Riley Exploration Permian, Inc. (REPX) FY 2024 MD&A

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

Riley Permian is a growth-oriented, independent oil and natural gas company focused on horizontal drilling of conventional oil-saturated and liquids-rich formations that produce long-term stable cash flows in the Permian Basin. The majority of our acreage is located in Yoakum County, Texas and Eddy County, New Mexico.

Our strategic business objectives include enhancing the rate of return on our invested capital, generating sustainable free cash flow, maintaining a strong and flexible balance sheet while maximizing our returns to shareholders. We implement this strategy primarily through identification and capture of attractive development opportunities, optimization of our assets and pursuing complementary growth opportunities that increase our scale and meet our strategic and financial objectives.

Recent Developments

Geopolitical and Economic Conditions

Commodity prices remain volatile. General domestic and international political and economic conditions, including the military conflict between Russia and Ukraine, conflicts in the Middle East, and the U.S. and global response to such conflicts, global economic growth, actions of OPEC+ countries, and implementation of tariffs could prolong market volatility or cause a decline in commodity prices.

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

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

2024 New Mexico Asset Acquisition

On May 7, 2024, the Company completed the acquisition of oil and natural gas properties in Eddy County, New Mexico ("2024 New Mexico Asset Acquisition"), which included 13,900 contiguous net acres adjacent to the Company's existing acreage in Eddy County, for a cash purchase price of approximately $19.1 million plus $0.5 million in transaction costs. The 2024 New Mexico Asset Acquisition was accounted for as an asset acquisition, with the final purchase price and transaction costs being capitalized to oil and natural gas properties. The acquisition was funded through a combination of proceeds from the 2024 Equity Offering and cash on hand.

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RPC Power Joint Venture

In January 2023, the Company formed a joint venture, RPC Power, for the purpose of constructing, owning and operating power generation assets which became fully operational in September of 2024. These assets use the Company’s produced natural gas to power a portion of our oilfield operations in Yoakum County, Texas. In May 2024, the Company entered into the Second Amended and Restated Limited Liability Company Agreement ("A&R LLC Agreement") to expand the scope of our joint venture to include the constructing, owning, and operating of additional new power generation and storage assets, which are expected to be operational beginning in late 2025 through 2026, for the sale of energy and ancillary services to ERCOT. In November 2024, the Company signed the Second Amendment to the A&R LLC Agreement, which increased the capital commitment for each owner from $42.5 million to $51.5 million. As of December 31, 2024, the Company owned 50% of the joint venture. On February 28, 2025, the Company contributed an additional $6.3 million to the joint venture which increased our total capital contributions to $30 million.

2024 Equity Offering

On April 8, 2024, the Company issued and sold 1,015,000 shares of common stock at a price of $27.00 per share. Net proceeds from the issuance were approximately $25.4 million, after deducting underwriting discounts and commissions and expenses.

Credit Facility Amendment

On December 13, 2024, the Company entered into the sixteenth amendment to the Credit Facility to, among other things, extend the stated maturity date from April 2026 to December 2028 (or if any Senior Notes are then outstanding, the date that is 181 days prior to the earliest stated maturity date of such Senior Notes, in this case October 2027), increase the borrowing base from $375 million to $400 million, and add one new lender to the lending group.

Gas Purchase Agreement

We believe the successful execution of the Company's New Mexico development plan is dependent upon maintaining operational control and securing reliable processing and downstream markets for our natural gas. As part of this plan, the Company signed a long-term gas purchase agreement for our New Mexico field with a new midstream counterparty, which includes dedicated acreage for a significant portion of the Company’s oil and gas assets in New Mexico, reimbursement by the Company of construction costs incurred by the midstream counterparty to connect to the Company’s pipeline (subject to a monetary cap of $18.7 million) and an initial 15-year term from the in-service date. In conjunction with the agreement, the Company intends to construct, own and operate low and high-pressure gathering lines and compression facilities that will connect to our new high capacity 20-inch natural gas pipeline to be constructed by the Company and designed to handle gas volumes of up to 150 MMcf per day. We currently anticipate the in-service date will be before the end of 2026. The Board of Directors approved an aggregate of approximately $130 million in capital expenditures to complete these initial projects of our midstream development plan.

Oil & Gas Property Impairments

At December 31, 2024, we recognized a non-cash $11.3 million impairment of proved properties comprised of a $9.5 million impairment in Texas, outside of the Champions field, and a $1.8 million impairment in New Mexico, outside of the Red Lake field. The impairments were primarily driven by a reduction in reserve volume due to lower well performance assessments based on historical trends. The affected areas included nine operated producing wells.

Impairment of EOR Project

At September 30, 2024, the Company recorded a $30.2 million impairment related to the discontinuation of our EOR Project, including a $28.9 million non-cash impairment and a $1.3 million cash impairment related to the termination of the Kinder Morgan CO2 contract. Select equipment from the EOR Project was salvaged for use in the Company's conventional vertical and horizontal development programs.

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Results of Operations

Comparison for the years ended December 31, 2024, and 2023.

The following table sets forth selected operating data for the years ended December 31, 2024, and 2023:

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(1)The Company's oil, natural gas and NGL sales are presented net of gathering, processing and transportation costs. These costs, related to natural gas and NGLs, at times exceeded the price we received and resulted in negative average realized prices.

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

(3)During the periods presented, the Company did not have any NGL derivative contracts in place.

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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. Realized prices and revenues from product sales are a function of the volumes produced, product quality, market prices, gas Btu content, as well as gathering, processing and transportation costs. Gathering, processing and transportation costs are allocated across natural gas and NGLs based on revenue, which leads to heightened fluctuations in such cost allocations across periods. Our revenues from oil, natural gas and NGL sales do not include the effects of derivatives. Our revenues may vary significantly from period to period as a result of changes in the volume of production sold or changes in commodity prices. The Company’s total oil and natural gas sales, net increased $37.2 million, or 10%, for the year ended December 31, 2024, compared to the year ended December 31, 2023. The following table presents the Company's oil and natural gas sales prior to and net of gathering, processing and transportation costs:

Oil revenues

For the year ended December 31, 2024, oil revenues increased by $45.8 million, or 13%, compared to the year ended December 31, 2023. The following table summarizes the effect of price and volume changes on oil revenues:

Our realized oil prices decreased by $1.52 during the year ended December 31, 2024, when compared to the year ended December 31, 2023, which corresponded with a $0.95 decrease in the average WTI price during the same period. An increase in basis differentials accounted for the remaining difference. Daily oil volumes increased by 15% due to increased production from new wells turned to sales in our Champions field as well as the 2023 and 2024 New Mexico Acquisitions.

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Natural gas revenues

For the year ended December 31, 2024, natural gas revenues decreased by $4.0 million compared to the year ended December 31, 2023. The following table summarizes the effect of price and volume changes on natural gas revenues:

Our realized natural gas prices, which were negative for the year ended December 31, 2024, decreased by $0.64 compared to the year ended December 31, 2023, due to weak Permian Basin natural gas prices that did not provide for full recovery of the Company's allocated gathering and processing costs. This corresponded with a $0.34 decrease in the average Henry Hub price during the year ended December 31, 2024, and an increase in basis differentials due to regional supply imbalances.

NGL revenues

For the year ended December 31, 2024, NGL revenues decreased by $4.6 million, or 67%, compared to the year ended December 31, 2023. The following table summarizes the effect of price and volume changes on NGL revenues:

Our realized NGL prices decreased by $5.34 during the year ended December 31, 2024, when compared to the year ended December 31, 2023. Realized prices decreased due to higher allocated gathering and processing costs from weak Permian Basin natural gas prices that limited the full recovery of the Company's allocated gathering and processing costs. This was partially offset by a 48% increase in volumes due to additional third party processing capacity that came online in 2024.

Contract Services - Related Party

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

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

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

The management services agreement with Riley Exploration Group, LLC was terminated effective May 31, 2024, and the management services agreement with Combo Resources, LLC was terminated effective January 31, 2024. See Note 9 - Transactions with Related Parties in the Company's consolidated financial statements in "Item 15. Exhibits and Financial Statement Schedules for more information.

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Costs and Expenses

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

Lease Operating Expenses ("LOE")

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

The Company’s LOE increased by $12.6 million for the year ended December 31, 2024, compared to the year ended December 31, 2023. This increase was driven by a $5.5 million increase due to more workovers primarily in our Red Lake field, a $4.5 million increase in our Champions field due to higher production volumes and a $3.4 million increase due to the inclusion of LOE expenses associated with our 2024 New Mexico Asset Acquisition, partially offset by a decrease in certain expenses, primarily chemical, fuel and repair costs. On a LOE per BOE basis, the additional volumes fully offset the $12.6 million increase as the 2024 LOE per BOE was flat when compared to 2023.

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

Production and ad valorem taxes increased by $3.9 million for the year ended December 31, 2024, compared to the year ended December 31, 2023, primarily due to increases in our oil and natural gas sales, net and $0.8 million from the new waste emissions charge.

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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, 2024, and 2023:

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(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

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

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.

DD&A expense increased by $9.8 million for the year ended December 31, 2024, compared to the year ended December 31, 2023. The increase for the year ended December 31, 2024, was primarily due to higher production in our Champions field and the inclusion of the 2023 New Mexico Acquisition for the full year as well as the 2024 New Mexico Asset Acquisition for part of the year.

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.

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

Other Impairments

The cost of proved and unproved oil and natural gas properties are assessed 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 undiscounted future cash flows of the oil, natural gas and NGL 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, natural gas and NGL properties to their estimated fair value.

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The Company recognized an impairment loss of $30.2 million for the year ended December 31, 2024, which consisted of a non-cash impairment loss of $28.9 million and a cash impairment loss of $1.3 million related to the termination of the Kinder Morgan CO2 contract. The impairment loss relates to the discontinuation of the Company's EOR project, in favor of redeploying the required future capital and salvaging certain assets for use in the Company's conventional vertical and horizontal development programs. There was no other impairment loss for the year ended December 31, 2023.

General and Administrative ("G&A") Expense

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

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

Transaction Costs

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

Interest Expense, net

Interest expense, net increased by $2.5 million during the year ended December 31, 2024, when compared to the year ended December 31, 2023. The increase in interest expense was primarily due to a full-year effect of the Senior Notes, which were the primary financing for the 2023 New Mexico Acquisition, including amortization of the discount.

Gain/Loss on Derivatives

The Company recognizes settlements and changes in the fair value of our derivative contracts as a single component within other income (expense) in our consolidated statements of operations. We have oil and natural gas derivative contracts, including fixed price swaps, basis swaps and collars, that settle against various indices. The following table presents the components of the Company's gain (loss) on derivatives, net for the years ended December 31, 2024, and 2023:

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

Income Tax Expense

Current income taxes represent the amount the Company expects to owe to federal and state tax authorities in the current period, based on our taxable income. Deferred income taxes are provided to reflect the future tax consequences or benefits of differences between the tax basis of assets and liabilities and their reported amounts in the financial statements using enacted

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tax rates. See Note 12 - Income Taxes in the Company's consolidated financial statements in "Item 15. Exhibits and Financial Statement Schedules for a full discussion of income taxes.

The decrease in deferred income tax expense from 2023 to 2024 is primarily due to the 2023 New Mexico Acquisition, which allowed for more accelerated tax depreciation in 2023.

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 our operations, fund capital expenditures and acquisitions, pay dividends and satisfy any indebtedness obligations. Cash flows are subject to a number of variables, including the level of oil and natural gas production and prices, and the significant capital expenditures required to more fully develop the Company’s oil and natural gas properties. Historically, our primary sources of capital funding and liquidity have been our cash on hand, cash flow from operations, borrowings under our Credit Facility and the issuance of our Senior Notes. At times and as needed, we may also issue debt or equity securities, including through transactions under our shelf registration statement filed with the SEC. In April 2024, the Company issued equity securities and used the proceeds to finance an acquisition, repay outstanding debt and for general corporate purposes. We estimate the combination of the sources of capital discussed above will continue to be adequate to meet our short and long-term liquidity needs.

Cash on hand and operating cash flow can be subject to fluctuations due to trends and uncertainties that are beyond our control. Likewise, our ability to issue equity, debt and obtain credit facilities on favorable terms may be impacted by a variety of market factors as well as fluctuations in our results of operations.

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, 2024, we had a working capital deficit of $54.6 million compared to a deficit of $31.1 million as of December 31, 2023. The current portion of our Senior Notes, which includes our regularly scheduled principal payments of $5 million per quarter, accounts for $20 million of our working capital deficit at December 31, 2024, and December 31, 2023. We utilize our Credit Facility and cash on hand to manage the timing of cash flows and fund short-term working capital deficits. At December 31, 2024, we had cash on hand of $13.1 million and $285 million of undrawn capacity under our Credit Facility.

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Cash Flows

The following table summarizes the Company’s cash flows for the years ended December 31, 2024, and 2023:

Operating Activities

Net cash provided by operating activities were $246.3 million for the year ended December 31, 2024, compared to $207.2 million for the year ended December 31, 2023, and primarily consisted of the following:

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(1)Operating expenses include LOE, production and ad valorem taxes, administrative costs, transaction costs and other minor operating expenses.

Net cash provided by operating activities increased $39.1 million, or 19%, compared to year ended December 31, 2023. Oil and natural gas revenues increased $58.2 million due to an increase in our oil and natural gas production partially offset by a $21.1 million decrease due to lower realized pricing.

Investing Activities

Net cash flows used in investing activities were $147.8 million for the year ended December 31, 2024, compared to $469.6 million for the year ended December 31, 2023, and primarily consisted of the following:

Capital expenditures for oil and natural gas properties decreased $36.3 million due primarily to lower average well cost. Cash contributions to our joint venture, RPC Power, increased $14.3 million to fund additional new power generation for self-consumption and for the sale of energy and ancillary services to ERCOT, which is expected to be operational beginning in late 2025 through 2026. The Company also began construction of midstream infrastructure in New Mexico to increase our oil and natural gas volume capacity, and we currently anticipate the in-service date will be before the end of 2026.

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Financing Activities

Net cash flows used in financing activities were $100.6 million for the year ended December 31, 2024, compared to net cash flows provided by financing activities of $264.4 million for the year ended December 31, 2023, and primarily consisted of the following:

During 2024, the Company repaid $90 million of debt, net of proceeds compared to net borrowings of $302 million in 2023 and cash dividends increased $3 million, partially offset by our 2024 Equity Offering of $25.4 million.

Credit Facility and Senior Notes

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

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

During the year ended December 31, 2023, the Company issued $200 million in principal amount of Senior Notes with a maturity date of April 2028. The proceeds from the Senior Notes were used to finance the 2023 New Mexico Acquisition. The principal balance of the Senior Notes as of December 31, 2024, was $165 million.

See Note 10 - 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.

Dividends

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

Contractual Obligations

As of December 31, 2024, the Company had a remaining volume commitment of less than seven years with our primary midstream counterparty in Texas. The Company also had natural gas delivery commitments under the A&R Tolling Agreement and a remaining equity commitment under the Second amendment to the A&R LLC Agreement of $27.7 million to fund our portion of the 2025 capital budget for the RPC Power joint venture. Further, the Company entered into a 15-year gas purchase agreement that required an acreage dedication to a midstream counterparty for a significant portion of our oil and gas assets in New Mexico. This agreement is expected to begin before the end of 2026. As a result of entering into the gas purchase agreement, the Company is committed to spend approximately $130 million in capital expenditures through 2026 to complete

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the initial projects of our midstream buildout plan. The Company incurred approximately $11 million in 2024. See Note 15 - 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, 2024, the Company had approximately $101.0 million of unproved leasehold. Of the remaining unproved leasehold costs at December 31, 2024, approximately $2.2 million is scheduled to expire in 2025. The Company expects to renew or extend these leases in 2025. If our drilling is not successful, this leasehold could become partially or entirely impaired.

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

See Note 7 - Fair Value Measurements in the Company's consolidated financial statements in "Item 15. Exhibits and Financial Statement Schedules" for a full discussion of our impairment analysis.

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

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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 2023 New Mexico Acquisition. In connection with the 2023 New Mexico Acquisition, we allocated the purchase price consideration of $324.7 million to the assets acquired and liabilities assumed based on estimated fair values as of the date of the acquisition.

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

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.