EX-99.1 4 ex99-1.htm

 

Exhibit 99.1

 

Report of Independent Auditors

and Consolidated Financial Statements

 

Nickel Road Operating LLC and Subsidiaries

 

December 31, 2022 and 2021

 

 

 

 

 

Table of Contents

 

 

  Page
Report of Independent Auditors 1
   
Consolidated Financial Statements 3
   
Consolidated Balance Sheets 4
   
Consolidated Statements of Income 6
   
Consolidated Statements of Changes in Members’ Capital 7
   
Consolidated Statements of Cash Flows 8
   
Notes to Consolidated Financial Statements 9

 

 

 

 

 

Report of Independent Auditors

 

The Management Committee

Nickel Road Operating LLC and Subsidiaries

 

Report on the Audit of the Financial Statements

 

Opinion

 

We have audited the consolidated financial statements of Nickel Road Operating LLC and Subsidiaries, which comprise the consolidated balance sheets as of December 31, 2022 and 2021, and the related consolidated statements of income, changes in members’ capital, and cash flows for the years then ended, and the related notes to the consolidated financial statements.

 

In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the financial position of Nickel Road Operating LLC and Subsidiaries, as of December 31, 2022 and 2021, and the results of their operations and their cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.

 

Basis for Opinion

 

We conducted our audits in accordance with auditing standards generally accepted in the United States of America (GAAS). Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Statements section of our report. We are required to be independent of Nickel Road Operating LLC and Subsidiaries and to meet our other ethical responsibilities, in accordance with the relevant ethical requirements relating to our audits. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

 

Responsibilities of Management for the Financial Statements

 

Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with accounting principles generally accepted in the United States of America, and for the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.

 

In preparing the financial statements, management is required to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about Nickel Road Operating LLC and Subsidiaries’ ability to continue as a going concern within one year after the date that the financial statements are available to be issued.

 

1
 

 

Auditor’s Responsibilities for the Audit of the Financial Statements

 

Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance but is not absolute assurance and therefore is not a guarantee that an audit conducted in accordance with GAAS will always detect a material misstatement when it exists. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Misstatements are considered material if there is a substantial likelihood that, individually or in the aggregate, they would influence the judgment made by a reasonable user based on the consolidated financial statements.

 

In performing an audit in accordance with GAAS, we:

 

● Exercise professional judgment and maintain professional skepticism throughout the audit.
   
● Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, and design and perform audit procedures responsive to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements.
   
● Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of Nickel Road Operating LLC and Subsidiaries’ internal control. Accordingly, no such opinion is expressed.
   
● Evaluate the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluate the overall presentation of the consolidated financial statements.
   
● Conclude whether, in our judgment, there are conditions or events, considered in the aggregate, that raise substantial doubt about Nickel Road Operating LLC and Subsidiaries’ ability to continue as a going concern for a reasonable period of time.

 

We are required to communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit, significant audit findings, and certain internal control–related matters that we identified during the audit.

 

Other Supplementary Information

 

Our audit was conducted for the purpose of forming an opinion on the consolidated financial statements as a whole. The accompanying supplemental schedules concerning oil and gas producing properties in Note 9 and Note 10 are presented for purposes of additional analysis and is not a required part of the consolidated financial statements. Because of the significance of the matter described above, it is inappropriate to, and we do not, express an opinion on this supplementary information.

 

 

Denver, Colorado

March 30, 2023

 

2
 

 

Consolidated Financial Statements

 

 

3
 

 

Nickel Road Operating LLC and Subsidiaries

Consolidated Balance Sheets

December 31, 2022 and 2021

 

   2022   2021 
         
ASSETS          
           
CURRENT ASSETS          
Cash and cash equivalents  $276,039   $148,372 
Restricted cash   3,200,000    - 
Joint interest receivable   197,655    189,757 
Accrued oil and gas sales   3,861,311    8,374,954 
Prepaid expenses   693,325    651,207 
           
Total current assets   8,228,330    9,364,290 
           
OIL AND GAS PROPERTIES, at cost (successful efforts method)          
Proved properties   113,415,744    116,315,420 
Unproved properties   1,068,954    7,659,295 
Accumulated depletion   (25,691,574)   (19,392,383)
           
Total oil and gas properties   88,793,124    104,582,332 
           
TOTAL ASSETS  $97,021,454   $113,946,622 

 

See accompanying notes.

 

4
 

 

Nickel Road Operating LLC and Subsidiaries

Consolidated Balance Sheets

December 31, 2022 and 2021

 

 

   2022   2021 
         
LIABILITIES AND MEMBERS’ CAPITAL          
           
CURRENT LIABILITIES          
Accounts payable  $1,921,542   $1,815,862 
Accrued liabilities   9,150,627    10,454,882 
Due to related party   255,743    87,750 
Current maturities of long-term debt, net of deferred financing costs   -    12,000,000 
Derivative liability, current   2,727,867    5,952,686 
           
Total current liabilities   14,055,779    30,311,180 
           
NON-CURRENT LIABILITIES          
Long-term debt, net of current portion and deferred financing costs   25,036,040    8,389,476 
Derivative liability, non-current   -    61,958 
Asset retirement obligations   1,167,701    1,201,468 
           
Total non-current liabilities   26,203,741    9,652,902 
           
Total liabilities   40,259,520    39,964,082 
           
COMMITMENTS AND CONTINGENCIES (Note 6)          
           
MEMBERS’ CAPITAL          
Contributed capital   64,025,830    64,025,830 
Distributed capital   (58,000,000)   - 
Retained earnings   50,736,104    9,956,710 
           
Total members’ capital   56,761,934    73,982,540 
           
TOTAL LIABILITIES AND MEMBERS’ CAPITAL  $97,021,454   $113,946,622 

 

See accompanying notes.

 

5
 

 

Nickel Road Operating LLC and Subsidiaries

Consolidated Statements of Income

Years Ended December 31, 2022 and 2021

 

 

   2022   2021 
REVENUES        
Oil and gas sales  $66,059,962   $43,452,456 
           
Total revenues   66,059,962    43,452,456 
           
OPERATING EXPENSES          
Production taxes   4,975,383    3,464,066 
Lease operating   3,942,294    2,104,831 
Depreciation, depletion, and amortization   17,760,179    11,061,218 
General and administrative   4,264,687    3,842,550 
Lease expirations   329,911    282,786 
           
Total operating expenses   31,272,454    20,755,451 
           
INCOME FROM OPERATIONS   34,787,508    22,697,005 
           
OTHER INCOME (EXPENSE)          
Interest expense   (936,453)   (466,495)
Gain on sale of oil and gas properties   25,331,465    - 
Realized loss on derivative instruments   (21,751,084)   (8,690,199)
Unrealized gain (loss) on derivative instruments   3,286,777    (4,403,945)
Other income (expense)   20,029    (95,440)
Interest income   41,152    2,612 
           
Total other income (expense)   5,991,886    (13,653,467)
           
NET INCOME  $40,779,394   $9,043,538 

 

See accompanying notes.

 

6
 

 

Nickel Road Operating LLC and Subsidiaries

Consolidated Statements of Changes in Members’ Capital

Years Ended December 31, 2022 and 2021

 

         Retained   Total 
  

Class A

Capital

  

Class B

Capital

   Earnings (Deficit)   Members’ Equity 
                 
BALANCE, January 1, 2021  $64,025,830   $    -   $913,172   $64,939,002 
                     
Capital contributions   -    -    -    - 
Net income   -    -    9,043,538    9,043,538 
                     
BALANCE, December 31, 2021   64,025,830    -    9,956,710    73,982,540 
                     
Capital distributions   (58,000,000)   -    -    (58,000,000)
Net income   -    -    40,779,394    40,779,394 
                     
BALANCE, December 31, 2022  $6,025,830   $-   $50,736,104   $56,761,934 

 

See accompanying notes.

 

7
 

 

Nickel Road Operating LLC and Subsidiaries

Consolidated Statements of Cash Flows

Years Ended December 31, 2022 and 2021

 

 

   2022   2021 
CASH FLOWS FROM OPERATING ACTIVITIES          
Net income  $40,779,394   $9,043,538 
Adjustments to reconcile net income to net cash from operating activities          
Depreciation, depletion, and amortization   17,760,179    11,061,218 
Amortization of debt issuance costs   140,941    79,360 
Gain on sale of oil and gas properties   (25,331,465)   - 
Lease expirations   329,911    282,786 
Unrealized loss on derivative instruments   (3,286,777)   4,403,945 
Change in operating assets and liabilities          
Accounts receivable   4,505,745    (5,539,212)
Prepaid expenses   (42,120)   (327,200)
Accounts payables   105,677    1,399,477 
Due to related party   167,993    15,731 
Accrued liabilities   24,449    4,986,467 
           
Net cash from operating activities   35,153,927    25,406,110 
           
CASH FLOWS FROM INVESTING ACTIVITIES          
Purchases of oil and gas properties   (37,025,536)   (51,137,515)
Proceeds from the sale of oil and gas properties   58,693,653    - 
           
Net cash from investing activities   21,668,117    (51,137,515)
           
CASH FLOWS FROM FINANCING ACTIVITIES          
Proceeds from long-term debt   29,700,000    30,000,000 
Repayment of long-term debt   (25,175,000)   (9,425,000)
Debt issuance costs   (19,377)   (264,884)
Capital distributions   (58,000,000)   - 
           
Net cash from financing activities   (53,494,377)   20,310,116 
           
NET CHANGE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH   3,327,667    (5,421,289)
           
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, beginning of year   148,372    5,569,661 
           
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, end of year  $3,476,039   $148,372 
           
RECONCILIATION OF CASH, CASH EQUIVALENTS AND RESTRICTED CASH, end of year          
Cash and cash equivalents  $276,039   $148,372 
Restricted cash   3,200,000    - 
           
Cash, cash equivalents, and restricted cash, end of year  $3,476,039   $148,372 
           
SUPPLEMENTAL CASH FLOW INFORMATION          
Capital expenditures in accounts payable and accrued liabilities  $-   $1,328,700 
           
Asset retirement obligations incurred  $209,652   $859,363 
           
Cash paid for interest  $853,027   $269,664 

 

See accompanying notes.

 

8
 

 

Nickel Road Operating LLC and Subsidiaries

Notes to Consolidated Financial Statements

 

 

Note 1 – Organization and Summary of Significant Accounting Policies

 

Organization – Nickel Road Operating LLC , a Delaware limited liability company (the Company), was formed on July 25, 2017, for the purpose of engaging in the evaluation, acquisition, exploration, drilling, development, and production of oil and gas in the United States of America. The Company shall continue in existence until it is liquidated or dissolved under the terms of the Amended Limited Liability Company Agreement (the LLC Agreement).

 

As a Limited Liability Company (LLC), the amount of loss at risk for each individual member is limited to the amount of capital contributed to the LLC, and unless otherwise noted, the individual member’s liability for indebtedness of an LLC is limited to the member’s capital contributions.

 

Basis of presentation – The Company follows accounting standards established by the Financial Accounting Standards Board (FASB). The FASB sets accounting principles generally accepted in the United States of America (GAAP) to ensure consistent reporting of the Company’s financial condition, results of operations, and cash flows. References to GAAP issued by the FASB in these footnotes are to the FASB Accounting Standards Codification (ASC) or “Codification.”

 

Use of estimates in the preparation of financial statements – The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

Depreciation, depletion, and amortization of oil and gas properties and the impairment of proved oil and gas properties are determined using estimates of oil and gas reserves. There are numerous uncertainties in estimating the quantity of reserves and in projecting the future rates of production and timing of development expenditures, including future costs to dismantle, dispose, and restore the Company’s properties. Oil and gas reserve engineering must be recognized as a subjective process of estimating underground accumulations of oil and gas that cannot be measured in an exact way.

 

Fair value of financial instruments – The Company’s financial instruments consist of cash and cash equivalents, restricted cash, trade receivables, trade payables, accrued liabilities, and derivative financial instruments. The carrying value of cash and cash equivalents, restricted cash, trade payables, accrued liabilities, and derivative financial instruments are considered to be representative of their fair market value due to the short maturity of these instruments. The carrying amount of debt reflected on the consolidated balance sheets approximates fair value as this debt has a variable interest rate that approximates a market interest rate.

 

Principles of consolidation – The accompanying consolidated financial statements are consolidated and include the accounts of the Company and its wholly owned subsidiaries, Source Rock Royalty LLC, Nickel Road Development LLC, and Peak Stone Properties LLC. All significant intercompany amounts have been eliminated in consolidation.

 

9
 

 

Nickel Road Operating LLC and Subsidiaries

Notes to Consolidated Financial Statements

 

 

Cash and cash equivalents – The Company considers all highly liquid investments with a maturity of three months or less, when purchased, to be cash equivalents. Cash and cash equivalents are maintained at financial institutions, and, at times, balances may exceed federally insured limits. The Company has not experienced any losses related to such balances, and management believes that the Company is not exposed to any significant risks on the balances.

 

Restricted cash – As of December 31, 2022, the Company held restricted cash of approximately $3,200,000 for accounts held in escrow related to the Company’s sale of Oil and Gas Properties. Per the terms of the Asset Purchase Agreement, see oil and gas properties within Note 1, entered on June 1, 2022, the escrow period is defined as one year from the closing date.

 

Accounts receivable – Accounts receivable consist of uncollateralized joint interest owner obligations due within 30 days of the invoice date, uncollateralized accrued revenues due under normal trade terms, generally requiring payment within 30 days of production, and other miscellaneous receivables. All receivables are reviewed periodically, and appropriate actions are taken on past-due amounts and those deemed uncollectible, if any. No allowance for bad debts has been recorded as of December 31, 2022 and 2021.

 

Significant customers – As of and for the year ended December 31, 2022, the Company’s two largest customers generated approximately 82% and 15% of sales, and one customer accounted for approximately 88% of accrued oil and gas sales.

 

As of and for the year ended December 31, 2021, the Company’s two largest customers generated approximately 80% and 15% of sales, and two customers accounted for approximately 86% and 11% of accrued oil and gas sales.

 

Oil and gas properties – The Company accounts for its oil and gas operations using the successful efforts method of accounting. Under this method, all costs associated with property acquisitions, successful exploratory wells, and development wells are capitalized. Items charged to expense generally include geological and geophysical costs, costs of unsuccessful exploratory wells, delay rentals, and oil and gas production costs. Capitalized costs of proved leasehold costs are depleted on a well-by-well basis using the units-of-production method based on total proved developed producing oil and gas reserves. Other capitalized costs of producing properties are also depleted based on total proved developed producing reserves. Depletion expense for the years ended December 31, 2022 and 2021 was approximately $17,712,000 and $11,034,000, respectively.

 

The Company assesses its proved oil and gas properties for impairment whenever events or circumstances indicate that the carrying value of the assets may not be recoverable, but at least annually. The impairment test compares undiscounted future net cash flows to the assets’ net book value. If the net capitalized costs exceed future net cash flows, then the cost of the property is written down to the estimated fair value. Fair value for oil and natural gas properties is generally determined based on an analysis of discounted future net cash flows adjusted for certain risk factors. There were no impairments of proved oil and gas properties as of December 31, 2022 and 2021.

 

10
 

 

Nickel Road Operating LLC and Subsidiaries

Notes to Consolidated Financial Statements

 

 

Unproved properties are assessed periodically on a project-by-project basis to determine whether an impairment has occurred. Management’s assessment includes consideration of the results of exploration activities, commodity price predictions or forecasts, planned future sales, or expiration of all or a portion of such projects. At December 31, 2022, management determined there was no impairment of unproved properties.

 

Gains and losses arising from sales of oil and gas properties are included in other income. However, a partial sale of proved properties within an existing field that does not significantly affect the unit-of-production depletion rate will be accounted for as a normal retirement with no gain or loss recognized. The sale of a partial interest within a proved property is accounted for as a recovery of cost. The partial sale of unproved property is accounted for as a recovery of cost when there is uncertainty of the ultimate recovery of the cost applicable to the interest retained.

 

On June 1, 2022, the Company entered into an Asset Purchase Agreement with a third party to sell a portion of the Company’s proved and unproved oil and gas properties. The Company sold various oil and gas properties held in the DJ Basin to a third party for $64,000,000; after purchase price adjustments total proceeds were approximately $58,694,000. The oil and gas properties sold by the Company had a carrying value of approximately $33,363,000, resulting in a gain of approximately $25,331,000.

 

Derivative financial instruments – The Company enters into derivative contracts, primarily swaps, and collars to hedge future crude oil and natural gas production in order to mitigate the risk of market price fluctuations. All derivative instruments are recorded on the balance sheet at fair value. The Company has elected not to apply hedge accounting to any of its derivative transactions; consequently, the Company recognizes mark to-market gains and losses in earnings currently, rather than deferring such amounts in other comprehensive income for those commodity derivatives that qualify as cash flow hedges.

 

Asset retirement obligations – An asset retirement obligation associated with the retirement of a tangible long-lived asset is recognized as a liability in the period incurred, with an associated increase in the carrying amount of the related long-lived asset and oil and natural gas properties. The cost of the tangible asset, including the asset retirement cost, is depleted over the useful life of the asset. The asset retirement obligation is recorded at its estimated fair value, measured by reference to the expected future cash outflows required to satisfy the retirement obligation discounted at our credit-adjusted risk-free interest rate. Accretion expense is recognized over time, as the discounted liability is accreted to its expected settlement value. Accretion expense is recorded within “Depletion, depreciation, and amortization” in the consolidated statements of operations. If the estimated future cost of the asset retirement obligation changes, an adjustment is recorded to both the asset retirement obligation and the long-lived asset. Revisions to estimated asset retirement obligations can result from changes in retirement cost estimates, revisions to estimated inflation rates, and changes in the estimated timing of abandonment.

 

Deferred financing costs – Deferred financing costs are capitalized and amortized over the contractual term of the related obligations. Debt issuance costs of approximately $281,000 were recognized within long-term debt as a reduction of the current outstanding balance in 2022, net of approximately $216,000 of amortization expense which is recorded as interest expense. See Note 7 for further details.

 

11
 

 

Nickel Road Operating LLC and Subsidiaries

Notes to Consolidated Financial Statements

 

 

Revenue recognition – The Company recognizes revenue in accordance with Accounting Standards Codification (ASC) 606, Revenue from Contracts with Customers. Revenue from the sale of oil, natural gas liquids (NGLs), and gas is recognized as the product is delivered to the customers’ custody transfer points, and collectability is reasonably assured. The Company fulfills the performance obligations under the customer contracts through daily delivery of oil, NGLs, and gas to the customers’ custody transfer points, and revenues are recorded on a monthly basis. The prices received for oil, NGLs, and natural gas sales under the Company’s contracts are generally derived from stated market prices, which are then adjusted to reflect deductions, including transportation, fractionation, and processing. As a result, the revenues from the sale of oil, natural gas, and NGLs will decrease if market prices decline. The sales of oil, NGLs, and gas, as presented on the condensed consolidated statements of operations, represent the Company’s share of revenues, net of royalties and excluding revenue interests owned by others. When selling oil, NGLs, and gas on behalf of royalty owners or working interest owners, the Company is acting as an agent and, thus, reports the revenue on a net basis. To the extent actual volumes and prices of oil and natural gas sales are unavailable for a given reporting period because of timing or information not received from third parties, the expected sales volumes and prices for those properties are estimated and recorded.

 

Income taxes – The Company is an LLC, which is not subject to U.S. federal income taxes. Rather, the Company’s taxable income flows through to the owners, who are responsible for paying the applicable income taxes on the income allocated to them. For tax years beginning on or after January 1, 2018, the Company is subject to audit rules enacted as part of the Bipartisan Budget Act of 2015 (the Centralized Partnership Audit Regime). Under the Centralized Partnership Audit Regime, any IRS audit of the Company would be conducted at the Company level, and if the IRS determines an adjustment, the default rule is that the Company would pay an “imputed underpayment,” including interest and penalties, if applicable. The Company may, instead, elect to make a “push-out” election, in which case the partners for the year that is under audit would be required to take into account the adjustments on their own personal income tax returns.

 

The LLC Agreement does not stipulate how the Company will address imputed underpayments. If the Company receives an imputed underpayment, a determination will be made based on the relevant facts and circumstances that exist at that time. Any payments that the Company ultimately makes on behalf of its current partners will be reflected as a dividend, rather than as a tax expense, at the time that such dividend is declared.

 

The Company has not recorded any liabilities as of December 31, 2022 or 2021 related to uncertain tax provisions. As of December 31, 2022 or 2021, the Company made no provision for interest or penalties related to uncertain tax positions. The Company files income tax returns in the U.S. federal jurisdiction and in various states. There are currently no federal or state income tax examinations underway for these jurisdictions.

 

12
 

 

Nickel Road Operating LLC and Subsidiaries

Notes to Consolidated Financial Statements

 

 

Leases – In February 2016, the Financial Accounting Standards Board (the FASB) issued Accounting Standards Update (ASU) No. 2016-02, “Leases (Topic 842)” which amended the existing lease accounting guidance to require lessees to recognize a right of use asset and lease liability on the consolidated balance sheets for all leases with terms greater than 12 months. The Company adopted the new lease standard and all related amendments on January 1, 2022. The Company applied a modified retrospective transition approach when adopting this new guidance which resulted in no cumulative-effect adjustments to the opening balance of retained earnings. The Company also elected the package of practical expedients permitted under the transition guidance that retain the lease classification and initial direct costs for any leases that existed prior to adoption of the standard. In addition, the Company has not reassessed the accounting treatment of contracts entered into prior to adoption of the new lease guidance. The Company evaluated whether its contractual arrangements entered into on or after
January 1, 2022, contain leases. Specifically, the Company considered whether it can control the underlying asset and have the right to obtain substantially all of the economic benefits or outputs from the asset. The Company evaluated the contractual arrangements, including the agreements governing the operation of both the Company and Company’s ownership interests in oil and natural gas properties, and concluded the Company does not represent a lessee or lessor as defined in Topic 842. Accordingly, the adoption of Topic 842 had no impact on the Company’s consolidated financial statements and the Company has not recognized any lease liabilities or right-of-use assets relating to Topic 842.

 

Note 2 – Members’ Capital

 

The Company is a limited liability company with membership interests issued and held by various members. The LLC Agreement authorizes Class A units and Class B units. Class A members are eligible to receive distributions. Upon formation, the Company issued a total of approximately 19,000 Class A units to members in proportion to their initial contributions. As of December 31, 2022 and 2021, $64,025,830 in cumulative capital contributions had been received.

 

Upon formation, 100 Class B units were granted to certain executives. Class B units are intended to provide compensation to the Class B member upon a liquidation event, subject to returns as described in the LLC Agreement. The requirements to provide compensation to the Class B members had not been met under the arrangement, nor was it considered probable the requirements would be met. Therefore, the grant-date fair values were inconsequential, and no amounts were recorded as of December 31, 2022 and 2021 in the accompanying consolidated financial statements.

 

By the terms of the LLC Agreement, distributions occur according to their respective equity interests, as defined. For the years ending December 31, 2022 and 2021 the Company made distributions to members of approximately $58,000,000 and $0, respectively.

 

13
 

 

Nickel Road Operating LLC and Subsidiaries

Notes to Consolidated Financial Statements

 

 

Note 3 – Asset Retirement Obligations

 

Asset retirement obligations represent the estimated present value of the amount to plug, abandon, and remediate producing properties at the end of their productive lives in accordance with applicable laws. The following table summarizes the Company’s asset retirement obligation transactions for the years ending December 31, 2022 and 2021:

 

   2022   2021 
           
Asset retirement obligations, beginning of year  $1,201,468   $315,220 
           
Liabilities incurred during the year   209,652    859,363 
Change in estimated plugging costs   (106,690)   - 
Liabilities settled during the year   (185,440)   - 
Accretion of discount   48,711    26,885 
           
Asset retirement obligation, end of year  $1,167,701   $1,201,468 

 

Note 4 – Hedging and Derivative Financial Instruments

 

Commodity derivative agreements – The Company utilizes swap and collar contracts to hedge the effect of price changes on a portion of its future oil and natural gas production. The objective of the Company’s hedging activities and the use of derivative financial instruments is to achieve more predictable cash flows. The use of derivatives involves the risk that the counterparties to such instruments will be unable to meet the financial terms of such contracts. The derivative contracts may be terminated by a non-defaulting party in the event of default by one of the parties to the agreement.

 

The Company has elected not to apply hedge accounting to any of its derivative transactions, and, consequently, the Company recognizes mark-to-market gains and losses in earnings currently, rather than deferring such amounts in accumulated other comprehensive income for those commodity derivatives that would otherwise qualify as cash flow hedges. All derivative instruments are recorded on the balance sheet at fair value.

 

As of December 31, 2022, the Company had the following commodity derivative instruments outstanding through 2023, as summarized in the table below:

 

   Collars   Fixed-Price Swaps 
          

Weighted

Average

Contract Price

          

Weighted

Average

Contract

 
Commodity/Index/Maturity Period  Quantity   Units   Floor   Ceiling   Quantity   Units   Price 
Crude Oil                            
NYMEX                                   
2023   320,200    BBL    $60.00   $75.85    -         - 
                                    
Natural Gas                                   
NYMEX                                   
2023   195,200    MMBTU     3.91    4.89    -         - 
                                    
CIG                                   
2023   -         -    -    106,200    MMBTU     (0.14)

 

14
 

 

Nickel Road Operating LLC and Subsidiaries

Notes to Consolidated Financial Statements

 

 

Derivative liabilities fair value – The fair value of the derivative commodity contracts was a net liability of approximately $2,728,000 and $6,015,000 at December 31, 2022 and 2021, respectively. The following table details the fair value of derivatives recorded in the accompanying consolidated balance sheets, by category:

 

   Fair Value   Fair Value 
   December 31,   December 31, 
   2022   2021 
         
Derivative liability - current  $2,727,867   $5,952,686 
Derivative liability - non-current  $-   $61,958 

 

Derivative gain (loss) – The following table summarizes the components of the net derivative gain (loss) line item presented in the accompanying consolidated statements of operations during the years ended December 31:

 

   2022   2021 
         
Unrealized gain (loss) on derivatives  $3,286,777   $(4,403,945)
Realized loss on derivatives   (21,751,084)   (8,690,199)
           
Total loss on derivatives  $(18,464,307)  $(13,094,144)

 

Note 5 – Fair Value Measurements

 

The Company follows ASC 820, Fair Value Measurements and Disclosures, which establishes a hierarchy for the inputs utilized in measuring fair value. The hierarchy maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. The hierarchy is broken down into three levels based on the reliability of the inputs as follows:

 

Level 1 – Quoted prices for identical assets or liabilities in active markets;

 

Level 2 – Quoted prices for similar assets or liabilities in active markets; and

 

Level 3 – Unobservable inputs for the asset or liability, such as discounted cash models.

 

15
 

 

Nickel Road Operating LLC and Subsidiaries

Notes to Consolidated Financial Statements

 

 

The following tables present the Company’s assets and liabilities that are measured at fair value on a recurring basis as of December 31, 2022 and 2021:

 

   Fair Value Measurement at December 31, 2022 
   Level 1   Level 2   Level 3   Total 
                 
Derivative instruments  $    -   $2,727,867   $    -   $2,727,867 
                     
Total investments  $-   $2,727,867   $-   $2,727,867 

 

   Fair Value Measurement at December 31, 2021 
   Level 1   Level 2   Level 3   Total 
                 
Derivative instruments  $     -   $6,014,644   $   -   $6,014,644 
                     
Total investments  $-   $6,014,644   $-   $6,014,644 

 

The inputs used to determine such fair value are primarily based upon observable market data for similar instruments, including the forward curve for commodity prices based on quoted market prices and would be classified within Level 2.

 

Note 6 – Commitments and Contingencies

 

Government regulation – Many aspects of the oil and gas industry are extensively regulated by federal, state, and local governments in all areas in which the Company has operations. Regulations govern such things as drilling permits, environmental protection and pollution control, spacing of wells, the unitization and pooling of properties, reports concerning operations, royalty rates, and various other matters, including taxation. Oil and gas industry legislation and administrative regulations are periodically changed for a variety of political, economic, and other reasons. As of December 31, 2022 or 2021, the Company has not been fined or cited for any violations of governmental regulations that would have a material adverse effect upon the financial condition, capital expenditures, earnings, or competitive position of the Company in the oil and gas industry.

 

Litigation – From time to time, the Company may be involved in litigation related to claims arising out of its operations in the normal course of business. As of the date of this report, no legal proceedings are ongoing or pending that management believes could have a materially adverse effect upon the Company’s financial condition or results of operations.

 

Note 7 – Long-term Debt

 

Revolving loan – On February 22, 2021, the Company entered into a revolving loan agreement (the Loan Agreement) with a maturity of February 22, 2024. The Loan Agreement provides for a maximum revolving loan (the Revolving Loan) of $35,000,000 with an initial borrowing base of $10,000,000. In October 2022, the Loan Agreement was amended. The total borrowing base and sublimit increased to $30,000,000 for the Revolving Loan.

 

16
 

 

Nickel Road Operating LLC and Subsidiaries

Notes to Consolidated Financial Statements

 

 

All sums advanced under the Revolving Loan, together with all accrued but unpaid interest thereon, are due in full at maturity. The Loan Agreement requires the Company to maintain certain affirmative and negative covenants, including certain financial ratios defined in the Loan Agreement, and provides the lender with a first security interest in substantially all of the Company assets. The interest rate of the Revolving Loan is the lesser of the (1) Wall Street Journal prime rate, plus the applicable margin, or (2) the Maximum Rate as defined per the Loan Agreement. The interest rate as of December 31, 2022, was 8.75%. Commitment fees equal to 0.5% of the undrawn amount are payable quarterly under this agreement. The outstanding balance on the Revolving Loan as of December 31, 2022, was $25,036,000, net of debt issuance cost of approximately $64,000. The full outstanding balance of approximately $25,100,000 is due in full on the maturity date of February 22, 2024.

 

Term loan – On September 1, 2021, the Loan Agreement was amended to establish a term loan (the Term Loan) in the amount of $12,000,000 that matured on August 31, 2022. The Term Loan was payable in monthly principal installments commencing January 31, 2022, plus all accrued interest. Interest for the Term Loan was fixed at 5.25%. The Term Loan also provides the lender with a first security interest in substantially all of the Company assets. As of December 31, 2022, this loan matured and was paid off in full.

 

Interest expense related to the Revolving Loan and the Term Loan for the years ended December 31, 2022 and 2021, was approximately $795,000 and $387,000, respectively.

 

On March 30, 2023, the Company amended its Loan Agreement to provide for a maximum Revolving Loan of $50,000,000 which matures on February 22, 2026. As of the date of the amendment the borrowing base was increased to $35,000,000, with a sublimit of $25,000,000, and continues to be subject to regular redeterminations by the lender. Permitted distributions are subject to limitations defined within the amendment and required hedge transactions are amended such that as of December 31, 2022, and thereafter, so long as the borrowing base utilization exceeds 60%, the Company is required to maintain crude oil hedges of at least 60% of the Company’s anticipated crude oil production for a period of not less than 12 months, to be complied with on a quarterly basis.

 

In addition to the $25,000,000 sublimit, the amended Loan Agreement also allows for a new Term Loan in the amount of $10,000,000 which commences on the date of the amendment and continues through July 31, 2023, after which the Lender shall have no further commitment to make an advance on the Term Loan, so long as the aggregate advances do not exceed $10,000,000. The Term Loan shall be payable in monthly principal installments commencing on August 1, 2023, plus all accrued interest, and matures on July 1, 2024. The Term Loan bears interest at a rate equal to the sum of the Prime Rate, plus the Applicable Margin (as defined in the Loan Agreement); provided, however, that the interest rate on the Term Note shall never fall below 3.75%.

 

17
 

 

Nickel Road Operating LLC and Subsidiaries

Notes to Consolidated Financial Statements

 

 

Note 8 – Related Parties

 

Management fees – The Company receives management services from Nickel Road Management LLC under the Management Services Agreement dated March 30, 2018 (the Services Agreement). In accordance with the Service Agreement, Nickel Road Management LLC provides management services, including office space and employment of all employees. The Company pays Nickel Road Management LLC a monthly amount equal to the allocated costs for monthly general and administrative expenses approved by the managers (the Development Plan and Budget). The Services Agreement will remain in effect for three years and will automatically extend for successive one-year terms coinciding with the period covered by the Development Plan and Budget unless terminated under the terms of the Services Agreement. For the years ended December 31, 2022 and 2021, the Company incurred service agreement reimbursement costs of approximately $4,122,000 and $3,668,000, respectively. For the years ending December 31, 2022 and 2021, the Company had approximately $256,000 and $88,000 in management fees due to Nickel Road Management LLC, respectively.

 

Note 9 – Estimated Quantities of Oil and Gas Reserves (unaudited)

 

Costs Incurred

 

The following table sets forth the costs incurred for property acquisitions, exploration, and development activities:

 

   Years Ended December 31, 
   2022   2021 
Acquisition costs          
Proved  $1,028,411   $6,537,937 
Unproved   1,213,079    400,638 
Exploration costs          
Geological and geophysical   -    112,627 
Development costs   34,719,791    50,924,901 
Total costs incurred  $36,961,281   $57,976,103 

 

18
 

 

Nickel Road Operating LLC and Subsidiaries

Notes to Consolidated Financial Statements

 

 

Oil and Natural Gas Reserves

 

The following table sets forth the Company’s net proved oil and gas reserves and the changes in net proved oil and gas reserves for the years ended December 31, 2020, 2021, and 2022. All of the Company’s proved reserves are located in the state of Colorado in the United States of America.

 

   Oil (Bbl)   Gas (Mcf)   Liquids (Bbl)   BOE 
Proved reserves at December 31, 2020   7,523,571    15,643,734    4,479,670    14,610,530 
Revisions   (713,886)   (2,534,693)   (1,003,525)   (2,139,860)
Extensions   2,901,457    4,087,821    800,146    4,382,907 
Divestiture of reserves   -    -    -    - 
Acquisition of reserves   -    -    -    - 
Production   (561,018)   (810,683)   (150,232)   (846,364)
                     
Proved reserves at December 31, 2021   9,150,124    16,386,179    4,126,059    16,007,213 
Revisions   (1,806,746)   875,476    (850,846)   (2,511,679)
Extensions   2,238,184    5,752,187    1,031,821    4,228,703 
Divestiture of reserves   (1,705,171)   (3,197,920)   (785,350)   (3,023,508)
Acquisition of reserves   -    -    -    - 
Production   (618,787)   (919,804)   (161,585)   (933,673)
                     
Proved reserves at December 31, 2022   7,257,604    18,896,118    3,360,099    13,767,056 
                     
Proved developed reserves at:                    
December 31, 2020   1,415,209    4,193,520    1,010,929    3,125,058 
December 31, 2021   3,731,662    6,669,807    1,182,570    6,025,867 
December 31, 2022   2,599,724    6,452,542    1,103,821    4,778,969 
                     
Proved undeveloped reserves at:                    
December 31, 2020   6,108,362    11,450,214    3,468,741    11,485,472 
December 31, 2021   5,418,462    9,716,372    2,943,489    9,981,346 
December 31, 2022   4,657,880    12,443,576    2,256,278    8,988,087 

 

19
 

 

Nickel Road Operating LLC and Subsidiaries

Notes to Consolidated Financial Statements

 

 

Note 10 – Standardized Measure of Discounted Future Net Cash Flows (unaudited)

 

The standardized measure of discounted future net cash flows from the Company’s proved oil and gas reserves is presented in the following table:

 

   Years Ended December 31, 
   2022   2021 
         
Future cash inflows  $883,016,626   $762,792,704 
Future production costs and taxes   (293,548,055)   (202,378,828)
Future development costs   (147,621,778)   (90,494,378)
Future income tax expense   -    - 
           
Future net cash flows   441,846,793    469,919,498 
10% annual discount for estimated timing of cash flows   (197,175,725)   (209,994,570)
           
Standardized measure of discounted future net cash flows  $244,671,068   $259,924,928 

 

The following are the principal sources of change in the standardized measure of discounted future net cash flows from the Company’s proved oil and gas reserves:

 

   Years Ended December 31, 
   2022   2021 
         
Balance, beginning of year  $259,924,928   $57,068,129 
Net change in prices and production costs   66,158,782    124,014,280 
Net change in future development costs   (18,682,942)   447,826 
Oil & Gas net revenue   (57,149,450)   (37,892,101)
Extensions   52,216,906    118,176,519 
Acquisition of reserves   -    - 
Divestiture of reserves   (48,657,637)   - 
Revisions of previous quantity estimates   (49,945,233)   (14,044,829)
Previously estimated development costs incurred   15,239,276    - 
Net change in taxes   -    - 
Accretion of discount   25,992,493    5,706,813 
Changes in timing and other   (426,055)   6,448,291 
           
Balance, end of year  $244,671,068   $259,924,928 

 

Estimated net future cash flows represent an estimate of future net revenues from the production of proved reserves using average sales prices along with estimates of the operating costs, production taxes, and future development and abandonment costs necessary to produce such reserves. The Company’s proved reserves as of December 31, 2022 and 2021 were measured using commodity prices based on the twelve-month unweighted arithmetic mean of the first day of the month price for the period January through December. No deduction has been reflected for depreciation, depletion, or any direct cost, such as general and administrative costs.

 

Note 11 – Subsequent Events

 

The Company has reviewed all subsequent events through March 30, 2023, the date the consolidated financial statements were available to be issued.

 

20