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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended March 31, 2024

Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from to

Commission File Number 001-31759

PHX MINERALS INC.

(Exact name of registrant as specified in its charter)

 

Delaware

73-1055775

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

1320 South University Drive, Suite 720, Fort Worth, Texas 76107

(Address of principal executive offices)

Registrant's telephone number including area code (405) 948-1560

Securities registered pursuant in Section 12(b) of the Act:

 

Title of each class

 

Trading Symbol(s)

 

Name of each exchange on which registered

Common Stock, $0.01666 par value

 

PHX

 

New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No

Outstanding shares of Common Stock at May 1, 2024: 37,458,487 shares.


INDEX

 

 

Part I

 

Financial Information

Page

 

 

 

 

 

 

 

 

Item 1

 

Condensed Financial Statements

1

 

 

 

 

 

 

 

 

 

 

Condensed Balance Sheets – March 31, 2024 and December 31, 2023

1

 

 

 

 

 

 

 

 

 

 

Condensed Statements of Income – Three months ended March 31, 2024 and 2023

2

 

 

 

 

 

 

 

 

 

 

Statements of Stockholders’ Equity – Three months ended March 31, 2024 and 2023

3

 

 

 

 

 

 

 

 

 

 

Condensed Statements of Cash Flows – Three months ended March 31, 2024 and 2023

4

 

 

 

 

 

 

 

 

 

 

Notes to Condensed Financial Statements

5

 

 

 

 

 

 

 

 

Item 2

 

Management's Discussion and Analysis of Financial Condition and Results of Operations

14

 

 

 

 

 

 

 

 

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 5

 

Other Information

23

 

 

 

 

 

 

 

 

Item 6

 

Exhibits

24

 

 

 

 

 

 

 

 

Signatures

24

 


Special Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q (“Form 10-Q”) includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. In some cases, you can identify forward-looking statements in this Form 10-Q by words such as “anticipate,” “project,” “intend,” “estimate,” “expect,” “believe,” “predict,” “budget,” “projection,” “goal,” “plan,” “forecast,” “target” or similar expressions.

All statements, other than statements of historical facts, included in this Form 10-Q that address activities, events or developments that we expect or anticipate will or may occur in the future are forward-looking statements. Forward-looking statements may include, but are not limited to, statements relating to: our ability to execute our business strategies; the volatility of realized natural gas and oil prices; the level of production on our properties; estimates of quantities of natural gas, oil and NGL reserves and their values; general economic or industry conditions; public health crises or pandemics, and any related actions taken by businesses and governments; legislation or regulatory requirements; conditions of the securities markets; our ability to raise capital; changes in accounting principles, policies or guidelines; financial or political instability; acts of war or terrorism; title defects in the properties in which we invest; and other economic, competitive, governmental, regulatory or technical factors affecting our properties, operations or prices.

We caution you that the forward-looking statements contained in this Form 10-Q are subject to risks and uncertainties, many of which are beyond our control, incident to the exploration for, and development, production and sale of, natural gas, oil, and NGLs. These risks include, but are not limited to, the risks described in Item 1A of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2023 (“Annual Report”), and any quarterly reports on Form 10-Q filed subsequently thereto, including any risks described in Item 1A of this Form 10-Q. Investors should also read the other information in this Form 10-Q and the Annual Report where risk factors are presented and further discussed.

Should one or more of the risks or uncertainties described above or elsewhere in this Form 10-Q occur, or should underlying assumptions prove incorrect, our actual results and plans could differ materially from those expressed in any forward-looking statements. Any forward-looking statement speaks only as of the date of which such statement is made, and we undertake no obligation to correct or update any forward-looking statement, whether as a result of new information, future events or otherwise, except as required by applicable law.

Except as required by applicable law, all forward-looking statements attributable to us are expressly qualified in their entirety by this cautionary statement. This cautionary statement should be considered in connection with any subsequent written or oral forward-looking statements that we or persons acting on our behalf may issue.

 


Glossary of Certain Terms

 

The following is a glossary of certain accounting, oil and natural gas industry and other defined terms used in this Form 10-Q:

 

ASC

Accounting Standards Codification.

ASU

Accounting Standards Update.

Bbl

Barrel.

Board

Board of directors of the Company.

BTU

British Thermal Units.

Common Stock

Common Stock, par value $0.01666 per share, of the Company.

completion

The process of treating a drilled well followed by the installation of permanent equipment for the production of crude oil and/or natural gas.

DD&A

Depreciation, depletion and amortization.

FASB

The Financial Accounting Standards Board.

field

An area consisting of a single reservoir or multiple reservoirs all grouped on, or related to, the same individual geological structural feature or stratigraphic condition. The field name refers to the surface area, although it may refer to both the surface and the underground productive formations.

G&A

General and administrative costs.

GAAP

United States generally accepted accounting principles.

Independent Consulting Petroleum Engineer(s)

Cawley, Gillespie & Associates.

LOE

Lease operating expense.

MCF

Thousand cubic feet.

MCFE

Natural gas stated on an MCF basis and crude oil and natural gas liquids converted to a thousand cubic feet of natural gas equivalent by using the ratio of one Bbl of crude oil or natural gas liquids to six MCF of natural gas.

Mmbtu

Million BTU.

minerals, mineral acres or mineral interests

Fee mineral acreage owned in perpetuity by the Company.

NGL

Natural gas liquids.

NYMEX

New York Mercantile Exchange.

play

Term applied to identified areas with potential oil and/or natural gas reserves.

proved reserves

The quantities of crude oil and natural gas, which, by analysis of geoscience and engineering data, can be estimated with reasonable certainty to be economically producible from a given date forward, from known reservoirs and under existing economic conditions, operating methods, and government regulations prior to the time at which contracts providing the right to operate expire, unless evidence indicates renewal is reasonably certain.

royalty interest

Well interests in which the Company does not pay a share of the costs to drill, complete and operate a well but receives a smaller proportionate share (as compared to a working interest) of production.

SEC

The United States Securities and Exchange Commission.

SOFR

The Secured Overnight Financing Rate.

undeveloped acreage

Acreage on which wells have not been drilled or completed to a point that would permit the production of commercial quantities of crude oil and/or natural gas.

working interest

Well interests in which the Company pays a share of the costs to drill, complete and operate a well and receives a proportionate share of production.

WTI

West Texas Intermediate.

 

References to natural gas and oil properties

References to natural gas and oil properties in this Form 10-Q inherently include NGL associated with such properties.


 

 

PART I FINANCIAL INFORMATION

 

ITEM 1 CONDENSED FINANCIAL STATEMENTS

 

PHX MINERALS INC.

CONDENSED BALANCE SHEETS

 

 

March 31, 2024

 

 

December 31, 2023

 

Assets

 

(unaudited)

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

1,625,749

 

 

$

806,254

 

Natural gas, oil, and NGL sales receivables (net of $0 allowance for uncollectable accounts)

 

 

3,683,671

 

 

 

4,900,126

 

Refundable income taxes

 

 

455,553

 

 

 

455,931

 

Derivative contracts, net

 

 

2,400,390

 

 

 

3,120,607

 

Other

 

 

668,705

 

 

 

878,659

 

Total current assets

 

 

8,834,068

 

 

 

10,161,577

 

 

 

 

 

 

 

 

Properties and equipment at cost, based on successful efforts accounting:

 

 

 

 

 

 

Producing natural gas and oil properties

 

 

212,852,807

 

 

 

209,082,847

 

Non-producing natural gas and oil properties

 

 

56,150,263

 

 

 

58,820,445

 

Other

 

 

1,360,614

 

 

 

1,360,614

 

 

 

 

270,363,684

 

 

 

269,263,906

 

Less accumulated depreciation, depletion and amortization

 

 

(116,177,898

)

 

 

(114,139,423

)

Net properties and equipment

 

 

154,185,786

 

 

 

155,124,483

 

 

 

 

 

 

 

 

Derivative contracts, net

 

 

-

 

 

 

162,980

 

Operating lease right-of-use assets

 

 

537,685

 

 

 

572,610

 

Other, net

 

 

429,486

 

 

 

486,630

 

 

 

 

 

 

 

 

Total assets

 

$

163,987,025

 

 

$

166,508,280

 

 

 

 

 

 

 

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable

 

$

621,191

 

 

$

562,607

 

Current portion of operating lease liability

 

 

236,465

 

 

 

233,390

 

Accrued liabilities and other

 

 

1,100,976

 

 

 

1,215,275

 

Total current liabilities

 

 

1,958,632

 

 

 

2,011,272

 

 

 

 

 

 

 

 

Long-term debt

 

 

30,750,000

 

 

 

32,750,000

 

Deferred income taxes, net

 

 

6,782,969

 

 

 

6,757,637

 

Asset retirement obligations

 

 

1,073,025

 

 

 

1,062,139

 

Derivative contracts, net

 

 

158,620

 

 

 

-

 

Operating lease liability, net of current portion

 

 

635,506

 

 

 

695,818

 

 

 

 

 

 

 

 

Total liabilities

 

 

41,358,752

 

 

 

43,276,866

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

Common Stock, $0.01666 par value; 54,000,500 shares authorized and
  
36,121,723 issued at March 31, 2024; 54,000,500 shares authorized and 36,121,723 issued at December 31, 2023

 

 

601,788

 

 

 

601,788

 

Capital in excess of par value

 

 

42,403,417

 

 

 

41,676,417

 

Deferred directors' compensation

 

 

1,425,523

 

 

 

1,487,590

 

Retained earnings

 

 

78,717,910

 

 

 

80,022,839

 

 

 

 

123,148,638

 

 

 

123,788,634

 

Less treasury stock, at cost; 122,785 shares at March 31, 2024, and 131,477 shares
   at December 31, 2023

 

 

(520,365

)

 

 

(557,220

)

Total stockholders' equity

 

 

122,628,273

 

 

 

123,231,414

 

Total liabilities and stockholders' equity

 

$

163,987,025

 

 

$

166,508,280

 

 

(The accompanying notes are an integral part of these condensed financial statements.)

(1)


 

PHX MINERALS INC.

CONDENSED STATEMENTS OF INCOME

 

 

 

Three Months Ended March 31,

 

 

 

2024

 

 

2023

 

Revenues:

 

(unaudited)

 

Natural gas, oil and NGL sales

 

$

7,090,208

 

 

$

11,857,247

 

Lease bonuses and rental income

 

 

151,718

 

 

 

313,150

 

Gains (losses) on derivative contracts

 

 

627,492

 

 

 

3,802,820

 

 

 

$

7,869,418

 

 

$

15,973,217

 

Costs and expenses:

 

 

 

 

 

 

Lease operating expenses

 

 

332,409

 

 

 

574,942

 

Transportation, gathering and marketing

 

 

843,504

 

 

 

1,128,756

 

Production and ad valorem taxes

 

 

392,327

 

 

 

552,258

 

Depreciation, depletion and amortization

 

 

2,356,326

 

 

 

1,889,990

 

Provision for impairment

 

 

-

 

 

 

2,073

 

Interest expense

 

 

714,886

 

 

 

557,473

 

General and administrative

 

 

3,347,037

 

 

 

2,981,909

 

Losses (gains) on asset sales and other

 

 

24,212

 

 

 

(4,334,428

)

Total costs and expenses

 

 

8,010,701

 

 

 

3,352,973

 

Income (loss) before provision for income taxes

 

 

(141,283

)

 

 

12,620,244

 

 

 

 

 

 

 

 

Provision for income taxes

 

 

42,332

 

 

 

3,067,000

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(183,615

)

 

$

9,553,244

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted earnings (loss) per common share (Note 4)

 

$

(0.01

)

 

$

0.27

 

 

 

 

 

 

 

 

Weighted average shares outstanding:

 

 

 

 

 

 

Basic

 

 

36,303,392

 

 

 

35,935,791

 

Diluted

 

 

36,303,392

 

 

 

35,935,791

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends per share of common stock paid in period

 

$

0.0300

 

 

$

0.0225

 

 

 

 

 

 

 

 

 

(The accompanying notes are an integral part of these condensed financial statements.)

(2)


 

PHX MINERALS INC.

STATEMENTS OF STOCKHOLDERS’ EQUITY

Three Months Ended March 31, 2024

 

 

 

 

 

 

Capital in

 

 

Deferred

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

Excess of

 

 

Directors'

 

 

Retained

 

 

Treasury

 

 

Treasury

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Par Value

 

 

Compensation

 

 

Earnings

 

 

Shares

 

 

Stock

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at December 31, 2023

 

 

36,121,723

 

 

$

601,788

 

 

$

41,676,417

 

 

$

1,487,590

 

 

$

80,022,839

 

 

 

(131,477

)

 

$

(557,220

)

 

$

123,231,414

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(183,615

)

 

 

-

 

 

 

-

 

 

 

(183,615

)

Restricted stock award expense

 

 

-

 

 

 

-

 

 

 

656,656

 

 

 

-

 

 

 

 

 

 

-

 

 

 

-

 

 

 

656,656

 

Dividends declared

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(1,121,314

)

 

 

-

 

 

 

-

 

 

 

(1,121,314

)

Distribution of deferred
   directors' compensation

 

 

-

 

 

 

-

 

 

 

70,344

 

 

 

(107,199

)

 

 

-

 

 

 

8,692

 

 

 

36,855

 

 

 

-

 

Increase in deferred directors'
   compensation charged to
   expense

 

 

-

 

 

 

-

 

 

 

-

 

 

 

45,132

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

45,132

 

Balances at March 31, 2024

 

 

36,121,723

 

 

$

601,788

 

 

$

42,403,417

 

 

$

1,425,523

 

 

$

78,717,910

 

 

 

(122,785

)

 

$

(520,365

)

 

$

122,628,273

 

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2023

 

 

 

 

 

 

Capital in

 

 

Deferred

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

Excess of

 

 

Directors'

 

 

Retained

 

 

Treasury

 

 

Treasury

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Par Value

 

 

Compensation

 

 

Earnings

 

 

Shares

 

 

Stock

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at December 31, 2022

 

 

35,938,206

 

 

$

598,731

 

 

$

43,344,916

 

 

$

1,541,070

 

 

$

68,925,774

 

 

 

(300,272

)

 

$

(4,307,365

)

 

$

110,103,126

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

9,553,244

 

 

 

-

 

 

 

-

 

 

 

9,553,244

 

Restricted stock award expense

 

 

-

 

 

 

-

 

 

 

580,998

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

580,998

 

Dividends declared

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(50,034

)

 

 

-

 

 

 

-

 

 

 

(50,034

)

Distribution of restricted stock
   to officers and directors

 

 

-

 

 

 

-

 

 

 

(766,846

)

 

 

-

 

 

 

-

 

 

 

53,476

 

 

 

766,846

 

 

 

-

 

Distribution of deferred
   directors' compensation

 

 

-

 

 

 

-

 

 

 

(24,330

)

 

 

(281,497

)

 

 

-

 

 

 

21,312

 

 

 

305,827

 

 

 

-

 

Increase in deferred directors'
   compensation charged to
   expense

 

 

-

 

 

 

-

 

 

 

-

 

 

 

53,589

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

53,589

 

Balances at March 31, 2023

 

 

35,938,206

 

 

$

598,731

 

 

$

43,134,738

 

 

$

1,313,162

 

 

$

78,428,984

 

 

 

(225,484

)

 

$

(3,234,692

)

 

$

120,240,923

 

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(The accompanying notes are an integral part of these condensed financial statements.)

(3)


 

PHX MINERALS INC.

CONDENSED STATEMENTS OF CASH FLOWS

 

 

 

Three Months Ended March 31,

 

 

 

2024

 

 

2023

 

Operating Activities

 

(unaudited)

 

Net income (loss)

 

$

(183,615

)

 

$

9,553,244

 

 

 

 

 

 

 

 

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

 

 

 

 

 

 

Depreciation, depletion and amortization

 

 

2,356,326

 

 

 

1,889,990

 

Impairment of producing properties

 

 

-

 

 

 

2,073

 

Provision for deferred income taxes

 

 

25,332

 

 

 

2,934,000

 

Gain from leasing fee mineral acreage

 

 

(151,718

)

 

 

(313,150

)

Proceeds from leasing fee mineral acreage

 

 

151,718

 

 

 

373,878

 

Net (gain) loss on sales of assets

 

 

(66,500

)

 

 

(4,417,983

)

Directors' deferred compensation expense

 

 

45,132

 

 

 

53,589

 

Total (gain) loss on derivative contracts

 

 

(627,492

)

 

 

(3,802,820

)

Cash receipts (payments) on settled derivative contracts

 

 

1,669,309

 

 

 

816,838

 

Restricted stock award expense

 

 

656,656

 

 

 

580,998

 

Other

 

 

35,731

 

 

 

35,904

 

Cash provided (used) by changes in assets and liabilities:

 

 

 

 

 

 

Natural gas, oil and NGL sales receivables

 

 

1,216,455

 

 

 

2,328,673

 

Other current assets

 

 

207,497

 

 

 

123,948

 

Accounts payable

 

 

67,986

 

 

 

(175,207

)

Income taxes receivable

 

 

378

 

 

 

(776,077

)

Other non-current assets

 

 

56,338

 

 

 

40,576

 

Income taxes payable

 

 

-

 

 

 

(576,427

)

Accrued liabilities

 

 

(212,882

)

 

 

261,430

 

Total adjustments

 

 

5,430,266

 

 

 

(619,767

)

Net cash provided by operating activities

 

 

5,246,651

 

 

 

8,933,477

 

 

 

 

 

 

 

 

Investing Activities

 

 

 

 

 

 

Capital expenditures

 

 

(7,440

)

 

 

(190,826

)

Acquisition of minerals and overriding royalty interests

 

 

(1,406,248

)

 

 

(10,236,615

)

Net proceeds from sales of assets

 

 

66,500

 

 

 

9,210,005

 

Net cash provided by (used in) investing activities

 

 

(1,347,188

)

 

 

(1,217,436

)

 

 

 

 

 

 

 

Financing Activities

 

 

 

 

 

 

Borrowings under Credit Facility

 

 

1,000,000

 

 

 

6,000,000

 

Payments of loan principal

 

 

(3,000,000

)

 

 

(13,300,000

)

Payments on off-market derivative contracts

 

 

-

 

 

 

(560,162

)

Payments of dividends

 

 

(1,079,968

)

 

 

(810,071

)

Net cash provided by (used in) financing activities

 

 

(3,079,968

)

 

 

(8,670,233

)

 

 

 

 

 

 

 

Increase (decrease) in cash and cash equivalents

 

 

819,495

 

 

 

(954,192

)

Cash and cash equivalents at beginning of period

 

 

806,254

 

 

 

2,115,652

 

Cash and cash equivalents at end of period

 

$

1,625,749

 

 

$

1,161,460

 

 

 

 

 

 

 

 

Supplemental Disclosures of Cash Flow Information:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest paid (net of capitalized interest)

 

$

733,799

 

 

$

611,922

 

Income taxes paid (net of refunds received)

 

$

16,623

 

 

$

1,485,505

 

 

 

 

 

 

 

 

Supplemental Schedule of Noncash Investing and Financing Activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends declared and unpaid

 

$

41,346

 

 

$

50,034

 

 

 

 

 

 

 

 

Gross additions to properties and equipment

 

$

1,406,743

 

 

$

10,996,880

 

Net increase (decrease) in accounts receivable for properties and equipment additions

 

 

6,945

 

 

 

(569,439

)

Capital expenditures and acquisitions

 

$

1,413,688

 

 

$

10,427,441

 

 

(The accompanying notes are an integral part of these condensed financial statements.)

(4)


 

PHX MINERALS INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1: Basis of Presentation and Accounting Principles

Basis of Presentation

The accompanying unaudited condensed financial statements of PHX Minerals Inc. have been prepared in accordance with the instructions to Form 10-Q as prescribed by the SEC. Management believes that all adjustments necessary for a fair presentation of the financial position and results of operations and cash flows for the periods have been included. All such adjustments are of a normal recurring nature. The results are not necessarily indicative of those to be expected for a full fiscal year.

Certain amounts and disclosures have been condensed or omitted from these financial statements pursuant to the rules and regulations of the SEC. Therefore, these condensed financial statements should be read in conjunction with the financial statements and related notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2023. Unless indicated otherwise or the context requires, the terms “we,” “our,” “us,” “PHX” or the “Company” refer to PHX Minerals Inc.

Accounting standards that have been issued or proposed by the FASB, or other standards-setting bodies, that do not require adoption until a future date are not expected to have a material impact on the Company’s financial statements upon adoption.

NOTE 2: Revenues

Revenues from contracts with customers

Natural gas, oil and NGL sales

Sales of natural gas, oil and NGL are recognized when production is sold to a purchaser and control of the product has been transferred. Oil is priced on the delivery date based upon prevailing prices published by purchasers with certain adjustments related to oil quality and physical location. The price the Company receives for natural gas and NGL is tied to a market index, with certain adjustments based on, among other factors, whether a well delivers to a gathering or transmission line, quality and heat content of natural gas, and prevailing supply and demand conditions, so that the price of natural gas fluctuates to remain competitive with other available natural gas supplies. These market indices are determined on a monthly basis. Each unit of commodity is considered a separate performance obligation; however, as consideration is variable, the Company utilizes the variable consideration allocation exception permitted under the standard to allocate the variable consideration to the specific units of commodity to which they relate.

Disaggregation of natural gas, oil and NGL revenues

The following table presents the disaggregation of the Company's natural gas, oil and NGL revenues for the three months ended March 31, 2024 and 2023:

 

 

 

Three Months Ended March 31, 2024

 

 

 

Royalty Interest

 

 

Working Interest

 

 

Total

 

Natural gas revenue

 

$

3,201,897

 

 

$

363,777

 

 

$

3,565,674

 

Oil revenue

 

 

2,518,321

 

 

 

313,875

 

 

 

2,832,196

 

NGL revenue

 

 

456,056

 

 

 

236,282

 

 

 

692,338

 

Natural gas, oil and NGL sales

 

$

6,176,274

 

 

$

913,934

 

 

$

7,090,208

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2023

 

 

 

Royalty Interest

 

 

Working Interest

 

 

Total

 

Natural gas revenue

 

$

6,186,021

 

 

$

724,748

 

 

$

6,910,769

 

Oil revenue

 

 

3,432,950

 

 

 

679,838

 

 

 

4,112,788

 

NGL revenue

 

 

504,770

 

 

 

328,920

 

 

 

833,690

 

Natural gas, oil and NGL sales

 

$

10,123,741

 

 

$

1,733,506

 

 

$

11,857,247

 

 

Prior-period performance obligations and contract balances

The Company records revenue in the month production is delivered to the purchaser. As a non-operator, the Company has limited visibility into the timing of when new wells start producing, and production statements may not be received for 30 to 90 days

(5)


 

or more after the date production is delivered. As a result, the Company is required to estimate the amount of production delivered to the purchaser and the price that will be received for the sale of the product. The expected sales volumes and prices for these properties are estimated and recorded within the natural gas, oil and NGL sales receivables line item on the Company’s balance sheets. The difference between the Company's estimates and the actual amounts received for natural gas, oil and NGL sales is recorded in the quarter that payment is received from the third party. For the quarters ended March 31, 2024 and 2023, revenue recognized during the reporting period related to performance obligations satisfied in prior reporting periods for existing wells was considered a change in estimate.

As noted above, as a non-operator, there are instances when the Company is limited by the information operators provide. Through cash received on new wells, in the quarters ended March 31, 2024 and 2023, the Company identified several producing properties on its minerals that had production dates prior to the quarters ended March 31, 2024 and 2023. Estimates of the natural gas and oil sales related to those properties were made and are reflected in the natural gas, oil and NGL sales on the Company’s Statements of Income and on the Company’s Balance Sheets in natural gas, oil and NGL sales receivables.

In connection with obtaining more relevant information on new wells on Company acreage during the quarters ended March 31, 2024 and 2023, the Company recorded a change in estimate for new wells to natural gas, oil and NGL sales totaling $447,284 of which $23,159 related to the production periods before January 1, 2023 and $424,125 related to the fiscal year ended December 31, 2023; and the Company recorded a change in estimate for new wells to natural gas, oil and NGL sales totaling $876,704 of which $64,900 related to the production periods before October 1, 2022 and $811,804 related to the three months ended December 31, 2022.

Lease bonus revenue

The Company generates lease bonus revenue by leasing its mineral interests to exploration and production companies. A lease agreement represents the Company’s contract with a third party and generally conveys the rights to any natural gas, oil or NGL discovered, grants the Company a right to a specified royalty interest and requires that drilling and completion operations commence within a specified time period. Control is transferred to the lessee and the Company has satisfied its performance obligation when the lease agreement is executed, such that revenue is recognized when the lease bonus payment is received. The Company accounts for its lease bonuses as conveyances in accordance with the guidance set forth in ASC 932 (Extractive Activities—Oil and Gas), and upon leasing, it recognizes the lease bonus as a cost recovery with any excess above its cost basis in the mineral interests being treated as a gain. The excess of lease bonus above the mineral interests basis is shown in the lease bonuses and rental income line item on the Company’s Statements of Income.

Natural gas and oil derivative contracts

See Note 9 for discussion of the Company’s accounting for derivative contracts.

NOTE 3: Income Taxes

The Company’s provision for income taxes differs from the statutory rate primarily due to estimated federal and state benefits generated from excess federal and Oklahoma percentage depletion, which are permanent tax benefits, and the change in valuation allowance from prior year. Excess percentage depletion, both federal and Oklahoma, can only be taken in the amount that exceeds cost depletion, which is calculated on a unit-of-production basis. The Company completes an evaluation of the expected realization of the Company’s gross deferred tax assets each quarter. Excess tax benefits and deficiencies of stock-based compensation are recognized as provision (benefit) for income taxes in the Company’s Statements of Income.

Both excess federal percentage depletion, which is limited to certain production volumes and by certain income levels, and excess Oklahoma percentage depletion, which has no limitation on production volume, reduce estimated taxable income or add to estimated taxable loss projected for any year. The federal and Oklahoma excess percentage depletion estimates will be updated throughout the year until finalized with detailed well-by-well calculations at fiscal year-end. Depending upon whether a provision for income taxes or a benefit for income taxes is expected for a year, federal and Oklahoma excess percentage depletion will either decrease or increase the effective tax rate, respectively. The benefits of federal and Oklahoma excess percentage depletion and excess tax benefits and deficiencies of stock-based compensation are not directly related to the amount of pre-tax income (loss) recorded in a period. Accordingly, in periods where a recorded pre-tax income or loss is relatively small, the proportional effect of these items on the effective tax rate may be significant.

As of March 31, 2024, the Company completed an evaluation of the expected realization of its gross deferred tax assets. As a result of its evaluation, the Company concluded a valuation allowance is required for certain state deferred tax assets and for the quarter ended March 31, 2024, the change in the Company’s valuation allowance from December 31, 2023 is an increase of $1,000

(6)


 

recorded in the income tax provision. The Company’s effective tax rate for the three months ended March 31, 2024 was a -30% provision as compared to a 24% provision for the three months ended March 31, 2023. The change in effective tax rate resulted from a decrease in net income and the discrete income tax expense for deferred directors' compensation benefit and changes in state tax rates recorded in the quarter ended March 31, 2024.

NOTE 4: Basic and Diluted Earnings (Loss) Per Common Share (“EPS”)

Basic earnings (loss) per share of Common Stock is calculated using net income (loss) divided by the weighted average number of voting shares of Common Stock outstanding, including unissued, vested directors’ deferred compensation shares, during the period. Diluted earnings (loss) per share of Common Stock is calculated using net income (loss) divided by the weighted average number of voting shares of Common Stock outstanding, including unissued, vested directors’ deferred compensation shares and any other potentially dilutive shares of Common Stock, during the period. Participating securities had no effect on basic and diluted EPS at March 31, 2024.

For the three months ended March 31, 2024 and 2023, the Company excluded restricted stock in the diluted EPS calculation that would have been antidilutive. The average shares outstanding of restricted stock excluded from the diluted EPS was 946,350 and 498,431 for the three months ended March 31, 2024 and 2023, respectively.

The following table presents a reconciliation of the components of basic and diluted EPS.

 

Three Months Ended March 31,

 

 

2024

 

 

2023

 

Basic EPS

 

 

 

 

 

Numerator:

 

 

 

 

 

Basic net income (loss)

$

(183,615

)

 

$

9,553,244

 

Denominator:

 

 

 

 

 

Common Shares

 

35,998,651

 

 

 

35,698,363

 

Unissued, directors' deferred compensation shares

 

304,741

 

 

 

237,428

 

Basic weighted average shares outstanding

 

36,303,392

 

 

 

35,935,791

 

Basic EPS

$

(0.01

)

 

$

0.27

 

 

 

 

 

 

 

Diluted EPS

 

 

 

 

 

Numerator:

 

 

 

 

 

Basic net income (loss)

$

(183,615

)

 

$

9,553,244

 

Diluted net income (loss)

 

(183,615

)

 

 

9,553,244

 

Denominator:

 

 

 

 

 

Basic weighted average shares outstanding

 

36,303,392

 

 

 

35,935,791

 

Effects of dilutive securities:

 

 

 

 

 

Unvested restricted stock

 

-

 

 

 

-

 

Diluted weighted average shares outstanding

 

36,303,392

 

 

 

35,935,791

 

Diluted EPS

$

(0.01

)

 

$

0.27

 

 

 

NOTE 5: Long-Term Debt

The Company has a $100,000,000 credit facility (the “Credit Facility”) with a syndicate of banks led by Independent Bank pursuant to a credit agreement entered into in September 2021 (as amended, the “Credit Agreement”). The Credit Facility had a borrowing base of $50,000,000 and a maturity date of September 1, 2025 as of March 31, 2024. On April 18, 2024, the borrowing base was reaffirmed at $50,000,000, in connection with the regularly scheduled semi-annual redetermination, and the maturity date was extended to September 1, 2028. The Credit Facility is secured by the Company’s personal property and at least 75% of the total value of the proved, developed and producing oil and gas properties. The interest rate is based on either (a) SOFR plus an applicable margin ranging from 2.750% to 3.750% per annum based on the Company’s Borrowing Base Utilization or (b) the greater of (1) the Prime Rate in effect for such day, or (2) the overnight cost of federal funds as announced by the U.S. Federal Reserve System in effect on such day plus one-half of one percent (0.50%), plus, in each case, an applicable margin ranging from 1.750% to 2.750% per annum based on the Company’s Borrowing Base Utilization. The election of Independent Bank prime or SOFR is at the Company’s discretion. The interest rate spread from Independent Bank prime or SOFR will be charged based on the ratio of the loan balance to the borrowing base. The interest rate spread from SOFR or the prime rate increases as a larger percent of the borrowing base is advanced. At March 31, 2024, the effective interest rate was 8.57%.

(7)


 

The Company’s debt is recorded at the carrying amount on its balance sheets. The carrying amount of the debt under the Credit Facility approximates fair value because the interest rates are reflective of market rates. Debt issuance costs associated with the Credit Facility are presented in “Other, net” on the Company’s balance sheets. Total debt issuance cost, net of amortization, as of March 31, 2024 was $137,380. The debt issuance cost is amortized over the life of the Credit Facility.

Determinations of the borrowing base under the Credit Facility are made semi-annually (usually June and December) or whenever the lending banks, in their sole discretion, believe that there has been a material change in the value of the Company’s natural gas and oil properties. The Credit Facility contains customary covenants which, among other things, require periodic financial and reserve reporting and place certain restrictions on the Company’s ability to incur debt, grant liens, make fundamental changes and engage in certain transactions with affiliates. The Credit Facility also restricts the Company’s ability to make certain restricted payments if before or after the Restricted Payment (i) the Available Commitment is less than ten percent (10%) of the Borrowing Base or (ii) the Leverage Ratio on a pro forma basis is greater than 2.50 to 1.00. In addition, the Company is required to maintain certain financial ratios, a current ratio (as described in the Credit Facility) of no less than 1.0 to 1.0 and a funded debt to EBITDAX of no more than 3.5 to 1.0 based on the trailing twelve months. At March 31, 2024, the Company was in compliance with the covenants of the Credit Facility, had $30,750,000 in outstanding borrowings and had $19,250,000 available for borrowing under the Credit Facility. All capitalized terms in this description of the Credit Facility that are not otherwise defined in this Form 10-Q have the meaning assigned to them in the Credit Agreement.

NOTE 6: Deferred Compensation Plan for Non-Employee Directors

Annually, non-employee directors may elect to be included in the Deferred Compensation Plan for Non-Employee Directors. This plan provides that each outside director may individually elect to be credited with future unissued shares of Company Common Stock rather than cash for all or a portion of their annual retainers and Board and committee meeting fees. These unissued shares are recorded to each director’s deferred compensation account at the closing market price of the shares on the payment dates of the annual retainers. Only upon a director’s retirement, termination or death or a change-in-control of the Company will the shares recorded for such director be issued under this plan. Directors may elect to receive shares, when issued, over annual time periods of up to ten years. The promise to issue such shares in the future is an unsecured obligation of the Company.

NOTE 7: Long Term Incentive Plan

Compensation expense for restricted stock awards is recognized in G&A. Forfeitures of awards are recognized at the time of forfeiture. The following table summarizes the Company’s pre-tax compensation expense for the three months ended March 31, 2024 and 2023 related to the Company’s market-based and time-based restricted stock:

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2024

 

 

2023

 

Market-based, restricted stock

 

$

480,676

 

 

$

523,410

 

Time-based, restricted stock

 

 

175,980

 

 

 

57,588

 

Total compensation expense

 

$

656,656

 

 

$

580,998

 

 

A summary of the Company’s unrecognized compensation cost for its unvested market-based and time-based restricted stock and the weighted-average periods over which the compensation cost is expected to be recognized is shown in the following table:

 

 

 

As of March 31, 2024

 

 

 

Unrecognized Compensation Cost

 

 

Weighted Average Period (in years)

 

Market-based, restricted stock

 

$

1,961,976

 

 

 

1.55

 

Time-based, restricted stock

 

 

865,155

 

 

 

1.71

 

Total

 

$

2,827,131

 

 

 

 

 

(8)


 

NOTE 8: Properties and Equipment

Acquisitions

The Company made the following property acquisitions during the three-month periods ended March 31, 2024 and 2023.

Quarter Ended

 

Net royalty acres (1)(2)

 

Cash Paid

 

Total Purchase Price (1)

 

% Proved / % Unproved

 

Area of Interest

March 31, 2024

 

 

 

 

 

 

 

 

 

 

 

 

146

 

$1.4 million

 

$1.4 million

 

5% / 95%

 

SCOOP

March 31, 2023

 

 

 

 

 

 

 

 

 

 

 

 

912

 

$10.8 million

 

$10.8 million

 

44% / 56%

 

Haynesville / SCOOP

(1) Excludes subsequent closing adjustments and insignificant acquisitions.

(2) An estimated net royalty equivalent was used for the unleased minerals included in the net royalty acres.

 

All purchases made in the 2024 and 2023 quarters were for mineral and royalty acreage and were accounted for as asset acquisitions.

Divestitures

The Company made the following property divestitures during the three-month periods ended March 31, 2024 and 2023. Revenue and expenses recognized between the effective date and close date of divestitures is recorded in the Operating Activities section in the Statements of Cash Flows.

 

Quarter Ended

 

Net mineral acres(1)/ Wellbores(2)

 

Sale Price (3)

 

Gain/(Loss) (3)

 

Location

March 31, 2024

 

 

 

 

 

 

 

 

 

 

No significant divestitures

 

 

 

 

 

 

March 31, 2023

 

 

 

 

 

 

 

 

 

 

755 acres

 

$0.3 million

 

$0.3 million

 

OK / TX

 

 

267 wellbores

 

$10.7 million

 

$4.1 million

 

OK / TX

(1) Number of net mineral acres sold.

(2) Number of gross wellbores associated with working interests sold.

(3) Excludes subsequent closing adjustments and insignificant divestitures.

 

Natural Gas, Oil and NGL Reserves

Management considers the estimation of the Company’s natural gas, oil and NGL reserves to be the most significant of its judgments and estimates. Changes in natural gas, oil and NGL reserve estimates affect the Company’s calculation of DD&A, provision for retirement of assets and assessment of the need for asset impairments. On an annual basis, with a semi-annual update, the Company’s Independent Consulting Petroleum Engineer, with assistance from Company staff, prepares estimates of natural gas, oil and NGL reserves based on available geologic and seismic data, reservoir pressure data, core analysis reports, well logs, analogous reservoir performance history, production data and other available sources of engineering, geologic and geophysical information. Between periods in which reserves would normally be calculated, the Company updates the reserve calculations utilizing appropriate prices for the current period. The estimated natural gas, oil and NGL reserves were computed using the 12-month average price calculated as the unweighted arithmetic average of the first-day-of-the-month natural gas, oil and NGL price for each month within the 12-month period prior to the balance sheet date, held flat over the life of the properties. However, projected future natural gas, oil and NGL pricing assumptions are used by management to prepare estimates of natural gas, oil and NGL reserves and future net cash flows used in asset impairment assessments and in formulating management’s overall operating decisions. Natural gas, oil and NGL prices are volatile, affected by worldwide production and consumption, and are outside the control of management.

Impairment

Company management monitors all long-lived assets, principally natural gas and oil properties, for potential impairment when circumstances indicate that the carrying value of the asset may be greater than its estimated future net cash flows. The evaluations involve significant judgment since the results are based on estimated future events, such as inflation rates; future drilling and completion costs; future sales prices for natural gas, oil and NGL; future production costs; estimates of future natural gas, oil and NGL reserves to be recovered and the timing thereof; the economic and regulatory climates; and other factors. The need to test a property for impairment may result from significant declines in sales prices or unfavorable adjustments to natural gas, oil and NGL

(9)


 

reserves. Between periods in which reserves would normally be calculated, the Company updates the reserve calculations to reflect any material changes since the prior report was issued and then utilizes updated projected future price decks current with the period. For the three months ended March 31, 2024 and 2023, management’s assessment resulted in no impairment provisions on producing properties. The Company wrote off $2,073 on wells assigned to the operator with zero consideration received during the three months ended March 31, 2023.

NOTE 9: Derivatives

The Company has entered into commodity price derivative agreements, including fixed swap contracts and costless collar contracts. These instruments are intended to reduce the Company’s exposure to short-term fluctuations in the price of natural gas and oil. Fixed swap contracts set a fixed price and provide payments to the Company if the index price is below the fixed price, or require payments by the Company if the index price is above the fixed price. Collar contracts set a fixed floor price and a fixed ceiling price and provide payments to the Company if the index price falls below the floor or require payments by the Company if the index price rises above the ceiling. These contracts cover only a portion of the Company’s natural gas and oil production and provide only partial price protection against declines in natural gas and oil prices. The Company’s derivative contracts are currently with BP Energy Company (“BP”). The derivative contracts with BP are secured under the Credit Facility with Independent Bank (see Note 5: Long-Term Debt). The derivative instruments have settled or will settle based on the prices below:

Derivative Contracts in Place as of March 31, 2024

Calendar Period

 

Contract total volume