PRIMEENERGY RESOURCES CORP - Quarter Report: 2022 March (Form 10-Q)

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Delaware		84-0637348
(State or other jurisdiction of incorporation or organization)		(I.R.S. employer Identification No.)

Title of each class		Trading Symbol(s)		Name of each exchange on which registered
Common Stock, $0.10 par value		PNRG		NASDAQ

Large Accelerated Filer		☐		Accelerated Filer		☐
Non-Accelerated Filer		☒		Smaller Reporting Company		☒
				Emerging growth company		☐

		Page
Part I—Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets –March 31, 2022 and December 31, 2021			3
Condensed Consolidated Statements of Operations – For the three months ended March 31, 2022 and 2021			4
Condensed Consolidated Statement of Equity – For the three months ended March 31, 2022 and 2021			5
Condensed Consolidated Statements of Cash Flows – For the three months ended March 31, 2022 and 2021			6
Notes to Condensed Consolidated Financial Statements – March 31, 2022			7-13
Item 2. Management’s Discussion and Analysis of Financial Conditions and Results of Operation			14-22
Item 3. Quantitative and Qualitative Disclosures About Market Risk			22
Item 4. Controls and Procedures			22
Part II - Other Information
Item 1. Legal Proceedings			23
Item 1A. Risk Factors			23
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			23
Item 3. Defaults Upon Senior Securities			23
Item 4. Reserved			23
Item 5. Other Information			23
Item 6. Exhibits			24-26
Signatures			27

Item 1.

FINANCIAL STATEMENTS

		March 31, 2022				December 31, 2021
ASSETS
Current Assets
Cash and cash equivalents		$	4,076			$	10,347
Accounts receivable, net			20,679				14,208
Prepaid obligations			168				733
Derivative asset			36				—
Other current assets			40				40
Total Current Assets			24,999				25,328
Property and Equipment
Oil and gas properties at cost			541,264				539,484
Less: Accumulated depletion and depreciation			(366,371	)			(359,742	)
			174,893				179,742
Field and office equipment at cost			27,351				27,080
Less: Accumulated depreciation			(22,538	)			(22,159	)
			4,813				4,921
Total Property and Equipment, Net			179,706				184,663
Derivative asset long-term and other assets			782				923
Total Assets		$	205,487			$	210,914
LIABILITIES AND EQUITY
Current Liabilities
Accounts payable		$	9,096			$	7,282
Accrued liabilities			6,709				7,821
Due to related parties			—				52
Current portion of asset retirement and other long-term obligations			1,623				1,630
Derivative liability short-term			12,761				4,935
Total Current Liabilities			30,189				21,720
Long-Term Bank Debt			9,000				36,000
Asset Retirement Obligations			12,894				13,222
Derivative Liability Long-Term			—				650
Deferred Income Taxes			41,886				38,743
Other Long-Term Obligations			2,118				1,488
Total Liabilities			96,087				111,823
Commitments and Contingencies
Equity
Common stock, $.10 par value; 2022 and 2021: Authorized: 2,810,000 shares, outstanding 2022: 1,980,889; outstanding 2021: 1,992,077			281				281
Paid-in capital			7,555				7,555
Retained earnings			140,044				128,902
Treasury stock, at cost; 2022: 829,111 shares; 2021: 817,923			(38,480	)			(37,647	)
Total Equity			109,400				99,091
Total Liabilities and Equity		$	205,487			$	210,914

		2022				2021
Revenues
Oil sales		$	26,305			$	9,270
Natural gas sales			3,746				1,658
Natural gas liquids sales			3,851				1,745
Realized (loss) on derivative instruments, net			(3,819	)			(212	)
Field service income			3,240				1,425
Unrealized (loss) on derivative instruments, net			(7,139	)			(911	)
Other income			29				29
Total Revenues			26,213				13,004
Costs and Expenses
Lease operating expense			8,721				4,467
Field service expense			3,000				1,418
Depreciation, depletion, amortization and accretion on discounted liabilities			7,178				6,497
General and administrative expense			6,672				2,016
Total Costs and Expenses			25,571				14,398
Gain on Sale and Exchange of Assets			13,991				—
Income (Loss) from Operations			14,633				(1,394	)
Other Income (Expense)
Interest Expense			(349	)			(523	)
Income (Loss) Before Provision for (Benefit from) Income Taxes			14,284				(1,917	)
Provision for (Benefit from) Income Taxes			3,142				(460	)
Net Income (Loss)			11,142				(1,457	)
Less: Net (Loss) Attributable to Non-Controlling Interests			—				(2	)
Net Income (Loss) Attributable to PrimeEnergy Resources		$	11,142			$	(1,455	)
Basic Income (Loss) Per Common Share		$	5.62			$	(0.73	)
Diluted Income (Loss) Per Common Share		$	4.07			$	(0.73	)

		Shares Outstanding				Common Stock				Additional Paid-In Capital				Retained Earnings				Treasury Stock				Total Stockholders’ Equity – PrimeEnergy				Non- Controlling Interest				Total Equity
Balance at December 31, 2021			1,992,077			$	281			$	7,555			$	128,902			$	(37,647	)		$	99,091			$	—			$	99,091
Purchase 11,188 shares of common stock			(11,188	)		$	—			$	—			$	—			$	(833	)		$	(833	)		$	—			$	(833	)
Net Income			—				—				—				11,142				—				11,142				—				11,142
Balance at March 31, 2022			1,980,889			$	281			$	7,555			$	140,044			$	(38,480	)		$	109,400			$	—			$	109,400
Balance at December 31, 2020			1,994,177			$	281			$	7,541			$	126,804			$	(37,502	)		$	97,124			$	874			$	97,998
Net (Loss)			—				—				—				(1,455	)			—				(1,455	)			(2	)			(1,457	)
Balance at March 31, 2021			1,994,177			$	281			$	7,541			$	125,349			$	(37,502	)		$	95,669			$	872			$	96,541

		2022				2021
Cash Flows from Operating Activities:
Net Income (Loss)		$	11,142			$	(1,457	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation, depletion, amortization and accretion on discounted liabilities			7,178				6,497
Gain on sale and exchange of assets			(13,991	)			—
Unrealized loss on derivative instruments, net			7,139				911
Deferred income taxes			3,143				(460	)
Changes in assets and liabilities:
Accounts receivable			(6,471	)			(156	)
Due to related parties			(52	)			—
Prepaids and other assets			565				(872	)
Accounts payable			1,814				(231	)
Accrued liabilities			(1,112	)			500
Net Cash provided by Operating Activities			9,355				4,732
Cash Flows from Investing Activities:
Capital expenditures, including exploration expense			(1,784	)			(660	)
Proceeds from sale of properties and equipment			13,991				—
Net Cash Provided by (Used in) Investing Activities			12,207				(660	)
Cash Flows from Financing Activities:
Purchase of stock for treasury			(833	)			—
Proceeds from long-term bank debt			—				3,000
Repayment of long-term bank debt			(27,000	)			(4,050	)
Net Cash (Used in) Financing Activities			(27,833	)			(1,050	)
Net (Decrease) Increase in Cash and Cash Equivalents			(6,271	)			3,022
Cash and Cash Equivalents at the Beginning of the Period			10,347				996
Cash and Cash Equivalents at the End of the Period		$	4,076			$	4,018
Supplemental Disclosures:
Income taxes paid		$	—			$	—
Interest paid		$	240			$	355

(Thousands of dollars)		March 31, 2022				December 31, 2021
Accounts Receivable:
Joint interest billing		$	3,025			$	1,902
Trade receivables			1,768				1,429
Oil and gas sales			16,152				11,154
Other			105				94
			21,050				14,579
Less: Allowance for doubtful accounts			(371	)			(371	)
Total		$	20,679			$	14,208
Accounts Payable:
Trade		$	3,983			$	2,390
Royalty and other owners			3,290				2,802
Partner advances			1,063				1,209
Other			760				881
Total		$	9,096			$	7,282
Accrued Liabilities:
Compensation and related expenses		$	3,865			$	3,919
Property costs			1,731				2,901
Taxes			813				893
Other			300				108
Total		$	6,709			$	7,821

(Thousands of dollars)		Operating Leases
2022		$	451
2023			150
Total undiscounted lease payments		$	601
Less: Amount associated with discounting			(51	)
Net operating lease liabilities		$	550

(Thousands of dollars)		March 31, 2022
Asset retirement obligation at December 31, 2021		$	14,295
Liabilities incurred			—
Liabilities settled			(498	)
Accretion expense			170
Asset retirement obligation at March 31, 2022		$	13,967

March 31, 2022		Quoted Prices in Active Markets For Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)				Balance at March 31, 2022
(Thousands of dollars)
Assets
Commodity derivative contracts		$	—			$	—			$	36			$	36
Total assets		$	—			$	—			$	36			$	36
Liabilities
Commodity derivative contracts		$	—			$	—			$	(12,761	)		$	(12,761	)
Total liabilities		$	—			$	—			$	(12,761	)		$	(12,761	)

December 31, 2021		Quoted Prices in Active Markets For Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)				Balance at December 31, 2021
(Thousands of dollars)
Assets
Commodity derivative contracts		$	—			$	—			$	—			$	—
Total assets		$	—			$	—			$	—			$	—
Liabilities
Total liabilities		$	—			$	—			$	(5,585	)		$	(5,585	)

(Thousands of dollars)
Net Liabilities – December 31, 2021		$	(5,585	)
Total realized and unrealized (gains) losses:
Included in earnings (a)			(10,958	)
Purchases, sales, issuances and settlements			3,818
Net Liabilities — March 31, 2022		$	(12,725	)

(a)	Derivative instruments are reported in revenues as realized gain/loss and on a separately reported line item captioned unrealized gain/loss on derivative instruments.

						Fair Value
(Thousands of dollars)		Balance Sheet Location				March 31, 2022				December 31, 2021
Asset Derivatives:
Derivatives not designated as cash-flow hedging instruments:
Crude Oil commodity contracts			Derivative asset short-term			$	36			$	—
Total						$	36			$	—
Liability Derivatives:
Derivatives not designated as cash-flow hedging instruments:
Crude oil commodity contracts			Derivative liability short-term			$	(9,711	)		$	(3,992	)
Natural gas commodity contracts			Derivative liability short-term				(3,050	)			(943	)
Crude oil commodity contracts			Derivative liability long-term				—				(490	)
Natural gas commodity contracts			Derivative liability long-term				—				(160	)
Total						$	(12,761	)		$	(5,585	)
Total derivative instruments						$	(12,725	)		$	(5,585	)

		Location of gain/loss recognized in income		Amount of gain/loss recognized in income
(Thousands of dollars)				2022				2021
Derivatives not designated as cash-flow hedge instruments:
Natural gas commodity contracts		Unrealized (loss) on derivative instruments, net		$	(1,948	)		$	(15	)
Crude oil commodity contracts		Unrealized (loss) on derivative instruments, net			(5,191	)			(896	)
Natural gas commodity contracts		Realized (loss) on derivative instruments, net			(620	)			(60	)
Crude oil commodity contracts		Realized (loss) on derivative instruments, net			(3,199	)			(152	)
				$	(10,958	)		$	(1,123	)

		Quarter Ended March 31,
		2022												2021
		Net Income (In 000’s)				Weighted Average Number of Shares Outstanding				Per Share Amount				Net Loss (In 000’s)				Weighted Average Number of Shares Outstanding				Per Share Amount
Basic		$	11,142				1,980,878			$	5.62			$	(1,455	)			1,994,197			$	(0.73	)
Effect of dilutive securities:
Options(a)							756,544
Diluted		$	11,142				2,737,422			$	4.07			$	(1,455	)			1,994,197			$	(0.73	)

(a)	The effect of the 767,000 outstanding stock options is antidilutive for the quarter ended March 31, 2021, due to net loss for this period.

We are an independent oil and natural gas company engaged in acquiring, developing, and producing oil and natural gas. We presently own producing and properties located primarily in Texas, and Oklahoma. In addition, we own a substantial amount of well servicing equipment. All of our oil and gas properties and interests are located in the United States. Assets in our principal focus areas include mature properties with long-lived reserves and significant development opportunities as well as newer properties with development and exploration potential. We believe our balanced portfolio of assets and our ongoing hedging program position us well for both the current commodity price environment and future potential upside as we develop our attractive resource opportunities. Our primary sources of liquidity are cash generated from our operations and our credit facility.

Our cash flows depend on many factors, including the price of oil and gas, the success of our acquisition and drilling activities and the operational performance of our producing properties. We use derivative instruments to manage our commodity price risk. This practice may prevent us from receiving the full advantage of any increases in oil and gas prices above the maximum fixed amount specified in the derivative agreements and subjects us to the credit risk of the counterparties to such agreements. Since all our derivative contracts are accounted for under accounting, we expect continued volatility in gains and losses on derivative contracts in our consolidated statement of operations as changes occur in the NYMEX price indices.

Our activities are concentrated in central Oklahoma. This region is managed from our office in Oklahoma City, Oklahoma. As of December 31, 2021, we had 549 producing wells (189 net) in the area, of which 195 wells are operated by us. Principal producing intervals are in the Roberson, Avant, Skinner, Sycamore, Bromide, McLish, Hunton, Mississippian, Oswego, Red Fork, and Chester formations at depths ranging from 1,100 to 10,500 feet. Average net daily production in our Region in 2021 was 747 Boe. At December 31, 2021, we had 2,383 MBoe of proved reserves in the area, representing 20% of our total proved reserves. We maintain an acreage position of approximately 48,400 gross (10,802 net) acres in this region, primarily in Canadian, Kingfisher, Grant, Major, and Garvin counties. Our region is actively participating with third-party operators in the horizontal development of lands that include Company owned interests in several counties in the Stack and Scoop plays of Oklahoma where drilling primarily targets reservoirs of the Mississippian, and Woodford formations.

In the first quarter of 2022, in the region the Company committed to participate with 9.38% interest in the drilling of four horizontal wells in Canadian County, Oklahoma operated by Ovintiv Inc. The first of these was spud April 2, and the fourth on May 1,2022. All four wells are expected to be completed and online in July of this year. These proved undeveloped drilling plans and their reserves were not included in the 2021 reserve report.

In the first quarter of 2022, the Company participated with 10.3% interest in the drilling of four long horizontal wells in Irion County, Texas operated by SEM Operating Company, LLC. All four wells have finished drilling and are awaiting completion which is expected to occur in the second quarter of 2022.

In addition, the Company has received proposals for 13 new horizontal wells in West Texas planned for the third quarter. We intend to participate for 50% interest in the drilling of nine horizontal wells in Reagan County, Texas with BTA Oil Producers, Inc and to participate for 38% in the drilling of four horizontal wells in Martin County, Texas with ConocoPhilips. We also anticipate to begin development of ten new horizontal wells with Hibernia Energy III, LLC, in Reagan County, Texas, in the fourth quarter of 2022. The Company will own approximately 25% of these ten wells expected to be completed in 2023. These proved undeveloped drilling plans were added in 2022, and are therefore not represented in the 2021 reserves report.

Our interests in proved developed and undeveloped oil and gas properties, including the interests held by the Partnerships, have been evaluated by Ryder Scott Company, L.P. for each of the three years ended December 31, 2021. The professional qualifications of the technical persons primarily responsible for overseeing the preparation of the reserve estimates can be found in Exhibit 99.1, the Ryder Scott Company, L.P. Report on Registrant’s Reserves Estimates. In matters related to the preparation of our reserve estimates, our district managers report to the Engineering Data manager, who maintains oversight and compliance responsibility for the internal reserve estimate process and provides oversight for the annual preparation of reserve estimates of 100% of our reserves by our independent third-party engineers, Ryder Scott Company, L.P. The members of our district and central groups consist of degreed engineers and geologists with between approximately twenty and thirty-five years of industry experience, and between eight and twenty-five years of experience managing our reserves. Our Engineering Data manager, the technical person primarily responsible for overseeing the preparation of reserves estimates, has over thirty years of experience, holds a Bachelor degree in Geology and an MBA in finance and is a member of the Society of Petroleum Engineers and American Association of Petroleum Geologist. See Part II, Item 8 “Financial Statements and Supplementary Data”, for additional discussions regarding proved reserves and their related cash flows. All of our reserves are located within the continental United States. The following table summarizes our oil and gas reserves at each of the respective dates:

In 2020, in West Texas we participated in the drilling of seven wells: one for 8.6% interest which was brought into production in July of 2020, and six wells with an average 47.5% interest that were drilled but not completed at and therefore classified as Proved Undeveloped in the reserve report. The Company invested approximately $8.0 million in these seven wells in 2020. Also in 2020, proved producing reserves were added in West Texas through the addition of 11 horizontal wells completed in Midland County, Texas, in which we receive 0.56% to 1% over-riding royalty interest.

In 2021, in West Texas, we participated with Apache in the drilling of three additional horizontals on the Kashmir Tract in Upton County, Texas and completed these three wells in September of 2021 along with six other wells drilled in 2020 on the same lease that were drilled but uncompleted at 2020. The Company has an average of 47.8% interest in these nine wells and invested approximately $30 million in these horizontal wells.

In our Oklahoma, Scoop-Stack play, in 2019, we participated in the drilling and completion of six wells on our WM Wallace tract for 7.67% interest, and nine wells, included on our Slash, Osborn, and Leon tracts, with an average 1.34% interest. In addition, three wells drilled in Oklahoma in 2018, were completed in 2019 converting 24 Mboe of reserves to proved developed. Also in Oklahoma, six wells designated as on December 31, 2018, were brought into production in 2019: five located on our Ruthie tract, and one on our Braum tract.

At December 31, 2020, in total, the Company had 3,221 Mboe of proved undeveloped reserves attributable to 13 wells operated by others, 10 of which were drilled but not completed by 2020, and three that were not drilled until 2021. The three new horizontals along with the six uncompleted wells at were brought online in late September and early October of 2021. These successful new wells are on our Kashmir tract in Upton County, Texas operated by Apache Corporation. These nine PUD wells at 2020 accounted for 3,127 Mboe of the total undeveloped reserves where the Company has an average 47.5% interest and invested approximately $30 million dollars in these wells. The four other PUD wells, drilled but not completed at 2020, are located in Grady County, Oklahoma and accounted for 95 Mboe of the total undeveloped reserves.    

At December 31, 2021, the Company had 159 Mboe of proved developed reserves attributable to three horizontal wells drilled and completed in Canadian County, Oklahoma in December of 2021, but not yet online. Three of the four wells were successfully completed and online in January, 2022, while one well had completion issues and has been temporarily abandoned. In regard to the four drilled but uncompleted PUD wells in Grady County, Oklahoma, noted in the paragraph above, reserves previously attributed to these wells were not included in the 2021 reserve report as the operator has no near-term plans for their completion.

In the first quarter of 2022, in our West Texas horizontal drilling program, the Company participated with 10.3% interest in the drilling of four horizontal wells with SEM Operating Company and has received proposals for an additional 23 horizontal wells to begin this year. In total the Company is likely to invest approximately $76 million in these 27 wells. In Oklahoma, thus far in 2022, the Company is participating for 9.38% interest with Ovintiv in the drilling of four wells in Canadian County, Oklahoma. These four wells and the four SEM wells are anticipated to be online in July of this year.    Additional drilling and future development plans will be established based on an expectation of available cash flows from operations and availability of funds under our revolving credit facility.

The PV 10 Value represents the discounted future net cash flows attributable to our proved oil and gas reserves before income tax, discounted at 10%. Although this measure is not in accordance with U.S. generally accepted accounting principles (“GAAP”), we believe that the presentation of the PV10 Value is relevant and useful to investors because it presents the discounted future net cash flow attributable to proved reserves prior to taking into account corporate future income taxes and the current tax structure. We use this measure when assessing the potential return on investment related to oil and gas properties. The PV10 of future income taxes represents the sole reconciling item between this PV10 Value versus the GAAP measure presented in the standardized measure of discounted cash flow. A reconciliation of these values is presented in the last three columns of the table above. The standardized measure of discounted future net cash flows represents the present value of future cash flows attributable to proved oil and natural gas reserves after income tax, discounted at 10%.

“Proved developed” oil and gas reserves are reserves that can be expected to be recovered from existing wells with existing equipment and operating methods. “Proved undeveloped” oil and gas reserves are reserves that are expected to be recovered from new wells on undrilled acreage, or from existing wells where a relatively major expenditure is required for recompletion. Our reserves include amounts attributable to interests in the Partnerships. These interests represent less than 10% of our reserves.

Maintaining a strong balance sheet and ample liquidity are key components of our business strategy. In 2022, we will continue our focus on preserving financial flexibility and ample liquidity as we manage the risks facing our industry. Our capital budget for the year is• reflective of current commodity prices and has been established based on an expectation of available cash flows, with any cash flow deficiencies expected to be funded by borrowings under our revolving credit facility. As we have done historically to preserve or enhance liquidity, we may adjust our capital program throughout the year, divest assets, or enter into strategic joint ventures.

In the third quarter of 2021, nine horizontal wells in Upton County, Texas, operated by Apache Corporation, were completed and brought into production. In the fourth quarter of 2021, three horizontal wells operated by Ovintiv in Canadian County, Oklahoma were completed and brought online in January 2022. The Company has an average of 47.5% interest in the nine wells completed with Apache and 11.25% interest in the three wells completed with Ovintiv.

To date in 2022, the Company has participated with SEM Operating Company LLC in the drilling of four 7,900’ horizontal wells in Irion County, Texas with 10.3% interest, and participated with Ovintiv Inc in the drilling of four 10,000’-long horizontal wells in Canadian County, Oklahoma with 9.38% interest. We expect all eight of these wells to be completed soon and online in July of this year. An additional 23 wells are planned to begin development in the second half of 2022; nine with BTA Oil Producers, four with ConocoPhilips, and ten with Hibernia Energy III>

In Upton County, Texas, we are developing a contiguous 3,260 acre block with our joint venture partner, Apache Corporation. In this block the Company has 2,600 leasehold acres with interest between 14% and 56% depending on the particular lease and depth being developed. In 2018, eight successful wells were drilled horizontally by Apache Corporation in the Wolfcamp “B” of this block with the Company participating for 49% interest and this is believed to be full development of the Wolfcamp “B” reservoir. Together with Apache, we are planning development of the Upper Wolfcamp, Jo Mill, and Lower Spraberry reservoirs of this block. These shallower reservoirs have been on our offset 1,300 acre Kashmir tract. It is expected that as many as 54 additional horizontals will be developed on this 3,260 acres in the near future. This development is estimated to cost approximately $370.6 million, with the Company’s share being approximately $170.8 million. In addition to the 54 prospective wells to be drilled for these three reservoirs, a fourth target reservoir, the Middle Spraberry, is also prospective for future development. The potential of the Middle Spraberry on the 3,260 acre block is for 18 horizontal wells to be drilled and completed at a gross cost of approximately $126.3 million with the Company’s share being approximately $61.8 million. The actual number of wells that are eventually drilled as well as the cost and the timing of drilling will vary based upon many factors, including commodity market conditions.

Also in the Permian Basin of West Texas, we are developing a 965 acre block with ConocoPhillips in Martin County, Texas. In 2016 and 2017, four horizontal wells were drilled, completed, and put on production. The Company owns 35% to 38% interest in this joint venture acreage and we have received drilling plans from ConocoPhilips for the drilling of four wells in the third quarter of 2022 that are likely to be laterals. The Company’s investment in these wells is expected to be $15 million.

In 2022, in West Texas, the Company is currently participating for 10.3% interest with SEM Operating Company in the drilling of four 7,900’-long horizontal wells in Irion County, Texas. We anticipate an investment of $2.55 million in these wells. We have also received proposals from BTA Oil Producers for the drilling of nine horizontals in Reagan County, Texas to begin in the third quarter of this year. The Company intends to participate for its 50% interest in six wells and 31% interest in three wells. Our expected investment in the drilling and completion of these wells is $40.5 million. In addition, we received a proposal from ConocoPhilips for the drilling of four horizontal wells in Marting Couty, and a proposal from Hibernia Energy III for the drilling of ten horizontal wells in Reagan County. We expect the development of these projects to begin in the fourth quarter of 2022. PrimeEnergy will have approximately 38% interest in the four ConocoPhilips wells and 25% interest in the Hibernia Energy wells.

In Oklahoma, we are focused on development of our reserves in Canadian, Grady, Kingfisher, Garfield, Major, and Garvin counties where we have approximately 6,200 net leasehold acres in the Scoop/Stack Play. In 2019, we participated for an average of 4.6% interest with Newfield Exploration in twelve successful wells in Canadian County on our Slash and Wallace tracts. In 2021, we participated for 11.25% interest with Ovintiv Inc. in four wells on our Peters tract, in Canadian County. Three of these wells were successfully completed in December 2021 and online in January 2022, while one well had completion issues and has been temporarily abandoned. At today’s product prices, payout of the Company’s $2.2 million investment in these four wells is expected to be in approximately six months.    

In April 2022. in Oklahoma, the Company and Ovintiv began drilling four horizontal wells on our Bohlman tract in the same area as the successful Peters wells. All four of the Bohlman wells have been spud and the first is in the process of being drilled at the time of this writing. The Company is participating with 9.38% interest for approximately $1.8 million through completion which is expected to occur in June and July.

increased 166.9% to $33.9 million for the three months ended March 2022 from $12.7 million in the same period of 2021. Sales vary due to changes in volumes of production sold and realized commodity prices. Our production across all three products increased substantially reflecting the production from our West Texas wells added in the fourth quarter of 2021 and our Oklahoma wells which were placed in production in January 2022. The changes in volumes and prices are presented in the table below.

We do not apply hedge accounting to any of our commodity-based derivatives, thus changes in the fair market value of commodity contracts held at the end of a reported period, referred to as adjustments, are recognized as unrealized gains and losses in the accompanying condensed consolidated statements of operations. As oil and natural gas prices remain volatile, accounting treatment creates volatility in our revenues. Unrealized and realized losses by product are presented in the table below.

increased $1.8 million or 128.6% for the first quarter 2022 to $3.2 million from $1.4 million for the first quarter 2021. This increase is a combined result of increased utilization and rates charged to customers during the current quarter compared to the same quarter in 2021. Workover rig services, hot oil treatments, salt water hauling and disposal represent the bulk of our field service operations.

increased $4.2 million or 93.3% from $4.5 million for the first quarter 2021 to $8.7 million for the first quarter 2022. This increase reflects the increased production taxes related to the increased oil, gas and NGL revenue, and the additional operating expenses related to the wells added in the fourth quarter of 2021 and the first quarter of 2022.

increased $1.6 million or 114.3% to $3.0 million for the first quarter 2022 from $1.4 million for the first quarter 2021. Field service expenses primarily consist of wages and equipment operating expenses which have increased during the three months ended March 31, 2022 over the same period of 2021 related to increased utilization of the equipment during the current quarter compared to the same quarter in 2021.

increased $0.7 million or 10.8% from $6.5 million for the first quarter 2021 to $7.2 million for the first quarter 2022 reflecting the increased production in the first quarter of 2022.

increased $4.7 million or 235% from $2.0 million for the three months ended March 31, 2021 to $6.7 million for the three months ended March 31, 2022. This increase in 2022 is primarily due to increased employee compensation and benefits.

decreased $0.2 million or 40% from $0.5 million for the first quarter 2021 to $0.3 million for the first quarter 2022. This decrease reflects the decrease in current borrowings under our revolving credit agreement.

for the March 31, 2022 and 2021 quarters varied due to the change in net income and loss for those periods.

In the first quarter of 2022, the Company participated in the drilling of four wells with SEM Operating Company in Irion County, Texas for 10.3% interest and in April of this year began participating with Ovintiv in four wells in Canadian County, Oklahoma with 9.38% interest. In addition, the Company has received drilling proposals for an additional 23 horizontal wells to be drilled in West Texas this year. In total the Company is likely to invest approximately $76 million in these 31 wells. Additional drilling and future development plans will be established based on an expectation of available cash flows from operations and availability of funds under our revolving credit facility.

The Company maintains a Credit Agreement providing for a reserves-based line of credit totaling $300 million, with a current borrowing base of $50 million. As of May 20, 2022, the Company has no outstanding borrowings under this line. The bank reviews the borrowing base semi-annually and, at their discretion, may decrease or propose an increase to the borrowing base relative to a estimate of proved oil and gas reserves. The next borrowing base review is scheduled for June 2022, at this time we expect the borrowing base to be increased approximately 50%. Our oil and gas properties are pledged as collateral for the line of credit and we are subject to certain financial and operational covenants defined in the agreement. We are currently in compliance with these covenants and expect to be in compliance over the next twelve months. If we do not comply with these covenants on a continuing basis, the lenders have the right to refuse to advance additional funds under the facility and/or declare all principal and interest immediately due and payable. Our borrowing base may decrease as a result of lower natural gas or oil prices, operating difficulties, declines in reserves, lending requirements or regulations, the issuance of new indebtedness or for other reasons set forth in our revolving credit agreement. In the event of a decrease in our borrowing base due to declines in commodity prices or otherwise, our ability to borrow under our revolving credit facility may be limited and we could be required to repay any indebtedness in excess of the borrowing base.

As of the end of the current reported period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Rules and of the Securities Exchange Act of 1934 (the “Exchange Act”). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective with respect to the recording, processing, summarizing and reporting, within the time periods specified in the Commission’s rules and forms, of information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act.

The following exhibits are filed as a part of this report: