ITEM 1A. Risk Factors
In addition to the other information included in this Form 10-K, the following risk factors should be considered in evaluating our business and future prospects. If any of the following risk factors should occur, our financial condition could be materially impacted, and the holders of our securities could lose part or all of their investment in the Company. As the owner of mineral fee interests and non-operating working interests, we do not operate any natural gas and oil properties, and we do not have any employees or contractors in the field. As such, the risks associated with natural gas and oil operations affect us indirectly and typically through our non-operating working interests as we proportionately share in the costs of operating such wells. The risk factors described below are not exhaustive, and investors are encouraged to perform their own investigation with respect to our Company and our business. Investors should also read the other information in this Form 10-K, including the financial statements and related notes.
Risks Related to our Business
The volatility of natural gas and oil prices due to factors beyond our control greatly affects our financial condition, results of operations and cash available for distribution.
The supply of and demand for natural gas, oil and NGL impact the revenues we realize in connection with the sale of these commodities and, in turn, materially affect our financial results. Our revenues, operating results, cash available for distribution and the carrying value of our natural gas and oil properties depend significantly upon the prevailing prices for natural gas, oil and NGL. Natural gas, oil and NGL prices have historically been, and will likely continue to be, volatile. The prices for natural gas, oil and NGL are subject to wide fluctuation in response to a number of factors beyond our control, including:
domestic and worldwide economic conditions;
economic, political, regulatory and tax developments;
market uncertainty;
changes in the supply of and demand for natural gas, oil and NGL, both domestically and abroad;
the impacts and effects of public health crises, pandemics and epidemics;
availability and capacity of necessary transportation and processing facilities;
commodity futures trading;
regional price differentials;
differing quality of oil produced (i.e., sweet crude versus heavy or sour crude);
differing quality and NGL content of natural gas produced;
conservation and environmental protection efforts;
the level of imports and exports of natural gas, oil and NGL;
political instability or armed conflicts in major natural gas and oil producing regions;
actions taken by OPEC or other major natural gas, oil and NGL producing or consuming countries;
technological advancements affecting energy consumption and energy supply;
the level of prices and expectations about future prices of natural gas and oil;
the level of global natural gas and oil exploration and production;
the cost of exploring for, developing, producing and delivering natural gas and oil;
the price and quantity of foreign imports;
political and economic conditions in oil producing countries, including the Middle East, Africa, South America and Russia;
the ability of members of OPEC to agree to and maintain oil price and production controls;
speculative trading in natural gas and crude oil derivative contracts;
weather conditions and other natural disasters;
risks associated with operating drilling rigs;
the price and availability of, and competition from, alternative fuels;
domestic and foreign governmental regulations, taxes, duties and tariffs;
the continued threat of terrorism and the impact of military and other action, including U.S. military operations in the Middle East;
social unrest, political instability or armed conflict in major oil and natural gas producing regions outside the U.S., such as the conflicts between Ukraine and Russia and between Israel and Hamas;
the proximity, cost, availability and capacity of natural gas and oil pipelines and other transportation facilities; and
overall domestic and global economic conditions.
These factors and the volatility of the energy markets make it extremely difficult to predict future natural gas, oil and NGL price movements with any certainty. If the prices of natural gas, oil and NGL decline, our operations, financial condition and level of expenditures for the development of our natural gas, oil and NGL reserves may be materially and adversely affected. Lower natural gas, oil and NGL prices may also result in a reduction in the borrowing base under our credit agreement, which may be determined at the discretion of our lenders.
Low natural gas, oil and NGL prices for a prolonged period of time would have a material adverse effect on the Company.
The volatility of the energy markets makes it extremely difficult to predict future natural gas, oil and NGL price movements with any certainty. Natural gas, oil and NGL prices continued to fluctuate in fiscal year 2024, with realized sale prices of natural gas, oil and NGL declining in 2024 by 16%, 3% and 1%, respectively, compared to 2023 realized sale prices. Our financial position, results of operations, access to capital and the quantities of natural gas, oil and NGL that may be economically produced would be negatively impacted if natural gas, oil and NGL prices were low for an extended period of time. The ways in which low prices could have a material negative effect include the following:
significantly decrease the number of wells operators drill on our acreage, thereby reducing our production and cash flows;
cash flow would be reduced, decreasing funds available for capital expenditures employed to replace reserves and maintain or increase production;
future undiscounted and discounted net cash flows from producing properties would decrease, possibly resulting in recognition of impairment expense;
certain reserves may no longer be economic to produce, leading to lower proved reserves, production and cash flow;
access to sources of capital, such as equity and debt markets, could be severely limited or unavailable; and
we may incur a reduction in the borrowing base on our credit facility.
There is no assurance that our evaluation of strategic alternatives will result in any particular outcome, and the process of reviewing strategic alternatives or the conclusion of the process could adversely affect our business and our stockholders.
On December 12, 2024, we announced that the Board agreed to initiate a process to evaluate certain strategic alternatives to maximize stockholder value, including a potential merger or sale of the Company. Our Board has not set a deadline or definitive timetable for the completion of this strategic alternatives process, nor have any definitive decisions been made relating to any strategic alternatives at this time. There can be no assurance that this process will result in the Company’s consummation of a merger, sale of the Company or any other strategic transaction or outcome. Any potential transaction may be dependent on a number of factors that are beyond our control, for example, market conditions, industry trends, the interest of third parties in a potential transaction with us and the availability of any necessary financing on reasonable terms. The process of exploring strategic alternatives could adversely impact our business, financial condition and results of operations. We could incur substantial expenses associated with identifying, evaluating and negotiating potential strategic alternatives, including those related to equity compensation, severance pay and legal, accounting and financial advisory fees. In addition, the process may be time consuming and disruptive to our business operations, could divert the attention of management and the Board from our business, could negatively impact our ability to attract, retain and motivate key employees, and could us to potential in connection with this process or any resulting transaction. Further, speculation regarding any developments related to the review of strategic alternatives and perceived uncertainties related to the future of the Company could cause our stock price to fluctuate significantly.
The conflicts in Ukraine and Israel and related price volatility and geopolitical instability could negatively impact our business.
Global geopolitical tensions, including instability in the Middle East, and the conflicts between Russia and Ukraine and between Israel and Hamas, have caused, and could intensify, volatility in natural gas, oil and NGL prices, and the extent and duration of military actions, sanctions and resulting market disruptions could be significant and could potentially have a substantial negative impact on the global economy and/or our business for an unknown period of time. Any such volatility and disruptions may also magnify the impact of other risks described in this “Risk Factors” section.
Lower natural gas, oil and NGL prices or negative adjustments to natural gas, oil and NGL reserves may result in significant impairment charges.
We have elected to utilize the successful efforts method of accounting for our natural gas and oil exploration and development activities. Exploration expenses, including geological and geophysical costs, rentals and exploratory dry holes, are charged against income as incurred. Costs of successful wells and related production equipment and development dry holes are capitalized and amortized by property using the unit-of-production method (the ratio of natural gas, oil and NGL volumes produced to total proved or proved developed reserves) as natural gas, oil and NGL are produced.
All long-lived assets, principally our natural gas and oil properties, are monitored for potential impairment when circumstances indicate that the carrying value of the asset on our books may be greater than our future net cash flows. The need to test a property for impairment may result from declines in natural gas, oil and NGL sales prices or unfavorable adjustments to natural gas, oil and NGL reserves. The decision to not participate in future development on our leasehold acreage can trigger a test for impairment. Also, once assets are classified as held for sale, they are reviewed for impairment. Because of the uncertainty inherent in these factors, we cannot predict when or if future impairment charges will be recorded. If an impairment charge is recognized, cash flow from operating activities is not impacted, but net income and, consequently, stockholders’ equity are reduced. In periods when impairment charges are incurred, it could have a material effect on our results of operations. See Note 11 to the financial statements included in Item 8 – “Financial Statements and Supplemental Data” for further discussion on under the heading “.”
Our future success depends on developing our existing inventory of mineral acreage and acquiring additional mineral interests. Failure to develop our existing inventory of mineral acreage and to acquire additional mineral interests will cause reserves and production to decline materially from their current levels.
The rate of production from natural gas and oil properties generally declines as reserves are depleted. Our proved reserves will decline materially as reserves are produced except to the extent that we acquire additional mineral interests on properties containing proved reserves and our lessees or well operators conduct additional successful exploration and development drilling, successfully apply new technologies or identify additional behind-pipe zones (different productive zones within existing producing
well bores) or secondary recovery reserves. Our proved reserves of natural gas have declined by approximately 12% from approximately 56.0 million Mcf at December 31, 2023 to approximately 49.3 million Mcf at December 31, 2024.
Drilling for natural gas and oil invariably involves unprofitable efforts, not only from dry wells, but also from wells that are productive but do not produce sufficient reserves to return a profit after deducting drilling, completion, operating and other costs. In addition, wells that are profitable may not achieve a targeted rate of return. We rely on third-party operators’ interpretation of seismic data and other advanced technologies in identifying prospects and in conducting exploration and development activities. Nevertheless, prior to drilling a well, the seismic data and other technologies used do not allow operators to know conclusively whether natural gas, oil or NGL is present in commercial quantities.
Cost factors can adversely affect the economics of any project, and the eventual cost of drilling, completing and operating a well is controlled by well operators and existing market conditions. Further, drilling operations may be curtailed, delayed or canceled as a result of numerous factors, including:
unexpected drilling conditions;
title problems;
pressure or irregularities in formations;
equipment failures or accidents;
fires, explosions, blowouts and surface cratering;
lack of availability to market production via pipelines or other transportation;
adverse weather conditions;
environmental hazards or liabilities;
lack of water disposal facilities;
governmental regulations;
cost and availability of drilling rigs, equipment and services; and
expected sales price to be received for natural gas, oil or NGL produced from the wells.
Competition for acquisitions of mineral interests may increase the cost of, or cause us to refrain from, completing acquisitions. Our ability to complete acquisitions is dependent upon, among other things, our ability to obtain debt and equity financing and, in some cases, regulatory approvals. Further, these acquisitions may be in geographic regions in which we do not currently hold properties, which could result in unforeseen operating difficulties. In addition, if we enter into new geographic markets, we may be subject to additional and unfamiliar legal and regulatory requirements. Compliance with regulatory requirements may impose substantial additional obligations on us and our management, cause us to expend additional time and resources in compliance activities and increase our exposure to penalties or fines for non-compliance with such additional legal requirements. Further, the success of any completed acquisition will depend on our ability to effectively integrate the acquired business or assets into our existing operations. The process of integrating acquired businesses or assets may involve unforeseen difficulties and may require a disproportionate amount of our managerial and financial resources. In addition, possible future acquisitions may be larger and for purchase prices significantly higher than those paid for earlier acquisitions.
No assurance can be given that we will be able to identify suitable mineral interest acquisition opportunities, negotiate acceptable terms, obtain financing for acquisitions on acceptable terms or successfully acquire identified targets. Our failure to achieve consolidation savings, to integrate the acquired businesses and assets into our existing operations successfully or to minimize any unforeseen operational difficulties could have a material adverse effect on our financial condition, results of operations and cash available for distribution. The inability to effectively manage the integration of acquisitions could reduce our focus on subsequent acquisitions and current operations, which, in turn, could negatively impact our growth, results of operations and cash available for distribution.
Any acquisition of additional mineral and royalty interests that we complete will be subject to substantial risks.
Any acquisition involves potential risks, including, among other things:
the validity of our assumptions about estimated proved reserves, future production, prices, revenues, capital expenditures, operating expenses and costs;
a decrease in our liquidity by using a significant portion of our cash generated from operations or borrowing capacity to finance acquisitions;
a significant increase in our interest expense or financial leverage if we incur debt to finance acquisitions;
the assumption of unknown liabilities, losses or costs for which we are not indemnified or for which any indemnity we receive is inadequate;
mistaken assumptions about the overall cost of equity or debt;
our ability to obtain satisfactory title to the assets we acquire;
an inability to hire, train or retain qualified personnel to manage and operate our growing business and assets; and
the occurrence of other significant changes, such as impairment of natural gas and oil properties, goodwill or other intangible assets, asset devaluation or restructuring charges.
Our estimated proved reserves are based on many assumptions that may prove to be inaccurate. Any inaccuracies in these reserve estimates or underlying assumptions may materially affect the quantities and present value of our reserves.
It is not possible to measure underground accumulations of natural gas, oil and NGL with precision. Natural gas, oil and NGL reserve engineering requires subjective estimates of underground accumulations of natural gas, oil and NGL using assumptions concerning future prices of these commodities, future production levels and operating and development costs. In estimating our reserves, we and our Independent Consulting Petroleum Engineer must make various assumptions with respect to many matters that may prove to be incorrect, including:
future natural gas, oil and NGL prices;
unexpected complications from offset well development;
production rates;
reservoir pressures, decline rates, drainage areas and reservoir limits;
interpretation of subsurface conditions including geological and geophysical data;
potential for water encroachment or mechanical failures;
levels and timing of capital expenditures, lease operating expenses, production taxes and income taxes, and availability of funds for such expenditures; and
effects of government regulation.
If any of these assumptions prove to be incorrect, our estimates of reserves, the classifications of reserves based on risk of recovery and our estimates of the future net cash flows from our reserves could change significantly.
Our standardized measure of oil and natural gas reserves is calculated using the 12-month average price calculated as the unweighted arithmetic average of the first-day-of-the-month individual product prices for each month within the 12-month period prior to fiscal year end. These prices and the operating costs in effect as of the date of estimation are held flat over the life of the properties. Production and income tax expenses are deducted from this calculation of future estimated development, with the result
discounted at 10% per annum to reflect the timing of future net revenue in accordance with the rules and regulations of the SEC. Over time, we may make material changes to reserve estimates to take into account changes in our assumptions and the results of actual development and production.
The reserve estimates made for fields that do not have a lengthy production history are less reliable than estimates for fields with lengthy records. A lack of production history may contribute to inaccuracy in our estimates of proved reserves, future production rates and the timing of development expenditures. Further, our lack of knowledge of all individual well information known to the well operators such as incomplete well stimulation efforts, restricted production rates for various reasons and up-to-date well production data, etc. may cause differences in our reserve estimates.
Because PUD reserves, under SEC reporting rules, may only be recorded if the wells they relate to are scheduled to be drilled within five years of the date of recording, the removal of PUD reserves that are not developed within this five-year period may be required. Removals of this nature may significantly reduce the quantity and present value of our natural gas, oil and NGL reserves. Please read Item 2 – “Properties – Proved Reserves” and Supplementary Information to the financial statements included in Item 8 – “Financial Statements and Supplementary Data.”
Since forward-looking prices and costs are not used to estimate discounted future net cash flows from our estimated proved reserves, the standardized measure of our estimated proved reserves is not necessarily the same as the current market value of our estimated proved natural gas, oil and NGL reserves.
The timing of the development and production on our properties will affect the timing of actual future net cash flows from proved reserves, and thus their actual present value. In addition, the 10% discount factor used when calculating discounted future net cash flows, in compliance with the FASB statement on oil and natural gas producing activities disclosures, may not be the most appropriate discount factor based on interest rates in effect from time to time and risks associated with the Company, or the oil and natural gas industry in general.
Debt level and interest rates may adversely affect our business.
On September 1, 2021, we entered into a four-year Credit Agreement (as amended, the “Credit Agreement”) with certain lenders and Independent Bank, as Administrative Agent and Letter of Credit Issuer (as defined in the Credit Agreement). The Credit Agreement replaced our prior revolving credit facility set forth in the Amended and Restated Credit Agreement dated as of November 25, 2013, as amended, among the Company, each lender party thereto, and BOKF, NA dba Bank of Oklahoma, as administrative agent, which we repaid in full and terminated. As of December 31, 2024, we had a balance of $29,500,000 drawn on our credit facility set forth in the Credit Agreement (the “Credit Facility). The Credit Facility’s borrowing base is currently set at $50,000,000. All obligations under the Credit Agreement are secured, subject to permitted liens and other exceptions, by a first-priority security interest on substantially all of our personal property and at least 75% of the total value of the proved, developed and producing Oil and Gas Properties (as defined in the Credit Agreement) owned by the Company.
Should we incur additional indebtedness under the Credit Facility to fund capital projects or for other reasons, there is a risk this could adversely affect our business operations as follows:
cash flows from operating activities required to service indebtedness may not be available for other purposes;
covenants contained in the Credit Agreement may limit our ability to borrow additional funds, pay dividends and make certain investments;
any limitation on the borrowing of additional funds may affect our ability to fund capital projects and may also affect how we will be able to react to economic and industry changes;
a significant increase in the interest rate under the Credit Facility will limit funds available for other purposes; and
changes in prevailing interest rates may affect our capability to meet our interest payments, as the Credit Facility bears interest at floating rates.
The borrowing base of our Credit Facility is subject to periodic redetermination and is based in part on natural gas, oil and NGL prices. A lowering of our borrowing base because of lower natural gas, oil or NGL prices, or for other reasons, could require us to repay indebtedness in excess of the established borrowing base, or we might need to further secure the debt with additional collateral. Our ability to meet any debt obligations depends on our future performance. General business, economic, financial and
product pricing conditions, along with other factors, affect our future performance, and many of these factors are beyond our control. In addition, our failure to comply with the restrictive covenants relating to our Credit Facility could result in a default, which might adversely affect our business, financial condition, results of operations and cash flows.
We may incur losses as a result of title defects in the properties we own.
Consistent with industry practice, we do not have current abstracts or title opinions on all of our mineral acreage and, therefore, cannot be certain that we have unencumbered title to all of these properties. Our failure to cure any title defects that may exist may adversely impact our ability in the future to increase production and reserves. There is no assurance that we will not suffer a monetary loss from title defects or title failure. Additionally, undeveloped acreage has greater risk of title defects than developed acreage. If there are any title defects or defects in assignment of leasehold rights in properties in which we hold an interest, we may suffer a financial loss.
Competition in the oil and natural gas industry is intense, and most of our competitors have greater financial and other resources than we do.
We compete in the highly competitive areas of natural gas and oil acquisition, development, exploration and production. We face intense competition from both major and independent oil and natural gas companies to acquire desirable producing properties, new properties for future exploration and human resource expertise necessary to effectively develop properties. We also face similar competition in obtaining sufficient capital to maintain or grow production.
We may be subject to information technology system failures, network disruptions, cyber-attacks or other breaches in data security.
The oil and natural gas industry in general has become increasingly dependent upon digital technologies to conduct day-to-day operations, including certain exploration, development and production activities. We use digital technology to estimate quantities of natural gas, oil and NGL reserves, process and record financial data and communicate with our employees and third parties. Power, telecommunication or other system failures due to hardware or software malfunctions, computer viruses, vandalism, terrorism, natural disasters, fire, human error or by other means could significantly affect our ability to conduct our business. Though we have implemented complex network security measures, stringent internal controls and maintain offsite backup of all crucial electronic data, there cannot be absolute assurance that a form of system failure or data security breach will not have a material adverse effect on our financial condition and operations results. For instance, unauthorized access to our reserves information or other proprietary or commercially sensitive information could lead to data , communication or other in our operations or planned business transactions, any of which could have a material impact on our results of operations. We also face increased risk with the growing sophistication of generative artificial intelligence capabilities, which may or expand the existing capabilities of described above in a manner we cannot predict at this time. Further, as cyber-attacks continue to evolve, we may be required to expend significant additional resources to continue to modify or our protective measures or to and remediate any to cyber-attacks.
Our derivative activities may reduce the cash flow received for natural gas and oil sales.
In order to manage exposure to price volatility on our natural gas and oil production, we currently, and may in the future, enter into natural gas and oil derivative contracts for a portion of our expected production. Natural gas and oil price derivatives may limit the cash flow we actually realize and therefore reduce our ability to fund future projects. None of our natural gas and oil price derivative contracts are designated as hedges for accounting purposes; therefore, all changes in fair value of derivative contracts are reflected in earnings. Accordingly, these fair values may vary significantly from period to period, materially affecting reported earnings. In addition, this type of derivative contract can limit the benefit we would receive from increases in the prices for natural gas and oil. The fair value of our natural gas and oil derivative instruments outstanding as of December 31, 2024 was a net liability of $714,408.
There is risk associated with our derivative contracts that involves the possibility that counterparties may be unable to satisfy contractual obligations to us. If any counterparty to our derivative instruments were to default or seek bankruptcy protection, it could subject a larger percentage of our future natural gas and oil production to commodity price changes, could adversely affect our cash flows and could have a negative effect on our ability to fund future acquisitions.
Please read Item 7A – “Quantitative and Qualitative Disclosures about Market Risk” and Note 1 and 12 to the financial statements included in Item 8 – “Financial Statements and Supplementary Data” for additional information regarding derivative contracts.
There are inherent limitations in all control systems, and misstatements due to error or fraud could occur and not be detected.
The ongoing internal control provisions of Section 404 of the Sarbanes-Oxley Act of 2002 require us to identify material weaknesses in internal control over financial reporting, which is a process to provide reasonable assurance regarding the reliability of financial reporting for external purposes in accordance with GAAP. Our management, including our principal executive officer and principal financial officer, does not expect that our internal controls and disclosure controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. In addition, the design of a control system must reflect the fact that there are resource constraints and the benefit of controls must be relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud in our Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that can occur because of simple or . Further, controls can be by individual acts of some persons, by of two or more persons, or by management override of the controls. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will in our stated goals under all potential future conditions. Over time, a control may be because of changes in conditions, such as growth of the company or increased transaction volume, or the degree of compliance with the policies or procedures may . Because of inherent in a cost- control system, due to or may occur in the future and not be detected.
In addition, discovery and disclosure of a material weakness, by definition, could have a material adverse impact on our financial statements. Such an occurrence could negatively affect our business and affect how our stock trades. This could, in turn, negatively affect our ability to access public equity or debt markets for capital.
Future legislative or regulatory changes may result in increased costs and decreased revenues, cash flows and liquidity.
Companies that operate wells in which we own a working interest are subject to extensive federal, state and local regulation. We, as a working interest owner, are therefore indirectly subject to these same regulations. New or changed laws and regulations such as those described below could have a material adverse effect on our business. In particular, changes in law or regulation related to hydraulic fracturing or greenhouse gases could potentially increase capital, compliance and operating costs significantly, as well as halt or delay the further development of oil and gas reserves on our properties.
Federal Income Taxation
We are subject to U.S. federal income tax, as well as income or capital-based taxes in various states, and our operating cash flow is sensitive to the amount of income taxes we must pay. Income taxes are assessed on our net income as determined for federal income tax purposes, considering allowable deductions and credits. Changes in the types of earnings that are subject to income tax, the types of items that are considered allowable deductions or the rates assessed on our taxable earnings would all impact our income taxes and resulting operating cash flow.
Certain beneficial provisions within the Tax Cuts and Jobs Act passed in December 2017 began to be reduced beginning in 2023 and, without legislative action, will continue to be reduced. As a result, the percentage of immediate bonus depreciation available for qualified property placed into service in 2024 is set to be 60%, and shall be reduced by 20% each year until it reaches 0% in 2027.
The Inflation Reduction Act of 2022 (the “IRA”), which was signed into law in August 2022, includes several provisions that are specifically applicable to corporations. The IRA includes an annual 15% minimum tax on corporations that have “average annual adjusted financial statement income” in excess of $1 billion over a three-year period. The IRA also includes a 1% tax on publicly traded corporations on the fair market value of stock repurchased during any taxable year. Such tax applies to the extent such buybacks exceed $1 million during such year, which buyback value may be offset by other stock issuances.
Further revisions to U.S. tax law, such as any increase in corporate income tax rates, the repeal of the percentage depletion allowance, or the repeal of expensing for intangible drilling costs, could have a material adverse effect on our business. Moreover, the U.S. Department of Treasury has broad authority to issue regulations and interpretative guidance that may significantly impact how we apply U.S. tax law, with a corresponding impact on the results of our operations for the periods affected.
Oklahoma Taxation
Oklahoma imposes a gross production tax, or severance tax, on the value of natural gas, oil and NGL produced within the state. Under Oklahoma law, the gross production tax rate on the first three years of a horizontal well’s production is 5.2% and 7% thereafter. Future changes to Oklahoma production taxes could affect the profitability of wells producing natural gas, oil and NGL in Oklahoma.
Hydraulic Fracturing and Water Disposal
The vast majority of natural gas and oil wells drilled in recent years have been, and future wells are expected to be, hydraulically fractured as a part of the process of completing the wells and putting them on production. This is true of the wells drilled in which we own an interest. Hydraulic fracturing is a process that involves pumping water, sand and additives at high pressure into rock formations to stimulate natural gas and oil production. In developing plays where hydraulic fracturing, which requires large volumes of water, is necessary for successful development, the demand for water may exceed the supply. A lack of readily available water or a significant increase in the cost of water could cause delays or increased completion costs.
In addition to water, hydraulic fracturing fluid contains chemical additives designed to optimize production. Well operators are being required in certain states to disclose the components of these additives. Additional states and the federal government may follow with similar requirements or may restrict the use of certain additives. This could result in more costly or less effective development of wells.
The fluid produced from the fractured formation must be either treated for reuse or disposed of by injecting the fluid into disposal wells. Injection well disposal processes have been, and continue to be, studied to determine the extent of correlation between injection well disposal and the occurrence of earthquakes. Certain studies have concluded there is a correlation, and this has resulted in the cessation of or the reduction of injection rates in certain water disposal wells, especially in northern Oklahoma.
Efforts to regulate hydraulic fracturing and fluid disposal continue at the local, state and federal level. New regulations are being considered, including limiting water withdrawals and usage, limiting water disposition, restricting which additives may be used, implementing statewide hydraulic fracturing moratoriums and temporary or permanent bans in certain environmentally sensitive areas. Public sentiment against hydraulic fracturing and fluid disposal and shale production could result in more stringent permitting and compliance requirements. Consequences of these actions could potentially increase capital, compliance and operating costs significantly, as well as delay or halt the further development of gas and oil reserves on our properties. Though the Biden administration has not proposed the outright ban of hydraulic fracturing, the administration has proposed significant regulations regarding methane emissions that could potentially affect new and existing wells, including those that are hydraulically fractured. The proposed methane rule is discussed in more detail in the Climate Change section, below.
Any of the above factors could have a material adverse effect on our financial position, results of operations or cash flows.
Climate Change
Certain studies have suggested that emission of certain gases, commonly referred to as “greenhouse gases,” may be impacting the earth’s climate. Methane, the primary component of natural gas, and carbon dioxide, a byproduct of burning natural gas and oil, are examples of greenhouse gases. Various state governments and regional organizations are considering enacting new legislation and promulgating new regulations governing or restricting the emission of greenhouse gases from stationary sources such as gas and oil production equipment and operations.
The regulatory environment surrounding greenhouse gas emissions is evolving under the new administration. On January 20, 2025, President Trump issued the “Unleashing American Energy” executive Order (EO 3418), directing federal agencies to review and potentially revise or rescind regulations related to methane emissions and other climate policies affecting the oil and gas industry. This includes a review of the EPA Methane Rule that became effective on May 7, 2024. The EPA Methane Rule established new compliance requirements for emissions monitoring, equipment standards, and operational controls.
At the international level, the “Paris Agreement” requires member states to submit non-binding, individually-determined reduction goals known as Nationally Determined Contributions every five years after 2020. President Biden recommitted the United States to the Paris Agreement and in April 2021 announced a goal of reducing the United States’ emissions by 50-52% below 2005 levels by 2030. At the 2023 United Nations Climate Change Conference (“COP28”) in December 2023, participating countries signed a non-binding agreement calling for a transition away from fossil fuels, expansion of renewable energy capacity, and an acceleration of emissions reduction efforts.
There is a shift in federal climate policy under the Trump administration. The administration has prioritized domestic energy production and deregulation over climate change. The United States has initiated the process to withdraw from the Paris Agreement. On January 20, 2025, President Trump signed an executive order entitled “Putting America First in International Environmental Agreements” directing the immediate withdrawal from the Paris Agreement. Under the Paris Agreement, a request to withdraw becomes effective one year after receipt of notification. Although the United States remains a party to the Paris Agreement at this time, the administration has indicated its intent to reassess U.S. climate goals, regulatory policies and international commitments.
The COP28 agreement remains non-binding and does not impose any legal obligations on the United States. However, investors, financial institutions and other stakeholders could still impact access to capital and the cost of financing for fossil fuel projects. The extent to which global climate polices and market forces will affect the oil and gas industry is uncertain.
We will continue to monitor policy developments at the state, federal and international levels and assess their potential impacts on our business and operations.
Inflation Reduction Act of 2022
The Inflation Reduction Act of 2022 (IRA 2022) appropriates significant federal funding for renewable energy initiatives. These incentives could accelerate the transition of the U.S. economy towards lower- or zero-carbon emissions alternatives, which could decrease demand for oil and gas. Moreover, the IRA 2022 imposes a federal fee on the emission of greenhouse gases through a methane emissions charge. The IRA 2022 amends the federal Clean Air Act to impose a fee on the emission of methane from sources required to report their greenhouse gas emissions to the EPA, including those sources in the onshore petroleum and natural gas production and gathering and boosting source categories. The methane emissions charge could increase the operating costs of exploration and production operators.
On January 20, 2025, President Trump issued the “Unleashing American Energy” executive order (EO 3418), which directs federal agencies to suspend the disbursement of funds under IRA 2022, reassess existing energy policies, and streamline permitting processes for oil and gas development. If fully implemented, EO 3418 is expected to reduce compliance costs, expand development opportunities, and provide more investment certainty. However, while the executive order signals a shift in energy policy, certain provisions of the IRA were enacted through legislation that may require congressional action or judicial review before being fully repealed or modified. We will continue to monitor regulatory developments, potential legal challenges, and legislative actions that may affect the implementation of EO 3418. While the administration’s energy policies appear broadly supportive of the oil and gas industry, ongoing legal and political dynamics may impact the extent to which specific provisions are ultimately enforced or rescinded.
Seismic Activity
Earthquakes in northern and central Oklahoma and elsewhere have prompted concerns about seismic activity and possible relationships with the energy industry. Several states have imposed certain limits on the permitting or operation of disposal wells in areas with increased instances of induced seismic events. Legislative and regulatory initiatives intended to address these concerns may result in additional levels of regulation that could lead to operational delays, increase operating and compliance costs or otherwise adversely affect operations.
The adoption of derivatives legislation by the U.S. Congress could have an adverse effect on us and our ability to hedge risks associated with our business.
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act) required, in part, that the U.S. Commodity Futures Trading Commission (CFTC) and the SEC promulgate rules and regulations to establish federal oversight for the over-the-counter (OTC) derivatives markets and entities that participate in those markets. Among other things, the new rules and regulations impose (i) mandatory central clearing and exchange trading requirements on certain liquid, standardized swaps, (ii) initial
and variation margin requirements on swaps that are not required to be centrally cleared, and (iii) position limits that cap the notional exposure market participants can have to certain physical commodity derivatives such as the energy-related swaps that we use to hedge risk. These new rules and regulations have impacted the cost and availability of derivative products and hedging and swap positions that our counterparties can make available to us. While the majority of Dodd-Frank Act rules and regulations have been promulgated and are already in effect, any changes in the rules and regulations of derivative products, including swaps, may result in certain market participants deciding to curtail or cease their derivative activities with us altogether.
Risks Related to our Third-Party Operators
We do not control activities on our properties.
We do not operate any of the properties in which we have an interest and have very limited ability to exercise influence over the third-party operators of these properties. Our dependence on the third-party operators of our properties, and on the cooperation of other working interest owners in these properties, could negatively affect the following:
our return on capital used in drilling or property acquisition;
our production and reserve growth rates;
capital required to workover or recomplete wells;
success and timing of drilling, development and exploitation activities on our properties;
compliance with environmental, safety and other regulations;
lease operating expenses; and
plugging and abandonment costs, including well-site restorations.
Dependency on each operator’s judgment, expertise and financial resources could result in unexpected future costs, lost revenues and/or capital restrictions, to the extent they would cumulatively have a material adverse effect on our financial position and results of operations.
The natural gas and oil drilling and producing operations of our third-party operators involve various risks.
Because we do not operate our properties, our business relies heavily upon our third-party operators and their operational effectiveness. Through our third-party operators, we are subject to all the risks normally incident to the operation and development of natural gas and oil properties, including:
well blowouts, cratering, explosions and human related accidents;
mechanical, equipment and pipe failures;
adverse weather conditions, earthquakes and other natural disasters;
civil disturbances and terrorist activities;
natural gas, oil and NGL price reductions;
environmental risks stemming from the use, production, handling and disposal of water, waste materials, hydrocarbons and other substances into the air, soil or water;
title problems;
limited availability of financing;
marketing related infrastructure, transportation and processing limitations; and
regulatory compliance issues.
As a non-operator, we are also dependent on third-party operators and the contractors they hire for operational safety, environmental safety and compliance with regulations of governmental authorities.
We maintain insurance against many potential losses or liabilities arising from well operations in accordance with customary industry practices and in amounts believed by management to be prudent. However, this insurance does not protect us against all risks. For example, we do not maintain insurance for business interruption, acts of war or terrorism. Additionally, pollution and environmental risks generally are not fully insurable. These risks could give rise to significant uninsured costs that might have a material adverse effect on our business condition and financial results.
We may experience delays in the payment of royalties and be unable to replace operators that do not make required royalty payments, and we may not be able to terminate our leases with defaulting lessees if any of the operators on those leases declare bankruptcy.
A failure on the part of the operators to make royalty payments gives us the right to terminate the lease, repossess the property and enforce payment obligations under the lease. If we repossessed any of our properties, we would seek a replacement operator. However, we might not be able to find a replacement operator and, if we did, we might not be able to enter into a new lease on favorable terms within a reasonable period of time. In addition, the outgoing operator could be subject to a proceeding under title 11 of the United States Code (the “Bankruptcy Code”), in which case our right to enforce or terminate the lease for any defaults, including non-payment, may be substantially delayed or otherwise impaired. In general, in a proceeding under the Bankruptcy Code, the bankrupt operator would have a substantial period of time to decide whether to ultimately or assume the lease, which could prevent the execution of a new lease or the assignment of the existing lease to another operator. In the event that the operator the lease, our ability to collect amounts owed would be substantially , and our ultimate recovery may be only a fraction of the amount owed or nothing. In addition, if we are to enter into a new lease with a new operator, the replacement operator may not the same levels of production or sell natural gas or oil at the same price as the operator it replaced.
Shortages of oilfield equipment, services, qualified personnel and resulting cost increases could adversely affect results of operations.
The demand for qualified and experienced field personnel, geologists, geophysicists, engineers and other professionals in the oil and natural gas industry can fluctuate significantly, often in correlation with natural gas, oil and NGL prices, resulting in periodic shortages. When demand for rigs and equipment increases due to an increase in the number of wells being drilled, there have been shortages of drilling rigs, hydraulic fracturing equipment and personnel and other oilfield equipment. Higher natural gas, oil and NGL prices generally stimulate increased demand for, and result in increased prices of, drilling rigs, crews and associated supplies, equipment and services. These shortages or price increases could negatively affect the ability to drill wells and conduct ordinary operations by the operators of our wells, resulting in an adverse effect on our financial condition, cash flow and operating results.
The marketability of natural gas and oil production is dependent upon transportation, pipelines and refining facilities, which neither we nor many of our operators control. Any limitation in the availability of those facilities could interfere with our or our operators’ ability to market our or our operators’ production and could harm our business.
The marketability of our or our operators’ production depends in part on the availability, proximity and capacity of pipelines, tanker trucks and other transportation methods and processing and refining facilities owned by third parties. The amount of oil that can be produced and sold is subject to curtailment in certain circumstances, such as pipeline interruptions due to scheduled and unscheduled maintenance, excessive pressure, physical damage or lack of available capacity on these systems, tanker truck availability and extreme weather conditions. Also, the shipment of our or our operators’ natural gas and oil on third-party pipelines may be curtailed or delayed if it does not meet the quality specifications of the pipeline owners. The curtailments arising from these and similar circumstances may last from a few days to several months. In many cases, we or our operators are provided only with limited, if any, notice as to when these circumstances will arise and their duration. Any significant curtailment in gathering system or transportation, processing or refining-facility capacity could reduce our or our operators’ ability to market oil production and have a material effect on our financial condition, results of operations and cash distributions to stockholders. Our or our operators’ access to transportation options and the prices we or our operators receive can also be affected by federal and state regulation—including regulation of oil production, transportation and pipeline safety—as well as by general economic conditions and changes in supply and demand. In addition, the third parties on whom we or our operators rely for transportation services are subject to complex federal, state, tribal and local laws that could affect the cost, manner or feasibility of conducting our business.
We may be negatively impacted by inflation.
Increases in inflation could have an adverse effect on us. Current and future inflationary effects may be driven by, among other things, supply chain disruptions and governmental stimulus or fiscal policies, and geopolitical instability, including the ongoing conflicts between Ukraine and Russia and between Israel and Hamas. Continuing increases in inflation could increase our costs of labor and other costs related to our business, which could have an adverse impact on our business, financial position, results of operations and cash flows. Inflation has also resulted in higher interest rates in the U.S., which could increase our cost of debt borrowing in the future.
Risks Related to the Oil and Gas Industry
Concerns over general economic, business or industry conditions may have a material adverse effect on our results of operations, financial condition and cash available for distribution.
Concerns over global economic conditions, energy costs, geopolitical issues, inflation, the availability and cost of credit in the European, Asian and U.S. markets contribute to economic uncertainty and diminished expectations for the global economy. These factors, combined with volatile prices of natural gas, oil and NGL, volatility in consumer confidence and job markets, may result in an economic slowdown or recession. In addition, continued hostilities in the Middle East and the occurrence or threat of terrorist attacks in the United States or other countries could adversely affect the economies of the United States and other countries. Concerns about global economic growth have had a significant adverse impact on global financial markets and commodity prices. If the economic climate in the United States or abroad deteriorates, worldwide demand for petroleum products could diminish, which could impact the price at which natural gas, oil and NGL from our properties are sold, affect the ability of vendors, suppliers and customers associated with our properties to continue operations and ultimately impact our results of operations, financial condition and cash available for distribution.
Conservation measures and technological advances could reduce demand for natural gas and oil.
Fuel conservation measures, alternative fuel requirements, increasing consumer demand for alternatives to natural gas and oil, technological advances in fuel economy and energy generation devices could reduce demand for natural gas and oil. The impact of the changing demand for natural gas and oil services and products may have a material adverse effect on our business, financial condition, results of operations and cash available for distribution.
Risks Related to an Investment in our Common Stock
The issuance of additional shares of our Common Stock could cause the market price of our Common Stock to decline and may result in dilution to our existing stockholders.
We have in the past issued, and may in the future from time to time issue, additional shares of Common Stock in public offerings pursuant to registration statements filed with the SEC. We also issue shares of our Common Stock in private transactions from time to time. For example, in the past we have issued shares of Common Stock in private transactions as consideration for the acquisition of mineral and royalty assets, and we have registered the resale of such shares through the filing of registration statements on Form S-3. We may also, in the future, issue securities other than Common Stock in public offerings or private transactions.
We cannot predict the effect, if any, that market sales of our securities or the availability of our securities will have on the prevailing market price of our Common Stock from time to time. Substantial sales of shares of our Common Stock or other securities in the public market, or the perception that those sales could occur, may cause the market price of our Common Stock to decline. Such a decrease in our share price could in turn impair our ability to raise capital through the sale of additional equity securities. In addition, any such decline may make it more difficult for stockholders to sell shares of our Common Stock at prices they deem acceptable.
As of December 31, 2024, we were authorized to issue an aggregate of 75,010,000 shares of capital stock, consisting of 75,000,000 shares of Common Stock and 10,000 shares of preferred stock, par value $0.01666 per share (“Preferred Stock”), of which 37,922,368 shares of Common Stock and no shares of Preferred Stock were issued and outstanding on March 5, 2025. Future issuances of our Common Stock or Preferred Stock, or other securities convertible into our Common Stock or Preferred Stock, may result in significant dilution to our existing stockholders. Significant dilution would reduce the proportionate ownership and voting power held by our existing stockholders.
We may reduce or suspend our dividend in the future.
We have paid a quarterly dividend for many years. Our most recent quarterly dividend was $0.04 per share, and we have paid a quarterly dividend ranging from $0.015 per share or $0.04 per share for the past three years. In the future our Board may, without advance notice, determine to reduce or suspend our dividend in order to maintain our financial flexibility and best position us for long‑term success. The declaration and amount of future dividends is at the discretion of our Board and will depend on our financial condition, results of operations, cash flows, prospects, industry conditions, capital requirements and other factors and restrictions our Board deems relevant. The likelihood that dividends will be reduced or suspended is increased during periods of prolonged market weakness. In addition, our ability to pay dividends may be limited by agreements governing our indebtedness now or in the future. For example, our Credit Agreement sets limits on dividend payments and stock repurchases if those payments would cause the Leverage Ratio (as defined in the Credit Agreement) to go above 2.50 to 1.0 or the Available Commitment (as defined in the Credit Agreement) to go below ten percent of the Borrowing Base (as defined in the Credit Agreement). Although we do not currently have plans to reduce or our dividend, there can be no assurance that we will not reduce our dividend or that we will continue to pay a dividend in the future.
If we cannot meet the NYSE continued listing requirements, the NYSE may delist our Common Stock.
Our Common Stock is currently listed on the NYSE. In the future, if we are unable to meet the continued listing requirements of the NYSE, including, among other things, (i) the requirement of maintaining a minimum average closing price of $1.00 per share over a consecutive 30 trading-day period and (ii) the requirement of maintaining an average market capitalization of not less than $50 million over a 30 trading-day period with, at the same time, stockholders’ equity not less than $50 million, we would fall below compliance standards and risk having our Common Stock delisted. In addition, in the event of an abnormally low share price of our Common Stock and/or we fail to maintain an average market capitalization of at least $15 million over a 30-trading day period, we would be subject to immediate delisting under the NYSE’s rules without any opportunity to cure. A delisting of our Common Stock could negatively impact us by, among other things, the following:
causing our shares to be transferred to a more limited market than the NYSE, which could affect the market price, trading volume, liquidity and resale price of such shares;
reducing the number of investors, including institutional investors, willing to hold or acquire our Common Stock, which could negatively impact our ability to raise equity;
decreasing the amount of news and analyst coverage relating to us;
limiting our ability to issue additional securities, obtain additional financing or pursue strategic restructuring, refinancing or other transactions; and
impacting our reputation and, as a consequence, our business.
ITEM 1B. Staff Comments
None
ITEM 1C. Cybersecurity
Risk Management and Strategy
Cybersecurity risk management is part of the Company’s overall enterprise risk management program. Our cybersecurity risk management program is designed to provide a framework for handling cybersecurity threats and incidents, including threats and incidents associated with the use of services provided by third-party service providers, and facilitate coordination across different departments of our company. This framework includes steps for assessing the severity of a cybersecurity threat, identifying the source of a cybersecurity threat including whether the cybersecurity threat is associated with a third-party service provider, implementing cybersecurity countermeasures and mitigation strategies and informing management and our Board of material cybersecurity threats and incidents. We engage with third party service providers to perform penetration tests and to inform us of possible vulnerabilities . In addition, cybersecurity training is provided to all employees on a regular basis and at least annually.
Governance
Our Board has overall oversight responsibility for our risk management, including the cybersecurity risk management program. Management is responsible for identifying, considering and assessing material cybersecurity risks on an ongoing basis,
establishing processes to ensure that such potential cybersecurity risk exposures are monitored, putting in place appropriate mitigation measures and maintaining cybersecurity programs. Our cybersecurity programs are under the direction of our Principal Accounting Officer , who receives reports from our cybersecurity consultants and monitors the prevention, detection, mitigation, and remediation of cybersecurity incidents. Any significant cybersecurity incidents are reported to the Audit Committee, which consists of 100% independent directors, and ultimately to our Board. Management presents an assessment of our cybersecurity processes, procedures, and results of testing to the Audit Committee at least annually.
Despite our efforts, we cannot eliminate all risks from cybersecurity threats, or provide assurances that we have not experienced an undetected cybersecurity incident . For more information about these risks, please see “Risk Factors – We may be subject to information technology system failures, network disruptions, cyber-attacks or other breaches in data security.” in this Form 10-K.
