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Acquisition of XTO Properties | 12 Months Ended
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Dec. 31, 2022
Disclosure Acquisition of Xto Properties Abstract |
Acquisition of XTO Properties | Note 4 – Acquisition of XTO Properties On March 12, 2021 the Company, through its wholly owned subsidiary Empire New Mexico, entered into a purchase and sale agreement with XTO Holdings, LLC (a subsidiary of ExxonMobil) (the “Seller’) to acquire, among other things, certain oil and natural gas properties in New Mexico. The purchase price was $17,800,000 subject to customary adjustments. The transaction closed on May 14, 2021 with an effective date of January 1, 2021. The XTO acquisition has been assessed under the screen test for business combinations under FASB ASC 805, Business Combinations (“ASC 805”). The XTO acquisition met the screen test and has been accounted for as an asset acquisition using the acquisition method of accounting. Under the accounting for asset acquisitions, the acquisition is recorded using a cost accumulation and allocation model under which the cost of the acquisition is allocated on a relative fair value basis to the assets acquired and liabilities assumed. Acquisition-related transaction costs are capitalized as a component of the cost of the assets acquired. As a condition of the sale, the Company purchased a $5,000,000 performance bond for the benefit of the seller for proper plugging, abandonment and restoration of the purchased properties. The performance bond is collateralized with a letter of credit in the amount of $3,750,000. To effect the letter of credit, the Company entered into a Promissory Note Agreement with Bank of Oklahoma, NA in the amount of $3,750,000 which is due on demand with an interest rate established by the Bank, currently at 4%. The Promissory Note, and associated letter of credit, is collateralized with a bank certificate of deposit in a corresponding amount. In addition, the Company is required to deposit $100,000 per month, up to $1,250,000, into a sinking fund to be held by the surety. Subsequent amendments increased the monthly payment amounts to $160,000 in response to additional bonding requested by the State of New Mexico that increased the letter of credit requirement to $5.45 million. Payments on the sinking fund were made through April 2022 and no additional collateral deposits were required as of June 2022. At the end of 2022, the collateral requirement was removed and the Company received $2 million back from the sinking fund. The following table sets forth the Company's purchase price allocation:
Fair Value of Assets Acquired |  |  |
Oil and natural gas properties |  | $ | 17,662,402 |
Inventory of oil in tanks |  |  | 318,546 |
Vehicles |  |  | 179,156 |
Asset retirement obligations |  |  | 6,117,709 |
Total assets acquired |  |  | 24,277,813 |
Fair Value of Liabilities Assumed |  |  |  |
Royalty suspense |  |  | 290,325 |
Asset retirement obligations |  |  | 6,117,709 |
Total liabilities assumed |  |  | 6,408,034 |
Purchase Price |  |  | 17,869,779 |
The value of oil and gas properties was based on an allocation of the purchase price which included assignment of values to the other identifiable assets acquired and liabilities assumed. The value of inventory, vehicles, and royalty suspense was based on their relative fair values as described above. The fair value of asset retirement obligations is included in proved oil and natural gas properties with a corresponding liability in the table above. The fair value was determined based on a discounted cash flow model, which included assumptions of the estimated current abandonment costs, discount rate, inflation rate and timing associated with the incurrence of these costs. On October 7, 2022, the Company entered into a final settlement agreement with XTO. The provisions of this settlement allowed the Company to substitute the performance bond and letter of credit that were put into place with the transaction for a new performance bond that does not require the Company to have collateral invested in the performance bond. Due to the nature and timing of the settlement, the result of the final settlement was a non-cash expense of approximately $1.4 million to Other Income (Expense) on the Consolidated Statements of Operations in 2022.

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