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SUPPLEMENTAL OIL AND NATURAL GAS INFORMATION (UNAUDITED)

12 Months Ended

Dec. 31, 2021

SUPPLEMENTAL OIL AND NATURAL GAS INFORMATION (UNAUDITED)

15. SUPPLEMENTAL OIL AND NATURAL GAS INFORMATION (UNAUDITED)

Capitalized Costs incurred

The capitalized costs incurred in crude oil and natural gas acquisitions, exploration and development activities for the years ended December 31, 2021 and 2020 are provided in the table below:

	2021		2020
	(in thousands)
Proved property acquisition	$	46	$	1,851
Unproved property acquisition		5		-
Development		1,519		441
Exploration		-		-

Total	$	1,570	$	2,292

Capitalized Costs

The following table presents the Company’s capitalized costs associated with oil and natural gas producing activities as of December 31, 2021 and 2020:

	2021			2020
	(in thousands)
Oil and Natural Gas Properties:
Unevaluated properties:
Unproved leasehold costs	$	1,588		$	1,597
Evaluated properties in full cost pool		95,088			93,549
Less accumulated depletion and ceiling test impairment		(88,195	)		(87,708	)

Net capitalized costs	$	8,481		$	7,438

The Company did not incur a ceiling test write-down for the year ended December 31, 2021. During the year ended December 31, 2020, the Company incurred ceiling test write-downs of its oil and natural gas properties of $2.9 million due to a reduction in the value of its proved oil and natural gas reserves primarily as the result of a decrease in crude prices and the performance of a South Texas well drilled in the prior year. Depletion and amortization was $490 thousand ($3.98 per BOE) and $363 thousand ($4.55 per BOE) for the years ended December 31, 2021 and 2020, respectively.

Unevaluated oil and natural gas properties consist of leasehold costs that are excluded from the depletion, depreciation and amortization calculation and the ceiling test until a determination about the existence of proved reserves can be completed. Unevaluated oil and natural gas properties consisted of unproved lease acquisition costs and costs paid to evaluate potential acquisition prospects of $1.6 million at December 31, 2021 and 2020, respectively.

On a quarterly basis, management reviews market conditions and other changes in circumstances related to the Company’s unevaluated properties and transfers the costs to evaluated properties within the full cost pool as warranted. During the year ended December 31, 2020, the Company evaluated its unevaluated property and recorded a reclassification to the depletable base of the full cost pool of $2.1 million related to a reduction in value of certain of its acreage.

Results of Operations from oil and natural gas producing activities

Presented below are the results of operations from oil and natural gas producing activities for the years ended December 31, 2021 and 2020:

	2021			2020
	(in thousands)
Oil and natural gas sales	$	6,658		$	2,330
Lease operating expense		(2,421	)		(1,535	)
Production taxes		(471	)		(168	)
Depletion and amortization		(487	)		(356	)
Impairment of oil and natural gas properties		-			(2,943	)

Results of operations from oil and natural gas producing activities	$	3,279		$	(2,672	)

Oil and Natural Gas Reserves (Unaudited)

Proved reserves are estimated quantities of oil, NGLs and natural gas that geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. Oil and natural gas prices used are the average price during the 12-month period prior to the effective date of the report, determined as an unweighted arithmetic average of the first-day-of-the-month price for each month within such period, unless prices are defined by contractual arrangements. Proved developed reserves are reserves that can reasonably be expected to be recovered through existing wells with existing equipment and operating methods. The Company emphasizes that reserve estimates are inherently imprecise and that estimates of new discoveries and undeveloped locations are more imprecise than estimates of established producing oil and natural gas properties. Accordingly, these estimates are expected to change as future information becomes available.

Proved oil and natural gas reserve quantities at December 31, 2021 and 2020 and the related discounted future net cash flows before income taxes are based on the estimates prepared by Don Jacks, PE. The estimates have been prepared in accordance with guidelines established by the Securities and Exchange Commission. All of the Company’s estimated proved reserves are located in the United States.

As of December 31, 2021, and 2020, the Company had no proved undeveloped reserves. All proved reserves were proved developed producing and proved developed non-producing.

The Company’s estimated quantities of proved oil and natural gas reserves and changes in net proved reserves are summarized below for the years ended December 31, 2021 and 2020:

	(bbls)			(mcfe) ⁽¹⁾			(bbls)			(mcfe) ⁽¹⁾
	2021						2020
	Oil			Gas			Oil			Gas
	(bbls)			(mcfe) ⁽¹⁾			(bbls)			(mcfe) ⁽¹⁾

Total proved reserves:
Reserve quantities, beginning of year		975,745			1,676,948			807,505			1,129,258
Revisions of previous estimates		128,232			437,757			(248,770	)		(22,895	)
Discoveries and extensions		-			-			-			-
Purchases of minerals in place		11,365			-			477,479			686,670
Sale of minerals in place		-			-			-			-
Production		(93,722	)		(176,657	)		(60,469	)		(116,085	)

Reserve quantities, end of year		1,021,620			1,938,048			975,745			1,676,948

⁽¹⁾

Mcf equivalents (Mcfe) consist of natural gas reserves in mcf plus NGLs converted to mcf using a factor of 6 mcf for each barrel of NGL.

Notable changes in proved reserves for the year ended December 31, 2021 included the following:

	●	The upward revisions of previous estimates of 201,192 BOE were primarily attributable to revisions due to higher pricing used in the estimate of proved reserves at December 31, 2021.
	●	Purchases of minerals in place in 2021 represent reserves added as a result of the acquisition of one well in our Liberty County properties. Purchases of reserves in place in 2020 represent the reserves added as a result of the acquisitions of New Horizon Resources LLC, certain properties from FieldPoint Production Company, and certain properties from Newbridge Resources completed during the year.

Standardized Measure (Unaudited)

The Company computes a standardized measure of future net cash flows and changes therein relating to estimated proved reserves in accordance with authoritative accounting guidance. The assumptions used to compute the standardized measure are those prescribed by the FASB and the SEC. These assumptions do not necessarily reflect the Company’s expectations of actual revenues to be derived from those reserves, nor their present value amount. The limitations inherent in the reserve quantity estimation process, as discussed previously, are equally applicable to the standardized measure computations since these reserve quantity estimates are the basis for the valuation process.

Future cash inflows and production and development costs are determined by applying prices and costs, including transportation, quality, and basis differentials, to the year-end estimated future reserve quantities. The following prices as adjusted for transportation, quality, and basis differentials were used in the calculation of the standardized measure:

	2021		2020

Oil per Bbl	$	66.56	$	39.57
Gas per Mcfe ⁽¹⁾	$	3.60	$	1.99

⁽¹⁾

Consists of the weighted average price for natural gas in mcf plus NGLs converted to mcf using a factor of 6 mcf for each barrel of NGL.

Future operating costs are determined based on estimates of expenditures to be incurred in developing and producing the proved reserves in place at the end of the period using year-end costs and assuming continuation of existing economic conditions. Estimated future income taxes are computed using the current statutory income tax rates, including consideration for estimated future statutory depletion. The resulting future net cash flows are reduced to present value amounts by applying a 10% annual discount factor.

The standardized measure of discounted future net cash flows relating to the Company’s proved oil and natural gas reserves is as follows as of December 31, 2021 and 2020:

	2021			2020
	(in thousands)
Future cash inflows	$	76,041		$	39,090
Future cash outflows:
Production costs		(40,350	)		(24,189	)
Development costs		-			(302	)
Income taxes		(2,818	)		(142	)

Future net cash flows		32,873			14,457
10% annual discount factor		(13,706	)		(5,871	)

Standardized measure of discounted future net cash flows	$	19,167		$	8,586

Changes in Standardized Measure (Unaudited)

The changes in the standardized measure of future net cash flows relating to proved oil and natural gas reserves for the years ended December 31, 2021 and 2020 are as follows:

	2021			2020
	(in thousands)
Standardized measure, beginning of year	$	8,586		$	10,348
Sales of oil and natural gas, net of production costs		(3,766	)		(627	)
Net changes in prices and production costs		11,675			(8,487	)
Changes in estimated future development costs		302			(302	)
Extensions and discoveries		-			-
Purchases of minerals in place		216			5,841
Sale of minerals in place		-			-
Revisions in previous quantity estimates		3,080			(1,148	)
Previously estimated development costs incurred		(302	)		-
Net changes in income taxes		(1,389	)		1,649
Accretion of discount		674			855
Changes in timing and other		91			457

Standardized measure, end of year	$	19,167		$	8,586