Exhibit 99.5
Nickel Road Operating LLC and Subsidiaries
As of June 30, 2024 and December 31, 2023 and for the Six Months
Ended June 30, 2024 and 2023
Table of Contents
Consolidated Financial Statements
Nickel Road Operating LLC and Subsidiaries
Consolidated Balance Sheets
June 30, 2024 and December 31, 2023
| June 30, 2024 | December 31, 2023 | |||||||
| ASSETS | ||||||||
| CURRENT ASSETS | ||||||||
| Cash and cash equivalents | $ | 792,717 | $ | 336,115 | ||||
| Joint interest receivable | 470,287 | 897,804 | ||||||
| Accrued oil and gas sales | 4,800,319 | 5,658,034 | ||||||
| Derivative asset, current | - | 270,925 | ||||||
| Prepaid expenses | 510,644 | 426,404 | ||||||
| Total current assets | 6,573,967 | 7,589,282 | ||||||
| OIL AND GAS PROPERTIES, at cost (successful efforts method) | ||||||||
| Proved properties, net of impairment | 138,942,119 | 137,855,719 | ||||||
| Unproved properties, net of impairment | 1,932,242 | 1,690,690 | ||||||
| Accumulated depletion | (48,070,257 | ) | (41,010,449 | ) | ||||
| Total oil and gas properties | 92,804,104 | 98,535,960 | ||||||
| OTHER NON-CURRENT ASSETS | ||||||||
| Right-of-use asset, net | 230,910 | 325,933 | ||||||
| TOTAL ASSETS | $ | 99,608,981 | $ | 106,451,175 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
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Nickel Road Operating LLC and Subsidiaries
Consolidated Balance Sheets
June 30, 2024 and December 31, 2023
| June 30, 2024 | December 31, 2023 | |||||||
| LIABILITIES AND MEMBERS’ CAPITAL | ||||||||
| CURRENT LIABILITIES | ||||||||
| Accounts payable | $ | 776,716 | $ | 1,801,926 | ||||
| Accrued liabilities | 9,702,916 | 12,293,167 | ||||||
| Current maturities of long-term debt | - | 3,800,000 | ||||||
| Short-term lease liability | 197,116 | 192,384 | ||||||
| Total current liabilities | 10,676,748 | 18,087,477 | ||||||
| NON-CURRENT LIABILITIES | ||||||||
| Long-term debt, net of current portion and deferred financing costs | 10,942,143 | 16,660,116 | ||||||
| Asset retirement obligations | 1,380,706 | 1,347,493 | ||||||
| Long-term lease liability | 33,794 | 133,550 | ||||||
| Total non-current liabilities | 12,356,643 | 18,141,159 | ||||||
| Total liabilities | 23,033,391 | 36,228,636 | ||||||
| COMMITMENTS AND CONTINGENCIES (Note 7) | ||||||||
| MEMBERS’ CAPITAL | ||||||||
| Contributed capital | 64,025,830 | 64,025,830 | ||||||
| Distributed capital | (64,300,000 | ) | (64,300,000 | ) | ||||
| Retained earnings | 76,849,760 | 70,496,709 | ||||||
| Total members’ capital | 76,575,590 | 70,222,539 | ||||||
| TOTAL LIABILITIES AND MEMBERS’ CAPITAL | $ | 99,608,981 | $ | 106,451,175 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
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Nickel Road Operating LLC and Subsidiaries
Consolidated Statements of Income
Periods Ended June 30, 2024 and 2023
| 2024 | 2023 | |||||||
| REVENUES | ||||||||
| Oil and gas sales | 21,665,888 | $ | 22,473,667 | |||||
| Total revenues | 21,665,888 | 22,473,667 | ||||||
| OPERATING EXPENSES | ||||||||
| Production taxes | 1,663,238 | 1,723,041 | ||||||
| Lease operating | 2,936,033 | 2,359,390 | ||||||
| Depreciation, depletion, and amortization | 7,093,021 | 9,187,210 | ||||||
| General and administrative | 2,203,368 | 2,238,576 | ||||||
| Total operating expenses | 13,895,660 | 15,508,217 | ||||||
| INCOME FROM OPERATIONS | 7,770,228 | 6,965,450 | ||||||
| OTHER INCOME (EXPENSE) | ||||||||
| Interest expense, net | (903,475 | ) | (1,126,850 | ) | ||||
| Realized gain (loss) on derivative instruments | 223,485 | (288,438 | ) | |||||
| Unrealized gain (loss) on derivative instruments | (270,925 | ) | 2,578,523 | |||||
| Other income (expense) | (466,262 | ) | (35,206 | ) | ||||
| Total other income (expense) | (1,417,177 | ) | 1,128,029 | |||||
| NET INCOME | $ | 6,353,051 | $ | 8,093,479 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
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Nickel Road Operating LLC and Subsidiaries
Consolidated Statements of Changes in Members’ Capital
Periods Ended June 30, 2024 and 2023
| Class A | Class B | Retained | Total Members’ | |||||||||||||
| Capital | Capital | Earnings | Equity | |||||||||||||
| BALANCE, January 1, 2023 | $ | 6,025,830 | $ | - | $ | 50,736,104 | $ | 56,761,934 | ||||||||
| Net income | - | - | 8,093,479 | 8,093,479 | ||||||||||||
| BALANCE, June 30, 2023 | $ | 6,025,830 | $ | - | $ | 58,829,583 | $ | 64,855,413 | ||||||||
| BALANCE, January 1, 2024 | $ | (274,170 | ) | $ | - | $ | 70,496,709 | $ | 70,222,539 | |||||||
| Net income | - | - | 6,353,051 | 6,353,051 | ||||||||||||
| BALANCE, June 30, 2024 | $ | (274,170 | ) | $ | - | $ | 76,849,760 | $ | 76,575,590 | |||||||
The accompanying notes are an integral part of these consolidated financial statements.
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Nickel Road Operating LLC and Subsidiaries
Consolidated Statements of Cash Flows
Periods Ended June 30, 2024 and 2023
| 2024 | 2023 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
| Net income | $ | 6,353,051 | $ | 8,093,479 | ||||
| Adjustments to reconcile net income to net cash from operating activities | ||||||||
| Depreciation, depletion, and amortization | 7,093,021 | 9,187,210 | ||||||
| Amortization of debt issuance costs | 32,706 | 45,677 | ||||||
| Unrealized (gain) loss on derivative instruments | 270,925 | (2,578,523 | ) | |||||
| Change in operating assets and liabilities | ||||||||
| Accounts receivable | 1,285,232 | (1,002,336 | ) | |||||
| Prepaid expenses | (84,241 | ) | 408,481 | |||||
| Accounts payables | (1,025,210 | ) | (497,080 | ) | ||||
| Due from/(Due to) related party | 26,208 | (1,022 | ) | |||||
| Accrued liabilities | (2,616,460 | ) | 4,105,052 | |||||
| Net cash from operating activities | 11,335,232 | 17,760,938 | ||||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
| Purchases of oil and gas properties | (1,327,952 | ) | (12,394,208 | ) | ||||
| Net cash from investing activities | (1,327,952 | ) | (12,394,208 | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| Proceeds from short-term and long-term debt | 26,700,000 | 26,050,000 | ||||||
| Repayment of short-term and long-term debt | (36,250,000 | ) | (30,250,000 | ) | ||||
| Debt issuance costs | (678 | ) | (158,641 | ) | ||||
| Net cash from financing activities | (9,550,678 | ) | (4,358,641 | ) | ||||
| NET CHANGE IN CASH AND CASH EQUIVALENTS | 456,602 | 1,008,089 | ||||||
| CASH AND CASH EQUIVALENTS, beginning of period | 336,115 | 3,476,039 | ||||||
| CASH AND CASH EQUIVALENTS, end of period | $ | 792,717 | $ | 4,484,128 | ||||
| SUPPLEMENTAL CASH FLOW INFORMATION | ||||||||
| Cash paid for interest | $ | 845,735 | $ | 1,135,336 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
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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.” The consolidated interim financial statements follow the same accounting policies and methods of their application as the most recent annual financial statements.
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 or by reference to active markets. 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.
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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.
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 credit losses has been recorded as of June 30, 2024 and December 31, 2023. The accounts receivable and joint interest receivable balance on January 1, 2024 and 2023 was approximately $6,556,000 and $4,059,000, respectively.
Significant customers – As of and for the period ended June 30, 2024, the Company’s largest customer generated approximately 90% of sales, and one customer accounted for approximately 96% of accrued oil and gas sales.
As of and for the period ended June 30, 2023, the Company’s largest customers generated approximately 90% of sales, and one customer accounted for approximately 96% 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 periods ended June 30, 2024 and 2023 was approximately $7,060,000 and $9,158,000, 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 during the six-months ended June 30, 2024 and 2023.
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. During the six-months ended June 30, 2024 and 2023, management determined there was no impairment of unproved properties.
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Nickel Road Operating LLC and Subsidiaries
Notes to Consolidated Financial Statements
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 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 March 1, 2023, the Company entered into an Asset Purchase Agreement with a third party to sell the Company’s royalty interests in oil and gas properties for $7,000,000. The transaction was closed on August 31, 2023.
On January 11, 2024, the Company entered into an Asset Purchase Agreement with Prairie Operating Co., LLC (Prairie) to sell all of the Company’s interests in its oil and gas properties effective February 1, 2024, for cash proceeds of $83.0 million, subject to customary closing adjustments, and additional cash consideration of $11.5 million for existing permitted locations drilled by Prairie.
On August 15, 2024, the Company signed an amendment to the Asset Purchase Agreement (the Transaction) with Prairie. The amendment increased the cash proceeds for all of the Company’s oil and gas properties to $84.5 million and changed the effective date to January 1, 2024, subject to customary closing adjustments. Additionally, of the $9 million currently held in an escrow account, Nickel Road Operating, LLC will receive $6 million and Prairie will receive $3 million.
The transaction has not closed as of the date the consolidated financial statements were available to be issued.
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 consolidated balance sheets 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 income. 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.
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Nickel Road Operating LLC and Subsidiaries
Notes to Consolidated Financial Statements
Deferred financing costs – Deferred financing costs are capitalized and amortized over the contractual term of the related obligations. Debt issuance costs of approximately $444,000 was recognized within long-term debt as a reduction of the outstanding balance as of June 30, 2024 and December 31, 2023, respectively. During the periods ended June 30, 2024 and 2023 approximately $33,000 and $46,000 of associated amortization expense was recorded as interest expense. See Note 8 for further details.
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 natural 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 natural 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, NGLs and natural gas, will decrease if market prices decline. The sales of oil, NGLs, and natural gas, as presented on the condensed consolidated statements of income, represent the Company’s share of revenues, net of royalties and excluding revenue interests owned by others. When selling oil, NGLs, and natural 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, NGLs, 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 Internal Revenue Service (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 period 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 June 30, 2024 or December 31, 2023 related to uncertain tax provisions. As of June 30, 2024 and December 31, 2023, 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.
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Nickel Road Operating LLC and Subsidiaries
Notes to Consolidated Financial Statements
Leases – The Company accounts for leases in accordance with ASC Topic 842, Leases, (Topic 842), which requires lessees to recognize operating and finance leases with terms greater than 12 months on the consolidated balance sheet. The Company evaluates a contractual arrangement at its inception to determine if it is a lease or contains an identifiable lease component. Certain leases may contain both lease and non-lease components. The Company’s policy for all asset classes is to combine lease and non-lease components together and account for the arrangement as a single lease.
Certain assumptions and judgments made by the Company when evaluating a contract that meets the definition of a lease under Topic 842 include those to determine the discount rate and lease term. Unless implicitly defined, the Company determines the present value of future lease payments using an estimated incremental borrowing rate based on a yield curve analysis that factors in certain assumptions, including the term of the lease and credit rating of the Company at lease inception. The Company evaluates each contract containing a lease arrangement at inception to determine the length of the lease term when recognizing a right-of-use (ROU) asset and corresponding lease liability. When determining the lease term, options available to extend or early terminate the arrangement are evaluated and included when it is reasonably certain an option will be exercised. Exercising an early termination option may result in an early termination penalty depending on the terms of the underlying agreement. The Company excludes from the balance sheet leases with terms that are less than one year.
An ROU asset represents a lessee’s right to use an underlying asset for the lease term, while the associated lease liability represents the lessee’s obligations to make lease payments. At the commencement date, which is the date on which a lessor makes an underlying asset available for use by a lessee, a lease ROU asset and corresponding lease liability is recognized based on the present value of the future lease payments. The initial measurement of lease payments may also be adjusted for certain items, including options that are reasonably certain to be exercised, such as options to purchase the asset at the end of the lease term, or options to extend or early terminate the lease. Excluded from the initial measurement of an ROU asset and corresponding lease liability are certain variable lease payments, such as payments made that vary depending on actual usage or performance.
Subsequent to initial measurement, costs associated with the Company’s operating leases are either expensed or capitalized depending on how the underlying ROU asset is utilized and in accordance with GAAP requirements. When calculating the Company’s ROU asset and liability for a contractual arrangement that qualifies as an operating lease, the Company considers all of the necessary payments made or that are expected to be made upon commencement of the lease. As discussed above, excluded from the initial measurement are certain variable lease payments. Please refer to Note 6 – Leases for additional discussion.
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Nickel Road Operating LLC and Subsidiaries
Notes to Consolidated Financial Statements
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. As of June 30, 2024 and December 31, 2023, approximately 64.7 Class A units were outstanding to members.
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 June 30, 2024 and December 31, 2023 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 periods ending June 30, 2024 and 2023 the Company made no distributions to members.
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 periods ending June 30, 2024 and 2023:
| 2024 | 2023 | |||||||
| Asset retirement obligations, beginning of period | $ | 1,347,493 | $ | 1,167,701 | ||||
| Accretion of discount | 33,213 | 28,750 | ||||||
| Asset retirement obligation, end of period | $ | 1,380,706 | $ | 1,196,451 | ||||
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 consolidated balance sheet at fair value.
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Nickel Road Operating LLC and Subsidiaries
Notes to Consolidated Financial Statements
The Company had no commodity derivative instruments outstanding as of June 30, 2024. As of December 31, 2023, the Company had the following commodity derivative instruments outstanding:
| Collars | ||||||||||||||||
| Weighted Average Contract Price | ||||||||||||||||
| Commodity/Index/Maturity Period | Quantity | Units | Floor | Ceiling | ||||||||||||
| Crude Oil | ||||||||||||||||
| NYMEX | ||||||||||||||||
| 2024 | 247,100 | BBL | $ | 66.55 | $ | 79.15 | ||||||||||
Derivative assets fair value – The fair value of the derivative commodity contracts was a net asset of approximately $0 and $270,925 at June 30, 2024 and December 31, 2023, respectively. The following table details the fair value of derivatives recorded in the accompanying consolidated balance sheets, by category:
| Fair Value | Fair Value | |||||||
| June 30, | December 31, | |||||||
| 2024 | 2023 | |||||||
| Derivative asset - current | $ | - | $ | 270,925 | ||||
| Total derivative assets | $ | - | $ | 270,925 | ||||
Derivative gain (loss) – The following table summarizes the components of the net derivative gain (loss) line item presented in the accompanying consolidated statements of income during the periods ended June 30, 2024 and 2023:
| 2024 | 2023 | |||||||
| Unrealized gain (loss) on derivatives | $ | (270,925 | ) | $ | 2,578,523 | |||
| Realized gain (loss) on derivatives | 223,485 | (288,438 | ) | |||||
| Net gain (loss) on derivatives | $ | (47,440 | ) | $ | 2,290,085 | |||
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.
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Nickel Road Operating LLC and Subsidiaries
Notes to Consolidated Financial Statements
The Company did not have any assets or liabilities measured at fair value on a recurring basis as of June 30, 2024. The following table presents the Company’s assets and liabilities that are measured at fair value on a recurring basis as of December 31, 2023:
| Fair Value Measurement at December 31, 2023 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Derivative instruments | $ | - | $ | 270,925 | $ | - | $ | 270,925 | ||||||||
| Total assets and liabilities | ||||||||||||||||
| measured at fair value | $ | - | $ | 270,925 | $ | - | $ | 270,925 | ||||||||
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 – Leases
The Company leases a compressor under a non-cancellable operating lease agreement. It has been determined that the lease does not constitute a finance lease. Operating lease ROU assets and liabilities are recognized based on the present value of future minimum lease payments over the lease term at commencement date. The Company believes any option to terminate is not reasonably certain for the operating lease agreement.
For the period ended June 30, 2024, components of lease expense were as follows:
| Total lease costs (operating and short-term) | $ | 588,190 |
For the period ended June 30, 2023, components of lease expense were as follows:
| Total lease costs (operating and short-term) | $ | 504,034 |
All components of lease costs are expensed within lease operating expenses on the consolidated statement of income.
There was not any lease expense under ASC 842 during the period ended June 30, 2023.
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Nickel Road Operating LLC and Subsidiaries
Notes to Consolidated Financial Statements
For the period ended June 30, 2024, supplemental cash flow information related to leases was as follows:
| Cash paid for amounts included in measurement of lease liabilities | ||||
| Operating cash flows used for operating leases (including short-term) | $ | 102,000 | ||
| Right-of-use assets obtained in exchange for lease obligations (non-cash) | ||||
| Operating leases | $ | 388,011 | ||
| Weighted-average remaining lease term (years) | ||||
| Operating leases | 1.2 | |||
| Weighted-average discount rate | ||||
| Operating leases | 4.9 | % |
The following is the future maturities of the annual undiscounted cash flows of the operating lease liability as of June 30, 2024:
| Twelve Month Period Ending June 30, | ||||
| 2025 | $ | 204,000 | ||
| 2026 | 34,000 | |||
| Total minimum lease payments | 238,000 | |||
| Less imputed interest | (7,090 | ) | ||
| Present value of lease liability | $ | 230,910 | ||
Note 7 – 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 June 30, 2024 and December 31, 2023, 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.
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Nickel Road Operating LLC and Subsidiaries
Notes to Consolidated Financial Statements
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 8 – 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.
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 June 30, 2024, was 9.25%. 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 June 30, 2024, was approximately $10,942,000, net of debt issuance cost of approximately $91,000. The outstanding balance of approximately $11,033,000 is due in full on the maturity date of February 22, 2026.
On March 31, 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 September 30, 2023, 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.
On August 31, 2023, the Company amended its Loan Agreement to decrease the borrowing base to $33,000,000.
On January 31, 2024, the Company received a waiver of the minimum hedge transaction requirement from the lender through July 1, 2024. The Revolving Loan is reflected as a long-term debt on the Company’s consolidated balance sheet as of June 30, 2024, as the Company’s borrowing base utilization is below the 60% requirement which would require hedge transactions, as described above. However, should the Company increase their utilization above 60%, then they will need to reapply required hedges, receive another waiver from the lender, or repay the loan in full.
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Nickel Road Operating LLC and Subsidiaries
Notes to Consolidated Financial Statements
March 2023 Term Loan – The March 2023 amended Loan Agreement also allows for a new Term Loan (March 2023 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 March 2023 Term Loan, so long as the aggregate advances do not exceed $10,000,000. The March 2023 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 March 2023 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 March 2023 Term Loan shall never fall below 3.75%. The outstanding balance on the March 2023 Term Loan as of June 30, 2024, was $0. The full outstanding balance is due in full on the maturity date of July 1, 2024.
Interest expense related to the Revolving Loan and the Term Loans for the periods ended June 30, 2024 and 2023, was approximately $1,131,000 and $911,000, respectively.
Note 9 – Related Parties
Management fees – The Company receives management services from Nickel Road Management LLC under the Management Services Agreement dated March 31, 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 periods ended June 30, 2024 and 2023, the Company incurred service agreement reimbursement costs of approximately $2,152,000 and $2,111,000, respectively. For the periods ending June 30, 2024 and 2023, the Company had approximately $140,000 and $1,000 in management fees due to Nickel Road Management LLC, respectively. These balances are included accrued liabilities on the consolidated balance sheets.
Note 10 – Subsequent Events
As further disclosed in Note 1, on August 15, 2024, the Company signed an amendment to the Asset Purchase Agreement (the Transaction) with Prairie.
The Company has reviewed all subsequent events through August 29, 2024, the date the consolidated financial statements were available to be issued.
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