Overview

HNRA is an independent oil and natural gas company based in Texas that is focused on the acquisition, development, exploration, production and divestiture of oil and natural gas properties in the Permian Basin. The company’s assets consist of contiguous leasehold positions of approximately 13,700 gross (13,700 net) acres with an average working interest of 100%. HNRA operates 100% of the net acreage across its assets, all of which is net operated acreage of vertical wells with average depths of approximately 3,810 feet.

HNRA’s average daily production for the six months ended June 30, 2024 was 814 barrel of oil equivalent (“BOE”) per day, down from 1,022 BOE per day for the year ended December 31, 2023. The decrease in production was due to an increase in well downtime, water injection flowlines that needed repair or replacement, and the conveyance of a 10% override royalty interest to Pogo Royalty.

Impact of Coronavirus (“COVID-19”)

The COVID-19 pandemic resulted in a severe worldwide economic downturn, significantly disrupting the demand for oil and creating significant volatility, uncertainty and turmoil in the oil and gas industry. Since mid-2020, oil prices have improved, with demand steadily increasing despite the uncertainties surrounding COVID-19 variants. However, global oil price levels will ultimately depend on various factors beyond the company’s control, such as the effectiveness of responses to combat COVID-19, the ability of OPEC and other producers to manage global oil supply, and political stability of oil consuming countries.

Selected Factors That Affect Operating Results

HNRA’s revenues, cash flows and growth depend on the timing and success of production and development activities, oil and natural gas prices, production volumes, changes in derivative instrument fair values, ability to acquire high-quality acreage, and operating expenses. The company’s operating results are also affected by factors specific to the Permian Basin region, such as weather, infrastructure limitations, and regulatory matters.

Market Conditions

The price HNRA receives for its oil and natural gas production is largely a function of market supply and demand. Oil prices have been volatile, with the average NYMEX oil price increasing 6% to $79.64 per barrel for the six months ended June 30, 2024 compared to the prior year period. HNRA’s realized oil price, after reflecting settled derivatives and location differentials, was $75.07 per barrel for the six months ended June 30, 2024.

The average NYMEX natural gas price decreased 13% to $2.11 per Mcf for the six months ended June 30, 2024 compared to the prior year period.

Pogo Royalty Overriding Royalty Interest Transaction

Effective July 1, 2023, the Predecessor transferred a 10% overriding royalty interest to Pogo Royalty, a related party, for $10. This resulted in a $816,011 loss and a decrease in HNRA’s reserve balance, current net production volumes and revenues.

Results of Operations

Three months ended June 30, 2024 (Successor) Compared to Three months ended June 30, 2023

• Oil and natural gas sales decreased 26% due to a 34% decrease in production volumes, partially offset by a 7% increase in realized prices excluding the effect of settled derivatives.
• Derivative instrument losses were $83,478 in the current period compared to gains of $346,009 in the prior year period.
• Lease operating expenses increased 59% on a per unit basis to $29.50 per BOE due to increases in proactive maintenance activities.
• Depletion, depreciation and amortization expense increased due to the higher oil and gas properties balance from the fair value recognition of reserves in the acquisition.
• General and administrative expenses increased primarily due to higher costs associated with being a public company and stock-based compensation.
• Interest expense and amortization of financing costs increased significantly due to the new debt financing entered into as part of the acquisition.

Six months ended June 30, 2024 (Successor) Compared to six months ended June 30, 2023

• Oil and natural gas sales decreased 27% due to a 31% decrease in production volumes, partially offset by a 4% increase in realized prices excluding the effect of settled derivatives.
• Derivative instrument losses were $2,080,725 in the current period compared to gains of $763,043 in the prior year period.
• Lease operating expenses increased 16% on a per unit basis to $29.92 per BOE due to increases in proactive maintenance activities.
• Depletion, depreciation and amortization expense increased due to the higher oil and gas properties balance from the fair value recognition of reserves in the acquisition.
• General and administrative expenses increased primarily due to higher costs associated with being a public company and stock-based compensation.
• Interest expense and amortization of financing costs increased significantly due to the new debt financing entered into as part of the acquisition.

Liquidity, Capital Resources and Going Concern

As of June 30, 2024, HNRA had $25.8 million outstanding on its Senior Secured Term Loan, $15 million on the Seller Promissory Note, and $3.9 million in private notes payable, with $13.7 million due within one year. The company had $3.1 million in cash and a working capital deficit of $32.6 million, raising substantial doubt about its ability to continue as a going concern.

Management’s plans to address this include improving profitability, maintaining active hedges, and issuing additional common stock through a $150 million stock purchase agreement, subject to SEC approval. However, the company may need to seek additional capital and liquidity, which may not be available on favorable terms.

Critical Accounting Estimates

HNRA’s critical accounting estimates include the successful efforts method of accounting for oil and gas activities, proved reserve estimates, impairment of proved oil and gas properties, asset retirement obligations, litigation and environmental contingencies, fair value of the forward purchase agreement, and accounting for derivative instruments.