RILEY EXPLORATION PERMIAN, INC. The following discussion and analysis of the Company's financial condition and results of operations should be read in conjunction with the Company's consolidated financial statements and related notes thereto presented in this Annual Report. The following discussion contains "forward-looking statements" that reflect the Company's future plans, estimates, beliefs and expected performance. The Company's actual results could differ materially from those discussed in these forward-looking statements. See "Cautionary Statement Regarding Forward-Looking Statements" and "Part I. Item 1A. Risk Factors."
Overview
We operate in the upstream segment of the oil and natural gas industry and are focused on steadily growing conventional reserves, production and cash flow through the acquisition, exploration, development and production of oil, natural gas and NGLs primarily in thePermian Basin inWest Texas . The Company's activities are primarily focused on the San Andres Formation, a shelf margin deposit on the Northwest Shelf of thePermian Basin . We intend to continue to develop our reserves and increase production through development drilling and exploration activities and through acquisitions that meet our strategic and financial objectives.
Financial and Operating Highlights
Financial and operating results reflect the following:
•Increased total net equivalent production by 33% to 11.5 MBoe/d for the year
ended
•During the year ended
•Realized average combined price on production sold of
•Generated cash flow from operations of
•Incurred total accrual (activity based) capital expenditures before
acquisitions of
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•Paid cash dividends on common shares of$25.1 million during the year endedDecember 31, 2022 , and announced latest dividend of$0.34 per share with a record date ofJanuary 25, 2023 , which was paid onFebruary 8, 2023 , for a total of$6.7 million
•Exited the year with
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. Table of Contents Recent Developments Fiscal Year Change OnAugust 16, 2022 , the Company's Board acting by written consent resolved to amend and restate the Company's Second Amended and Restated Bylaws to change the Company's fiscal year period fromOctober 1st through September 30th each year toJanuary 1st through December 31st each year commencing with the 2022 calendar year. OnAugust 19, 2022 , the holders of approximately 75% of our outstanding Common Stock acting by written consent approved Bylaws Restatement and adopted the Third Amended and Restated Bylaws. In accordance with Rule 14c-2 under the Exchange Act, the aforementioned actions taken by written consent became effective onSeptember 23, 2022 . As a result, the Company's 2022 fiscal year was the period fromJanuary 1, 2022 toDecember 31, 2022 .
Market Conditions, Commodity Prices and Interest Rates
U.S. and global markets are experiencing heightened volatility following impactful geopolitical events, consistent evidence of widespread inflation, as well as increased fears of an economic recession. However, commodity prices have continued to remain high during 2022 due to OPEC+ and other oil and natural gas producers not rapidly increasing production levels, as well as from the recovery in demand related to the COVID-19 pandemic. The full-scale military invasion ofUkraine by Russian troops has continued unabated sinceFebruary 2022 coupled with related economic sanctions imposed onRussia further exacerbating supply shortages, leading to disruptions in the credit and capital markets, including significant uncertainty in commodity prices, during 2022. In addition, global markets are experiencing significant inflation attributable to a number of factors. Certain of our capital expenditures and expenses are affected by general inflation and we expect costs for 2023 to continue to be a function of supply and demand. Specifically, costs for oilfield equipment and services continue to experience impacts from significant inflation, which we expect to continue for the foreseeable future. In response to inflation concerns, theU.S. Federal Reserve initiated a monetary tightening policy in 2022, increasing interest rates in June, July, September andNovember 2022 with public estimates of potential further increases in the future. The Company's floating-rate credit facility is impacted by such rate increases. The combination of geopolitical events, inflation and the rising rate environment has led to increasing forecasts of aU.S. or global recession. Any such recession could prolong market volatility or cause a decline in commodity prices, among other potential impacts. The Company cannot estimate the length or gravity of the future impact these events will have on the Company's results of operations, financial position, liquidity and the value of oil and natural gas reserves. 61
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Results of Operations
Comparison for the years ended
The following table sets forth selected operating data for the years ended
Year Ended
December 31, 2022 September 30, 2021
Revenues (in thousands):
Oil sales $ 298,723 $ 136,421
Natural gas sales 10,755 7,500
Natural gas liquids sales 9,865 4,715
Oil and natural gas sales, net $ 319,343 $ 148,636
Production Data, net:
Oil (MBbls) 3,217 2,340
Natural gas (MMcf) 3,229 2,602
Natural gas liquids (MBbls) 444 380
Total (MBoe) 4,199 3,154
Daily combined volumes (Boe/d) 11,505 8,640
Daily oil volumes (Bbls/d) 8,814 6,411
Average Realized Prices:
Oil ($ per Bbl) $ 92.86 $ 58.29
Natural gas ($ per Mcf) 3.33 2.88
Natural gas liquids ($ per Bbl) 22.22 12.41
Combined ($ per Boe) $ 76.05 $ 47.12
Average Realized Prices, including derivative
settlements:(1)
Oil ($ per Bbl) $ 71.75 $ 51.47
Natural gas ($ per Mcf) 1.06 2.75
Natural gas liquids ($ per Bbl) 22.22 12.41
Combined ($ per Boe) $ 58.13 $ 41.95
_____________________
(1)The Company's calculation of the effects of derivative settlements includes
losses on the settlement of its commodity derivative contracts. These losses are
included under other income (expense) on the Company's consolidated statements
of operations.
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Oil and Natural Gas Revenues
Our revenues are derived from the sale of our oil and natural gas production, including the sale of NGLs that are extracted from our natural gas during processing. Revenues from product sales are a function of the volumes produced, product quality, market prices, and gas Btu content. Our revenues from oil, natural gas and NGL sales do not include the effects of derivatives. Our revenues may vary significantly from period to period as a result of changes in volumes of production sold or changes in commodity prices. The Company's total oil and natural gas revenue, net increased$170.7 million , or 115%, for the year endedDecember 31, 2022 compared to the year endedSeptember 30, 2021 . The Company's realized average combined price on its production for the year endedDecember 31, 2022 increased by$28.93 per Boe, or 61% compared to the year endedSeptember 30, 2021 . Oil revenues •For the year endedDecember 31, 2022 , oil revenues increased by$162.3 million , or 119%, compared to the year endedSeptember 30, 2021 . Of the increase,$111.2 million was attributable to an increase in our realized price and$51.1 million was attributable to an increase in volume. Volumes increased by 37%, while realized prices increased by 59% compared to the year endedSeptember 30, 2021 . •Oil volumes increased during the year endedDecember 31, 2022 due to production from new wells and workovers performed on existing wells. During the year endedDecember 31, 2022 , we brought online 15 gross (11.8 net) horizontal wells.
•The average WTI price increased by
Natural gas revenues •For the year endedDecember 31, 2022 , natural gas revenues increased by$3.3 million , compared to the year endedSeptember 30, 2021 , to$10.8 million from$7.5 million . Volumes increased by 24%, while realized prices increased by$0.45 per Mcf compared to the year endedSeptember 30, 2021 . •Natural gas sales volumes increased during the year endedDecember 31, 2022 compared to the year endedSeptember 30, 2021 due to production from new wells and workovers performed on existing wells.
•The average
Natural gas liquids revenues •For the year endedDecember 31, 2022 , NGL revenues increased by$5.2 million , compared to the year endedSeptember 30, 2021 , to$9.9 million from$4.7 million . Volumes increase by 17%, while realized prices increased$9.81 per Bbl compared to the year endedSeptember 30, 2021 . •NGL sales volumes increased during the year endedDecember 31, 2022 compared to the year endedSeptember 30, 2021 due to production from new wells and workovers performed on existing wells.
Contract Services -
The following table presents the Company's revenue and costs associated with its contract services - related party transactions:
Year Ended Year Ended
December 31, 2022 September 30, 2021
(In thousands)
Contract services - related parties(1) $ 2,400 $ 2,400
Cost of contract services - related parties(2) 450 477
Gross profit from contract services $ 1,950 $ 1,923
_____________________
(1)The Company's contract services - related parties revenue is derived from
master services agreements with related parties to provide certain
administrative support services.
(2)The Company's cost of contract services - related parties represents costs
specifically attributable to the master service agreements the Company has in
place with the respective related parties.
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Costs and Expenses
The following table presents the Company's operating costs and expenses and
other (income) expenses:
Year Ended
Year Ended September 30,
December 31, 2022 2021
Costs and Expenses: (In thousands)
Lease operating expenses $ 32,458 $ 21,975
Production and ad valorem taxes $ 19,273 $ 8,636
Exploration costs $ 2,032 $ 9,566
Depletion, depreciation, amortization and accretion $ 32,113 $ 26,015
Impairment of oil and natural gas properties $ 7,325 $ -
Administrative costs $ 18,496 $ 13,966
Equity-based compensation 3,439 6,793
General and administrative expense $ 21,935 $ 20,759
Transaction costs $ 2,638 $ 3,732
Interest expense, net $ 1,090 $ 4,534
Loss on derivatives $ 51,574 $ 89,195
Income tax expense $ 32,844 $ 13,016 Lease Operating Expenses ("LOE")
LOE are the costs incurred in the operation and maintenance of producing properties. Expenses for compression, direct labor, saltwater disposal and materials and supplies comprise the most significant portion of our lease operating expenses. Certain operating cost components, such as direct labor and materials and supplies, generally remain relatively fixed across broad production volume ranges, but can fluctuate depending on activities performed during a specific period. For instance, repairs to our pumping equipment or surface facilities or subsurface maintenance result in increased production expenses in periods during which they are performed. Certain operating cost components, such as compression and saltwater disposal associated with completion water, are variable and increase or decrease as hydrocarbon production levels and the volume of completion water disposal increases or decreases. The Company's LOE increased by$10.5 million for the year endedDecember 31, 2022 compared to the year endedSeptember 30, 2021 . For the year endedDecember 31, 2022 ,$5.4 million of the increase was due to higher workover expense as additional workovers were performed in the 2022 period, and$4.2 million of the increase was due to electricity and chemical rate increases, increase in field payroll, saltwater disposal charges, and new wells coming online.
Production and Ad Valorem Tax Expense
Production taxes are paid on produced oil, natural gas and NGLs based on a percentage of revenues at fixed rates established by federal, state or local taxing authorities. In general, the production taxes we pay correlate to changes in our oil, natural gas and NGL revenues. We are also subject to ad valorem taxes in the counties where our production is located. Ad valorem taxes are generally based on the valuation of our oil and natural gas properties, which also trend with oil and natural gas prices and vary across the different counties in which we operate. Production and ad valorem taxes increased by$10.6 million for the year endedDecember 31, 2022 compared to the year endedSeptember 30, 2021 . Production taxes increased primarily due to increases in our oil and natural gas sales, net, as discussed above. Ad valorem taxes increased for the year endedDecember 31, 2022 based on higher estimated property values for the current taxable period. 64
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Exploration Expense
Exploration expense consists of expiration of unproved leasehold and geological and geophysical costs which include seismic survey costs. The following table presents exploration expense by area for the year endedDecember 31, 2022 and the year endedSeptember 30, 2021 : Year Ended Year Ended December 31, 2022 September 30, 2021 (In thousands, except acreage data) Exploration expense(1)$ 1,953 $ 9,347 Geological and geophysical costs 79 219 Total exploration expense $
2,032 $ 9,566
Expired net acres - Texas 857 1,651 Expired net acres - New Mexico 518 16,239 Net acres renewed after expiration(2) 72 505
_____________________
(1)For the year endedDecember 31, 2022 , exploration expense includes$1.8 million and$0.2 million related to expiration of unproved leasehold costs inTexas andNew Mexico , respectively. For the year endedSeptember 30, 2021 , exploration expense included$3.5 million and$5.8 million related to expiration of unproved leasehold costs inTexas andNew Mexico , respectively. (2)The Company did not renew any net acreage after expiration inNew Mexico during the year endedDecember 31, 2022 and the year endedSeptember 30, 2021 .
Depletion, Depreciation, Amortization and Accretion Expense
Depletion, depreciation and amortization is the systematic expensing of the capitalized costs incurred to acquire, explore and develop oil, natural gas and NGLs. All costs incurred in the acquisition, exploration and development of properties (excluding costs of surrendered and abandoned leaseholds, delay lease rentals, dry holes and overhead related to exploration activities) are capitalized. Capitalized costs are depleted using the units of production method. Accretion expense relates to ARO. We record the fair value of the liability for ARO in the period in which the liability is incurred (at the time the wells are drilled or acquired) with the offset to property cost. The liability accretes each period until it is settled or the well is sold, at which time the liability is removed. Depletion, depreciation, amortization and accretion expense increased by$6.1 million for the year endedDecember 31, 2022 , respectively, compared to the year endedSeptember 30, 2021 . The increase for the year endedDecember 31, 2022 was primarily due to higher production, partially offset by a lower depletion rate. The depletion rate is a function of capitalized cost and related underlying reserves. The lower depletion rate was primarily driven by an increase in reserves as a result of the Company's drilling activity and improved commodity prices.
Impairment of
The cost of proved oil and natural gas properties are assessed on a field-by-field basis for impairment at least annually or whenever events and circumstances indicate that a decline in the recoverability of their carrying value may have occurred. We compare the expected undiscounted future cash flows of the oil and natural gas properties to the carrying amount of the oil, natural gas and NGL properties to determine if the carrying amount is recoverable. If the carrying amount exceeds the estimated undiscounted future cash flows, we adjust the carrying amount of the oil and natural gas properties to estimated fair value. The Company recognized an impairment loss on proved properties of$7.3 million for the year endedDecember 31, 2022 . The impairment loss relates to theNew Mexico field and was driven by the Company focusing its drilling efforts on its acreage inYoakum County . No impairment loss was recognized for the year endedSeptember 30, 2021 .
General and Administrative Expense ("G&A")
G&A expenses include corporate overhead such as payroll and benefits for our corporate staff, equity-based compensation expense, office rent for our headquarters, audit and other fees for professional services and legal compliance. G&A expenses are reported net of overhead recoveries.
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Total G&A expense increased by$1.2 million for the year endedDecember 31, 2022 compared to the year endedSeptember 30, 2021 . Administrative costs, which include payroll, benefits and non-payroll costs, increased by$4.5 million for the year endedDecember 31, 2022 compared to the year endedSeptember 30, 2021 . The increase in administrative costs was primarily attributable to increased employee count, professional services, insurance, technology, investor relations, and costs related to transitioning fiscal year-ends. Equity-based compensation expense decreased by$3.3 million for the year endedDecember 31, 2022 compared to the year endedSeptember 30, 2021 . The higher equity-based compensation during the year endedSeptember 30, 2021 relates to restricted shares awarded to certain employees following completion of the Merger that immediately vested.
Transaction Costs
Transaction costs represent costs incurred on successful or unsuccessful business combinations or unsuccessful property acquisitions. The transaction costs of$2.6 million for the year endedDecember 31, 2022 primarily relate to a potential business combination and related financing that the Company pursued but ultimately chose not to consummate due to changing market conditions. During the year endedSeptember 30, 2021 , the transaction costs of$3.7 million primarily relate to costs incurred on the Merger withTengasco inFebruary 2021 .
Interest Expense
Interest expense decreased by$3.4 million during the year endedDecember 31, 2022 when compared to the year endedSeptember 30, 2021 . The Company had a lower outstanding average balance on the revolving credit facility as well as an increase in the capitalized interest related to the Company's EOR project, partially offset by an increase in interest rates, during the year endedDecember 31, 2022 when compared to the year endedSeptember 30, 2021 . Additionally, interest expense decreased due to the Company settling the remaining open position on its interest rate swap resulting in a settlement of$1.5 million during 2022. Gain/Loss on Derivatives The Company recognizes settlements and changes in the fair value of its derivative contracts as a single component within other income (expense) on its consolidated statements of operations. We have oil and natural gas derivative contracts, including fixed price swaps, basis swaps and collars, that settle against various indices. The following table presents the components of the Company's loss on derivatives for the year endedDecember 31, 2022 and the year endedSeptember 30, 2021 : Year Ended Year Ended September 30, December 31, 2022 2021 (In thousands) Settlements on derivative contracts$ (75,257) $ (16,304) Non-cash gain (loss) on derivatives 23,683 (72,891) Loss on derivatives$ (51,574) $ (89,195) Our earnings are affected by the changes in value of our derivative portfolio between periods and the related cash received or paid upon settlement of our derivatives. To the extent the future commodity price outlook declines between periods, we will have mark-to-market gains, while future commodity price increases between measurement periods result in mark-to-market losses. The loss on derivatives for the year endedDecember 31, 2022 was$51.6 million , which decreased by$37.6 million compared to the year endedSeptember 30, 2021 . The change in the non-cash gain (loss) on derivatives was impacted by the decrease in total contract volumes for our open derivative contracts and the change in the estimated forward-looking oil and natural gas prices used at the end of the period to calculate the fair value of the open derivative contracts for the year endedDecember 31, 2022 compared to the year endedSeptember 30, 2021 . The increase in the loss on settlements on derivatives was due to the increase in oil and natural gas prices for the year endedDecember 31, 2022 compared to the year endedSeptember 30, 2021 . For example, the average WTI price was$94.90 per Bbl for the year endedDecember 31, 2022 compared to$59.40 per Bbl for the year endedSeptember 30, 2021 .
Income Tax Expense
The Company became a taxable entity as a result of its Merger withTengasco onFebruary 26, 2021 . See further discussion in Note 4 - Acquisitions and Divestitures to the Company's consolidated financial statements included herein. WhileREP LLC was organized as a limited liability company, taxable income passed through to its unitholders. Accordingly, a provision for 66
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federal and state corporate income taxes has been made for the operations of the Company beginningFebruary 27, 2021 in the accompanying consolidated financial statements. Deferred income taxes are provided to reflect the future tax consequences or benefits of differences between the tax basis of assets and liabilities and their reported amounts in the financial statements using enacted tax rates. Upon consummation of the Merger inFebruary 2021 , the Company established a$13.6 million provision for deferred income taxes with the conversion to a C-corporation. The majority of this deferred tax liability was established by a change in tax status which primarily was attributable to the oil and natural gas properties. See Note 11 - Income Taxes to the Company's consolidated financial statements included herein for further discussion of income taxes. Year Ended December Year Ended September 31, 2022 30, 2021 (In thousands) Current income tax expense$ 4,472 $ 54 Deferred income tax expense (benefit) 28,372 12,962 Total income tax expense (benefit)$ 32,844 $ 13,016 Effective income tax rate 21.7 % (38.4) %
Liquidity and Capital Resources
The business of exploring for, developing and producing oil and natural gas is capital intensive. Because oil, natural gas and NGL reserves are a depleting resource, like all upstream operators, we must make capital investments to grow and even sustain production. The Company's principal liquidity requirements are to finance its operations, fund capital expenditures and acquisitions, make cash distributions and satisfy any indebtedness obligations. Cash flows are subject to a number of variables, including the level of oil and natural gas production and prices, and the significant capital expenditures required to more fully develop the Company's oil and natural gas properties. Historically, our primary sources of capital funding and liquidity have been our cash on hand, cash flow from operations and borrowings under our revolving credit facility. At times and as needed, we may also issue debt or equity securities, including through transactions under our shelf registration statement filed with theSEC . We estimate the combination of the sources of capital discussed above will continue to be adequate to meet our short and long-term liquidity needs. Cash on hand and operating cash flow can be subject to fluctuations due to trends and uncertainties that are beyond our control. Likewise, our ability to issue equity and obtain credit facilities on favorable terms may be impacted by a variety of market factors as well as fluctuations in our results of operations. For further discussion of risks related to our liquidity and capital resources, see "Item 1A. Risk Factors."
Working Capital
Working capital is the difference in our current assets and our current liabilities. Working capital is an indication of liquidity and potential need for short-term funding. The change in our working capital requirements is driven generally by changes in accounts receivable, accounts payable, commodity prices, credit extended to, and the timing of collections from customers, the level and timing of spending for expansion activity, and the timing of debt maturities. As ofDecember 31, 2022 , we had a working capital deficit of$25.3 million compared to a deficit of$32.8 million as ofDecember 31, 2021 . The working capital deficit atDecember 31, 2022 reflects$16.5 million in current derivative liabilities compared to$31.0 million in current derivative liabilities atDecember 31, 2021 . As ofDecember 31, 2022 , we had an increase of$14.1 million in accrued capital expenditures and ad valorem tax. We utilize our revolving credit facility and cash on hand to manage the timing of cash flows and fund short-term working capital deficits. Our current derivative assets and liabilities represent the mark-to-market value as ofDecember 31, 2022 of future commodity production which will settle on a monthly basis through the end of their contractual terms. This aligns with the receipt of oil and natural gas revenues on a monthly basis. 67
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Cash Flows
The following table summarizes the Company's cash flows from continuing
operations:
Year Ended Year Ended
December 31 , September 30,
2022 2021
(In thousands) Statement of Cash Flows Data from Continuing Operations: Net cash provided by operating activities
$ 170,288 $ 86,073 Net cash used in investing activities$ (128,256) $ (59,628) Net cash used in financing activities$ (37,048) $ (14,937) Operating Activities The Company's net cash provided by operating activities increased by$84.2 million or 98% to$170.3 million for the year endedDecember 31, 2022 from$86.1 million for the year endedSeptember 30, 2021 . The increase was primarily driven by an increase in revenues of$170.7 million , partially offset by an increase of$59.0 million on settlements for commodity derivative contracts and an increase in operating expenses of$24.4 million , which excludes non-cash expenses such as equity-based compensation, expiration of unproved leasehold costs, impairment of oil and natural gas properties and depreciation, depletion, accretion and amortization expense.
Investing Activities
The Company's cash flows used in investing activities increased by$68.6 million or 115% to$128.3 million for the year endedDecember 31, 2022 from$59.6 million for the year endedSeptember 30, 2021 . The increase was primarily due to higher capital spending of$53.3 million related to the Company's increased drilling and completion activity and activity on itsEOR Project during the year endedDecember 31, 2022 compared to the year endedSeptember 30, 2021 , in addition to$15.3 million for the purchase of land during the year endedDecember 31, 2022 .
Financing Activities
Net cash flow used in financing activities increased by$22.1 million or 148% to$37.0 million for the year endedDecember 31, 2022 from$14.9 million for the year endedSeptember 30, 2021 . During the year endedSeptember 30, 2021 , the Company issued$46.7 million of equity, net of offering costs. These proceeds were primarily used to paydown amounts outstanding on the revolving credit facility. There was no equity issued in 2022. During the year endedDecember 31, 2022 , the Company had a net paydown on its revolving credit facility of$9.0 million , which compares to a net paydown of$41.0 million for the same period in 2021. In addition, the Company distributed an additional$6.8 million of dividends on common stock during the year endedDecember 31, 2022 compared to the same period in 2021. Revolving Credit Facility The Company's borrowing base was$225 million with outstanding borrowings of$56 million onDecember 31, 2022 , representing available borrowing capacity of$169 million . See further discussion in Note 9 - Revolving Credit Facility to the Company's consolidated financial statements included herein. OnApril 29, 2022 , the Company amended its Credit Agreement to, among other things, increase the borrowing base from$175 million to$200 million , extend the maturing date toApril 2026 , replace LIBOR with the SOFR and change the requirements for hedging to be based on utilization of the borrowing base and the Company's leverage ratio. OnOctober 25, 2022 , the Company subsequently amended its Credit Agreement to, among other things, increase the borrowing base from$200 million to$225 million and change the semi-annual redeterminations toApril 1 andOctober 1 to align with the Company's new fiscal year end ofDecember 31st .
Distributions
For the year ended
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Contractual Obligations
The Company has commitments with its primary midstream counterparty and has entered into purchase commitments throughout the year endedDecember 31, 2022 . See Note 14 - Commitments and Contingencies in our notes to the consolidated financial statements.
Critical Accounting Estimates
The discussion and analysis of the Company's financial condition and results of operations are based upon the Company's consolidated financial statements and accompanying notes included herein, which have been prepared in accordance withU.S. GAAP. The preparation of financial statements requires the Company to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. These estimates and assumptions may also affect disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.
Changes in facts and assumptions or the discovery of new information may result in revised estimates. Actual results could differ from these estimates and assumptions used in preparation of the Company's consolidated financial statements and it is at least reasonably possible these estimates could be revised in the near term and these revisions could be material.
Method of Accounting for
We utilize the successful efforts method of accounting for our oil and natural gas exploration and development activities which requires management's assessment of the proper designation of wells and associated costs as developmental or exploratory. This classification assessment is dependent on the determination and existence of proved reserves, which is a critical estimate discussed in the section below. The classification of developmental and exploratory costs has a direct impact on the amount of costs we initially recognize as exploration expense or capitalize, then subject to DD&A calculations and impairment assessments and valuations. Once a well is drilled, the determination that proved reserves have been discovered may take considerable time and requires both judgment and application of industry experience. Development wells are always capitalized. Costs associated with drilling an exploratory well are initially capitalized, or suspended, pending a determination as to whether proved reserves have been found. At the end of each quarter, the status of all suspended exploratory drilling costs are reviewed to determine whether the costs should continue to remain capitalized or shall be expensed. When making this determination, current activities, near-term plans for additional exploratory or appraisal drilling and the likelihood of reaching a development program is considered. If future development activities and the determination of proved reserves are unlikely to occur, the associated suspended exploratory well costs are recorded as dry hole expense and reported in exploration expense in the consolidated statements of operations. Otherwise, the costs of exploratory wells remain capitalized. Similar to the evaluation of suspended exploratory well costs, costs for unproved leasehold, for which reserves have not been proven, must also be evaluated for continued capitalization or impairment. At the end of each quarter, unproved leasehold costs are assessed for impairment by considering future drilling plans, drilling activity results, commodity price outlooks, planned future sales or expiration of all or a portion of such projects. AtDecember 31, 2022 , the Company had approximately$12.8 million of unproved leasehold. Of the remaining unproved leasehold costs atDecember 31, 2022 , approximately$0.6 million is scheduled to expire in 2023. The Company will renew or extend the lease if the leasehold expiring in 2023 relates to areas in which the Company is actively drilling. If our drilling is not successful, this leasehold could become partially or entirely impaired. Once a well is drilled, capitalized well costs for drilling and completion activities must be evaluated at least yearly or whenever facts and circumstances indicate a decline in the recoverability of their carrying value may have occurred. At the end of each year, the undiscounted future cash flows are compared to the carrying value on a field basis to evaluate if the carrying value is recoverable. If the carrying value is not recoverable, the Company will compare the carrying value of the asset to its fair value and recognize any impairment loss in the period. Significant inputs and judgements are used in determining the fair value of the assets. The Company utilizes a discounted cash flow model in order to estimate fair value by modeling the present value of future cash flows, net of estimated operating and development costs using estimates of proved reserves, future commodity pricing, future production estimates, anticipated capital expenditures, and various discount rates commensurate with the risk and current market conditions associated with the expected cash flow projected. During the year endedDecember 31, 2022 , the Company recognized a proved property impairment of$7.3 million related to the oil and natural gas properties inNew Mexico . 69
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. Table of Contents Oil and Natural Gas Reserves Our estimates of proved and proved developed reserves are a major component of our depletion calculation. Additionally, our proved reserves represent the element of these calculations that require the most subjective judgments. Estimates of reserves are forecasts based on engineering data, projected future rates of production and the timing of future expenditures. The process of estimating oil, natural gas and NGL reserves requires substantial judgment, resulting in imprecise determinations, particularly for new discoveries. Different reserve engineers may make different estimates of reserve quantities based on the same data. A third-party consulting firm prepares our reserve report which the estimates are based off of technical and economic data including, but not limited to, well test data, production data, historical price and cost information, and property ownership interests. The passage of time provides more qualitative information regarding estimates of reserves, when revisions are made to prior estimates to reflect updated information. The data for a given reservoir may also change substantially over time as a result of numerous factors, including, but not limited to, additional development activity, evolving production history and continual reassessment of the viability of production under varying economic conditions.
We test goodwill for impairment annually, or more frequently if events or changes in circumstances dictate that the carrying value of goodwill may not be recoverable. If the fair value is less than the carrying value, an impairment charge will be recognized for the amount by which the carrying amount exceeds the fair value. Because quoted market prices are not available, the fair value is estimated based upon a valuation analyses including comparable companies and transactions and premiums paid. An impairment loss is recognized if the carrying value of the reporting unit goodwill exceeds the implied fair value of that goodwill. The Company recognized goodwill of$19.0 million from the result of the Merger, all of which was allocated to the oil and natural gas properties acquired from the Merger. The Company bypassed the qualitative analysis to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying value amount, including goodwill, since the Company entered into a PSA shortly after acquiring the oil and natural gas properties. The Company compared the reporting unit fair value of$3.5 million with its carrying amount, including goodwill, of$19.0 million and recognized a goodwill impairment of$18.5 million . The impairment loss was recognized within loss from discontinued operations for the year endedSeptember 30, 2021 in our consolidated statement of operations.
See Note 3 - Summary of Significant Accounting Policies in the Company's consolidated financial statements in "Item 15. Exhibits and Financial Statement Schedules" for a full discussion of our significant accounting policies.
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