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Indicate by check mark if the registrant is a well-known seasoned issuer,
as defined in Rule 405 of the Securities Act. Yes [ ] No [ X ]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [ X ]
Indicate by check mark whether the registrant has submitted electronically
and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of
Regulation S-T during the preceding twelve months (or for such shorter period that the registrant was required to submit and post such
files). Yes [ X ] No [ ]
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the Company was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes [ X ] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer or a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer”,
“accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one):
If an emerging growth company, indicate by check mark if the registrant
has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant
to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act. Yes [ ] No [ X ]
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities
under a plan confirmed by a court. Yes [ ] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common, as of the latest practicable date.
Item 2. - Management's Discussion and Analysis of Financial Condition
and
Results of Operations
WARNING CONCERNING FORWARD LOOKING STATEMENTS
The following discussion should be read in conjunction with the financial
statements and notes thereto appearing elsewhere in this report.
This Report on Form 10-Q may contain forward-looking statements within the
meaning of the federal securities laws, principally, but not only, under the caption “Management’s Discussion and Analysis
of Financial Condition and Results of Operations.” We caution investors that any forward-looking statements in this report, or which
management may make orally or in writing from time to time, are based on management’s beliefs and on assumptions made by, and information
currently available to, management. When used, the words “anticipate,” “believe,” “expect,” “intend,”
“may,” “might,” “plan,” “estimate,” “project,” “should,” “will,”
“result” and similar expressions which do not relate solely to historical matters are intended to identify forward-looking
statements. These statements are subject to risks, uncertainties, and assumptions and are not guarantees of future performance, which
may be affected by known and unknown risks, trends, uncertainties, and factors that are beyond our control. Should one or more of these
risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated,
estimated, or projected. We caution you that while forward-looking statements reflect our good faith beliefs when we make them, they are
not guarantees of future performance and are impacted by actual events when they occur after we make such statements. We expressly disclaim
any responsibility to update our forward-looking statements, whether as a result of new information, future events or otherwise. Accordingly,
investors should use caution in relying on past forward-looking statements, which are based on results and trends at the time they are
made, to anticipate future results or trends.
Some of the risks and uncertainties that may cause our actual results, performance,
or achievements to differ materially from those expressed or implied by forward-looking statements include, among others, the factors
listed and described at Item 1A “Risk Factors” in the Company’s Annual Report on Form 10-K, which investors should review.
There have been changes to the risk factors previously described in the Company’s Form 10-K. for the fiscal year ended December
31, 2022 (the “Form 10-K”), including significant global economic and pandemic factors occurring during 2022 and continuing
into 2023 which are described in the following paragraphs.
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.
11
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 interests 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. 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 on the Company’s future financial results.
12
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 a very 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.
13
Results of Operations
Three months ended March 31, 2023, compared to the three months ended
March 31, 2022
Oil and gas revenues for the first three months of 2023 were $1,030,000,
as compared to $1,672,000 for the same period in 2022 a decrease of approximately $642,000 or 38.4%, due primarily to lower oil production
and lower natural gas prices between years.
Oil sales for the first three months of 2023 were approximately $492,000
compared to approximately $865,000 for the first three months of 2022, a decrease of approximately $373,000 or 43.1%. Oil sales volumes
for the first three months of 2023 were approximately 5,950 bbls, compared to approximately 11,300 bbls during the same period in 2022,
a decrease of approximately 5,350 bbls, or 47.4%,
Average oil prices received were $73.44 per bbl in the first three months
of 2023 compared to $71.34 per bbl in the first three months of 2022, an increase of approximately $2.10 per bbl or 2.9%.
Natural gas revenue for the first three months of 2023 was $538,000 compared
to $807,000 for the same period in 2022, a decrease of approximately $269,000 or 33.3%. Natural gas sales volumes for the first three
months of 2023 were approximately 150,000 mcf compared to approximately 142,000 mcf during the first three months of 2022, an increase
of approximately 8,000 mcf or 5.63%.
Average gross natural gas prices received were $3.70 per mcf in the first
three months of 2023 as compared to $5.67 per mcf in the same time period in 2022, a decrease of approximately $1.97 per mcf or 34.7%.
Revenues from lease operations were $37,000 in the first three months of
2023 compared to $44,000 in the first three months of 2022, a decrease of approximately $7,000 or 15.9%. Revenues from lease operations
are derived from field supervision charged to operated leases along with operator overhead charged to operated leases.
Revenues from gas gathering, compression and equipment rental for the first
three months of 2023 were $21,000 compared to $18,000 for the same period in 2022. These revenues are derived from gas volumes produced
and transported through the Company owned gas gathering systems.
Real estate revenue was approximately $68,000 during the first three months
of 2023 compared to $53,000 for the first three months of 2022, an increase of approximately $15,000, or 28.3%.
Interest income was $125,000 during the first three months of 2023 as compared
to $25,000 during the same period in 2022, an increase of approximately $100,000. Interest income is due to the Company investing its
funds in both long-term and short-term certificates of depository accounts paying higher rates of interest than those received in money
market accounts.
Other revenues for the first three months of 2023 were $11,000 as compared
to $12,000 for the same period in 2022, a decrease of approximately $1,000 or 8.3%.
Lease operating expenses in the first three months of 2023 were approximately
$238,000 as compared to $244,000 in the first three months of 2022 a net decrease of approximately $6,000, or 2.5%.
Production taxes, gathering and marketing expenses in the first three months
of 2023 were approximately $157,000 as compared to $181,000 for the first three months of 2022, a decrease of approximately $24,000 or
13.3%. This decrease relates directly to the decrease in oil and gas revenues as described in the above paragraphs.
Pipeline and rental expenses for the first three months of 2023 were $4,000
compared to $2,000 for the same time period in 2022.
Real estate expenses in the first three months of 2023 were approximately
$24,000 compared to $38,000 during the same period in 2022, a decrease of approximately $14,000 or 36.8%.
.
14
Depreciation, depletion, and amortization expenses for the first three months
of 2023 were $31,000 as compared to $17,000 for the same period in 2022, an increase of $14,000, or 82.4%. Amortization of the amount
for the full cost pool for the first three months of 2023 was $13,000 compared to zero dollars for the same period of 2022. The Company
re-evaluated its proved oil and natural gas reserve quantities as of December 31,2022. This re-evaluated reserve base was reduced for
oil and gas reserves that were produced or sold during the first three months of 2023 and adjusted for newly acquired reserves or for
changes in estimated production curves and future price assumptions. A year-to-date depletion rate of 5.733% for the three months ended
2023 was applied to the Company’s full cost pool of un-depleted capitalized oil and natural gas properties compared to a year-to-date
rate of 0.0% for the same period in 2022.
Asset Retirement Obligation (“ARO”) expense for the first three
months of 2023 was approximately $302,000 as compared to approximately $143,000 for the same period in 2022, an increase of approximately
$159,000 or 111.2%. The ARO expense is calculated to be the discounted present value of the estimated future cost to plug and abandon
the Company’s wells.
General and administrative expenses for the first three months of 2023 were
approximately $758,000 as compared to approximately $590,000 for the same period of 2022, an increase of approximately $168,000 or 28.5%.
Gain on sale of property, During the first quarter of 2023, the
Company sold its interest in five operated wells and associated leasehold acreage in various counties in the state of Arkansas for
$104,000. At the time of the sale, the Company’s unamortized full cost pool was approximately $230,000. The Company determined
that an adjustment to capitalized costs for this sale would significantly alter the relationship between capitalized costs and
proved oil and gas reserves. As a result, the Company recorded a gain on the sale of the property in the amount of $104,000 related
to the sale. In determining the gain on the sale of the property. The Company considered that the Company’s most recent
reserve report contained no reserves associated with the property sold, and therefore, no adjustment to capitalized costs was
necessary.
Financial Condition and Liquidity
The Company's operating capital needs, as well as its capital spending program
are generally funded from cash flow generated by operations. Because future cash flow is subject to several variables, such as the level
of production and the sales price of oil and natural gas, the Company can provide no assurance that its operations will provide cash sufficient
to maintain current levels of capital spending. Accordingly, the Company may be required to seek additional financing from third parties
to fund its exploration and development programs.