Item 1. Description of Business
GENERAL
Spindletop Oil & Gas Co. is an independent oil and gas company engaged
in the exploration, development, production and acquisition of oil and natural gas; and through one of its subsidiaries, the rental of
oilfield equipment; and the gathering and marketing of natural gas. The terms the "Company", "We", "Us"
or “Spindletop” are used interchangeably herein to refer to Spindletop Oil & Gas Co. (“Spindletop”, “SOG”)
and its wholly owned subsidiaries, Spindletop Drilling Company ("SDC"), and Prairie Pipeline Co. (“PPC”).
The Company has focused its oil and gas operations principally in Texas,
although we operate properties in six states including: Texas, Oklahoma, New Mexico, Louisiana, Arkansas, and Alabama. We operate a majority
of our projects through the drilling and production phases. Our staff has numerous years of experience in the operations area. We have
traditionally leveraged the risks associated with drilling by obtaining industry partners to share in the costs.
In addition, the Company, through PPC, owns several miles of pipelines associated
with Company operated oil and natural gas properties in Texas which are used for the gathering of natural gas. These gathering lines are
located primarily in the Fort Worth Basin and are being utilized to transport the Company's natural gas.
Website Access to Our Reports
We make available free of charge through our website, www.spindletopoil.com,
our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports as soon
as reasonably practicable after such material is electronically filed with the Securities and Exchange Commission. Information on our
website is not a part of this report.
Operating Approach
The Company has a long history with, and extensive knowledge of, the Fort
Worth Basin of Texas. Our technical staff has extensive oil and gas experience in the Fort Worth Basin, and other geological basins in
which the Company has operations.
The Company looks at cost effective ways to grow our production. We have
traditionally increased our reserve base in one of two ways. Initially, in the 1970s and 1980s, the Company obtained its production through
an exploration and development drilling program focused principally in the Fort Worth Basin of North Texas. Today, the Company has retained
many of these wells as producing properties and holds a large amount of acreage by production in that Basin.
During periods of lower product pricing the Company cost effectively added
to its reserve base through value-priced acquisitions. The Company’s focus has evolved to seek value-priced acquisitions combined
with the development of economically feasible drilling prospects. Currently we are continuing our efforts to acquire producing properties,
develop our leasehold acreage, and acquire selective additional leasehold acreage for development purposes. We are pursuing growth primarily
through acquisitions of good quality producing properties, participating in drilling projects with other operators, and selective drilling
and recompletion activities. Supply chain shortages along with labor shortages have caused rapidly rising costs for the Company to develop
and produce our oil and natural gas reserves. We believe that it is prudent to carefully evaluate all our options and consider whether
each transaction can be supported in today’s price environment.
Strategic Business Plans
One of our key strategies is to attempt to maintain shareholder value through
implementation of plans for selective drilling projects and value priced acquisitions to the extent the economics of such projects work
in the current environment. The Company's long-term focus is to grow its oil and natural gas production through a strategic combination
of selected property acquisitions, divestitures, participating in drilling projects with other operators, and a development program primarily
based on developing its leasehold acreage. Additionally, the Company plans to continue to rework existing wells to increase production
and reserves when feasible.
The Company's primary area of operation has been in the State of Texas.
We plan to continue to focus on operations in Texas, and we want to capitalize on our strengths which include an extensive knowledge of
the various reservoirs in Texas, experience in operations in this geographic area, development of lease holdings, and utilization of existing
infrastructure to minimize costs.
The Company will continue to generate and evaluate prospects using its own
technical staff and outside consultants. The Company intends to fund operations primarily from cash flow generated by its operations.
On July 26, 2021, the Company announced that its Board of Directors has
initiated a review of strategic alternatives to attempt to enhance shareholder value. The strategic alternatives being considered include
a possible sale of all or a material portion of assets, either in one transaction or a series of transactions, a merger of the Company
or other form of business combination involving the Company and a third party, the purchase of additional assets, the outright sale of
the Company, or recapitalization of the Company.
No definitive timeline exists for the process, and there can be no assurance
that the results of the review process will result in a transaction or other change. It is not expected that there will be further disclosure
of developments in the review process unless and until the Board of Directors has approved the specific course of action or has otherwise
determined that further disclosure is appropriate or required.
3
Areas of Operations
The Company owns various interests in wells located in numerous states and
the Company’s operations are currently located in 6 of those states which include Alabama, Arkansas, Louisiana, Oklahoma, New Mexico
and Texas.
The Company holds approximately 68,092 gross acres under lease in the states
listed below. The majority of the leases are held by production. A breakout of the Company’s leasehold acreage by geographic area
is as follows:
| |
Operated | |
Non-Operated | |
| |
| |
Percent |
| |
Properties | |
Properties | |
Total | |
of Total |
| |
Gross | |
Net | |
Gross | |
Net | |
Gross | |
Net | |
Gross | |
Net |
Geographic Area | |
Acres | |
Acres | |
Acres | |
Acres | |
Acres | |
Acres | |
Acres | |
Acres |
North Texas (1) | |
| 5,477 | | |
| 5,151 | | |
| 4,650 | | |
| 153 | | |
| 10,127 | | |
| 5,304 | | |
| 14.90 | % | |
| 32.34 | % |
East Texas | |
| 3,200 | | |
| 2,814 | | |
| 8,055 | | |
| 815 | | |
| 11,255 | | |
| 3,629 | | |
| 16.53 | % | |
| 22.13 | % |
Gulf Coast Texas | |
| 40 | | |
| 35 | | |
| 826 | | |
| 60 | | |
| 866 | | |
| 95 | | |
| 1.27 | % | |
| 0.58 | % |
West Texas | |
| 918 | | |
| 881 | | |
| 3,510 | | |
| 228 | | |
| 4,428 | | |
| 1,109 | | |
| 6.50 | % | |
| 6.76 | % |
Texas Panhandle | |
| 1,760 | | |
| 1,216 | | |
| 800 | | |
| 79 | | |
| 2,560 | | |
| 1,295 | | |
| 3.76 | % | |
| 7.90 | % |
Alabama | |
| 1,160 | | |
| 634 | | |
| 1,520 | | |
| 79 | | |
| 2,680 | | |
| 713 | | |
| 3.94 | % | |
| 4.35 | % |
Arkansas | |
| 1,286 | | |
| 1,141 | | |
| 1,618 | | |
| 82 | | |
| 2,904 | | |
| 1,223 | | |
| 4.26 | % | |
| 7.46 | % |
Louisiana | |
| 80 | | |
| 80 | | |
| 848 | | |
| 40 | | |
| 928 | | |
| 120 | | |
| 1.36 | % | |
| 0.73 | % |
New Mexico | |
| 2,276 | | |
| 1,827 | | |
| 359 | | |
| 4 | | |
| 2,635 | | |
| 1,831 | | |
| 3.87 | % | |
| 11.16 | % |
Oklahoma | |
| 240 | | |
| 128 | | |
| 24,437 | | |
| 324 | | |
| 24,677 | | |
| 452 | | |
| 36.24 | % | |
| 2.76 | % |
Colorado | |
| — | | |
| — | | |
| 240 | | |
| — | | |
| 240 | | |
| — | | |
| 0.35 | % | |
| 0.00 | % |
Michigan | |
| — | | |
| — | | |
| 160 | | |
| 5 | | |
| 160 | | |
| 5 | | |
| 0.23 | % | |
| 0.03 | % |
Montana | |
| — | | |
| — | | |
| 10 | | |
| 2 | | |
| 10 | | |
| 2 | | |
| 0.01 | % | |
| 0.01 | % |
North Dakota | |
| — | | |
| — | | |
| 302 | | |
| 15 | | |
| 302 | | |
| 15 | | |
| 0.44 | % | |
| 0.09 | % |
Utah | |
| — | | |
| — | | |
| 2,520 | | |
| 473 | | |
| 2,520 | | |
| 473 | | |
| 3.70 | % | |
| 2.88 | % |
Wyoming | |
| — | | |
| — | | |
| 1,800 | | |
| 134 | | |
| 1,800 | | |
| 134 | | |
| 2.64 | % | |
| 0.82 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Total | |
| 16,437 | | |
| 13,907 | | |
| 51,655 | | |
| 2,493 | | |
| 68,092 | | |
| 16,400 | | |
| 100.00 | % | |
| 100.00 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
(1) North Texas includes the Fort Worth Basin |
The Company uses recent and emerging technologies, as well as proven industry
practices, to develop and produce oil and natural gas from its properties. Additionally, the Company has a dedicated and well-trained
team of employees and professional staff that continually seek out low-risk profitable drilling and acquisition opportunities.
The majority of the Company’s leasehold acres are located in Texas.
A breakout of
the Company's most significant oil and gas reserves by geographic area is as follows:
| |
BOE | |
%Total |
North Texas including the Fort Worth Basin | |
| 588,705 | | |
| 69.63 | % |
East Texas | |
| 137,785 | | |
| 16.30 | % |
Panhandle Texas | |
| 26,207 | | |
| 3.10 | % |
West Texas | |
| 17,317 | | |
| 2.05 | % |
Gulf Coast Texas | |
| 2,150 | | |
| 0.25 | % |
Total Texas | |
| 772,164 | | |
| 91.33 | % |
| |
| | | |
| | |
Alabama | |
| 45,243 | | |
| 5.35 | % |
Arkansas | |
| 1,573 | | |
| 0.19 | % |
Oklahoma | |
| 13,645 | | |
| 1.61 | % |
New Mexico | |
| 10,263 | | |
| 1.21 | % |
Wyoming | |
| 1,997 | | |
| 0.24 | % |
Michigan | |
| 638 | | |
| 0.08 | % |
Total Other States | |
| 73,359 | | |
| 8.67 | % |
Total | |
| 845,523 | | |
| 100.00 | % |
North Texas - Fort Worth Basin & Bend Arch
The Fort Worth Basin has been a focal point of the Company since its inception.
Our technical personnel have numerous years of exploration, drilling, completing, and production experience extracting natural gas and
oil from both conventional and unconventional hydrocarbon deposits found across the basin. Furthermore, the Company maintains comprehensive
and extensive dossiers of geologic and engineering data gathered from the province.
The Fort Worth Basin is a major United States onshore natural gas-prone
expanse containing multiple pay zones that range in depth from one thousand to nine thousand (1,000-9,000) feet. Improved technical advances
in fracturing and stimulation technologies have helped unlock natural gas and oil reserves from the hydrocarbon bearing Barnett Shale
Formation; and thus, continue to bolster vigorous exploration and development activities that target these conventional and unconventional
reservoir reserves throughout the province.
Current Activities
West Texas
Effective March 4, 2022, the Company sold its interest in an operated oil
well along with its associated leasehold acreage, in Martin County, Texas.
North Texas
Effective January 1, 2022, the Company sold its interest in two operated
natural gas wells, two shut-in wells, five non-operated natural gas wells along with its associated leasehold acreage located in Hood
County, Texas, to Giant NRG Co., LP, a related entity. The terms of the transaction are no less favorable than could be obtained from
unaffiliated third parties and have been approve by a majority of our Board of Directors.
4
Oil and Natural Gas Reserves
The Company’s net proved oil and natural gas reserves have been estimated
by Company personnel. (See applicable footnote to the financial statements). No separate independent reserve report analysis has been
prepared by an independent third party.
The net proved crude oil and natural gas reserves of the Company as of December
31, 2022, based on SEC guidelines, were classified as follows:
| |
Barrels of Oil | |
BCF Gas |
Proved Developed Producing | |
| 157,840 | | |
| 4,126 | |
Proved Developed Non-Producing | |
| — | | |
| — | |
Proved Undeveloped | |
| — | | |
| — | |
Total Proved Reserves | |
| 157,840 | | |
| 4,126 | |
Only reserves that fell within the Proved classification were considered.
Other categories such as Probable or Possible Reserves were not considered. No value was given to the potential future development of
behind pipe reserves, untested fault blocks, or the potential for deeper reservoirs underlying the Company's properties. Shut-in, uneconomic
wells, and insignificant non-operated interests were excluded.
On a BOE (barrel of oil equivalent) basis (6 MCF/BOE), the net reserves
are:
| |
Barrels of Oil Equivalent (BOE) | |
|
| |
| |
|
Natural Gas Reserves | |
| 687,693 | | |
| 81 | % |
Oil Reserves | |
| 157,840 | | |
| 19 | % |
Total Reserves | |
| 845,533 | | |
| 100 | % |
| |
| | | |
| | |
Proved Developed Producing | |
| 845,533 | | |
| 100 | % |
Proved Developed Non-Producing | |
| — | | |
| 0 | % |
Proved Undeveloped | |
| — | | |
| 0 | % |
Total Proved Reserves | |
| 845,533 | | |
| 100 | % |
The Company has operational control over the majority of these reserves
and can therefore to a large extent control the timing of development and production.
| |
Barrels of Oil Equivalent (BOE) | |
|
| |
| |
|
Operated Wells | |
| 629,883 | | |
| 74 | % |
Non-Operated Wells | |
| 215,650 | | |
| 26 | % |
Total | |
| 845,533 | | |
| 100 | % |
Financial Information Relating to Industry Segments
The Company has three identifiable business segments: (1) exploration, acquisition,
development and production of oil and natural gas, (2) natural gas gathering, and (3) commercial real estate investment. Footnote 14 to
the Consolidated Financial Statements filed herein sets forth the relevant information regarding revenues, income from operations, and
identifiable assets for these segments.
Narrative Description of Business
The Company is engaged in the exploration, development, acquisition and
production of oil and natural gas, and the gathering and marketing of natural gas. The Company is also engaged in commercial real estate
leasing through leasing office space to non-related third-party tenants in the Company’s corporate headquarters office building.
Principal Products, Distribution and Availability
The principal products marketed by the Company are crude oil and natural
gas which are sold to major oil and gas companies, brokers, pipelines, and distributors. Reserves of oil and natural gas are depleted
upon extraction. The Company is always seeking to replace its oil and gas reserves.
The Company is also engaged in the gathering and marketing of natural gas
through its subsidiary PPC, which owns several miles of pipeline in Texas. Natural gas is gathered for a fee. Substantially all the natural
gas gathered by the Company is produced from wells that the Company operates and in which it owns a working interest.
The Company owns land and a two-story commercial office building in Dallas,
Texas, which it uses as its principal headquarters office. The Company leases the remainder of the building to non-related third-party
commercial tenants at prevailing market rates.
Patents, Licenses and Franchises
Oil and natural gas leases of the Company are obtained from the owner of
the mineral estate. The leases are generally for a primary term of one or more years, and often have extension options for an equivalent
period as the original primary term for payment of additional bonus consideration. The leases customarily provide for extension beyond
their primary term for as long as oil and natural gas are produced in commercial quantities or other operations are conducted on such
leases as provided by the terms of the leases.
The Company currently holds interests in producing and non-producing oil
and natural gas leases. The existence of the oil and natural gas leases and the terms of the oil and natural gas leases are important
to the business of the Company because future additions to reserves will come from oil and natural gas leases currently owned by the Company,
and others that may be acquired, when they are proven to be productive. The Company is continuing to purchase oil and natural gas leases
in areas where it currently has production, and also in other areas.
The following is a summary of a partial list of purchasers / operators (listed
by percent of total oil and natural gas sales) from oil and natural gas produced by the Company for the three-year period ended December
31, 2022.
5
Dependence on Purchasers and Operators
Purchaser / Operator | |
2022 | |
2021 | |
2020 |
Energy Transfer Crude Marketing, LLC | |
| 14 | % | |
| 0 | % | |
| 0 | % |
Giant NRG Co., LP | |
| 12 | % | |
| 0 | % | |
| 0 | % |
Bedrock Energy Partners | |
| 10 | % | |
| 9 | % | |
| 0 | % |
Enlink Gas Marketing, LTD. | |
| 9 | % | |
| 14 | % | |
| 12 | % |
Barnett Gathering, LP | |
| 7 | % | |
| 6 | % | |
| 5 | % |
Pruet Production Co. | |
| 5 | % | |
| 4 | % | |
| 3 | % |
ETC Texas Pipeline, LTD | |
| 4 | % | |
| 4 | % | |
| 2 | % |
Eastex Crude Company | |
| 4 | % | |
| 4 | % | |
| 3 | % |
BKV Midstream | |
| 4 | % | |
| 0 | % | |
| 0 | % |
Hunt Crude Oil Supply | |
| 3 | % | |
| 2 | % | |
| 6 | % |
Javelin Oil & Gas | |
| 3 | % | |
| 0 | % | |
| 0 | % |
Phillips 66 | |
| 2 | % | |
| 2 | % | |
| 3 | % |
Bedrock Production LLC | |
| 2 | % | |
| 2 | % | |
| 10 | % |
Producer's Midstream | |
| 2 | % | |
| 0 | % | |
| 0 | % |
IACX Roswell LLC | |
| 2 | % | |
| 3 | % | |
| 0 | % |
Oasis Transportation & Marketing Group | |
| 2 | % | |
| 1 | % | |
| 1 | % |
Trailblazer formerly ETX Energy, LLC | |
| 2 | % | |
| 1 | % | |
| 1 | % |
Empire Pipeline Corp. | |
| 2 | % | |
| 2 | % | |
| 1 | % |
Webb Energy Resources, Inc. | |
| 1 | % | |
| 1 | % | |
| 1 | % |
Edinger Engineering Inc. | |
| 1 | % | |
| 1 | % | |
| 1 | % |
Midcoast Energy Partners LP | |
| 1 | % | |
| 4 | % | |
| 2 | % |
DCP Midstream, LP | |
| 1 | % | |
| 1 | % | |
| 0 | % |
Land and Natural Resource Development | |
| 1 | % | |
| 1 | % | |
| 1 | % |
Eagle Ridge Operating, Inc | |
| 1 | % | |
| 1 | % | |
| 1 | % |
OXY USA, Inc. | |
| 1 | % | |
| 1 | % | |
| 1 | % |
FDL Operating LLC | |
| 0 | % | |
| 2 | % | |
| 2 | % |
Sunoco Partners Marketing | |
| 0 | % | |
| 13 | % | |
| 20 | % |
Targa Midstream Services, LLC | |
| 0 | % | |
| 11 | % | |
| 11 | % |
Peveler Pipeline, LP | |
| 0 | % | |
| 6 | % | |
| 4 | % |
Valero Energy Corporation | |
| 0 | % | |
| 1 | % | |
| 1 | % |
ACE Gathering, Inc. | |
| 0 | % | |
| 0 | % | |
| 1 | % |
Lion Oil Trading & Transportation | |
| 0 | % | |
| 0 | % | |
| 1 | % |
Enterprise Crude Oil, LLC | |
| 0 | % | |
| 0 | % | |
| 1 | % |
Oil and natural gas production is sold to many different purchasers/operators
under market sensitive, short-term contracts.
Except as set forth above, there are no other purchasers/operators of the
Company’s oil and natural gas production that individually accounted for more than one percent (1%) of the Company's oil and natural
gas revenues during the three years ended December 31, 2022.
The Company currently has no hedged contracts.
Prospective Drilling Activities
The Company's primary oil and natural gas prospect generation and acquisition
efforts have been in known producing areas in the United States with emphasis devoted to Texas.
The Company intends to use a portion of its available funds to participate
in operated and non-operated drilling activities. The Company does not own any drilling rigs. Independent drilling contractors perform
all drilling activity. The Company does not refine or otherwise process its oil and natural gas production.
Exploration for oil and natural gas is normally conducted with the Company
acquiring undeveloped oil and natural gas leases under prospects and carrying out exploratory drilling on the prospective leasehold with
the Company retaining a majority interest in the prospect. The Company may sell interests to third parties, with the Company retaining
an overriding royalty interest, carried working interest, or a reversionary interest.
A prospect is a geographical area designated by the Company for the purpose
of searching for oil and natural gas reserves and reasonably expected by it to contain at least one oil or natural gas reservoir. The
Company utilizes its own funds along with the issuance of common stock and options to purchase common stock in some limited cases, to
acquire oil and gas leases covering the lands comprising the prospects. These leases are selected by the Company and are obtained directly
from the landowners, as well as from landmen, geologists, other oil companies, some of whom may be affiliated with the Company, and by
direct purchase, farm-in, or option agreements. After an initial test well is drilled on a property, any subsequent development drilling
of such prospect will normally require the Company to fund the development activities.
Employees and Independent Contractors
As of December 31, 2022, the Company employed or contracted for the services
of a total of approximately 43 people. Of this total, 13 are full-time employees, and the remainder
are part-time employees or independent contractors. We believe that our relationships with our employees and contractors are good.
In order to effectively utilize our resources, we employ the services of
independent consultants and contractors to perform a variety of professional, technical, and field services, including in the areas of
lease acquisition, land related documentation and contracts, drilling and completion work, pumping, inspection, testing, maintenance and
specialized services. We believe that it can be more cost effective to utilize the services of consultants and independent contractors
for some of these services.
We depend to a large extent on the services of certain key management personnel
and officers, and the loss of any these individuals could have a material adverse effect on our operations. The Company does not maintain
key-man life insurance policies on its employees.
Financial Information about Foreign and Domestic Operations and Export
Sales
All of the Company's business is conducted domestically, with no export
sales.
Compliance with Environmental Regulations
Our oil and natural gas operations are subject to numerous United States
federal, state, and local laws and regulations relating to the protection of the environment, including those governing the discharge
of materials into the water and air, the generation, management and disposal of hazardous substances and wastes, and clean-up of contaminated
sites. We could incur material costs, including clean-up costs, fines, civil and criminal sanctions, and third-party claims for property
damage and personal injury as a result of violations of, or liabilities under, environmental laws and regulations. Such laws and regulations
not only expose us to liability for our own activities but may also expose us to liability for the conduct of others or for actions by
us that were in compliance with all applicable laws at the time those actions were taken. In addition, we could incur substantial expenditures
complying with environmental laws and regulations, including future environmental laws and regulations which may be more stringent.
6
Glossary of Oil and Gas Terms
The following are abbreviations and definitions of terms commonly used in
the oil and gas industry that are used in this Report. The terms defined herein may be found in this report in both upper and lower case
or a combination of both.
"2-D Seismic" means an advanced technology method by which a cross-section
of the earth's subsurface is created through the interpretation of reflecting seismic data collected along a single source profile.
"3-D Seismic" means an advanced technology method by which a three-dimensional
image of the earth's subsurface is created through the interpretation of reflection seismic data collected over a surface grid. 3-D seismic
surveys allow for a more detailed understanding of the subsurface than do conventional surveys and contribute significantly to field appraisal,
development, and production.
"BBL" means a barrel of 42 U.S. gallons.
“BBNGL” means billion barrels of natural gas liquids.
“BCF” or “BCFG” means billion cubic feet.
"BOE" means barrels of oil equivalent, converting volumes of natural
gas to oil equivalent volumes using a ratio of six Mcf of natural gas to one Bbl of oil.
“BOPD” means barrels of oil per day.
"BTU" means British Thermal Units. British Thermal Unit means
the quantity of heat required to raise the temperature of one pound of water by one degree Fahrenheit.
“BSWPD” means barrels of salt water per day.
"Completion" means the installation of permanent equipment for
the production of oil or natural gas.
"Development Well" means a well drilled within the proved area
of an oil or natural gas reservoir to the depth of a strata graphic horizon known to be productive.
"Dry Hole" or "Dry Well" means a well found to be incapable
of producing hydrocarbons in sufficient quantities such that proceeds from the sale of such production exceed production expenses and
taxes.
"Exploratory Well" means a well drilled to find and produce oil
or natural gas reserves not classified as proved, to find a new production reservoir in a field previously found to be productive of oil
or natural gas in another reservoir or to extend a known reservoir.
"Farm-Out" means an agreement pursuant to which the owner of a
working interest in an oil and natural gas lease assigns the working interest or a portion thereof to another party who desires to drill
on the leased acreage. Generally, the assignee is required to drill one or more wells in order to earn its interest in the acreage. The
assignor usually retains a royalty or reversionary interest in the lease. The interest received by an assignee is a "farm-in"
and the assignor issues a "farm-out."
"Farm-In" see "Farm-Out" above.
"Gas" means natural gas.
"Gross" when used with respect to acres or wells, refers to the
total acres or wells in which we have a working interest.
"Infill Drilling" means drilling of an additional well or wells
provided for by an existing spacing order to drain a reservoir more adequately.
"MCF" or “MCFG” means thousand cubic feet.
“MCFGPD” means thousand cubic feet of natural gas per day.
"MCFE" means MCF of natural gas equivalent; converting volumes
of oil to natural gas equivalent volumes using a ratio of one BBL of oil to six MCF of natural gas.
“MD” means measured depth.
“MMBO” means million barrels of oil.
"MMBTU" means one million BTUs.
"Net" when used with respect to acres or wells, refers to gross
acres or wells multiplied, in each case, by the percentage working interest owned by the Company.
"Net Production" means production that is owned by the Company,
less royalties and production due others.
"Non-Operated" or "Outside Operated" means wells that
are operated by a third party.
“Oil and Gas” means oil and natural gas.
"Operator" means the individual or company responsible for the
exploration, development, production and management of an oil or gas well or lease.
“Overriding Royalty” means a royalty interest which is usually
reserved by an owner of the leasehold in connection with a transfer to a subsequent owner.
"Present Value" ("PV") when used with respect to oil
and natural gas reserves, means the estimated future gross revenues to be generated from the production of proved reserves calculated
in accordance with the guidelines of the SEC, net of estimated production and future development costs as of the date of estimation without
future escalation, and discounted using an annual discount rate of 10%. Prices are not escalated and are computed using a 12-month average
price, calculated as the unweighted arithmetic average of the first-day-of-the month price for each month of the year (except to the extent
a contract specifically provides otherwise). No effect is given to non-property related expenses such as general and administrative expenses,
debt service, future income tax expense and depreciation, depletion, and amortization.
"Productive Wells" or "Producing Wells" consist of producing
wells and wells capable of production, including wells waiting on pipeline connections.
"Proved Developed Reserves" means reserves that can be expected
to be recovered through existing wells with existing equipment and operating methods. Additional oil and natural gas expected to be obtained
through the application of fluid injection or other improved recovery techniques for supplementing the natural forces and mechanisms of
primary recovery will be included as "proved developed reserves" only after testing by a pilot project or after the operation
of an installed program has confirmed through production response that increased recovery will be achieved.
7
"Proved Reserves" means the estimated quantities of crude oil
and natural gas which upon analysis of geological and engineering data appear with reasonable certainty to be recoverable in future years
from known reservoirs under existing economic and operating conditions, i.e., prices and costs as of the date the estimate is made. Prices
include consideration of changes in existing prices provided only by contractual arrangements, but not on escalations based upon future
conditions.
(i) Reservoirs are considered proved if either actual
production or conclusive formation
tests support economic producibility. The area of a
reservoir considered proved
includes (A) that portion delineated by drilling and
defined by gas-oil and/or oil-water
contacts, if any; and (B) the immediately adjoining
portions not yet drilled, but which
can be reasonably judged as economically productive
on the basis of available geological.
and engineering data. In the absence of information
on fluid contacts, the lowest known
structural occurrence of hydrocarbons controls the lower
proved limit of the reservoir.
(ii) Reserves which can be produced economically through
application of improved recovery
techniques (such as fluid injection) are included in
the "proved" classification when successful
testing by a pilot project, or the operation of an installed
program in the reservoir, provides
support for the engineering analysis on which the project
or program was based.
(iii) Estimates of proved reserves do not include the
following: (A) oil that may become
available from known reservoirs but is classified separately
as "indicated additional reserves";
(B) crude oil and natural gas, the recovery of which
is subject to reasonable doubt because of
uncertainty as to geology, reservoir characteristics
or economic factors; (C) crude oil and
natural gas that may occur in undrilled prospects; and
(D) crude oil and natural gas that may
be recovered from oil shales, coal, gilsonite and other
such resources.
"Proved Undeveloped Reserves" means reserves that are recovered
from new wells on undrilled acreage, or from existing wells where a relatively major expenditure is required for completion. Reserves
on undrilled acreage shall be limited to those drilling units offsetting productive units that are reasonably certain of production when
drilled. Proved reserves for other undrilled units can be claimed only where it can be demonstrated with certainty that there is continuity
of production from the existing productive formation. Under no circumstances should estimates for proved undeveloped reserves be attributable
to any acreage for which an application of fluid injection or other improved recovery technique is contemplated unless such techniques
have been proved effective by actual tests in the area and in the same reservoir.
"Recompletion" means the completion for production of an existing
well bore in another formation from that in which the well has been previously completed.
"Reserves" means proved reserves.
"Reservoir" means a porous and permeable underground formation
containing a natural accumulation of producible oil and/or gas that is confined by impermeable rock or water barriers and is individual
and separate from other reservoirs.
"Royalty" means an interest in an oil and natural gas lease that
gives the owner of the interest the right to receive a portion of the production from the leased acreage (or of the proceeds of the sale
thereof), but generally does not require the owner to pay any portion of the costs of drilling or operating the wells on the leased acreage.
Royalties may be either landowner's royalties, which are reserved by the owner of the leased acreage at the time the lease is granted,
or overriding royalties, which are usually reserved by an owner of the leasehold in connection with a transfer to a subsequent owner.
“TCF” means trillion cubic feet.
“TD” means total depth.
“TVD” means true vertical depth,
"Working Interest" means an interest in an oil and natural gas
lease that gives the owner of the interest the right to drill for and produce oil and gas on the leased acreage and requires the owner
to pay a share of the costs of drilling and production operations. The share of production to which a working interest owner is entitled
will always be smaller than the share of costs that the working interest owner is required to bear, with the balance of the production
accruing to the owners of royalties.
"Workover" means operations on a producing well to restore or
increase production.
8
Item 1A. Risk Factors
Risks Related Directly to Our Company.
One should carefully consider the following risk factors, in addition to
the other information set forth in this Report, before investing in shares of our common stock. Each of these risk factors could adversely
affect our business, operating results, and financial condition, as well as adversely affect the value of an investment in our common
stock. Some information in this Report may contain "forward-looking" statements that discuss future expectations of our financial
condition and results of operation. The risk factors noted in this section and other factors could cause our actual results to differ
materially from those contained in any forward-looking statements.
We are exposed to global health, economic and market risks that are
beyond our control, which could adversely affect our financial results and capital requirements.
The COVID-19 pandemic and the measures being taken to address and limit
the spread of the virus adversely affected the economies and financial markets of the world, resulting in an economic downturn beginning
in early 2020 that negatively impacted global demand and prices for crude oil and condensate, natural gas liquids (NGLs) and natural gas.
The effects of COVID-19 mitigation efforts, including the wide availability of vaccines, combined with the waning intensity of the pandemic,
have resulted in increased demand and prices for crude oil and condensate. In addition, worldwide oil inventories, from a historical perspective,
remain low and concerns exist with the ability of OPEC and other oil producing nations to meet forecasted future oil demand growth, with
many OPEC countries not able to produce at their OPEC agreed upon quota levels due to their limited capital investments directed towards
developing incremental oil supplies over the past few years. Furthermore, sanctions, import bans and price caps on Russia have been implemented
by various countries in response to the war in Ukraine, further impacting global oil supply. As a result of these and other oil supply
constraints, the world has experienced significant increases in energy costs. During December 2022, OPEC announced a continuation of its
2 MMBOPD production cut that started in November 2022 related to the uncertainty surrounding the global economy and future oil demand.
As a result of the global supply and demand imbalances, oil and gas prices remained strong through December 2022. In addition, the ongoing
pandemic, combined with the Russia/Ukraine conflict, has resulted in global supply chain disruptions, which has led to significant cost
inflation and the potential for a global recession. Specifically, the Company was impacted by higher than expected inflation in steel,
services and chemical prices, among other items. Global oil price levels and inflationary pressures will ultimately depend on various
factors that are beyond the Company's control, such as (i) the ability of OPEC and other oil producing nations to manage the global oil
supply, (ii) the impact of sanctions and import bans on production from Russia, (iii) the timing and supply impact of any Iranian sanction
relief on their ability to export oil, (iv) the effectiveness of responses by businesses and governments to combat any additional outbreaks
of the COVID-19 virus and their impact on domestic and worldwide demand, (v) the global supply chain constraints associated with manufacturing
and distribution delays, (vi) oilfield service demand and cost inflation, (vii) political stability of oil consuming countries and (viii)
increasing expectations that the world may be heading into a global recession. The Company continues to assess and monitor the impact
of these factors and consequences on the Company and its operations. Natural gas prices were robust during 2022. As a result, additional
natural gas supplies oversaturated the markets causing natural gas prices to deteriorate in the first quarter of 2023. Several of the
natural gas price indexes have now dropped below $2.00 per mmbtu.
Rising
inflation and other uncertainties regarding the global economy, financial environment, and global conflict could lead to an extended national
or global economic recession. A slowdown in economic activity caused by a recession would likely reduce national and worldwide demand
for oil and natural gas and result in lower commodity prices. Prolonged, substantial decreases in oil and natural gas prices would likely
have a material adverse effect on the Company’s business, financial condition, and results of operations, and could further limit
the Company's access to liquidity and credit and could hinder its ability to satisfy its capital requirements.
In the past several years, capital and credit markets have experienced
volatility and disruption. Given the levels of market volatility and disruption, the availability of funds from those markets may diminish
substantially. Further, arising from concerns about the stability of financial markets generally and the solvency of borrowers specifically,
the cost of accessing the credit markets has increased as many lenders have raised interest rates, enacted tighter lending standards,
or altogether ceased to provide funding to borrowers.
Due to these potential capital and credit market conditions, the Company
cannot be certain that funding will be available in amounts or on terms acceptable to the Company. The Company is evaluating whether current
cash balances and cash flow from operations alone would be sufficient to provide working capital to fully fund the Company's operations.
Accordingly, the Company is evaluating alternatives, such as joint ventures with third parties, or sales of interest in one or more of
its properties. Such transactions, if undertaken, could result in a reduction in the Company's operating interests or require the Company
to relinquish the right to operate the property. There can be no assurance that any such transactions can be completed or that such transactions
will satisfy the Company's operating capital requirements. If the Company is not successful in obtaining sufficient funding or completing
an alternative transaction on a timely basis on terms acceptable to the Company, the Company would be required to curtail its expenditures
or restructure its operations, and the Company would be unable to continue its exploration, drilling, and recompletion program, any of
which would have a material adverse effect on its business, financial condition, and results of operations.
A negative shift in some of the public’s attitudes toward the oil
and natural gas industry could adversely affect the Company’s ability to raise debt and equity capital. Certain segments of the
investment community have developed negative sentiments about investing in the oil and natural gas industry. Recent equity returns in
the sector versus other industry sectors have led to lower oil and natural gas representation in certain key equity market indices. In
addition, some investors, including investment advisors and certain wealth funds, pension funds, university endowments and family foundations,
have stated policies to disinvest in the oil and natural gas sector based on their social and environmental considerations. Certain other
stakeholders have also pressured commercial and investment banks to halt financing oil and natural gas production and related infrastructure
projects. Such developments, including environmental, social and governance (“ESG”) activism and initiatives aimed at limiting
climate change and reducing air pollution, could result in downward pressure on the stock prices of oil and natural gas companies. The
Company’s stock price could be adversely affected by these developments. This may also potentially result in a reduction of available
capital funding for potential development projects, impacting the Company’s future financial results.
The Company faces various risks associated with increased negative attitudes
toward oil and natural gas exploration and development activities. Opposition to oil and natural gas drilling and development activities
has been growing globally and is expanding in the United States. Companies in the oil and natural gas industry are often the target of
efforts from both individuals and nongovernmental organizations regarding safety, human rights, climate change, environmental matters,
sustainability, and business practices. Anti-development groups are working to reduce access to federal and state government lands and
delay or cancel certain operations such as drilling and development along with other activities. Opposition to oil and natural gas activities
could materially and adversely impact the Company’s ability to operate our business and raise capital.
There could be adverse legislation which if passed, would significantly
curtail our ability to attract investors and raise capital. Proposed changes in the Federal income tax laws which would eliminate or reduce
the percentage depletion deduction and the deduction for intangible drilling and development costs for small independent producers, will
significantly reduce the investment capital available to those in the industry as well as our Company. Lengthening the time to expense
seismic costs will also have an adverse effect on our ability to explore and find new reserves.
Other factors that may affect the demand for oil and natural gas, and therefore
impact our results, include technological improvements in energy efficiency; seasonal weather patterns; increased competitiveness of,
or government policy support for, alternative energy sources; changes in technology that alter fuel choices, such as technological advances
in energy storage that make wind and solar more competitive for power generation; changes in consumer preferences for our products, including
consumer demand for alternative fueled or electric transportation or alternatives to plastic products; and broad-based changes in personal
income levels.
Commodity prices and margins also vary depending on a number of factors
affecting supply. For example, increased supply from the development of new oil and gas supply sources and technologies to enhance recovery
from existing sources tend to reduce commodity prices to the extent such supply increases are not offset by commensurate growth in demand.
Other sections of this report may also include suggested factors that could
adversely affect our business and financial performance. Moreover, we operate in an extremely competitive and rapidly changing environment.
New risks may emerge from time to time, and it is not possible for management to predict all such matters; nor can we assess the impact
of all such matters on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially
from those contained in any forward-looking statements. Given these uncertainties, investors should not place undue reliance on forward-looking
statements as a prediction of actual results. Investors should also refer to our quarterly reports on Form 10-Q for future periods and
current reports on Form 8-K as we file them with the SEC, and to other materials we may furnish to the public from time to time through
Forms 8-K or otherwise.
9
We face significant competition, and many of our competitors have
resources in excess of our available resources.
The oil and natural gas industry is highly competitive. We encounter competition
from other oil and gas companies in all areas of our operations, including the acquisition of producing properties and sale of crude oil
and natural gas. Our competitors include major integrated oil and gas companies and numerous independent oil and gas companies, individuals,
and drilling and income programs. Many of our competitors are large, well-established companies with substantially larger operating staffs
and greater capital resources than us. Such companies may be able to pay more for productive oil and gas properties and exploratory prospects
and to define, evaluate, bid for, and purchase a greater number of properties and prospects than our financial or human resources permit.
Our ability to acquire additional properties and to discover reserves in the future will depend upon our ability to evaluate and select
suitable properties and to consummate transactions in this highly competitive environment.
Exploratory drilling is a speculative activity that may not result
in commercially productive reserves and may require expenditures in excess of budgeted amounts.
Drilling activities are subject to many risks, including the risk that no
commercially productive oil or natural gas reservoirs will be encountered. There can be no assurance that new wells drilled by us will
be productive or that we will recover all or any portion of our investment. Drilling for oil and natural gas may involve unprofitable
efforts, not only from dry wells, but also from wells that are productive but do not produce sufficient net revenues to return a profit
after drilling, operating and other costs. The cost of drilling, completing and operating wells is often uncertain. Our drilling operations
may be curtailed, delayed, or canceled as a result of a variety of factors, many of which are beyond our control, including economic conditions,
mechanical problems, pressure or irregularities in formations, title problems, weather conditions, compliance with governmental requirements,
and shortages in or delays in the delivery of equipment and services. In today's environment, shortages make drilling rigs, labor, and
services difficult to obtain and could cause delays or inability to proceed with our drilling and development plans. Such equipment shortages
and delays sometimes involve drilling rigs where inclement weather prohibits the movement of land rigs causing a high demand for rigs
by a large number of companies during a relatively short period of time. Our future drilling activities may not be successful. Lack of
drilling success could have a material adverse effect on our financial condition and results of operations.
Our operations are also subject to all the hazards and risks normally incident
to the development, exploitation, production, and transportation of, and the exploration for, oil and natural gas, including unusual or
unexpected geologic formations, pressures, down hole fires, mechanical failures, blowouts, explosions, uncontrollable flows of oil, natural
gas or well fluids and pollution and other environmental risks. These hazards could result in substantial losses to us due to injury and
loss of life, severe damage to and destruction of property and equipment, pollution and other environmental damage and suspension of operations.
We participate in insurance coverage maintained by the operator of its wells, although there can be no assurances that such coverage will
be sufficient to prevent a material adverse effect to us in such events.
The vast majority of our oil and natural gas reserves are classified as
proved reserves. Recovery of the Company's future proved undeveloped reserves will require significant capital expenditures. Our management
estimates that additional capital expenditures will be required to fully develop some of these reserves in the next twelve-month period.
No assurance can be given that our estimates of capital expenditures will prove accurate, that our financing sources will be sufficient
to fully fund our planned development activities or that development activities will be either successful or in accordance with our schedule.
Additionally, any significant decrease in oil and natural gas prices or any significant increase in the cost of development could result
in a significant reduction in the number of wells drilled and/or reworked. No assurance can be given that any wells will produce oil
or natural gas in commercially profitable quantities.
We are subject to uncertainties in reserve estimates and future net
cash flows.
This annual report contains estimates of our oil and natural gas reserves
and the future net cash flows from those reserves. These estimates have been prepared by Company personnel for 2022, 2021, and 2020. There
are numerous uncertainties inherent in estimating quantities of reserves of oil and natural gas and in projecting future rates of production
and the timing of development expenditures, including many factors beyond our control. The reserve estimates in this annual report are
based on various assumptions, including decline curve analysis, constant oil and natural gas prices, operating expenses, capital expenditures
and the availability of funds, and therefore, are inherently imprecise indications of future net cash flows. Actual future production,
cash flows, taxes, operating expenses, development expenditures and quantities of recoverable oil and gas reserves may vary substantially
from those assumed in the estimates. Any significant variance in these assumptions could materially affect the estimated quantity and
value of reserves set forth in this annual report. Additionally, our reserves may be subject to downward or upward revision based upon
actual production performance, results of future development and exploration, prevailing oil and natural gas prices and other factors,
many of which are beyond our control.
The present value of future net reserves discounted at 10% (the "PV-10")
of proved reserves referred to in this annual report should not be construed as the current market value of the estimated proved reserves
of oil and gas attributable to our properties. In accordance with applicable requirements of the SEC, the estimated discounted future
net cash flows from proved reserves are generally based on prices using a 12-month average price, calculated as the un-weighted arithmetic
average of the first day-of-the month price for each month of each year, and costs as of the date of the estimate, whereas actual future
prices and costs may be materially higher or lower. Actual future net cash flows also will be affected by: (i) the timing of both production
and related expenses; (ii) changes in consumption levels; and (iii) governmental regulations or taxation. In addition, the calculation
of the present value of the future net cash flows using a 10% discount as required by the SEC is not necessarily the most appropriate
discount factor based on interest rates in effect from time to time and risks associated with our reserves or the oil and gas industry
in general. Furthermore, our reserves may be subject to downward or upward revision based upon actual production, results of future development,
supply and demand for oil and natural gas, prevailing oil and natural gas prices and other factors. See "Properties - Oil and Gas
Reserves."
Unless we replace our oil and natural gas reserves, our reserves and
production will decline, which would adversely affect our cash flows and income.
Unless we conduct successful development, exploitation and exploration activities
or acquire properties containing proved reserves, our proved reserves will decline as those reserves are produced. Producing oil and natural
gas reservoirs generally are characterized by declining production rates that vary depending upon reservoir characteristics and other
factors. Our future oil and natural gas reserves and production, and, therefore our cash flow and income, are highly dependent on our
success in efficiently developing and exploiting our current reserves and economically finding or acquiring additional recoverable reserves.
We may be unable to make such acquisitions because we are:
| · | unable to identify attractive acquisition candidates or negotiate acceptable
purchase contracts with them. |
| · | unable to obtain financing for these acquisitions on economically acceptable
terms; or |
If we are unable to develop, exploit, find or acquire additional reserves
to replace our current and future production, our cash flow and income will decline as production declines, until our existing properties
would be incapable of sustaining commercial production.
There are risks in acquiring producing oil and natural gas properties,
including difficulties in integrating acquired properties into our business, additional liabilities and expenses associated with acquired
properties, diversion of management attention, increasing the scope, geographic diversity, and complexity of our operations.
One of our business strategies includes growing our reserve base through
acquisitions of oil and natural gas properties. Our failure to integrate acquired properties successfully into our existing business,
or the expense incurred in consummating future acquisitions, could result in unanticipated expenses and losses. In addition, we may assume
environmental cleanup or reclamation obligations or other unanticipated liabilities in connection with these acquisitions. The scope and
cost of these obligations may ultimately be materially greater than estimated at the time of the acquisition.
We are continually investigating opportunities for acquisitions. In connection
with future acquisitions, the process of integrating acquired operations into our existing operations may result in unforeseen operating
difficulties and may require significant management attention and financial resources that would otherwise be available for the ongoing
development or expansion of existing operations. Our ability to make future acquisitions may be constrained by our ability to obtain additional
financing.
Possible future acquisitions could result in our incurring debt, contingent
liabilities, and expense, all of which could have a material effect on our financial condition and operating results.
10
Acquisitions may prove to be worth less than we paid because of uncertainties
in evaluating recoverable reserves and potential liabilities.
Successful acquisitions require an assessment of several factors, including
estimates of recoverable reserves, exploration potential, recovery applicability from water flood and Enhanced Oil Recovery techniques
(“EOR”), future oil and natural gas prices, operating costs, and potential environmental and other liabilities. Such assessments
are inexact, and their accuracy is inherently uncertain. In connection with our assessments, we perform a review of the acquired properties
which we believe is generally consistent with industry practices. However, such a review will not reveal all existing or potential problems.
In addition, our review may not permit us to become sufficiently familiar with the properties to fully assess their deficiencies and capabilities.
We do not inspect every well or property. Even when we inspect a well or property, we do not always discover structural, subsurface, and
environmental problems that may exist or arise. We are generally not entitled to contractual indemnification for pre-closing liabilities,
including environmental liabilities. Normally, we acquire interests in properties on an “as is” basis with limited remedies
for breaches of representations and warranties. As a result of these factors, we may not be able to acquire oil and natural gas properties
that contain economically recoverable reserves or be able to complete such acquisitions on acceptable terms.
Additionally, significant acquisitions can change the nature of our operations
and business depending upon the character of the acquired properties, which may have substantially different operating and geological
characteristics or be in different geographic locations than our existing properties. It is our current intention to continue focusing
on acquiring properties with development and exploration potential located in onshore United States. To the extent that we acquire properties
substantially different from the properties in our primary operating regions or acquire properties that require different technical expertise,
we may not be able to realize the economic benefits of these acquisitions as efficiently as in our prior acquisitions.
We cannot control activities on properties we do not operate. Failure
to fund capital expenditure requirements may result in reduction or forfeiture of our interests in some of our non-operated projects.
We do not operate some of the properties in which we have an interest, and
we have limited ability to exercise influence over operations for these properties or their associated costs. As of December 31, 2022,
approximately 26% of our crude oil and natural gas proved reserves were operated by other companies. Our dependence on other operators
and other working interest owners for these projects and our limited ability to influence operations and associated costs could materially
adversely affect the realization of our targeted return on capital in drilling or acquisition activities and our targeted production growth
rate. The success and timing of drilling, development and exploitation activities on properties operated by others depend on a number
of factors that are beyond our control, including the operator’s expertise and financial resources, approval of other participants
for drilling wells and utilization of technology.
When we are not the majority owner or operator of a particular crude oil
or natural gas project, we may have no control over the timing or amount of capital expenditures associated with such project. If we are
not willing or able to fund our capital expenditures relating to such projects when required by the majority owner or operator, our interests
in these projects may be reduced or forfeited.
We are subject to risks associated with the current United States
Government Administration’s possible budget features.
Future legislation may set forth budget proposals which if passed, would
significantly curtail our ability to attract investors and raise capital. Future possible changes in the Federal income tax laws which
would eliminate or reduce the percentage depletion deduction and the deduction for intangible drilling and development costs for small
independent producers will likely significantly reduce the investment capital available to those in the industry as well as our Company.
Lengthening the time to expense seismic costs would likely also have an adverse effect on our ability to explore and find new reserves.
We are subject to various operating and other casualty risks that
could result in liability exposure or the loss of production and revenues.
Our oil and gas business involves a variety of operating risks, including,
but not limited to, unexpected formations or pressures, uncontrollable flows of oil, natural gas, brine or well fluids into the environment
(including groundwater contamination), blowouts, fires, explosions, pollution, and other risks, any of which could result in personal
injuries, loss of life, damage to properties and substantial losses. Although we carry insurance at levels that we believe are reasonable,
we are not fully insured against all risks. We do not carry business interruption insurance. Losses and liabilities arising from uninsured
or under-insured events could have a material adverse effect on our financial condition and operations.
From time to time, due primarily to contract terms, pipeline interruptions
or weather conditions, the producing wells in which we own an interest have been subject to production curtailments. The curtailments
range from production being partially restricted to wells being completely shut in. The duration of curtailments varies from a few days
to several months. In most cases, we are provided only limited notice as to when production will be curtailed and the duration of such
curtailments. We are not currently experiencing any material curtailment of our production.
We intend to increase to some extent our development and, to a lesser extent,
exploration activities. Exploration drilling and, to a lesser extent, development drilling of oil and gas reserves involve a high degree
of risk that no commercial production will be obtained and/or that production will be insufficient to recover drilling and completion
costs. The cost of drilling, completing and operating wells is often uncertain. Our drilling operations may be curtailed, delayed, or
canceled as a result of numerous factors, including title problems, weather conditions, compliance with governmental requirements and
shortages or delays in the delivery of equipment. Furthermore, completion of a well does not assure a profit on the investment or a recovery
of drilling, completion, and operating costs.
We depend on our key management personnel and technical experts and
the loss of any of these individuals could adversely affect our business.
If we lose the services of our key management personnel, technical experts
or are unable to attract additional qualified personnel, our business, financial condition, results of operations, development efforts
and ability to grow could suffer. We have assembled a team of engineers, landmen, and geologists who have considerable experience in drilling
and completion techniques to explore for and to develop crude oil and natural gas. We depend upon the knowledge, skill, and experience
of these experts to assist us in improving the performance and reducing the risks associated with our participation in crude oil and natural
gas exploration and development projects. In addition, the success of our business depends, to a significant extent, upon the abilities
and continued efforts of our management, particularly Chris Mazzini, our Chief Executive Officer, President and Chairman of the Board.
We do not have an employment agreement with or key-man life insurance on Mr. Mazzini or any of our other key employees. Many of our key
personnel are either eligible for retirement or will become eligible in the next one to four years. The Company does not have a succession
plan in place for key management and technical personnel replacements.
The inability to continue to hire, train and retain operational, technical,
and managerial personnel could adversely affect our results of operations.
The average age of the employee base of the Company has been increasing
for several years, with a number of employees either currently eligible to retire or becoming eligible to retire within the next one to
four years. If we are unable to hire appropriate personnel to fill future needs, the Company could encounter operating challenges and
increased costs, primarily due to a loss of knowledge, errors due to inexperience or the lengthy time typically required to adequately
train replacement personnel. In addition, higher costs could result from the increased use of contractors to replace retiring employees,
loss of productivity or increased safety compliance issues. The inability to hire, train and retain new operational, technical, and managerial
personnel adequately and to transfer institutional knowledge and expertise could adversely affect our ability to manage and operate our
business. If we were unable to hire, train and retain appropriately qualified personnel, our results of operations could be adversely
affected.
The costs of providing health care benefits to our employees may increase
substantially.
We provide health care benefits to eligible full-time employees. The costs
of providing health care benefits to our employees could significantly increase over time due to rapidly increasing health care inflation,
and any future legislative changes related to the provision of health care benefits. The impact of additional costs which are likely to
be passed on to the Company are difficult to measure at this time. Further, our costs of providing such benefits are also subject to a
number of factors, including (i) changing demographics; and (ii) future government regulation.
Certain of our affiliates control a majority of our outstanding common
stock, which may affect your vote as a shareholder.
Our executive officers, directors, and their affiliates as of December 31,
2022, hold approximately 87.41% of our outstanding shares of common stock. As a result, officers, directors and their affiliates and such
shareholders have the ability to exert significant influence over our business affairs, including the ability to control the election
of directors and results of voting on all matters requiring shareholder approval. This concentration of voting power may delay or prevent
a potential change in control.
Certain of our affiliates have engaged in business transactions with
the Company, which may result in conflicts of interest.
Certain officers, directors, and related parties, including entities controlled
by Mr. Mazzini, the President and Chief Executive Officer, have engaged in business transactions with the Company which were not the
result of arm's length negotiations between independent parties. Our management believes that the terms of these transactions were as
favorable to us as those that could have been obtained from unaffiliated parties under similar circumstances. Future transactions between
us and our affiliates will be on terms no less favorable than could be obtained from unaffiliated third parties and will be approved
by a majority of the members of our Board of Directors.
11
Our common stock is traded on the Over-the-Counter market and is currently
quoted on the OTC Market (Other), symbol "SPND".
The liquidity of our common stock may be adversely affected, and purchasers
of our common stock may have difficulty selling our common stock if our common stock does not continue to trade in that or another suitable
trading market.
There is presently only a limited public market for our common stock, and
there is no assurance that a ready public market for our securities will develop. It is likely that any market that develops for our common
stock will be highly volatile and that the trading volume in such market will be limited. The trading price of our common stock could
be subject to wide fluctuations in response to quarter-to-quarter variations in our operating results, announcements of our drilling results
and other events or factors. In addition, the United States stock market has from time-to-time experienced extreme price and volume fluctuations
that have affected the market price for many companies and which often have been unrelated to the operating performance of these companies.
These broad market fluctuations may adversely affect the market price of our securities.
We do not intend to declare dividends in the foreseeable future.
Our Board of Directors presently intends to retain all our earnings for
the expansion of our business. We therefore do not anticipate the distribution of cash dividends in the foreseeable future. Any future
decision of our Board of Directors to pay cash dividends will depend, among other factors, upon our earnings, financial position, and
cash requirements.
We are subject to certain title risks.
Our company employees and contract land professionals have reviewed title
records or other title review materials relating to substantially all our producing properties. The title investigation performed by us
prior to acquiring undeveloped properties is thorough, but less rigorous than that conducted prior to drilling, consistent with industry
standards. We believe we have satisfactory title to all our producing properties in accordance with standards generally accepted in the
oil and gas industry. Our properties are subject to customary royalty interests, liens incident to operating agreements, liens for current
taxes and other burdens, which we believe do not materially interfere with the use of or affect the value of such properties. At December
31, 2022, our leaseholds for some of our net acreage were being kept in force by virtue of production on that acreage in paying quantities.
The remaining net acreage was held by lease rentals and similar provisions and requires production in paying quantities prior to expiration
of various time periods to avoid lease termination.
We expect to make acquisitions of oil and gas properties from time to time
subject to available resources. In making an acquisition we generally focus most of our title and valuation efforts on the more significant
properties. It is generally not feasible for us to review in-depth every property we purchase and all records with respect to such properties.
However, even an in-depth review of properties and records may not necessarily reveal existing or potential problems, nor will it permit
us to become familiar enough with the properties to assess fully their deficiencies and capabilities. Evaluation of future recoverable
reserves of oil and gas, which is an integral part of the property selection process, is a process that depends upon evaluation of existing
geological, engineering and production data, some, or all of which may prove to be unreliable or not indicative of future performance.
To the extent the seller does not operate the properties, obtaining access to properties and records may be more difficult. Even when
problems are identified, the seller may not be willing or financially able to give contractual protection against such problems, and we
may decide to assume environmental and other liabilities in connection with acquired properties.
Our business is highly capital-intensive, requiring continuous development
and acquisition of oil and gas reserves. In addition, capital is required to operate and expand our oil and natural gas field operations
and purchase equipment. On December 31, 2022, we had working capital of $9,838,000. We anticipate that we will be able to meet our cash
requirements for the next 12 months. However, if such plans or assumptions change or prove to be inaccurate, we could be required to seek
additional financing sooner than currently anticipated.
We have funded our operations, acquisitions, and expansion costs primarily
through our internally generated cash flow. Our success in obtaining the necessary capital resources to fund future costs associated with
our operations and expansion plans is dependent upon our ability to: (i) increase revenues through acquisitions and recovery of our proved
producing and proved developed non-producing oil and gas reserves; and (ii) maintain effective cost controls at the corporate administrative
office and in field operations. However, even if we achieve some success with our plans, there can be no assurance that we will be able
to generate sufficient revenues to achieve significant profitable operations or fund our expansion plans.
We have substantial capital requirements necessary for undeveloped
properties for which we may not be able to obtain adequate financing.
Development of our properties will require additional capital resources.
We have no commitments to obtain any additional debt or equity financing and there can be no assurance that additional financing will
be available, when required, on favorable terms to us. The inability to obtain additional financing could have a material adverse effect
on us, including requiring us to significantly curtail our oil and gas acquisition and development plans or farm-out development of our
properties. Any additional financing may involve substantial dilution to the interests of our shareholders at that time.
Oil and natural gas prices fluctuate widely, and low prices could
have a material adverse impact on our business and financial results.
Our revenues, profitability and the carrying value of our oil and gas properties
are substantially dependent upon prevailing prices of, and demand for, oil and natural gas and the costs of acquiring, finding, developing,
and producing reserves. Our ability to obtain borrowing capacity, to repay future indebtedness, and to obtain additional capital on favorable
terms is also substantially dependent upon oil and natural gas prices. Historically, the markets for oil and natural gas have been volatile
and are likely to continue to be volatile in the future. Prices for oil and natural gas are subject to wide fluctuations in response to:
(i) relatively minor changes in the supply of, and demand for, oil and natural gas; (ii) market uncertainty; and (iii) a variety of additional
factors, all of which are beyond our control. These factors include domestic and foreign political conditions, the price and availability
of domestic and imported oil and natural gas, the level of consumer and industrial demand, weather, domestic and foreign government relations,
the price and availability of alternative fuels and overall economic conditions. Furthermore, the marketability of our production depends
in part upon the availability, proximity, and capacity of gathering systems, pipelines and processing facilities. Volatility in oil and
natural gas prices could affect our ability to market our production through such systems, pipelines, or facilities. As of December 31,
2022, approximately 91% of our oil and natural gas production is currently sold to 19 purchasers/operators on a month-to-month basis at
prevailing spot market prices. Oil prices remained subject to unpredictable political and economic forces during 2022, 2021, and 2020,
and experienced fluctuations similar to those seen in natural gas prices for the year. We believe that oil prices will continue to fluctuate
in response to changes in the policies of the Organization of Petroleum Exporting Countries ("OPEC"), changes in demand from
many Asian countries, current events in the Middle East and Eastern Europe, security threats to the United States, and other factors associated
with the world political and economic environment. As a result of the many uncertainties associated with levels of production maintained
by OPEC and other oil producing countries, the availabilities of worldwide energy supplies and competitive relationships and consumer
perceptions of various energy sources, we are unable to predict what changes will occur in crude oil and natural gas prices.
Natural gas prices plummeted in the first quarter of 2023 due to an oversupply
of natural gas.
Gathering and transporting natural gas involve risks that may result
in accidents and additional operating costs.
Our natural gas pipeline business involves several hazards and operating
risks that cannot be completely avoided, such as leaks, accidents, and operational problems, which could cause loss of human life, as
well as substantial financial losses resulting from property damage, damage to the environment and to our operations. We maintain liability
and property insurance coverage in place for many of these hazards and risks. However, because some of our pipelines are near or are in
populated areas, any loss of human life or adverse financial results resulting from such events could be large. If these events were not
fully covered by our general liability and property insurance, which policies are subject to certain limits and deductibles, our operations
or financial results could be adversely affected. Our pipelines are aging, and we will be responsible for eventually replacing these lines.
The costs of maintaining and replacing our aging pipeline infrastructure may have a material adverse impact on our operating costs and
financial results.
We will be responsible for additional costs in connection with abandonment
of properties.
We are responsible for payment of plugging and abandonment costs on our
oil and gas properties pro rata to our working interest. Based on our experience, we anticipate that in most cases, the costs of abandoning
such properties will range from $40,000 to $150,000 or more per well. In addition, abandonment costs and their timing may change due to
many factors, including actual production results, inflation rates and changes in environmental laws and regulations.
12
Risks that Involve the Oil and Gas Industry in General.
We are subject to various governmental regulations which may cause
us to incur substantial costs.
Our operations are affected from time to time in varying degrees by political
developments and federal, state, and local laws and regulations. In particular, oil and natural gas production-related operations are
or have been subject to price controls, taxes and other laws and regulations relating to the oil and gas industry. Failure to comply with
such laws and regulations can result in substantial penalties. The regulatory burden on the oil and gas industry increases our cost of
doing business and affects our profitability. Although we believe we are in substantial compliance with all applicable laws and regulations
because such laws and regulations are frequently amended or reinterpreted, we are unable to predict the future cost or impact of complying
with such laws and regulations.
Sales of natural gas by us are not regulated and are generally made at market
prices. However, the Federal Energy Regulatory Commission ("FERC") regulates interstate natural gas transportation rates and
service conditions, which affect the marketing of natural gas produced by us, as well as the revenues received by us for sales of such
production. Sales of our natural gas currently are made at uncontrolled market prices, subject to applicable contract provisions and price
fluctuations that normally attend sales of commodity products.
Since the mid-1980s, the FERC has issued a series of orders, culminating
in Order Nos. 636, 636-A and 636-B ("Order 636"), that have significantly altered the marketing and transportation of natural
gas. Order 636 mandated a fundamental restructuring of interstate pipeline sales and transportation service, including the unbundling
by interstate pipelines of the sale, transportation, storage, and other components of the city-gate sales services such pipelines previously
performed. One of the FERC's purposes in issuing the orders was to increase competition within all phases of the natural gas industry.
Order 636 and subsequent FERC orders issued in individual pipeline restructuring proceedings have been the subject of appeals, and the
courts have largely upheld Order 636. Because further review of certain of these orders is still possible, and other appeals may be pending,
it is difficult to exactly predict the ultimate impact of the orders on us and our natural gas marketing efforts. Generally, Order 636
has eliminated or substantially reduced the interstate pipelines' traditional role as wholesalers of natural gas and has substantially
increased competition and volatility in natural gas markets.
While significant regulatory uncertainty remains, Order 636 may ultimately
enhance our ability to market and transport our natural gas, although it may also subject us to greater competition, more restrictive
pipeline imbalance tolerances and greater associated penalties for violation of such tolerances.
The FERC has announced several important transportation-related policy statements
and proposed rule changes, including the appropriate manner in which interstate pipelines release capacity under Order 636 and, more recently,
the price which shippers can charge for their released capacity. In addition, in 1995, the FERC issued a policy statement on how interstate
natural gas pipelines can recover the costs of new pipeline facilities. In January 1997, the FERC issued a policy statement and a request
for comments concerning alternatives to its traditional cost-of-service rate making methodology. A number of pipelines have obtained FERC
authorization to charge negotiated rates as one such alternative. While any additional FERC action on these matters would affect us only
indirectly, these policy statements and proposed rule changes are intended to further enhance competition in natural gas markets. We cannot
predict what the FERC will take on these matters, nor can we predict whether the FERC's actions will achieve its stated goal of increasing
competition in natural gas markets. However, we do not believe that we will be treated materially differently than other natural gas producers
and marketers with which we compete.
The price we receive from the sale of oil is affected by the cost of transporting
such products to market. Effective January 1, 1995, the FERC implemented regulations establishing an indexing system for transportation
rates for oil pipelines, which, generally, would index such rates to inflation, subject to certain conditions and limitations. These regulations
could increase the cost of transporting oil by interstate pipelines, although the most recent adjustment generally decreased rates. These
regulations have generally been approved on judicial review. We are not able to predict with certainty the effect, if any, of these regulations
on its operations. However, the regulations may increase transportation costs or reduce wellhead prices for oil.
The State of Texas and many other states require permits for drilling operations,
drilling bonds and reports concerning operations and impose other requirements relating to the exploration for and production of oil and
natural gas. Such states also have statutes or regulations addressing conservation matters, including provisions for the unitization or
pooling of oil and gas properties, the establishment of maximum rates of production from wells and the regulation of spacing, plugging
and abandonment of such wells. The statutes and regulations of certain states limit the rate at which oil and gas can be produced from
our properties. However, we do not believe we will be affected materially differently by these statutes and regulations than any other
similarly situated oil and gas company.
We may not have enough insurance to cover all the risks we face, which
could result in significant financial exposure.
We maintain insurance coverage against some, but not all, potential losses
to protect against the risks we face. We may elect not to carry insurance if our management believes that the cost of insurance is excessive
relative to the risks presented. If an event occurs that is not covered, or not fully covered, by insurance, it could harm our financial
condition, results of operations and cash flows. In addition, we cannot fully insure against pollution and environmental risks.
Future new technologies could make the products we sell obsolete.
Future alternative technologies could dramatically impact the demand for
the natural gas and crude oil we sell thereby causing a material adverse impact on our operations and financial results. Such alternative
technologies could also cause a material adverse impact on the value of our oil and natural gas properties.
Cyber-attacks or acts of cyber-terrorism could disrupt our business
operations and information technology systems or result in the loss or exposure of confidential or sensitive customer, employee or Company
information.
Our business operations and information technology systems may be vulnerable
to an attack by individuals or organizations intending to disrupt our business operations and information technology systems, even though
the Company has implemented policies, procedures, and controls to prevent and detect these activities. We use our information technology
systems to manage our oil and gas operations and other business processes. Disruption of those systems could adversely impact our ability
to safely operate our wells, operate our pipelines or otherwise run our business. Accordingly, if such an attack or act of terrorism were
to occur, our operations and financial results could be adversely affected. In addition, we use our information technology systems to
protect confidential or sensitive employee and Company information developed and maintained in the normal course of our business. Any
attack on such systems that would result in the unauthorized release of employee, or other confidential or sensitive data could have a
material adverse effect on our business reputation, increase our costs and expose us to additional material legal claims and liability.
If such an attack or act of terrorism were to occur, our operations and financial results would be adversely affected since we may not
maintain insurance coverage to cover these risks.
Natural disasters, terrorist activities, or other significant events
could adversely affect our operations or financial results.
Natural disasters are always a threat to our assets and operations. In addition,
the threat of terrorist activities could lead to increased economic instability and volatility in the price of natural gas that could
affect our operations. Also, companies in our industry may face a heightened risk of exposure to actual acts of terrorism, which could
subject our operations to increased risks. As a result, the availability of insurance covering such risks may become more limited, which
could increase the risk that an event could adversely affect our operations or financial results.
The operations and financial results of the Company could be adversely
impacted because of climate changes or related additional legislation or regulation in the future.
To the extent climate changes occur, our businesses could be adversely impacted,
although we believe it is likely that any such resulting impacts would occur very gradually over a long period of time and thus would
be difficult to quantify with any degree of specificity. To the extent climate changes would result in warmer temperatures in our areas
of operations, financial results could be adversely affected through lower gas volumes and revenues. In addition, there have been a number
of federal and state legislative and regulatory initiatives proposed in recent years in an attempt to control or limit the effects of
global warming and overall climate change, including greenhouse gas emissions, such as carbon dioxide. The adoption of this type of legislation
by Congress or similar legislation by states or the adoption of related regulations by federal or state governments mandating a substantial
reduction in greenhouse gas emissions in the future could have far-reaching and significant impacts on the energy industry. Such new legislation
or regulations could result in increased compliance costs for us or additional operating restrictions on our business, affect the demand
for natural gas, or impact the prices we charge to our customers. At this time, we cannot predict the potential impact of such laws or
regulations that may be adopted on our future business, financial condition, or financial results.
13
We are subject to various environmental risks which may cause us to
incur substantial costs.
Our operations and properties are subject to extensive and changing federal,
state, and local laws and regulations relating to environmental protection, including the generation, storage, handling and transportation
of oil and natural gas and the discharge of materials into the environment, and relating to safety and health. The recent trend in environmental
legislation and regulation generally is toward stricter standards, and this trend will likely continue. These laws and regulations may
require the acquisition of a permit or other authorization before construction or drilling commences and for certain other activities;
limit or prohibit construction, drilling and other activities on certain lands lying within wilderness and other protected areas; and
impose substantial liabilities for pollution resulting from our operations. The permits required for our various operations are subject
to revocation, modification, and renewal by issuing authorities. Governmental authorities have the power to enforce compliance with their
regulations, and violations are subject to fines, penalties, or injunctions. In the opinion of management, we are in substantial compliance
with current applicable environmental laws and regulations, and we have no material commitments for capital expenditures to comply with
existing environmental requirements. Nevertheless, changes in existing environmental laws and regulations or in interpretations thereof
could have a significant impact on us. The impact of such changes, however, would not likely be any more burdensome to us than to any
other similarly situated oil and gas company.
The Comprehensive Environmental Response, Compensation, and Liability Act
("CERCLA"), also known as the "Superfund" law, and similar state laws impose liability, without regard to fault or
the legality of the original conduct, on certain classes of persons that are considered to have contributed to the release of a "hazardous
substance" into the environment. These persons include the owner or operator of the disposal site or sites where the release occurred
and companies that disposed or arranged for the disposal of the hazardous substances found at the site. Persons who are or were responsible
for releases of hazardous substances under CERCLA may be subject to joint and several liabilities for the costs of cleaning up the hazardous
substances that have been released into the environment and for damages to natural resources. Furthermore, neighboring landowners and
other third parties may file claims for personal injury and property damage allegedly caused by the hazardous substances released into
the environment.
We generate typical oil and gas field wastes, including hazardous wastes
that are subject to the Federal Resources Conservation and Recovery Act and comparable state statutes. The United States Environmental
Protection Agency and various state agencies have limited the approved methods of disposal for certain hazardous and non-hazardous wastes.
Furthermore, certain wastes generated by our oil and gas operations that are currently exempt from regulation as "hazardous wastes"
may in the future be designated as "hazardous wastes", and therefore be subject to more rigorous and costly operating and disposal
requirements.
The Oil Pollution Act ("OPA") imposes a variety of requirements
on responsible parties for onshore and offshore oil and gas facilities and vessels related to the prevention of oil spills and liability
for damages resulting from such spills in waters of the United States. The "responsible party" includes the owner or operator
of an onshore facility or vessel or the lessee or permittee of, or the holder of a right of use and easement for, the area where an onshore
facility is located. OPA assigns liability to each responsible party for oil spill removal costs and a variety of public and private damages
from oil spills. Few defenses exist to the liability for oil spills imposed by OPA. OPA also imposes financial responsibility requirements.
Failure to comply with ongoing requirements or inadequate cooperation in a spill event may subject a responsible party to civil or criminal
enforcement actions.
We own or lease properties that for many years have produced oil and natural
gas. We also own natural gas gathering systems. It is not uncommon for such properties to be contaminated with hydrocarbons. Although
we or previous owners of these interests may have used operating and disposal practices that were standard in the industry at the time,
hydrocarbons or other wastes may have been disposed of or released on or under the properties or on or under other locations where such
wastes have been taken for disposal. These properties may be subject to federal or state requirements that could require us to remove
any such wastes or to remediate the resulting contamination. In addition to properties that we operate, we have interests in many properties
which are operated by third parties over whom we have limited control. Notwithstanding our lack of control over properties operated by
others, the failure of the previous owners or operators to comply with applicable environmental regulations may, in certain circumstances,
adversely impact us.