Morgan EP, LLC

6 Months Ended

Jun. 30, 2025

(9) Morgan E&P, LLC

Morgan E&P, LLC (“Morgan”) was organized by the Fund on April 3, 2023 as a Delaware limited liability company and a wholly-owned subsidiary of the Fund. On May 22, 2023, Morgan completed the acquisition of 4,747.52 net acres, in the Bakken/Three Forks formation in the Williston Basin of North Dakota, and acquired approximately 1,100 additional acres on September 26, 2023. During the second quarter of 2024, Morgan acquired an additional 810 net acres proximate to its existing holdings. The acreage and associated mineral rights were acquired from Pro Energy I LLC (“Pro Energy”) who received a carried working interest of 20% in the acquired acreage.

Under the terms of the Purchase and Sale Agreement covering the initial acreage acquired by Morgan, Morgan is required to drill and complete a minimum of six wells within 18 months of receiving the first drilling permits. The average cost of drilling a new horizontal well is approximately $8.2 million. During the fourth quarter of 2023, Morgan sold certain of its wellbore interest in its initial 2 wells to a third party for $5.6 million in cash in exchange for a net revenue interest of approximately 27% in these wells.

During the fourth quarter of 2024, Morgan entered into an agreement to acquire the carried working interest held by Pro Energy in exchange for a payment of $2.4 million in cash.

During 2024, in addition to the increase in acreage noted above, Morgan also experienced an increase in proved reserves and probable reserves, largely due to the commencement of production of its initial two wells that were drilled and completed in the fourth quarter of 2023.

In May 2023, we entered into an agreement with Morgan to provide it up to $10.0 million in senior debt financing, subject to a schedule of disbursements and draws that we determine. In February 2024, we increased the total amount of the facility to $10.5 million. As of June 30, 2025, the facility had been fully-drawn.

Going-Concern—The accompanying unaudited condensed consolidated financial statements of Morgan have been prepared on a going concern basis, which contemplates the near-term sale of quantities of oil and gas, realization of assets and the satisfaction of liabilities and other commitments in the normal course of business. As such, the unaudited condensed consolidated financial statements do not include adjustments relating to the recoverability and classification of assets and their carrying amount, or the amount and classification of liabilities that may result should Morgan be unable to continue as a going concern. As of June 30, 2025, Morgan does not have sufficient cash resources to fund its present operations. Morgan is presently seeking external financing to enable it to continue operations over the twelve months from the date of this quarterly report, but we cannot assure you that Morgan will be successful in doing so, or that such endeavors will generate sufficient liquidity to enable Morgan to continue operations over the next twelve months. These factors raise substantial doubt about Morgan’s ability to continue as a going concern.

We do not consolidate the financial results of Morgan with the financial results of the Fund and, accordingly, only the value of our investment in Morgan is included on our balance sheets. Our investment in Morgan is valued in accordance with our normal valuation procedures and is based in part on a reserve report prepared for Morgan by Cawley, Gillespie, & Associates, Inc., an independent petroleum engineering firm, the transactions and values of comparable companies in this sector, and the estimated value of leasehold mineral interests associated with the acreage held by Morgan. A valuation of Morgan was performed by a third-party valuation firm, who recommended a value range of Morgan consistent with the fair value determined by our Management (See Schedule of Investments).

Below is summarized unaudited condensed financial information for Morgan E&P, LLC as of June 30, 2025 and December 31, 2024 and for the three and six months ended June 30, 2025 and 2024, respectively, (in thousands):

	June 30, 2025			December 31, 2024

Assets:
Cash	$	10		$	15
Revenue receivables		497			343
Joint interest billing receivables		1,671			1,738
Other receivables		19			2
Prepaids and other current assets		30			35
Current assets		2,227			2,133

Property, plant and equipment
Oil and gas properties, net - full cost method		6,923			6,959
Other property, plant and equipment, net		29			34
Total property, plant and equipment - net		6,952			6,993

Other noncurrent assets
Operating lease right-of-use assets, net		207			227
Total noncurrent assets		207			227

Total assets	$	9,386		$	9,353

Liabilities and Member's Deficit:

Current liabilities
Accounts payable	$	6,605		$	6,656
Revenue payable		214			319
Current portion of operating lease liabilities		50			47
Due to parent		1,319			550
Accrued liabilities		3,080			3,162
Total current liabilities		11,268			10,734

Long-term liabilities
Asset retirement obligations		4			4
Long-term operating lease liabilities		181			207
Note payable - Due to parent		10,500			10,500
Long-term accrued liabilities - Due to parent		2,105			1,471
Total long-term liabilities		12,790			12,182
Total liabilities		24,058			22,916

Retained earnings - beginning of year		(13,563	)		(1,804	)
Current year deficit		(1,109	)		(11,759	)
Member's deficit		(14,672	)		(13,563	)

Total liabilities and member's deficit	$	9,386		$	9,353

	Three Months Ended June 30,						Six Months Ended June 30,
	2025			2024			2025			2024
Oil and gas revenue		32			1,391			205			2,466

Operating costs and expenses
Lease operating		13			628			56			1,996
Production and ad valorem taxes		2			132			18			235
Marketing, transportation and gathering		10			50			16			78
Depreciation, depletion, and amortization		13			273			64			498
General and administrative		218			624			526			1,138
Total operating costs and expenses		256			1,707			680			3,945
Loss from operations		(224	)		(316	)		(475	)		(1,479	)
Other income (expense)
Interest income		—			—			—			6
Interest expense		(319	)		(324	)		(634	)		(607	)
Total other income (expense), net		(319	)		(324	)		(634	)		(601	)
Net loss	$	(543	)	$	(640	)	$	(1,109	)	$	(2,080	)

	Six Months Ended June 30,
	2025			2024
Cash flows from operating activities:
Net loss	$	(1,109	)	$	(2,080	)
Adjustments to reconcile net loss to cash flows provided by operating activities:
Depreciation, depletion, amortization		64			498
Amortization of right-of-use asset		20			23
Changes in operating assets and liabilities:
Revenue receivables		(154	)		(107	)
Joint interest billing receivables		67			652
Prepaids and other current assets		(12	)		(1	)
Accounts payable		(52	)		1,606
Revenue payable		(105	)		496
Prepayments from working interest owners		—			(122	)
Due to parent		769			—
Payment of operating lease liability		(23	)		(7	)
Accrued liabilities		(102	)		(311	)
Long Term Accrued liabilities - due to parent		634			601
Net cash provided by operating activities		(3	)		1,248

Cash flows from investing activities:
Additions to oil and gas properties		(2	)		(5,519	)
Net cash used in investing activities		(2	)		(5,519	)

Cash flows from financing activities:
Proceeds from Note payable - Due to parent		—			2,247
Net cash provided by financing activities		—			2,247

Net change in cash		(5	)		(2,024	)
Cash at beginning of period		15			2,441

Cash at end of period		10		$	417

Supplemental Disclosure of Cash Flow Information
Non-cash investing and financing activities
Changes in capital accounts payable and capital accruals	$	(20	)	$	4,051
Prepayments applied to joint-interest receivables		—			(1	)

Critical Accounting Policies for Morgan

Acquisitions—Morgan evaluates each acquisition of oil and gas properties to determine whether each should be accounted for as an acquisition of assets or business in accordance with Accounting Standards Update No. 2017-01: Business Combinations (Topic 805) Clarifying the Definition of a Business (“ASU 2017-01”).

Asset acquisitions are recorded at the cost of acquiring the property. The results of operations of the oil and gas properties acquired in the Company’s acquisitions have been included in the consolidated financial statements since the closing dates of the respective acquisitions. A business combination may result in the recognition of a bargain purchase gain or goodwill based on the measurement of the fair value of the assets and liabilities acquired at the acquisition date as compared to the fair value of consideration transferred, adjusted for purchase price adjustments. The initial accounting for business combinations may not be complete and adjustments to provisional amounts, or recognition of additional assets acquired, or liabilities assumed, may occur as more detailed analyses are completed and additional information is obtained about the facts and circumstances that existed as of the acquisition dates.

Oil & Gas Properties—The method of accounting for oil and natural gas properties determines what costs are capitalized and how these costs are ultimately matched with revenue and expenses. Morgan uses the full cost method of accounting for oil and natural gas properties. Under the full cost method, all direct costs and certain indirect costs associated with the acquisition, exploration, and development of oil and natural gas properties are capitalized.

Oil and gas properties include costs that are excluded from costs being depleted or amortized. Oil and natural gas property costs excluded represent investments in unproved properties and include non-producing leasehold, geological and geophysical costs associated with leasehold or drilling interests and exploration costs. The Company excludes these costs until the project is evaluated and proved reserves are established or impairment is determined. Excluded costs are reviewed at least annually to determine if impairment has occurred. The amount of any evaluated or impaired oil and natural gas properties is transferred to capitalized costs being amortized. For the six months ended June 30, 2025 and 2024, the Company transferred $0.02 million and $1.4 million, respectively, to the full cost pool.

Oil and natural gas properties are depleted using the units-of-production method. The depletion expense is significantly affected by the unamortized historical and future development costs and the estimated proved oil and natural gas reserves. Estimation of proved oil and natural gas reserves relies on professional judgment and the use of factors that cannot be precisely determined. Holding all other factors constant, if proved oil and natural gas reserves were revised upward or downward, earnings would increase or decrease, respectively. Subsequent proved reserve estimates that are materially different from those reported would change the depletion expense recognized during the future reporting period. Proceeds from the sales or disposition of oil and natural gas of proved and unproved properties are accounted for as a reduction of capitalized costs with no gain or loss recognized, unless such reduction would significantly alter the relationship between capitalized costs and proved reserves, in which case the gain or loss is recognized in the statement of income. In general, a significant alteration occurs when the deferral of gains or losses will result in an amortization rate materially different from the amortization rate calculated upon recognition of gains or losses. Abandonments of properties are accounted for as adjustments of capitalized costs with no loss recognized.

Under the full cost accounting rules, total capitalized costs are limited to a ceiling equal to the present value of future net revenue, discounted at 10% per annum, plus the lower of cost or fair value of unevaluated properties less income tax effects (the “ceiling limitation”). Future net revenue used to calculate the ceiling do not include cash outflows associated with settling asset retirement obligations. Morgan performs an annual ceiling test to evaluate whether the net book value of the full cost pool exceeds the ceiling limitation. If capitalized costs (net of accumulated depreciation, depletion, and amortization) are greater than the discounted future net revenue or ceiling limitation, a write-down or impairment of the full cost pool is required. A write-down of the carrying value of the full cost pool is a non-cash charge that reduces earnings and impacts members’ equity in the period of occurrence and typically results in lower depreciation, depletion, and amortization expense in future periods. Once incurred, a write-down is not reversible at a later date. The risk that Morgan will be required to write-down the carrying value of oil and natural gas properties increases during a period when oil or gas prices are depressed. In addition, a write-down may occur if estimates of proved reserves are substantially reduced or estimates of future development costs increase significantly.

Income Taxes—A limited liability company is not subject to the payment of federal income taxes as components of its income and expenses flow through directly to the members. However, Morgan may be subject to certain state income taxes, inasmuch as it maintains a registered office in Texas. Texas margin tax applies to legal entities conducting business in Texas. The margin tax is based on our Texas sourced taxable margin. The tax is calculated by applying a tax rate to a base that considers both revenue and expenses and therefore has the characteristics of an income tax. Taxable Subsidiaries may generate income tax expense because of the Taxable Subsidiaries’ ownership of the portfolio companies. We reflect any such income tax expense on our Statements of Operations. Morgan had no federal income tax expense since inception.

Asset Retirement Obligations—The fair value of asset retirement obligations are recorded in the period in which they are incurred if a reasonable estimate of fair value can be made, and the corresponding cost is capitalized as part of the carrying amount of the related long-lived asset. The fair value of the asset retirement obligation is measured using expected future cash outflows discounted at Morgan’s credit- adjusted risk-free interest rate. Fair value, to the extent possible, should include a market risk premium for unforeseeable circumstances. No market risk premium was included in Morgan’s asset retirement obligation fair value estimate since a reasonable estimate could not be made. The liability is accreted to its then present value each period, and the capitalized cost is depleted or amortized over the estimated recoverable reserves using the units-of-production method. If the obligation is settled for other than the carrying amount of the liability, the Company will record the difference to the full cost pool.

Environmental Matters

We do not believe the existence of current environmental laws or interpretations thereof will materially hinder or adversely affect Morgan’s business operations; however, there can be no assurances of future effects on Morgan of new laws or interpretations thereof.

Environmental Contingencies

Morgan’s activities are subject to local, state, and federal laws and regulations governing environmental quality and pollution control in the United States. The exploration, drilling and production from wells, natural gas facilities, including the operation and construction of pipelines, plants and other facilities for transporting, processing, treating, or storing natural gas and other products, are subject to stringent environmental regulation by state and federal authorities, including the Environmental Protection Agency (“EPA”). Such regulation can increase the cost of planning, designing, installing, and operating such facilities.

Subsequent Event

On August 14, 2025, Morgan announced that it had secured a $3 million loan facility, the proceeds of which will be used to fund near-term drilling and work-over operations in the Bakken Shale formation of North Dakota’s Williston Basin on two existing but non-producing wells owned by Morgan.