Acquisitions of Oil and Natural Gas Properties

9 Months Ended

Sep. 30, 2023

Business Combination and Asset Acquisition [Abstract]

Acquisitions of Oil and Natural Gas Properties

New Mexico Acquisition

On April 3, 2023, the Company completed the New Mexico Acquisition from Pecos for approximately $330 million, before customary purchase price adjustments. The assets acquired are located in Eddy County, New Mexico, and include approximately 10,600 total contiguous net acres of leasehold. The acquisition included 18 net horizontal wells and 250 net vertical wells. Additionally, the assets add significant drilling locations to the Company's inventory.

The Company funded the New Mexico Acquisition through a combination of borrowings under the Company's revolving credit facility and proceeds from the issuance of $200 million of Senior Notes, including application of a $33 million escrow deposit paid during the three months ended March 31, 2023 with borrowings under the revolving credit facility. For further information regarding the financing for the New Mexico Acquisition, see Note 9 - Long-Term Debt.

The New Mexico Acquisition qualified as a business combination using the acquisition method of accounting. The assets acquired and liabilities assumed were recognized at fair value as of the acquisition date. The preliminary purchase price allocation is subject to change for up to one year subsequent to the Closing Date due to changes in the estimated fair value of the assets acquired and liabilities assumed in the New Mexico Acquisition. The assets acquired and liabilities assumed were recognized on the condensed consolidated balance sheet at fair value as of the acquisition date. The fair value measurements of the oil and natural gas properties acquired and asset retirement obligations assumed were derived utilizing an income approach and based, in part, on significant inputs not observable in the market. These inputs represent Level 3 measurements in the fair value hierarchy and include, but are not limited to, estimates of reserves, future development, future operating costs, future cash flows and the use of weighted average cost of capital. These inputs required the use of significant judgments and estimates at the date of valuation, and use of different estimates and judgments could yield different results.

The following presents the preliminary allocation of the total purchase price of the New Mexico Acquisition to the identified assets acquired and liabilities assumed based on estimated fair value as of the Closing Date:


Preliminary purchase price allocation as of September 30, 2023 (in thousands):

Total cash consideration	$	324,686

Assets acquired:

Inventory	$	2,980
Oil and natural gas properties	342,457
Amount attributable to assets acquired	$	345,437

Fair value of liabilities assumed:
Revenue payable	$	1,475
Asset retirement obligations	19,276
Amount attributable to liabilities assumed	$	20,751



Net assets acquired	$	324,686

Transaction costs associated with the New Mexico Acquisition were approximately $0.2 million and $5.8 million for the three and nine months ended September 30, 2023, respectively, and are included on the accompanying condensed consolidated statements of operations.

Post-Acquisition Operating Results

The results of operations attributable to the New Mexico Acquisition since the Closing Date have been included in the condensed consolidated statements of operations and include $25.1 million of total revenue, net and $15.7 million of earnings for the three months ended September 30, 2023 and $49.5 million of total revenue, net and $31.3 million of earnings for the nine months ended September 30, 2023.

Pro Forma Operating Results (Unaudited)

The following unaudited pro forma combined results for the three and nine months ended September 30, 2023 and 2022 reflect the consolidated results of operations of the Company as if the New Mexico Acquisition had occurred on January 1, 2022. The unaudited pro forma information includes adjustments for (i) transaction costs being reclassified to the first quarter of 2022 instead of being recorded in the three and nine months ended September 30, 2023 (ii) amortization for the discount and deferred financing costs and interest expense related to the Senior Notes, (iii) depletion, depreciation and amortization expense, and (iv) interest expense related to Pecos that would not have been recognized had the Company acquired the assets. In addition, the pro forma information has been effected for taxes with a 23% tax rate.


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
	(In thousands, except per share amounts)
Total revenues	$	108,294	$	117,256	$	305,813	$	331,910
Net income	$	10,745	$	66,421	$	87,545	$	108,845
Basic net income per common share	$	0.55	$	3.40	$	4.45	$	5.57
Diluted net income per common share	$	0.54	$	3.39	$	4.39	$	5.54

The unaudited pro forma combined financial information is for informational purposes only and is not intended to represent or to be indicative of the combined results of operations that the Company would have reported had the New Mexico Acquisition been completed as of January 1, 2022 and should not be taken as indicative of the Company's future combined

results of operations. The actual results may differ significantly from that reflected in the unaudited pro forma combined financial information for a number of reasons, including, but not limited to, differences in assumptions used to prepare the unaudited pro forma combined financial information and actual results.

Other Acquisitions

On April 21, 2023, the Company completed an asset acquisition of interests in oil and natural gas leases primarily related to non-producing leasehold in Yoakum County, TX, within the San Andres formation in the Permian Basin for a purchase price of approximately $5.4 million, subject to customary post-closing adjustments. The Company accounted for this acquisition as an acquisition of assets.