexico Acquisition.

Financing Activities

Net cash flow provided by financing activities increased by $301.4 million for the year ended December 31, 2023 compared to the year ended December 31, 2022. During the year ended December 31, 2023, the Company had net borrowings on its Credit Facility of $129.0 million and proceeds from issuance of its Senior Notes, net of repayments, of $173.0 million, compared to a net paydown of $9.0 million on its Credit Facility for the same period in 2022. The increase in proceeds from borrowings was primarily attributable to the New Mexico Acquisition. In addition, the Company distributed an additional $2.6 million of dividends on common stock during the year ended December 31, 2023 compared to the same period in 2022 as a result of higher outstanding share count and a higher dividend per share.

Credit Facility and Senior Notes

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

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

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

See Note 9 - Long-Term Debt in the Company's consolidated financial statements in "Item 15. Exhibits and Financial Statement Schedules" for a full discussion of our long-term debt.

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Distributions

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

Contractual Obligations

As of December 31, 2023, the Company has commitments with its primary midstream counterparty and has purchase commitments totaling $13.1 million related to its 2024 drilling program. In addition, the Company entered into an agreement to form a joint venture and is committed to contributing its portion of capital expenditures into the joint venture company and further entered into a tolling agreement to commit to providing the natural gas needed for the joint venture. See Note 13 - Commitments and Contingencies in the Company's consolidated financial statements in "Item 15. Exhibits and Financial Statement Schedules" for a full discussion of our commitments and contingencies.

Critical Accounting Estimates

The preparation of financial statements requires the Company to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. These estimates and assumptions may also affect 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.

Changes in facts and assumptions or the discovery of new information may result in revised estimates. Actual results could differ from these estimates and assumptions used in preparation of the Company’s consolidated financial statements and it is at least reasonably possible these estimates could be revised in the near term and these revisions could be material.

Method of Accounting for Oil and Natural Gas Properties

We utilize the successful efforts method of accounting for our oil and natural gas exploration and development activities which requires management's assessment of the proper designation of wells and associated costs as developmental or exploratory. This classification assessment is dependent on the determination and existence of proved reserves, which is a critical estimate discussed in the section below. The classification of developmental and exploratory costs has a direct impact on the amount of costs we initially recognize as exploration expense or capitalize, then subject to DD&A calculations and impairment assessments and valuations.

Once a well is drilled, the determination that proved reserves have been discovered may take considerable time and requires both judgment and application of industry experience. At the end of each quarter, the status of all suspended exploratory drilling costs are reviewed to determine whether the costs should continue to remain capitalized or shall be expensed. When making this determination, current activities, near-term plans for additional exploratory or appraisal drilling and the likelihood of reaching a development program is considered.

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

Once a well is drilled, capitalized well costs for drilling and completion activities must be evaluated at least yearly or whenever facts and circumstances indicate a decline in the recoverability of their carrying value may have occurred. At the end of each year, the undiscounted future cash flows are compared to the carrying value on a field basis to evaluate if the carrying value is recoverable. If the carrying value is not recoverable, the Company will compare the carrying value of the asset to its fair value and recognize any impairment loss in the period. Significant inputs and judgements are used in determining the fair value of the assets. The Company utilizes a discounted cash flow model in order to estimate fair value by modeling the present value of future cash flows, net of estimated operating and development costs using estimates of reserves, future commodity pricing, future production estimates, anticipated capital expenditures, and various discount rates commensurate with the risk

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and current market conditions associated with the expected cash flow projected. During the year ended December 31, 2023, the Company recognized a proved property impairment of $9.8 million relating to certain properties in Texas outside of the Company's acreage in the Champions Field. The Company recognized an impairment loss on proved properties of $7.3 million for the year ended December 31, 2022, which related to a decrease in fair value of its historical properties in New Mexico.

Oil and Natural Gas Reserves

Our estimates of proved and proved developed reserves are a major component of our depletion calculation. Additionally, our proved reserves represent the element of these calculations that require the most subjective judgments. Estimates of reserves are forecasts based on engineering data, projected future rates of production and the timing of future expenditures. The process of estimating oil, natural gas and NGL reserves requires substantial judgment, resulting in imprecise determinations, particularly for new discoveries. Different reserve engineers may make different estimates of reserve quantities based on the same data. A third-party reservoir engineering firm prepares our reserve report, which the estimates are based off of technical and economic data including, but not limited to, well test data, production data, historical price and cost information, and property ownership interests.

The passage of time provides more qualitative information regarding estimates of reserves, when revisions are made to prior estimates to reflect updated information. The data for a given reservoir may also change substantially over time as a result of numerous factors, including, but not limited to, additional development activity, evolving production history and continual reassessment of the viability of production under varying economic conditions.

Business Combinations

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

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

Estimated fair values assigned to assets acquired can have a significant impact on future results of operations presented in the Company's financial statements. A higher fair value assigned to a property results in higher DD&A expense, which results in lower net earnings. In the event that future commodity prices or reserve quantities are lower than those used as inputs to determine estimates of acquisition date fair values, the likelihood increases that certain costs may be determined to not be recoverable.

See Note 4 - Acquisitions of Oil and Natural Gas Properties in the Company's consolidated financial statements in "Item 15. Exhibits and Financial Statement Schedules" for a full discussion of our acquisitions.

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