Form 8-K/A - Current report: [Amend]

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 8-K/A

(Amendment No. 1)

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

Date of report (Date of earliest event reported): August 2, 2023

Civitas Resources, Inc.

(Exact name of registrant as specified in its charter)

Delaware		001-35371		61-1630631
(State or other jurisdiction of incorporation)		(Commission File Number)		(IRS Employer Identification No.)

555 17th Street, Suite 3700

Denver, Colorado 80202

(Address of principal executive offices, including zip code)

Registrant’s telephone number, including area code: (303) 293-9100

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

¨ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

¨ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

¨ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

¨ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

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

Title of each class		Trading Symbol		Name of exchange on which registered
Common Stock, par value $0.01 per share		CIVI		New York Stock Exchange

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).

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. ¨

Explanatory Note

This Amendment No. 1 on Form 8-K/A (this “Amendment”) is being filed by Civitas Resources, Inc., a Delaware corporation (the “Company”), to amend and supplement its Current Report on Form 8-K filed with the Securities and Exchange Commission (the “SEC”) on August 2, 2023 (the “Original Report”). As previously disclosed in the Original Report, on August 2, 2023, the Company completed the acquisition of all of the issued and outstanding equity interests of (i) Hibernia Energy III, LLC, a Delaware limited liability company (“Hibernia Energy”) and Hibernia Energy III-B, LLC, a Delaware limited liability company and (ii) Tap Rock AcquisitionCo, LLC, a Delaware limited liability company (“Tap Rock AcquisitionCo”), Tap Rock Resources II, LLC, a Delaware limited liability company (“Tap Rock II”), and Tap Rock NM10 Holdings, LLC, a Delaware limited liability company.

The Company is filing this Amendment solely to supplement Item 9.01 of the Original Report to file (i) the audited consolidated financial statements of Hibernia Energy as of December 31, 2022 and 2021 and for the years ended December 31, 2022 and 2021, (ii) the unaudited consolidated financial statements of Hibernia Energy as of June 30, 2023 and for the six months ended June 30, 2023 and 2022, (iii) the audited consolidated financial statements of Tap Rock AcquisitionCo as of December 31, 2022 and 2021 and for the years ended December 31, 2022 and 2021, (iv) the unaudited consolidated financial statements of Tap Rock AcquisitionCo as of June 30, 2023 and for the six months ended June 30, 2023 and 2022, (v) the audited consolidated financial statements of Tap Rock II as of December 31, 2022 and 2021 and for the years ended December 31, 2022 and 2021, (vi) the unaudited condensed consolidated financial statements of Tap Rock II as of June 30, 2023 and for the six months ended June 30, 2023 and 2022 and (vii) the unaudited pro forma condensed combined financial information of the Company as of June 30, 2023, for the six months ended June 30, 2023, and for the year ended December 31, 2022. Except for the foregoing, this Amendment does not modify or update any other disclosure contained in the Original Report.

Item 9.01.

Financial Statements and Exhibits.

(a) Financial statements of businesses acquired.

Hibernia Energy

The audited consolidated balance sheets of Hibernia Energy as of December 31, 2022 and 2021 and the audited consolidated statements of operations, statements of members’ equity, and statements of cash flows for each of the years ended December 31, 2022 and 2021, and the related notes thereto, are filed herewith and attached hereto as Exhibit 99.1, and are incorporated herein by reference.

The unaudited consolidated balance sheet of Hibernia Energy as of June 30, 2023, and the unaudited consolidated statements of operations, statements of members’ equity, and statements of cash flows for each of the six months ended June 30, 2023 and 2022, and the related notes thereto, are filed herewith and attached hereto as Exhibit 99.2, and are incorporated herein by reference.

Tap Rock AcquisitionCo

The audited consolidated balance sheets of Tap Rock AcquisitionCo as of December 31, 2022 and 2021 and the audited consolidated statements of operations, statements of changes in equity, and statements of cash flows for the years ended December 31, 2022 and 2021, and the related notes thereto, are filed herewith and attached hereto as Exhibit 99.3, and are incorporated herein by reference.

The unaudited consolidated balance sheet of Tap Rock AcquisitionCo as of June 30, 2023, and the unaudited consolidated statements of operations, statements of changes in equity, and statements of cash flows for each of the six months ended June 30, 2023 and 2022, and the related notes thereto, are filed herewith and attached hereto as Exhibit 99.4, and are incorporated herein by reference.

Tap Rock II

The audited consolidated balance sheets of Tap Rock II as of December 31, 2022 and 2021, and the audited consolidated statements of operations, statements of changes in members’ equity, and statements of cash flows for the years ended December 31, 2022 and 2021, and the related notes thereto, are filed herewith and attached hereto as Exhibit 99.5, and are incorporated herein by reference.

The unaudited condensed consolidated balance sheet of Tap Rock II as of June 30, 2023, and the unaudited condensed consolidated statements of operations, statements of changes in members’ equity, and statements of cash flows for each of the six months ended June 30, 2023 and 2022, and the related notes thereto, are filed herewith and attached hereto as Exhibit 99.6, and are incorporated herein by reference.

(b) Pro forma financial information.

The unaudited pro forma condensed combined balance sheet of the Company and its subsidiaries as of June 30, 2023, and the unaudited pro forma condensed combined statements of operations for the six months ended June 30, 2023 and for the year ended December 31, 2022, are filed herewith and attached hereto as Exhibit 99.7, and are incorporated herein by reference.

(d) Exhibits.

Exhibit No.		Description
23.1		Consent of Ernst & Young LLP, independent auditors for Hibernia Energy III, LLC.
23.2		Consent of Ernst & Young LLP, independent auditors for Tap Rock AcquisitionCo, LLC.
23.3		Consent of Ernst & Young LLP, independent auditors for Tap Rock Resources II, LLC.
99.1		Audited Consolidated Financial Statements of Hibernia Energy III, LLC as of December 31, 2022 and 2021 and for the years ended December 31, 2022 and 2021.
99.2		Unaudited Consolidated Financial Statements of Hibernia Energy III, LLC as of June 30, 2023 and for the six months ended June 30, 2023 and 2022.
99.3		Audited Consolidated Financial Statements of Tap Rock AcquisitionCo, LLC as of December 31, 2022 and 2021 and for the years ended December 31, 2022 and 2021.
99.4		Unaudited Consolidated Financial Statements of Tap Rock AcquisitionCo, LLC as of June 30, 2023 and for the six months ended June 30, 2023 and 2022.
99.5		Audited Consolidated Financial Statements of Tap Rock Resources II, LLC as of December 31, 2022 and 2021 and for the years ended December 31, 2022 and 2021.
99.6		Unaudited Condensed Consolidated Financial Statements of Tap Rock Resources II, LLC as of June 30, 2023 and for the six months ended June 30, 2023 and 2022.
99.7		Unaudited Pro Forma Condensed Combined Financial Information of Civitas Resources, Inc. as of June 30, 2023, for the six months ended June 30, 2023, and for the year ended December 31, 2022.
104		Cover Page Interactive Data File (formatted as Inline XBRL).

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

Dated:	September 29, 2023		Civitas Resources, Inc.

		By:	/s/ Travis L. Counts
		Name:	Travis L. Counts
		Title:	Chief Legal Officer and Secretary

Exhibit 23.1

Consent of Independent Auditors

We consent to the incorporation by reference in the following Registration Statements:

(1)

Registration Statement (Form S-3 No. 333 –263753) of Civitas Resources, Inc.

(2)

Registration Statements (Form S-8 Nos. 333-260881, 333-257295, 333-229431, 333-217545) of Civitas Resources, Inc.

of our report dated April 11, 2023, relating to the consolidated financial statements of Hibernia Energy III, LLC as of and for the years ended December 31, 2022 and 2021 appearing in this Current Report on Form 8-K/A of Civitas Resources, Inc.

/s/ Ernst & Young LLP

Houston, Texas

September 29, 2023

Exhibit 23.2

Consent of Independent Auditors

We consent to the incorporation by reference in the Registration Statements:

(1)

Registration Statement (Form S-3 No. 333-263753) of Civitas Resources, Inc.

(2)

Registration Statements (Form S-8 Nos. 333-260881, 333-257295, 333-229431, 333-217545) of Civitas Resources, Inc.

of our report dated August 31, 2023, relating to the consolidated financial statements of Tap Rock AcquisitionCo, LLC, as of and for the years ended December 31, 2022 and 2021 appearing in this Current Report on Form 8-K/A of Civitas Resources, Inc.

/s/ Ernst & Young LLP

Denver, Colorado

September 29, 2023

Exhibit 23.3

Consent of Independent Auditors

We consent to the incorporation by reference in the Registration Statements:

(1)

Registration Statement (Form S-3 No. 333-263753) of Civitas Resources, Inc.

(2)

Registration Statements (Form S-8 Nos. 333-260881, 333-257295, 333-229431, 333-217545) of Civitas Resources, Inc.

of our report dated March 30, 2023, relating to the consolidated financial statements of Tap Rock Resources II, LLC, as of and for the years ended December 31, 2022 and 2021 appearing in this Current Report on Form 8-K/A of Civitas Resources, Inc.

/s/ Ernst & Young LLP

Denver, Colorado

September 29, 2023

Exhibit 99.1

HIBERNIA ENERGY III, LLC

CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2022 and 2021
with Report of Independent Auditors

HIBERNIA ENERGY III, LLC

CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2022 and 2022

Table of Contents

Report of Independent Auditors	1

Consolidated Financial Statements:

Consolidated Balance Sheets	3

Consolidated Statements of Operations	4

Consolidated Statements of Members’ Equity	5

Consolidated Statements of Cash Flows	6

Notes to Consolidated Financial Statements	7

Building a better working world	Ernst & Young LLP	Tel: +1713750 1500
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	Suite 2400
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	Houston, TX 77010

Report of Independent Auditors

To the Board of Directors of Hibernia Energy Ill , LLC

Opinion

We have audited the consolidated financial statements of Hibernia Energy 111, LLC (the Company) , which comprise the consolidated balance sheets as of December 31, 2022 and 2021, and the related consolidated statements of operations, members' equity and cash flows for the years then ended, and the related notes (collectively referred to as the "financial statements").

In our opinion, the accompanying financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2022 and 2021, and the results of its operations and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America .

Basis for Opinion

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

Responsibilities of Management for the Financial Statements

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

In preparing the financial statements, management is required to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the Company 's ability to continue as a going concern for one year after the date that the financial statements are available to be issued.

Auditor's Responsibilities for the Audit of the Financial Statements

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

A member firm of Ernst & Young Global Limited

Building a better

working world

In performing an audit in accordance with GAAS, we:

•

Exercise professional judgment and maintain professional skepticism throughout the audit.

•

Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, and design and perform audit procedures responsive to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.

•

Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control. Accordingly , no such opinion is expressed.

•

Evaluate the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluate the overall presentation of the financial statements.

•

Conclude whether, in our judgment, there are conditions or events, considered in the aggregate, that raise substantial doubt about the Company 's ability to continue as a going concern for a reasonable period of time.

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

April 11, 2023

A member firm of Ernst & Young Global Limited

HIBERNIA ENERGY III, LLC

CONSOLIDATED BALANCE SHEETS

AS OF DECEMBER 31, 2022 AND 2021

(In $ thousands)

	December 31,			December 31,
	2022			2021
CURRENT ASSETS:
Cash and cash equivalents	$	19,229		$	9,527
Accounts receivable		93,491			39,147
Prepaid assets and other		1,462			344
Inventory		792			420
Commodity derivatives, current		10,098			-
Total current assets		125,072			49,438

OIL AND NATURAL GAS PROPERTIES, at cost utilizing the full cost method
Proved properties		923,897			514,275
Unproved properties		29,951			26,070
		953,848			540,345
Less: Accumulated depletion		(137,046	)		(52,938	)
		816,802			487,407

OTHER PROPERTY AND EQUIPMENT, at cost		61,536			30,814
Less: Accumulated depreciation		(4,092	)		(2,213	)
		57,444			28,601

OTHER ASSETS
Commodity derivatives, long-term		253			-
Debt issuance costs, net of accumulated amortization		2,158			2,366
Deposits		20			20
Operating right of use asset, net of amortization		5,430			-
		7,861			2,386
TOTAL ASSETS	$	1,007,179		$	567,832

CURRENT LIABILITIES
Accounts payable	$	113,545		$	43,295
Oil and gas royalties payable		61,588			39,995
Interest payable		1,043			193
Obligations from commodity derivatives, current		26,558			37,544
Accrued liabilities		22,279			12,588
Related party payable		1,331			-
Current portion of lease liability - operating		3,331			-
Total current liabilities		229,675			133,615

LONG-TERM LIABILITIES
Long-term debt		299,000			62,500
Deferred rent		-			34
Deferred income taxes (franchise)		3,448			445

Obligations from commodity derivatives, long-term		13,292			21,044
Asset retirement obligations		8,888			9,057
Non-current portion of lease liability - operating		2,024			-
Total long-term liabilities		326,652			93,080
Total liabilities		556,327			226,695

MEMBERS' EQUITY
Members' equity		100,314			348,712
Accumulated deficit		(7,575	)		(3,653	)
Current year net income (loss)		358,113			(3,922	)
		450,852			341,137

TOTAL LIABILITIES AND MEMBERS' EQUITY	$	1,007,179		$	567,832

See accompanying notes to consolidated financial statements.

HIBERNIA ENERGY III, LLC

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021

(In $ thousands)

	Year			Year
	Ended			Ended
	December 31,			December 31,
	2022			2021
REVENUES:
Oil	$	509,874		$	122,669
Natural gas		58,746			14,409
Natural gas liquids		79,363			26,211
Realized loss on commodity derivatives		(111,712	)		(52,216	)
Salt water disposal income		-			674
		536,271			111,747

OPERATING EXPENSES:
Lease operating		32,576			9,042
Workover		3,018			2,166
Production, ad valorem and severance tax		38,495			9,705
Revenue deductions		22,980			7,305
Depletion, depreciation and accretion		86,411			26,763
General and administrative costs		7,455			5,670
Equity compensation expense		2,102			-
Total operating expenses		193,037			60,651

INCOME FROM OPERATIONS		343,234			51,096

OTHER EXPENSE:
Interest expense, net		(11,255	)		(2,366	)
Other income, net		37			72
Provision for income taxes		(3,012	)		28
Unrealized gain (loss) on commodity derivatives		29,089			(49,277	)
Gain (loss) on sale of assets		20			(3,475	)
Total other expense		14,879			(55,018	)

NET INCOME (LOSS)	$	358,113		$	(3,922	)

See accompanying notes to consolidated financial statements.

HIBERNIA ENERGY III, LLC

CONSOLIDATED STATEMENTS OF MEMBERS' EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021

(In $ thousands)

Balance as of December 31, 2020	$	344,946
Non-cash contributions		113
Net loss		(3,922	)
Balance as of December 31, 2021	$	341,137
Advances on units		(9,883	)
Distributions		(238,515	)
Net income		358,113
Balance as of December 31, 2022	$	450,852

See accompanying notes to consolidated financial statements.

HIBERNIA ENERGY III, LLC

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021

(In $ thousands)

	Year			Year
	Ended			Ended
	December 31,			December 31,
	2022			2021
OPERATING ACTIVITIES:
Net income (loss)	$	358,113		$	(3,922	)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depletion, depreciation and accretion		86,411			26,763
Amortization of capitalized debt issuance costs		1,340			444
Deferred tax expense		3,003			-
Deferred rent expense		-			(59	)
Non-cash lease expense		2,813			-
(Gain) loss on sale of assets		(20	)		3,475
Change in commodity derivatives		(29,090	)		49,277
Excess value of options and primary unit FV Equity based compensation		112			-
Non-cash contributions		-			113
Changes in operating assets and liabilities:
Accounts Receivable		(54,344	)		(27,917	)
Prepaid expenses and other assets		(2,622	)		(2,429	)
Accounts payable & accrued liabilities		52,131			46,144
Change in lease liability - operating		(2,922	)		-
Net cash provided by operating activities		414,925			91,889

INVESTING ACTIVITIES:
Capital expenditures on oil and natural gas properties		(362,588	)		(111,281	)
Acquisitions of oil and natural gas properties from third parties		(21,820	)		(25,481	)
Proceeds from sale of oil and natural gas properties		20,011			2,576
Purchases of other property and equipment		(28,850	)		(14,526	)
Proceeds from sales of other property and equipment		34			42,313
Net cash used in investing activities		(393,213	)		(106,399	)

FINANCING ACTIVITIES:
Borrowings from long-term debt		450,500			100,500
Repayment of borrowings of long-term debt		(214,000	)		(80,000	)
Advances on units		(9,995	)		-
Return of capital to members		(238,515	)		-
Net cash (used in) provided by financing activities		(12,010	)		20,500

Increase in cash		9,702			5,990
Cash, beginning of period		9,527			3,537
Cash, end of period	$	19,229		$	9,527

Supplemental cash flow information:
Cash paid for interest	$	6,180		$	1,237
Cash paid for income taxes (franchise)		-			-

See accompanying notes to consolidated financial statements.

HIBERNIA ENERGY III, LLC

Notes to Consolidated Financial Statements December 31, 2022 and 2021

(1)

Formation and Operations of the Company

Hibernia Energy III, LLC, a Delaware limited liability company, and its subsidiaries (collectively, the Company or Hibernia) was formed on July 28, 2017 for the purpose of engaging in the acquisition, development, and operation of oil and gas properties in the United States of America. The Company is a consolidated affiliate of Natural Gas Partners (NGP) and was initially capitalized by $250 million of equity commitments from NGP through NGP Natural Resources XII, L.P. In addition to the commitment from NGP, Hibernia management and members (collectively, the Members) made equity commitments in excess of $21 million, to be contributed as needed to fund oil and gas property acquisitions and other working capital needs. As an 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 actual capital contribution. The LLC agreement terminates on August 8, 2024 unless the Board agrees to extend operations.

(2)

Summary of Significant Accounting Polices

(a)

Principles of Consolidation

The Company’s consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States and include the accounts of Hibernia Energy III, LLC and its subsidiaries, Hibernia Resources III, LLC, Hibernia Management III, LLC, Cloverride Royalty, LLC and Celtic Disposal, LLC. All intercompany transactions and balances have been eliminated upon consolidation. Undivided interests in oil and natural gas exploration and production joint ventures have been consolidated on a proportionate basis.

(b)

Recent Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, Leases, as a new Topic, ASC Topic 842. The new lease standard requires entities to recognize right-of-use assets and lease liabilities on its balance sheets and disclose key information about leasing arrangements. This standard offers specific accounting guidance for a lessee, a lessor and sale and leaseback transactions. Lessees and lessors are required to disclose qualitative and quantitative information about leasing arrangements to enable users of the financial statements to assess the amount, timing and uncertainty of cash flows arising from leases. The standard is effective for annual reporting periods beginning after December 15, 2021.

The Company elected the package of practical expedients permitted under the transition guidance, allowing the Company to carry forward conclusions related to: (a) whether expired or existing contracts contain leases; (b) lease classification; and (c) initial direct costs for existing leases. The Company has elected not to record operating lease right-of-use assets or lease liabilities associated with leases with durations of 12 months or less. The Company elected the practical expedient allowing aggregation of non-lease components with related lease components when evaluating the accounting treatment for all classes of underlying assets.

HIBERNIA ENERGY III, LLC

Notes to Consolidated Financial Statements December 31, 2022 and 2021

The Company adopted this standard effective January 1, 2022 using the modified retrospective approach. In transitioning to ASC 842, the Company elected to use the practical expedient package available at the time of implementation and did not elect to use hindsight in determining lease term and assessing impairment of entity’s right-of-use assets. These elections have been applied consistently to all leases existing at, or entered into after, January 1, 2022 (the beginning of the period of adoption). As a result of the adoption of the new lease accounting guidance, we recognized on January 1, 2022, a right-of-use asset of $2,247 thousand and a lease liability of $2,246 thousand. Lease disclosures for the year ended December 31, 2021 are made under prior lease guidance in FASB ASC 840.

In June 2016, the Financial Accounting Standards Board issued ASU 2016-13, "Financial Instruments- Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments," ("ASU 2016-13") which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. ASU 2016-13 replaces the existing incurred loss impairment model with an expected loss methodology, which will result in more timely recognition of credit losses. ASU 2016-13 is effective for annual reporting periods, and interim periods within those years, beginning after December 15, 2022. It requires a cumulative effect adjustment to the balance sheet as of the beginning of the first reporting period in which the guidance is effective. We adopted ASU 2016-13 on January 1, 2023 and the adoption of ASU 2016-13 did not have a material impact on our consolidated financial statements.

(c)

Use of Estimates

The preparation of consolidated financial statements in conformity with U.S. GAAP 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 revenue and expenses during the reporting period.

Estimated quantities of crude oil, natural gas liquid (NGL) and natural gas reserves are the most significant of the Company’s estimates. Reservoir engineering is a subjective process that includes numerous uncertainties inherent in estimating quantities of underground proved crude oil, NGL and natural gas reserves. The accuracy of any reserves estimate is a function of the quality of available data and of engineering and geological interpretation and judgment. As a result, reserves estimates may be different from the quantities ultimately recovered.

Other items subject to estimates and assumptions include the carrying amount of oil & gas properties subject to the full cost “ceiling test,” and depreciation, depletion, and amortization, future plugging and abandonment costs, mark-to-market valuation of commodity derivatives, and values of assets acquired and liabilities assumed in acquisitions. While the Company believes current estimates are reasonable and appropriate, actual results could differ from those estimates.

(d)

Cash and Cash Equivalents

For purposes of the consolidated statements of cash flows, the Company considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents. The Company maintains cash balances at financial institutions in the United States of America, which from time to time, may exceed federally insured amounts. The Company has not experienced any losses in such accounts. None of the Company’s cash is restricted.

HIBERNIA ENERGY III, LLC

Notes to Consolidated Financial Statements December 31, 2022 and 2021

(e)

Accounts Receivable

Accounts receivable consists primarily of accrued revenues for oil and gas sales and joint owner billings. Receivables related to revenue from contracts with customers are $66,568 thousand and $31,843 thousand at December 31, 2022 and 2021, respectively. Receivables from joint owner billings are $26,857 thousand and $7,313 thousand at December 31, 2022 and 2021, respectively. An allowance for doubtful accounts is determined based on a review of the Company’s receivables. Receivables are charged off when collection efforts have failed and the account is deemed uncollectible. As of December 31, 2022 and 2021, the Company believes all accounts receivable are collectible and no allowance is required.

(f)

Oil and Gas Properties

The Company accounts for its investment in oil and gas producing activities using the full cost method of accounting. Accordingly, all costs associated with the acquisition, exploration and development of oil and gas properties, including costs of undeveloped leaseholds, dry holes and leasehold equipment, are capitalized. Internal costs incurred that are directly identified with acquisition, exploration and development activities undertaken by the Company for its own account, and that are not related to production, general corporate overhead or similar activities, are also capitalized. Interest costs incurred and attributable to unproved oil and gas properties under current evaluation are also capitalized. All costs related to production activities are charged to expense as incurred.

The capitalized costs of oil and gas properties plus estimated future development costs (based on current costs) to be incurred in developing proved reserves, net of estimated salvage values and accumulated depreciation, depletion, and amortization (DD&A) are amortized on a unit of production method over the estimated productive life of the proved reserves. DD&A expense related to oil and gas properties for the year ended December 31, 2022 and 2021 was $84,108 thousand and $24,318 thousand, respectively.

Certain oil and gas property costs can represent investments in unproved properties and are excluded from capitalized costs being depleted. These costs can include nonproducing leasehold, geological, and geophysical costs associated with unproved leasehold acreage and exploration drilling costs. These costs are excluded until projects are evaluated and either proved reserves are established or management determines these costs have been impaired. As of December 31, 2022 and 2021, there was $29,951 thousand and $26,070 thousand, respectively classified as unproved in the Company’s portfolio of oil and gas properties, respectively.

Under the full cost method of accounting, capitalized costs of oil and gas properties, net of accumulated DD&A and deferred income taxes, may not exceed the full cost “ceiling.” The ceiling is based on the present value of estimated future net cash flows from proved oil and gas reserves, discounted at 10% per annum, net of related tax effects. Estimated future net revenue excludes future cash outflows associated with settling asset retirement obligations included in the net book value of oil and gas properties. Estimated future net cash flows are calculated using end-of-period costs and an unweighted arithmetic average of commodity prices in effect on the first day of each of the previous 12 months. Prices are held constant indefinitely and are not changed except where different prices are fixed and determinable from applicable contracts for the remaining term of those contracts. Any excess of the net book value, less related deferred taxes, over the ceiling is written off as an impairment. An impairment recorded in one period may not be reversed in a subsequent period even though commodity prices may have increased the ceiling applicable to the subsequent period. For the periods ended December 31, 2022 and 2021, the full cost ceiling was greater than the capitalized costs of oil and gas properties, net of accumulated DD&A and deferred income taxes. As such, no impairments were recorded.

HIBERNIA ENERGY III, LLC

Notes to Consolidated Financial Statements December 31, 2022 and 2021

Proceeds from the sale of proved oil and gas properties are recognized as a reduction of oil and gas property costs with no gain or loss recognized, unless the sale significantly alters the relationship between capitalized costs and proved reserves of oil and gas. Proceeds from the sale of unproved oil and gas properties are recognized as a reduction of oil and gas property costs with no gain or loss recognized, unless the consideration received is greater than the unproved oil and gas property balance. For the years ended December 31, 2022 and 2021, the Company did not have any sales of oil and gas properties that significantly altered such relationship or that were greater than the unproved property balance.

The Company recognizes liabilities for retirement obligations associated with tangible long-lived assets, such as producing well sites when there is a legal obligation associated with the retirement of such assets and the amount can be reasonably estimated. The initial measurement of an asset retirement obligation is recorded as a liability at its fair value, with an offsetting asset retirement cost recorded as an increase to the associated property and equipment on the consolidated balance sheets. When the assumptions used to estimate a recorded asset retirement obligation change, a revision is recorded to both the asset retirement obligation and the asset retirement cost.

(g)

Oil and Gas Reserves

The estimates of proved oil and natural gas reserves utilized in the preparation of the consolidated financial statements are estimated in accordance with the guidelines established by the Securities and Exchange Commission and the FASB, which require that reserve estimates be prepared under existing economic and operating conditions using a 12-month historical average first of month price with no provision for price and cost escalations in future years except by contractual arrangements.

(h)

Business Combinations and Asset Acquisitions

The Company accounts for acquisitions of businesses from third parties using the acquisition method. Under the acquisition method the fair value of purchase consideration is allocated to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values. When sufficient market data is not available, the Company determines the fair values of proved and unproved properties acquired by preparing internal estimates of cash flows from the production of crude oil, natural gas and NGL reserves with the assistance of reserve engineers. The Company estimates future prices, operating and development costs to apply to the estimated reserves quantities acquired to arrive at an estimate of future net undiscounted cash flows. Future net undiscounted cash flows are discounted to fair value using a market-based weighted average cost of capital rate determined appropriate at the time of the business combination. The underlying commodity prices embedded in the Company’s estimated cash flows are the product of a process that begins with NYMEX forward curve pricing, adjusted for estimated location and quality differentials, as well as other factors that management believes will impact realizable prices. To compensate for the inherent risk of estimating and valuing unproved reserves, discounted future net cash flows of probable and possible reserves are reduced by additional risk-weighting factors. The inputs used by management for the fair value measurements of these acquired oil and gas properties include significant unobservable inputs, and therefore, the fair value measurements employed are classified as Level 3 for these types of assets.

HIBERNIA ENERGY III, LLC

Notes to Consolidated Financial Statements December 31, 2022 and 2021

For acquisitions of assets from third parties, the Company records the purchase price at cost and allocates such amounts to the identifiable assets and liabilities on a relative fair value basis. Fair values used in the relative fair value allocation are estimated in a similar manner as used in business combinations noted above. The Company accounts for acquisitions of businesses and acquisitions of assets from NGP and affiliates controlled by NGP as transactions between entities under common control, whereby the assets and liabilities acquired are recorded at NGP’s carrying value with differences between the fair value paid and the net assets acquired to be reflected in Members’ Equity. Historical financial results are recast for all periods presented in common control transactions involving the acquisition (or disposal) of a business. Common control transactions not involving the acquisition (or disposal) of a business do not require recasting of historical financial results. For the years ended December 31, 2022 and 2021, there were no such common control transactions.

(i)

Other Property and Equipment

Other property and equipment are recorded at cost. Depreciation is calculated using the straight-line method over the estimated useful lives of the related assets, which generally range between 3 to 30 years as shown in the table below. Expenditures for the maintenance and repair of these assets are expensed as incurred. Expenditures that significantly improve or extend the useful life of these assets are capitalized and depreciated. DD&A expense related to other property and equipment for the year ended December 31, 2022 and 2021 was $1,911 thousand and $2,122 thousand, respectively.

Asset Category		Useful Life
Office Furniture & Fixtures		7
Computer Software		5
Computer Hardware		5
Office Equipment		5
Vehicles		5
Leasehold Improvements		6
Field Equipment		3
Building		30
Facility Costs		20
Salt Water Disposal Facilities		20

The carrying value of the other property and equipment is periodically evaluated under the provisions of GAAP. GAAP requires long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. When it is determined that the estimated future net cash flows of an asset will not be sufficient to recover its carrying amount, an impairment loss must be recorded to reduce the carrying amount to its estimated fair value. No impairment was recorded for the years ended December 31, 2022 and 2021.

HIBERNIA ENERGY III, LLC

Notes to Consolidated Financial Statements December 31, 2022 and 2021

(j)

Revenue Recognition

Oil, natural gas and natural gas liquids revenues are recognized upon the transfer of control of the products to a purchaser. Transfer of control typically occurs when the products are delivered to the purchaser, title or risk of loss has transferred and collectability of the revenue is reasonably assured. Revenue is recognized net of royalties due to third parties in an amount that reflects the consideration the Company expects to receive in exchange for those products. The Company’s oil production is primarily sold under market-sensitive contracts that are typically priced at a differential to a market index price or at purchaser posted prices for the producing area. For oil contracts, the Company generally records sales based on the net amount received. The Company’s natural gas production is primarily sold under market- sensitive contracts that are typically priced at a differential to the published natural gas index price for the producing area due to the natural gas quality and the proximity to major consuming markets. For natural gas contracts, the Company generally records wet gas sales at the wellhead or inlet of the gas processing plant as revenues net of transportation, gathering and processing expenses if the processor is the customer and there is no redelivery of commodities to the Company at the tailgate of the plant. Conversely, the Company generally records residual natural gas and NGL sales at the tailgate of the plant on a gross basis along with the associated transportation, gathering and processing expenses if the processor is a service provider and there is redelivery of commodities to the Company at the tailgate of the plant. The Company recognizes salt water disposal revenue when control transfers from the producer at the facility and is recorded based on the agreed upon contract price. All facts and circumstances of an arrangement are considered and judgment is often required in making this determination.

Revenue

Revenue from contracts with customers includes the sale of oil, natural gas and natural gas liquids production and gathering and transportation revenues recorded in oil, natural gas and natural gas liquids in the consolidated statements of operations.

Oil, gas, and NGL sales and salt water disposal revenue totaled $509,874 thousand, $58,746 thousand, $79,363 thousand, and $0 respectively, representing total revenue from contracts with customers presented on the consolidated statement of operations of $647,983 thousand for the year ended December 31, 2022. Oil, gas, and NGL sales and salt water disposal revenue totaled $122,669 thousand, $14,409 thousand, $26,211 thousand, and $674 thousand respectively, representing total revenue from contracts with customers presented on the consolidated statement of operations of $163,963 thousand for the year ended December 31, 2021.

Performance obligations and contract balances

Customers are invoiced once the Company’s performance obligations have been satisfied. Payment terms and conditions vary by contract type, although terms generally include a requirement of payment within 30 days. There are no significant judgments that significantly affect the amount or timing of revenue from contracts with customers. Accordingly, the Company’s product sales contracts do not give rise to material contract assets or contract liabilities. Accounts receivable from the sales of oil, gas and natural gas liquids are primarily from exploration and production companies that own interests in properties operated by the Company. The Company routinely assesses the financial strength of its customers and bad debts are recorded based on an account by account review specifically identifying receivables that the Company believes may be uncollectible after all means of collection have been exhausted, and the potential recovery is considered remote. As of December 31, 2022 and 2021, the Company did not have any reserves for doubtful accounts.

HIBERNIA ENERGY III, LLC

Notes to Consolidated Financial Statements December 31, 2022 and 2021

The Company applies the optional exemptions in Topic 606 and does not disclose consideration for remaining performance obligations with an original expected duration of one year or less or for variable consideration related to wholly unsatisfied performance obligations.

(k)

Income Taxes

The Company is a pass-through entity for U.S. tax purposes. Under the existing provisions of the Internal Revenue Code, a pass-through entity is exempt from U.S. federal income tax. The income or loss of a pass-through entity is passed through to the owners who include their share of the Company’s separately stated items of income, deduction, loss, and credit and their share of non-separately stated income or loss. Accordingly, no provision for U.S. federal income tax has been provided for the accompanying consolidated financial statements since the owners report their share of the Company’s taxable income or loss in their income tax return. Provisions for state taxes are based on the gross profit margin of the Company.

Tax positions are evaluated in a two-step process. The Company first determines whether it is more likely than not that a tax position will be sustained upon examination. If a tax position meets the more likely than not threshold, it is then measured to determine the amount of expense to record in the financial statements. The tax position is measured as the largest amount of expense that is greater than 50 percent likely to be realized upon settlement. The Company classifies any potential accrued interest recognized on an underpayment of income taxes as interest expense and classifies any statutory penalties recognized on a tax position taken as operating expense. Management of the Company has not taken a tax position that, if challenged, would be expected to have a material effect on the consolidated financial statements at December 31, 2022.

The Company is subject to Texas Franchise Tax. A provision for Texas Franchise Tax is recognized as income taxes in the consolidated financial statements based on taxes payable or refundable for the current year. Deferred income taxes are recorded under the asset and liability method whereby deferred income tax assets and liabilities are computed for differences between the financial statement and income tax bases of assets and liabilities that will result in taxable or deductible amounts in the future. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. A valuation allowance is recorded to reduce the carrying value of deferred tax assets when it is more likely than not that a portion or all deferred tax assets will expire before realization of the benefit or future deductibility is not probable.

For the year ended December 31, 2022 and 2021, total income tax expense was $3,012 thousand and ($35) thousand, respectively. As of December 31, 2022 and 2021, the Company’s deferred tax liabilities of $3,448 thousand and $445 thousand, respectively, consisted of differences between the financial statement and income tax basis of oil and gas properties that will be taxable in the future.

HIBERNIA ENERGY III, LLC

Notes to Consolidated Financial Statements December 31, 2022 and 2021

Tax returns related to the years ended December 31, 2017, 2018, 2019, 2020, and 2021 remain open to possible examination by the tax authorities. No tax returns are currently under examination by any tax authorities. The Company did not incur any penalties or interest related to tax returns during the years ended December 31, 2022 and 2021.

(l)

Concentrations of Credit Risk

The Company’s oil and gas operations have a concentration of purchasers in the energy industry. This customer concentration may impact the Company’s overall exposure to credit risk, either positively or negatively, in that the purchasers may be similarly affected by changes in economic or other conditions. As of December 31, 2022, the Company does not require collateral from its purchasers against their receivables and did not experience any material credit losses or write offs of receivables and an allowance for doubtful accounts was not deemed necessary.

During 2022, the Company had four customers that accounted for 84.0% of revenue. Accounts receivable from these customers, totaled approximately $48,531 thousand at December 31, 2022. During 2021, the Company had three customers that accounted for 91.9% of revenue. Accounts receivable from these customers, totaled approximately $29,251 thousand at December 31, 2021.

(m)

Fair value of Financial instruments

In accordance with the reporting requirements of ASC Topic 825, Financial Instruments, the Company calculates the fair value of its assets and liabilities which qualify as financial instruments using valuation techniques that maximize the use of observable inputs and minimize the unobservable inputs to the extent possible. The Company determines fair value based on assumptions that market participants would use in pricing an asset or liability in the principal or most advantageous market. When considering market participant assumptions in fair value measurements, the following fair value hierarchy distinguishes between observable and unobservable inputs, which are categorized in one of the following levels:

	●	Level 1 Inputs: Quoted prices in active markets for identical assets or liabilities that the Company can access at the measurement date.

	●	Level 2 Inputs: Observable inputs other than Level 1 that are based upon quoted market prices for similar assets or liabilities, based upon quoted prices within inactive markets, or inputs other than quoted market prices that are observable through market data for substantially the full term of the asset or liability.

	●	Level 3 Inputs: Unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at measurement date. The Company develops unobservable inputs using the best information available in the circumstance, which might include the Company’s own data.

Financial assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of the fair value of assets and liabilities and their placement within the fair value hierarchy levels.

HIBERNIA ENERGY III, LLC

Notes to Consolidated Financial Statements December 31, 2022 and 2021

The estimated fair value of cash and cash equivalents, prepaid expenses, accounts receivable, and accounts payable approximate the carrying amounts due to the relatively short maturity of these instruments. The fair value of the Company’s debt obligations is considered to approximate carrying value due to its variable interest rates. None of these instruments are held for trading purposes.

The following table presents assets and liabilities that are measured at fair value on a recurring basis as of December 31, 2022 and 2021:

	December 31, 2022
	Level 1		Level 2		Level 3		Total
Assets
Commodity derivatives, current	$	-	$	10,097,935	$	-	$	10,097,935
Commodity derivatives, long-term		-		252,758		-		252,758
Total	$	-	$	10,350,693	$	-	$	10,350,693

	December 31, 2022
	Level 1		Level 2		Level 3		Total
Liabilities
Obligations from commodity derivatives, current	$	-	$	26,558,471	$	-	$	26,558,471
Obligations from commodity derivatives, long-term		-		13,291,951		-		13,291,951
Total	$	-	$	39,850,422	$	-	$	39,850,422

HIBERNIA ENERGY III, LLC

Notes to Consolidated Financial Statements December 31, 2022 and 2021

	December 31, 2021
	Level 1		Level 2		Level 3		Total
Liabilities
Obligations from commodity derivatives, current	$	-	$	37,544,303	$	-	$	37,544,303
Obligations from commodity derivatives, long-term		-		21,044,486		-		21,044,486
Total	$	-	$	58,588,789	$	-	$	58,588,789

Commodity Derivative Instruments

The Company accounts for derivative contracts in accordance with ASC Topic 815, Accounting for Derivative Instruments and Hedging Activities, which established accounting and reporting standards for derivative instruments. Currently, the Company has elected not to designate any derivative contracts as accounting hedges under the provisions of ASC Topic 815. As such, all derivative contracts are carried at their fair value on the balance sheet and are marked to market at the end of each period with a related adjustment to earnings.

The Company’s consolidated statements of cash flows includes the unrealized gain and loss on commodity derivative instruments, which represented the difference between the total gain and loss on commodity derivative instruments and the cash received or paid on settlements of commodity derivative instruments during the reporting period.

Fair values of the Company’s commodity derivative instruments are based on third-party pricing models which utilize inputs that are either readily available in the public market, such as forward curves, or can be corroborated from active markets of broker quotes. Future prices generally have observable inputs and are classified as Level 2 under the fair value hierarchy defined in ASC Topic 820. As of December 31, 2022 and 2021, the Company believes that substantially all the inputs required to calculate the fair value of oil, natural gas, and natural gas liquids futures prices are observable in the marketplace throughout the term of these derivative instruments or supported by observable levels at which transactions are executed in the marketplace, and are, therefore, classified as Level 2. Significant changes in the quoted forward prices for commodities and changes in market volatility generally lead to corresponding changes in the fair value measurement of the Company’s commodity derivative instruments.

HIBERNIA ENERGY III, LLC

Notes to Consolidated Financial Statements December 31, 2022 and 2021

Derivative instruments are recorded on the balance sheet at fair value. If the right of offset exists and certain other criteria are met, derivative assets and liabilities with the same counterparty are netted on the balance sheet against derivative assets and derivative liabilities, respectively. Results of the counterparty netting as of December 31, 2022 and 2021 are show in the tables below:

	December 31, 2022
	Gross		Netting			Net
Assets:
Commodity derivatives, current	$	28,367,332	$	(18,269,396	)	$	10,097,936
Commodity derivatives, long- term	$	837,071	$	(584,314	)	$	252,758
Liabilities:
Obligations from commodity derivatives, current	$	44,827,867	$	(18,269,396	)	$	26,558,471
Obligations from commodity derivatives, long- term	$	13,876,265	$	(584,314	)	$	13,291,951

HIBERNIA ENERGY III, LLC

Notes to Consolidated Financial Statements December 31, 2022 and 2021

	December 31, 2021
	Gross		Netting			Net
Assets:
Commodity derivatives, current	$	2,092,978	$	(2,092,978	)	$	-
Commodity derivatives, long- term	$	1,905,860	$	(1,905,860	)	$	-
Liabilities:
Obligations from commodity derivatives, current	$	39,637,281	$	(2,092,978	)	$	37,544,303
Obligations from commodity derivatives, long- term	$	22,950,346	$	(1,905,860	)	$	21,044,486

At December 31, 2022, the Company had the following open commodity contracts:

	Oil Fixed Price Swap Contracts
Year	Average Commodity Price		Total Barrels Under Contract
2023	$	62.55	4,497,494
2024	$	56.00	835,968
2025	$	57.70	27,060

HIBERNIA ENERGY III, LLC

Notes to Consolidated Financial Statements December 31, 2022 and 2021

	Oil Basis Swap Contracts
Year	Average Basis Variance Pricing		Total Barrels Under Contract
2023	$	.39		3,336,973
2024	$	.26		811,702
2025	$	.25		27,060

	Oil Rolling Swap Contracts
Year	Average Basis Variance Pricing		Total Barrels Under Contract
2023	$	1.07		1,813,827
2024	$	.58		98,800

	Natural Gas Fixed Price Swap Contracts
Year	Average Commodity Price		Total Mcfs Under Contract
2023	$	5.63		1,626,510
2024	$	5.64		315,250

HIBERNIA ENERGY III, LLC

Notes to Consolidated Financial Statements December 31, 2022 and 2021

	Natural Gas Basis Swap Contracts
Year	Average Basis Variance Pricing		Total Mcfs Under Contract
2023	$	.82		3,901,328
2024	$	.54		385,090

	Natural Gas Option Contracts
Year	Average Floor Price		Average Ceiling Price		Total Mcfs Under Contract
2023	$	2.86	$	3.95		4,676,341
2024	$	3.07	$	4.22		229,430

		Natural Gas Liquids Fixed Price Swap Contracts
Year	Average Commodity Price		Total Gallons Under Contract
2023	$	1.10		16,568,160
2024	$	.92		2,748,060

HIBERNIA ENERGY III, LLC

Notes to Consolidated Financial Statements December 31, 2022 and 2021

As part of a divestiture during the year ended December 31, 2020, the Company agreed to contingent consideration arrangements, where they will receive certain amounts if commodity prices are greater than specified thresholds. The fair values of the contingent consideration arrangements were determined by a third-party valuation specialist including significant inputs such as forward oil prices curves and volatility factors. These inputs are substantially observable in active markets throughout the full term of the contingent consideration arrangements or can be derived from observable data and are therefore designated as Level 2 within the valuation hierarchy. In 2021, the contingent considerations arrangements were realized in the amount of $400 thousand.

(3)

Oil and Gas Properties – Full Cost Method

Oil and gas properties consist of the following, in thousands:

	2022			2021
Proved properties	$	923,897		$	514,275
Unproved properties		29,951			26,070
		953,848			540,345
Less accumulated depletion		(137,046	)		(52,938	)
	$	816,802		$	487,407

(4)

Asset Retirement Obligations

The value of asset retirement obligations is measured using valuation techniques consistent with the income approach, which converts future cash flows to a single discounted amount. Significant assumptions to the valuation include: (i) estimated plugging and abandonment cost per well based on Company experience; (ii) estimated remaining life per well based on the reserve life per well; (iii) future inflation factors; (iv) the Company’s average credit adjusted risk free rate; and (v) applicable regulatory requirements.

Inherent in the value calculation of asset retirement obligations are numerous assumptions and judgments including, in addition to those noted above, the ultimate settlement of these amounts, the ultimate timing of such settlement, and changes in legal, regulatory, environmental and political environments. To the extent future revisions to these assumptions impact the fair value of the existing asset retirement obligation liability, a corresponding adjustment will be made to the asset balance.

HIBERNIA ENERGY III, LLC

Notes to Consolidated Financial Statements December 31, 2022 and 2021

Changes in the Company’s asset retirement obligation were as follows, in thousands:

	2022			2021
Asset retirement obligation at beginning of year	$	9,057		$	6,023
Wells drilled or acquired during the year		1,365			4,474
Adjustment due to change in well lives		-			(1,010	)
Accretion of discount		393			323
Sale and plugging of assets		(1,927	)		(753	)
Asset retirement obligation at end of year	$	8,888		$	9,057

HIBERNIA ENERGY III, LLC

Notes to Consolidated Financial Statements December 31, 2022 and 2021

(5)

Acquisitions and Divestitures

(a)

Acquisition of Certain Oil & Gas Properties from Arroyo Energy Fund – 2022

On January 25, 2022, March 3, 2022 and September 9, 2022, the Company closed on the acquisition of certain proved leasehold located in Reagan County in Texas from Arroyo Energy Fund, LP and Arroyo Energy Fund II, LP in exchange for cash consideration of $8.55 million. The acquisition was funded through a combination of draws on the Company’s revolving credit facility and cashflow from operations.

The transaction was accounted for as an acquisition of assets, with total aggregate consideration paid plus transaction costs paid being allocated to each of the assets acquired and liabilities assumed on a relative fair value basis.

(b)

Acquisition of Certain Oil & Gas Properties from Fox Management LLC – 2022

On May 12, 2022, the Company closed on the acquisition of certain proved leasehold located in Reagan County in Texas from Fox Management LLC in exchange for cash consideration of $5.72 million. The acquisition was funded through a combination of draws on the Company’s revolving credit facility and cashflow from operations.

(c)

Acquisition of Certain Oil & Gas Properties from Charles R Qualia – 2022

On April 26, 2022, the Company closed on the acquisition of certain proved leasehold located in Reagan County in Texas from Mr. Qualia in exchange for cash consideration of $2.47 million. The acquisition was funded through a combination of draws on the Company’s revolving credit facility and cashflow from operations.

(d)

Acquisition of Certain Oil & Gas Properties related to the McAlpine/Sharp et al working interest – 2022

In June 2022, the Company closed on the acquisition of certain unproved leasehold located in Reagan County in Texas from four parties for cash consideration totaling $2.82 million. The acquisition was funded through a combination of draws on the Company’s revolving credit facility and cashflow from operations.

HIBERNIA ENERGY III, LLC

Notes to Consolidated Financial Statements December 31, 2022 and 2021

(e)

Other Acquisitions of Oil & Gas Properties – 2022

During 2022, the Company closed on acquisitions and trades of proved and unproved leasehold located in Reagan County in Texas from various parties in exchange for cash consideration of $2.26 million. The acquisitions were funded through a combination of draws on the Company’s revolving credit facility and cashflow from operations.

The transactions were accounted for as acquisitions of assets, with total aggregate consideration paid plus transaction costs paid being allocated to each of the assets acquired and liabilities assumed on a relative fair value basis.

(f)

Acquisition of Certain Oil & Gas Properties from Apache – 2021

On July 30, 2021, the Company closed on the acquisition of certain proved and unproved oil & gas properties located in Reagan County in Texas from Apache Corporation and Apache Deepwater LLC (Apache) in exchange for cash consideration of $17.69 million. The acquisition was funded through a combination of draws on the Company’s revolving credit facility and cashflow from operations.

(g)

Acquisition of Certain Oil & Gas Properties from Marathon – 2021

On August 17 2021, the Company closed on the acquisition of certain proved and unproved leasehold located in Reagan County in Texas from Marathon Oil (West Texas) L.P (Marathon) in exchange for cash consideration of $6.71 million. The acquisition was funded through a combination of draws on the Company’s revolving credit facility and cashflow from operations.

(h)

Other Acquisitions of Oil & Gas Properties – 2021

During 2021, the Company closed on acquisitions and trades of proved and unproved oil and gas properties located in Reagan County in Texas from various parties in exchange for cash consideration of $.843 million. The acquisitions were funded through a combination of draws on the Company’s revolving credit facility and cashflow from operations.

(i)

Divestiture of Oil & Gas Properties – 2022

On July 12, 2022, Hibernia closed a transaction with BCP Resources LLC, in which the Company sold certain proved oil and gas properties located in Reagan County in Texas. Net cash proceeds from the sale totaled $20.01 million.

HIBERNIA ENERGY III, LLC

Notes to Consolidated Financial Statements December 31, 2022 and 2021

(j)

Divestiture of Salt Water Disposal Assets – 2021

On May 25, 2021, Hibernia closed a transaction with XRI Holdings, LLC and XRI Disposal Holdings, LLC in which the Company sold its operated SWD assets and entered into long-term (17 year) water disposal and water supply agreements. As a result of this sale, a loss of $3.47 million was recognized in 2021.

(6)

Credit Facility

On May 1, 2018, the Company entered into a Credit Agreement with JPMorgan Chase Bank as administrative agent and issuing bank to other prospective lenders (the Credit Agreement) with an initial borrowing base of $28 million. The Company entered into the fifth amendment to the Credit Agreement on May 24, 2021 and subsequently entered into the sixth amendment on November 24, 2021. These amendments included several commercial changes, extending the maturity to November 24, 2025, added four additional lenders, Canadian Imperial Bank of Commerce (CIBC), Comerica Bank, Amegy Bank and Citibank, NA, and transitioned the benchmark rate from LIBOR to an Adjusted SOFR rate, secured overnight financing rate.

The borrowing base under the Credit Agreement is subject to review every six-months on April 1 and October 1 of each year where it can be increased or decreased based on the projected present value (as determined by petroleum engineers incorporating certain assumptions provided by the lenders) of estimated future net cash flows from proved oil and gas reserves of the oil and gas properties pledged as collateral. Pursuant with these reviews, the borrowing base was $600 million and $250 million as of December 31, 2022 and 2021, respectively.

Amounts drawn under the Credit Agreement bear interest at variable rates, at the Company’s option, based either on either (i) the Secured Overnight Financing Rate (SOFR) plus 0.10% plus an applicable margin (Term Benchmark) or (ii) the base rate, with the base rate, equal to the highest of (a) JPMorgan Change Bank prime rate, (b) the Federal Funds Rate plus 0.5%, or (c) LIBOR plus 1%, plus an applicable margin (ABR loans).

As amended, fees on letters of credit issued under the Credit Agreement are at a rate equal to the applicable margin plus issuance fees of 0.125%. The Company must also pay a quarterly commitment fee on the unused portion of the borrowing base of 0.5%. The applicable margin is based on the ratio of outstanding cash borrowing plus issued letters of credit divided by the borrowing base (the Borrowing Base Utilization Percentage) as follows:

*Borrowing Base* *Utilization Grid*
Borrowing Base Utilization Percentage	< 25%	> 25% but < 50%	> 50% but < 75%	> 75% but < 90%	> 90%
Term Benchmark Loans and RFR Loans	2.750%	3.000%	3.250%	3.500%	3.750%
ABR Loans	1.750%	2.000%	2.250%	2.500%	2.750%

HIBERNIA ENERGY III, LLC

Notes to Consolidated Financial Statements December 31, 2022 and 2021

As amended, the Credit Agreement contains customary covenants, which include the requirement to maintain certain financial covenants consisting of a maximum permitted debt to net income before interest, taxes, depreciation, depletion, amortization, exploration, and debt issuance costs ratio of 3.25:1 and a consolidated current assets plus unused capacity under the Credit Agreement to consolidated current liabilities ratio not to exceed 1:1. At December 31, 2022, the Company was in compliance with all loan covenants.

At December 31, 2022 and 2021, the Company had $299 million and $62.5 million of borrowings, respectively, and no letters of credit outstanding under the Credit Agreement and, as a result, $301 million and $187.5 million, respectively, was available for use under the credit facility. The weighted average interest rate on borrowings at December 31, 2022 and 2021 was 7.7% and 3.2%, respectively.

(7)

Joint Development Agreement (“JDA”)

On October 26, 2021, the Company executed a definitive agreement with Northern Oil and Gas, Inc. (the “Partner”) to jointly develop up to 16 Hibernia operated wells in Upton and Reagan Counties, Texas. The development program targets the Wolfcamp and Spraberry formations and Hibernia serves as operator of all the wells. Under the agreement, the Partner will carry Hibernia for a portion of the capital costs to drill, complete and equip the program wells. The agreement covers well bore interest only and as such the Partner will not have the right to participate in future development on the assets as the program is completed.

(8)

Farmout and Development Agreement (“FDA”)

On May 20, 2019, the Company executed a definitive agreement with DCR III, L.P. (the “Investor”) to jointly develop up to 30 Hibernia operated wells in Upton and Reagan Counties, Texas (the “Development Agreement”) for up to $150 million, whereby $89.7 million in development capital was utilized through December 31, 2020. At the time of the executed agreement, one well was already in progress of being drilled. The Company contributed the well to the agreement at cost in the amount of $12.54 million. The Investor made a cash payment related to their working interest portion of the contributed well. On November 7, 2019, the Company entered into an amendment to the farmout and development agreement. Under this amendment, the total capital commitment was increased to $200 million. The amount advanced by the investor for drilling activities was $23.9 million, which was recorded as a liability on the balance sheet as of December 31, 2019. On March 20, 2020, the Company entered into a Second Amendment as a result of the commodity market volatility that occurred at the onset of the Coronavirus pandemic. This amendment addressed the suspension and drilling and completion operations until market conditions recovered and also set the gross well count of the development program at 25. The drilling program (the “Drilling Program”) targets the Wolfcamp and Spraberry formations and Hibernia serves as operator of all Drilling Program wells.

Under the Development Agreement, the Investor funded 85% of our working interest portion of drilling and completion costs to initially earn 85% of our working interest in each new well (in each case, proportionately reduced by other participating working interests in the well). As a result, we paid 15% of our working interest portion of such costs for 15% of our original working interest in the well. Our consolidated financial statements reflect only our working interest share in the productive wells.

HIBERNIA ENERGY III, LLC

Notes to Consolidated Financial Statements December 31, 2022 and 2021

The FDA covers well bore only costs and as such the Investor does not participate in capital expenditures related to the production facilities used in the operation of the jointly drilled wells. As a result, the Investor is charged $1.50 per barrel for their proportionate share of production running through the facilities. The Company billed $599 thousand and $1,799 thousand in facility usage recovery for the year ended December 31, 2022 and 2021 respectively. The recovery is shown in lease operating expense on the consolidate statements of operations.

On June 27, 2020, the Company entered into a Third Amendment to the FDA. The key adjustments included in this amendment related to resumption of completion operations and how the capital for these operations would be funded. This amendment set forth that the Company will fund 100% of completion capital expenditures for the 10 uncompleted wells and the ownership in these wells were amended based on expected total drilling and completion capital expenditures.

By December 31, 2020, Hibernia had drilled and completed all 25 gross wells under the Development Agreement.

On August 31, 2022, the Investor achieved the target internal rate of return and multiple of invested capital in excess of hurdle rates for its investment for all wells, therefore the Investor’s working interest reverted from Initial Working interest to 0% working interest and the Company’s working interest increased by the amount of the Investors decrease. There are no further obligations related to this FDA.

(9)

Commodity Risk Management

The Company’s revenues are derived from the sale of oil and gas production. Accordingly, the Company is exposed to risks associated with the volatility of oil and gas prices. The Company, with the approval of the board of directors, has established a hedging program to hedge its expected oil and gas revenue against price volatility.

Hedging transactions may take the form of collars, swaps, options or other derivatives indexed to NYMEX or other commodity price indexes. At December 31, 2022, the Company had contracts consisting of swaps and options. Such derivative contracts do not exceed anticipated production volumes, are expected to have a reasonable correlation between price movements in the futures market and the spot markets where the Company’s production is marketed. Derivatives are expected to be closed as related production occurs but may be closed earlier if anticipated downward price movement occurs or if the Company believes the potential for such movement has abated. 

As of December 31, 2022, the fair value of commodity derivatives on the consolidated balance sheet totaled $29,499 thousand as a net liability, of which $10,098 thousand was classified as current assets, $253 thousand was classified as noncurrent assets, $26,558 thousand was classified as current liabilities and $13,292 thousand was classified as noncurrent liabilities. As of December 31, 2021, the fair value of commodity derivatives on the consolidated balance sheet totaled $58,588 thousand as a net liability, of which none was classified as current or noncurrent assets and $37,544 thousand was classified as current liabilities and $21,044 thousand was classified as noncurrent liabilities.

HIBERNIA ENERGY III, LLC

Notes to Consolidated Financial Statements December 31, 2022 and 2021

The effect of derivatives on the consolidated statement of operations was as follows for the year-ended December 31, 2022 and 2021:

	2022			2021

	(In thousands)
Cash (paid) received in settlement of commodity derivatives	$	(111,712	)	$	(52,216	)
Unrealized gain (loss) on commodity derivatives		29,089			(49,277	)
		(82,623	)		(101,493	)

(10)

Members’ Equity

The Company’s operations are governed by the provisions of the Amended and Restated Limited Liability Company Agreement (LLC Agreement). Pursuant with the terms of the LLC Agreement there are two classes of membership interests, Class A Units and Class B Units. Distributions are first made to the holders of Class A Units pro rata in accordance with their membership interests. Once the holders of Class A Units receive a specified level of cumulative cash distributions, the holders of Class B Units receive a percentage of distributions allocable to the vested amount of Class B Units held. For the year ended December 31, 2022, total cash distributions were paid in the amount of $238,515 thousand.

Class A Units – Contributed Capital

Class A units represent interests held by investors who have contributed cash to the Company. Pursuant with the terms of the LLC Agreement, the Company is authorized to issue as many Class A Units as needed up to the committed amounts, subject to the approval of the Board of Directors.

The holders of Class A Units will (i) share in each item of Company income, gain, loss, deduction and credit, (ii) are entitled to participate in distributions, and (iii) are entitled to other voting and participating rights. For the year ended December 31, 2022 and the year-ended December 31, 2021, holders of Class A Units had reached the full commitment amount.

Class B Units – Incentive Units

Cash B Units represent incentive units issued to certain employees. Forty percent of Class B Units vest ratably over five years or earlier upon a monetization event (change in ownership, liquidation or dissolution). The remaining sixty percent of Class B Units vest upon specified levels of cumulative cash distributions to the holders of Class A Units and vested holders of Class B Units being met. All vested and unvested Class B Units will be forfeited if a unit holder’s employment is terminated for cause or the unit holder resigns prior to completion of their service arrangement. If the unit holder’s employment is terminated by the Company without cause or the unit holder resigns upon completion of the service requirement, the Company has the right, but not the obligation, to repurchase all of the vested Class B Units.

HIBERNIA ENERGY III, LLC

Notes to Consolidated Financial Statements December 31, 2022 and 2021

The Class B Units award the member a right to receive profits interest while employed and the right to receive residual equity interest upon a monetization event. The right to receive profits interests while employed is accounted for under ASC Topic 710, Compensation – general, whereas the right to receive residual equity upon a monetization event is accounted for as a liability award under ASC Topic 718, Compensation – stock compensation. During the years ended December 31, 2022 and 2021, no payments were made in respect of the Class B Units and no incentive compensation was recognized because the payment conditions leading to expected future benefits, which relate to a monetization event, as well as distributions, are not probable of occurring. As of December 31, 2022 and 2021, there were 940 and 940 Class B Units granted and outstanding, respectively.

Advances on Units

On September 23, 2022, the Company entered into Promissory Notes with several members of the organization for purposes of accelerating the noteholders expected future receipt of funds distributed by the Company. The Notes will advance funds to the Noteholders during the first $400 million dollars of distribution by the Company in a principal amount equal to 5% of the first one hundred million dollars ($100,000,000) of gross distributions and 3.33% of the next three hundred million dollars ($300,000,000) of gross distributions. The Notes shall become due and payable at the earliest of the maturity date of September 23, 2029, the sale/merger/IPO of the Company, or the day a Noteholder is no longer employed by the Company. The Notes shall bear interest at a per annum rate equal to the annual long-term Applicable Federal Rate.

As of December 31, 2022, the Company had issued $9,995 thousand in promissory notes to members of the organization, through distributions in September and December 2022. Based on the valuation of the underlying equity that secured these notes at the time of issuance, the Company recorded $9,883 thousand related to these notes to equity, with the remaining $112 thousand being recorded as compensation costs.

(11)

Commitments and Contingencies

(a)

Litigation

The Company is subject to certain claims and litigation arising in the normal course of business. In the opinion of management, the outcome of such matters will not have a materially adverse effect on the results of operations or financial position of the Company.

(b)

Environmental

There were no known environmental or other regulatory matters related to the Company’s operations that were reasonably expected to result in a material liability to the Company. Compliance with environmental laws and regulations has not had, and is not expected to have, a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows.

HIBERNIA ENERGY III, LLC

Notes to Consolidated Financial Statements December 31, 2022 and 2021

(c)

Leases

A lease provides the lessee the right to control the use of an identified asset for a period of time in exchange for consideration. Operating lease right-of-use assets and finance lease right-of-use assets (collectively “ROU assets”) represent the Company’s right to use an underlying asset for the lease term. Operating lease liabilities and finance lease liabilities (collectively, “lease liabilities”) represent the Company’s obligation to make lease payments arising from the lease. The Company determines if an arrangement is a lease at inception. ROU assets and lease liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. The Company excludes short-term leases having initial terms of 12 months or less from ROU assets and lease liabilities.

The Company has leases for its office spaces and certain equipment. Most operating leases contain renewal options that provide for rent increases based on prevailing market conditions. The Company has lease extension terms for our office spaces that have either been extended or are likely to be extended. The terms used to calculate the ROU assets and lease liabilities for these properties include the renewal options that the Company is reasonably certain to exercise.

The discount rate used to determine the commencement date present value of lease payments is the risk- free rate. ROU assets include any lease payments required to be made prior to commencement and exclude lease incentives. Both ROU assets and lease liabilities exclude variable payments not based on an index or rate, which are treated as period costs. The Company’s lease agreements do not contain significant residual value guarantees, restrictions or covenants.

Total operating lease costs were approximately $2,848 thousand for the year ended December 31, 2022. Short-term lease costs, for leases with terms of less than 12 months, during 2022 were approximately $10 thousand. Maturities of lease liabilities as of December 31, 2022 are as follows (in thousands):

	Operating Leases
2023	$	3,448
2024		1,490
2025		586
Thereafter		-
Total lease payments		5,524
Less present value discount		(162	)
Lease liabilities	$	5,362

HIBERNIA ENERGY III, LLC

Notes to Consolidated Financial Statements December 31, 2022 and 2021

Weighted average lease term and discount rate as of December 31, 2022 are as follows:

	2022
Weighted average remaining lease term (years)
Operating leases		1.84
Weighted average discount rate
Operating leases		2.92	%

Cash paid during December 31, 2022 for operating and finance leases are as follows (in thousands):

		2022
Operating cash flows		$	2,922

ROU assets obtained in exchange for lease liabilities during December 31, 2022 are as follows (in thousands):

		2022
Operating leases		$	8,262

(12)

Subsequent Events

The Company has evaluated subsequent events through April 11, 2023 which is the date the financial statements were available for issuance.

(13) Supplemental Oil and Gas Information (Unaudited)

Net Proved Oil, NGL and Natural Gas Reserves

The reserve estimates presented below were made in accordance with GAAP requirements for disclosures about oil and gas producing activities and SEC rules for oil and gas reporting of reserve estimation and disclosure.

Proved reserves are the estimated quantities of oil, gas, and NGLs 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 that renewal is reasonably certain, regardless of whether deterministic or probabilistic methods are used for the estimation. Existing economic conditions include prices and costs at which economic producibility from a reservoir is to be determined, and the price to be used is the average price during the 12-month period prior to the ending date of the period covered by the report, determined as an unweighted arithmetic average of the first-day-of- the-month price for each month within such period, unless prices are defined by contractual arrangements, excluding escalations based upon future conditions. All of the Company estimated proved reserves are located in the United States.

The tables below present a summary of changes in the Company’s estimated proved reserves for each of the years ended December 31, 2022 and 2021. The Company emphasizes that reserve estimates are inherently imprecise and that estimates of new discoveries and undeveloped locations are more imprecise than estimates of established producing oil and gas properties. Accordingly, these estimates are expected to change as future information becomes available.

	For the Year Ended December 31, 2022
	Oil			Gas			NGL			Total
Total proved reserves	MBbl			MMcf			BBbl			MBOE
Beginning of year		60,371.6			213,891.0			46,426.4			142,446.5
Revisions of previous estimates		(10,530.0	)		10,828.6			(2,973.7	)		(11,698.9	)
Extensions		25,601.2			99,309.4			20,152.1			62,304.9
Divestiture of Reserves		(500.5	)		(5,835.0	)		(1,058.9	)		(2,531.9	)
Acquisition of Reserves		4,131.3			34,900.1			6,925.9			16,873.8
Production		(5,192.2	)		(10,699.8	)		(2,245.3	)		(9,220.8	)
End of year		73,881.4			342,394.3			67,226.5			198,173.6

Proved developed reserves:
Beginning of year		20,385.3			88,702.1			18,731.7			53,900.6
End of year		33,651.4			172,306.7			33,472.9			95,842.0
Proved undeveloped reserves:
Beginning of year		39,986.3			125,188.9			27,694.8			88,545.9
End of year		40,230.1			170,087.6			33,753.6			102,331.6

For the year ended December 31, 2022, extensions resulted primarily from 44 gross (33.9 net) new wells drilled for 30,419.6 MBoe and 49 gross (37.9 net) new proved undeveloped locations for 31,885.3 MBoe.

	For the Year Ended December 31, 2021
	Oil			Gas			NGL			Total
Total proved reserves	MBbl			MMcf			BBbl			MBOE
Beginning of year		44,490.1			115,043.1			27,425.3			91,089.3
Revisions of previous estimates		(4,989.4	)		27,233.7			3,207.8			2,757.3
Extensions		18,464.4			56,365.5			12,373.2			40,231.8
Divestiture of Reserves		(611.5	)		(1,220.4	)		(288.4	)		(1,103.3	)
Acquisition of Reserves		6,280.5			24,340.9			5,373.6			15,711.0
Production		(3,262.5	)		(7,871.9	)		(1,665.1	)		(6,239.6	)
End of year		60,371.6			213,891.0			46,426.4			142,446.5

For the year ended December 31, 2021, extensions resulted primarily from 25 gross (21.4 net) new wells drilled for 23,506.4 MBoe and 21 gross (15.4 net) new proved undeveloped locations for 16,725.5 MBoe.

Standardized Measure of Discounted Future Net Cash Flows

The Company computes a standardized measure of discounted future net cash flows and changes therein relating to estimated proved reserves in accordance with authoritative accounting guidance. Future cash inflows and production and development costs are determined by applying prices and costs, including transportation, quality, and basis differentials, to the year-end estimated future reserve quantities. Each property the Company operates is also charged with field-level overhead in the estimated reserve calculation. The resulting future net cash flows are reduced to present value amounts by applying a 10 percent annual discount factor.

Future operating costs are determined based on estimates of expenditures to be incurred in developing and producing the estimated proved reserves in place at the end of the period using year end costs and assuming continuation of existing economic conditions, plus Company overhead incurred by the central administrative office attributable to operating activities and estimated abandonment costs.

The assumptions used to compute the standardized measure of discounted future net cash flows are those prescribed by the FASB and the SEC. These assumptions do not necessarily reflect the Company’s expectations of actual revenues to be derived from those reserves, nor their present value amount. The limitations inherent in the reserve quantity estimation process, as discussed previously, are equally applicable to the standardized measure of discounted future net cash flows computations since these reserve quantity estimates are the basis for the valuation process. The following prices as adjusted for transportation, quality, and basis differentials were used in the calculation of the standardized measure of discounted future net cash flows:

	For the Year Ended December 31,
	2022		2021
Oil (per Bbl)	$	94.49	$	64.50
Gas (per Mcf)	$	4.98	$	3.04
NGLs (per Bbl)	$	48.67	$	24.14

The following summary sets forth the Company’s future net cash flows relating to proved oil, gas, and NGL reserves based on the standardized measure of discounted future net cash flows:

	As of December 31,
	2022			2021

	(in thousands)
Future cash inflows	$	10,729,509		$	5,592,956
Future production costs		(1,962,712	)		(995,564	)
Future development costs		(974,037	)		(618,484	)
Future income tax expense		(56,330	)		(29,363	)
Future net cash flows	$	7,736,429		$	3,949,545
10% percent annual discount		(3,759,906	)		(2,137,270	)
Standardized measure of discounted future net cash flow (1)	$	3,976,523		$	1,812,275

(1) The company is LLC and not subject to federal income taxes

The principal sources of changes in the standardized measure of discounted future net cash flows were:

	As of December 31,
	2022			2021

	(in thousands)
Standardized measure of discounted future net cash flows, beginning of year	$	1,812,275		$	395,156
Net change in prices and production costs		883,321			802,508
Net change in future development costs		(67,863	)		7,002
Sales of oil, gas, and NGL's produced, net of production costs		(525,438	)		(245,294	)
Extensions		1,358,437			645,369
Purchase of reserves in place		267,980			159,259
Divestiture of reserves		(21,561	)		(1,383	)
Revisions of previous quantity estimates		(113,124	)		44,806
Previously estimated development costs incurred		130,529			11,755
Net change in taxes		(15,257	)		(9,447	)
Accretion of discount		182,659			40,003
Changes in timing and other		84,565			(37,459	)
Standardized measure of discounted future net cash flows, end of year	$	3,976,523		$	1,812,275

Exhibit 99.2

HIBERNIA ENERGY III, LLC

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Interim Period Ended June 30, 2023 and 2022

HIBERNIA ENERGY III, LLC

CONSOLIDATED FINANCIAL STATEMENTS

Interim Period Ended June 30, 2023 and 2022

Table of Contents

Consolidated Financial Statements:

Consolidated Balance Sheets	3

Consolidated Statements of Operations	4

Consolidated Statements of Members’ Equity	5

Consolidated Statements of Cash Flows	7

Notes to Consolidated Financial Statements	8

HIBERNIA ENERGY III, LLC

UNAUDITED CONSOLIDATED BALANCE SHEETS

AS OF JUNE 30, 2023 AND DECEMBER 31, 2022

(In $ thousands)

	June 30,			December 31,
	2023			2022
CURRENT ASSETS:
Cash and cash equivalents	$	11,074		$	19,229
Accounts receivable		103,082			93,491
Prepaid assets and other		389			1,462
Inventory		778			792
Commodity derivatives, current		-			10,098
Total current assets		115,323			125,072

OIL AND NATURAL GAS PROPERTIES, at cost utilizing the full cost method
Proved properties		1,160,700			923,897
Unproved properties		29,484			29,951
		1,190,184			953,848
Less: Accumulated depletion		(212,306	)		(137,046	)
		977,878			816,802

OTHER PROPERTY AND EQUIPMENT, at cost		80,961			61,536
Less: Accumulated depreciation		(5,683	)		(4,092	)
		75,278			57,444

OTHER ASSETS
Commodity derivatives, long-term		-			253
Debt issuance costs, net of accumulated amortization		1,414			2,158
Deposits		20			20
Operating right of use asset, net of amortization		3,561			5,430
		4,995			7,861
TOTAL ASSETS	$	1,173,474		$	1,007,179

CURRENT LIABILITIES
Accounts payable	$	33,643		$	113,545
Oil and gas royalties payable		78,941			61,588
Interest payable		1,248			1,043
Obligations from commodity derivatives, current		-			26,558
Accrued liabilities		87,727			22,279
Related party payable		-			1,331
Current portion of lease liability - operating		2,487			3,331
Total current liabilities		204,046			229,675

LONG-TERM LIABILITIES
Long-term debt		310,000			299,000
Deferred income taxes (franchise)		4,601			3,448
Obligations from commodity derivatives, long-term		-			13,292
Asset retirement obligations		9,229			8,888
Non-current portion of lease liability - operating		1,004			2,024
Total long-term liabilities		324,834			326,652
Total liabilities		528,880			556,327

MEMBERS' EQUITY
Members' equity		39,902			100,314
Retained earnings (accumulated deficit)		350,538			(7,575	)
Current year net income		254,154			358,113
		644,594			450,852
TOTAL LIABILITIES AND MEMBERS' EQUITY	$	1,173,474		$	1,007,179

See accompanying notes to consolidated financial statements.

HIBERNIA ENERGY III, LLC

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

(In $ thousands)

	Six Months Ended			Six Months Ended
	June 30,			June 30,
	2023			2022
REVENUES:
Oil	$	311,896		$	211,997
Natural gas		14,651			20,549
Natural gas liquids		46,862			35,723
Realized gain (loss) on commodity derivatives		22,910			(69,552	)
		396,319			198,717
OPERATING EXPENSES:
Lease operating		29,417			11,301
Workover		1,796			1,584
Production, ad valorem and severance tax		21,493			13,595
Revenue deductions		18,819			7,673
Depletion, depreciation and accretion		77,046			27,302
General and administrative costs		5,793			3,731
Equity compensation expense		226			-
Total operating expenses		154,590			65,186
INCOME FROM OPERATIONS		241,729			133,531
OTHER INCOME (EXPENSE):
Interest expense, net		(15,427	)		(2,709	)
Other income, net		72			4
Provision for income taxes		(1,729	)		(6	)
Unrealized gain (loss) on commodity derivatives		29,500			(80,725	)
Gain on sale of assets		9			-
Total other income (expense)		12,425			(83,436	)
NET INCOME	$	254,154		$	50,095

See accompanying notes to consolidated financial statements.

HIBERNIA ENERGY III, LLC

UNAUDITED CONSOLIDATED STATEMENTS OF MEMBERS' EQUITY

(In $ thousands)

Balance as of December 31, 2022	$	450,852
Contributions		50
Advances on units		(1,166	)
Distributions		(59,296	)
Net income		254,154
Balance as of June 30, 2023	$	644,594

See accompanying notes to consolidated financial statements.

HIBERNIA ENERGY III, LLC

UNAUDITED CONSOLIDATED STATEMENTS OF MEMBERS' EQUITY

(In $ thousands)

Balance as of December 31, 2021	$	341,137
Net income		50,095
Balance as of June 30, 2022	$	391,232

See accompanying notes to consolidated financial statements.

HIBERNIA ENERGY III, LLC

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In $ thousands)

	Six Months Ended			Six Months Ended
	June 30,			June 30,
	2023			2022
OPERATING ACTIVITIES:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:	$	254,154		$	50,095
Depletion, depreciation and accretion		77,046			27,302
Amortization of capitalized debt issuance costs		743			597
Deferred tax expense		1,153			-
Non-cash lease expense		1,874			1,033
Gain on sale of assets		(9	)		-
Change in commodity derivatives		(29,500	)		80,725
Changes in operating assets and liabilities:
Accounts Receivable		(9,124	)		(80,672	)
Prepaid expenses and other assets		1,088			(5,067	)
Accounts payable & accrued liabilities		32,005			67,685
Change in lease liability - operating		(1,869	)		(1,109	)
Net cash provided by operating activities		327,561			140,589

INVESTING ACTIVITIES:
Capital expenditures on oil and natural gas properties		(257,086	)		(152,234	)
Acquisitions of oil and natural gas properties from third parties		(7,983	)		(15,570	)
Proceeds from sale of oil and natural gas properties		199			750
Purchases of other property and equipment		(21,442	)		(13,017	)
Proceeds from sales of other property and equipment		8			-
Net cash used in investing activities		(286,304	)		(180,071	)

FINANCING ACTIVITIES:
Borrowings from long-term debt		141,000			102,500
Repayment of borrowings of long-term debt		(130,000	)		(45,000	)
Advances on units		(1,166	)		-
Contributions from members		50			-
Return of capital to members		(59,296	)		-
Net cash (used in) provided by financing activities		(49,412	)		57,500

(Decrease) increase in current period		(8,155	)		18,018
Cash, beginning of period		19,229			9,527
Cash, end of period	$	11,074		$	27,545

See accompanying notes to consolidated financial statements.

HIBERNIA ENERGY III, LLC

Notes to Consolidated Financial Statements

June 30, 2023

(Unaudited)

(1)

Formation and Operations of the Company

Effective May 31st, the Members, Hibernia Energy III, LLC (“HE3”) and Hibernia Energy III Holdings (“HE3 Holdings”), LLC entered into a Board-approved Contribution Agreement that stated all Members shall irrevocably contribute all HE3 interests to HE3 Holdings, and cease to own any limited liability company interests in HE3. As a result, HE3 Holdings will be the sole member of HE3.

(2)

Basis of Presentation

(a)

Presentation

In the opinion of management, the unaudited interim consolidated financial statements of the Company as of June 30, 2023 and for the six months ended June 30, 2023 and 2022 include all adjustments and accruals, consisting of normal, recurring adjustments and accruals necessary for a fair presentation of the results of the interim periods in conformity with U.S. GAAP. The operating results for the six months ended June 30, 2023 are not necessarily indicative of results for a full year.

Certain information and footnote disclosures normally included in financial statements in accordance with U.S. GAAP have been condensed or omitted. These unaudited interim consolidated financial statements should be read together with the audited consolidated financial statements and notes for the year ended December 31, 2022.

(b)

Recent accounting pronouncements

In June 2016, the Financial Accounting Standards Board issued ASU 2016-13, "Financial Instruments- Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments," ("ASU 2016-13") which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. ASU 2016-13 replaces the existing incurred loss impairment model with an expected loss methodology, which will result in more timely recognition of credit losses. ASU 2016-13 is effective for annual reporting periods, and interim periods within those years, beginning after December 15, 2022. It requires a cumulative effect adjustment to the balance sheet as of the beginning of the first reporting period in which the guidance is effective. On January 1, 2023, we adopted ASC 326 "Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments," ("ASC 326") using the prospective transition approach. The adoption of this standard did not have a material impact on our condensed consolidated financial statements.

(c)

Use of Estimates

HIBERNIA ENERGY III, LLC

Notes to Consolidated Financial Statements

June 30, 2023

(Unaudited)

(3)

Fair value of Financial Instruments

•

Level 1 Inputs: Quoted prices in active markets for identical assets or liabilities that the Company can access at the measurement date.

•

Level 2 Inputs: Observable inputs other than Level 1 that are based upon quoted market prices for similar assets or liabilities, based upon quoted prices within inactive markets, or inputs other than quoted market prices that are observable through market data for substantially the full term of the asset or liability.

•

Level 3 Inputs: Unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at measurement date. The Company develops unobservable inputs using the best information available in the circumstance, which might include the Company’s own data.

Financial assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of the fair value of assets and liabilities and their placement within the fair value hierarchy levels.

HIBERNIA ENERGY III, LLC

Notes to Consolidated Financial Statements

June 30, 2023

(Unaudited)

As of June 30, 2023, the Company did not hold any assets and liabilities that are measured at fair value on a recurring basis. The following table presents assets and liabilities that are measured at fair value on a recurring basis as December 31, 2022:

	December 31, 2022
	Level 1		Level 2		Level 3		Total
Assets
Commodity derivatives, current	$	-	$	10,097,935	$	-	$	10,097,935
Commodity derivatives, long-term		-		252,758		-		252,758
Total	$	-	$	10,350,693	$	-	$	10,350,693

	December 31, 2022
	Level 1		Level 2		Level 3		Total
Liabilities
Obligations from commodity derivatives, current	$	-	$	26,558,471	$	-	$	26,558,471
Obligations from commodity derivatives, long-term		-		13,291,951		-		13,291,951
Total	$	-	$	39,850,422	$	-	$	39,850,422

Commodity Derivative Instruments

HIBERNIA ENERGY III, LLC

Notes to Consolidated Financial Statements

June 30, 2023

(Unaudited)

Fair values of the Company’s commodity derivative instruments are based on third-party pricing models which utilize inputs that are either readily available in the public market, such as forward curves, or can be corroborated from active markets of broker quotes. Future prices generally have observable inputs and are classified as Level 2 under the fair value hierarchy defined in ASC Topic 820. As of June 30, 2023 and December 31, 2022, the Company believes that substantially all the inputs required to calculate the fair value of oil, natural gas, and natural gas liquids futures prices are observable in the marketplace throughout the term of these derivative instruments or supported by observable levels at which transactions are executed in the marketplace, and are, therefore, classified as Level 2. Significant changes in the quoted forward prices for commodities and changes in market volatility generally lead to corresponding changes in the fair value measurement of the Company’s commodity derivative instruments.

Derivative instruments are recorded on the balance sheet at fair value. If the right of offset exists and certain other criteria are met, derivative assets and liabilities with the same counterparty are netted on the balance sheet against derivative assets and derivative liabilities, respectively. As of June 30, 2023, the Company did not hold any commodity derivative instruments.

HIBERNIA ENERGY III, LLC

Notes to Consolidated Financial Statements

June 30, 2023

(Unaudited)

Results of the counterparty netting as of December 31, 2022 are show in the tables below:

	December 31, 2022
	Gross		Netting			Net
Assets:
Commodity derivatives, current	$	28,367,332	$	(18,269,396	)	$	10,097,936
Commodity derivatives, long- term	$	837,071	$	(584,314	)	$	252,758

Liabilities:
Obligations from commodity derivatives, current	$	44,827,867	$	(18,269,396	)	$	26,558,471
Obligations from commodity derivatives, long-term	$	13,876,265	$	(584,314	)	$	13,291,951

(4)

Oil and Gas Properties – Full Cost Method

Oil and gas properties consist of the following, in thousands:

	June 30, 2023			December 31, 2022
Proved properties	$	1,160,700		$	923,897
Unproved properties		29,484			29,951
		1,190,184			953,848
Less accumulated depletion		(212,306	)		(137,046	)
	$	977,878		$	816,802

HIBERNIA ENERGY III, LLC

Notes to Consolidated Financial Statements

June 30, 2023

(Unaudited)

(5)

Acquisitions

The Company regularly seeks to acquire or trade for acreage that complements its operations, provides exploration and development opportunities, increases the lateral length of future horizontal wells and provides superior returns on investments.

During the six months ended June 30, 2023, the Company closed on acquisitions and trades of proved and unproved leasehold located in Reagan County in Texas from various parties in exchange for cash consideration of $7.98 million. The acquisitions were funded through a combination of draws on the Company’s revolving credit facility and cashflow from operations.

During the six months ended June 30, 2022, the Company closed on the acquisition of certain proved leasehold located in Reagan County in Texas from Arroyo Energy Fund, LP and Arroyo Energy Fund II, LP, Fox Management LLC, Charles R Qualia and parties related to the McAlpine/Sharp et al working interests in exchange for cash consideration of $15.57 million. The acquisitions were funded through a combination of draws on the Company’s revolving credit facility and cashflow from operations.

The Company accounted for these transactions as acquisitions of assets, with total aggregate consideration paid plus transaction costs paid being allocated to each of the assets acquired and liabilities assumed on a relative fair value basis.

(6)

Credit Facility

The Company maintains a revolving corporate credit facility (the “Credit Facility”) with a syndicate of financial institutions and has aggregate loan commitments of $600 million. The credit facility has a maturity date of November 24, 2025. As of June 30, 2023, the Company had $310 million of borrowings under the Credit Facility. The weighted average interest rate on borrowings at June 30, 2023 was 8.47%. At June 30, 2023, the Company was in compliance with all loan covenants.

(7)

Commodity Risk Management

HIBERNIA ENERGY III, LLC

Notes to Consolidated Financial Statements

June 30, 2023

(Unaudited)

Hedging transactions may take the form of collars, swaps, options or other derivatives indexed to NYMEX or other commodity price indexes. At June 30, 2023 the Company did not hold any open contracts. At December 31, 2022, the Company had contracts consisting of swaps and options. Such derivative contracts did not exceed anticipated production volumes, and had a reasonable correlation between price movements in the futures market and the spot markets where the Company’s production was marketed. Derivatives are expected to be closed as related production occurs but may be closed earlier if anticipated downward price movement occurs or if the Company believes the potential for such movement has abated.

The effect of derivatives on the consolidated statement of operations was as follows for the six months ended June 30, 2023 and 2022:

	June 30, 2023		June 30, 2022
		(In thousands)
Cash received (paid) in settlement of commodity derivatives	$	22,910	$	(69,552	)
Unrealized gain (loss) on commodity derivatives		29,500		(80,725	)
	$	52,410	$	(150,277	)

(8)

Members’ Equity

The Company’s operations are governed by the provisions of the Amended and Restated Limited Liability Company Agreement (LLC Agreement). Pursuant with the terms of the LLC Agreement there are two classes of membership interests, Class A Units and Class B Units. Distributions are first made to the holders of Class A Units pro rata in accordance with their membership interests. Once the holders of Class A Units receive a specified level of cumulative cash distributions, the holders of Class B Units receive a percentage of distributions allocable to the vested amount of Class B Units held. For the six months ended June 30, 2023 and 2022, total cash distributions were paid in the amount of $59,296 thousand and $0 thousand, respectively.

HIBERNIA ENERGY III, LLC

Notes to Consolidated Financial Statements

June 30, 2023

(Unaudited)

Class A Units – Contributed Capital

The holders of Class A Units will (i) share in each item of Company income, gain, loss, deduction and credit, (ii) are entitled to participate in distributions, and (iii) are entitled to other voting and participating rights. For the six months ended June 30, 2023 and 2022, holders of Class A Units had reached the full commitment amount.

Class B Units – Incentive Units

The Class B Units award the member a right to receive profits interest while employed and the right to receive residual equity interest upon a monetization event. The right to receive profits interests while employed is accounted for under ASC Topic 710, Compensation – general, whereas the right to receive residual equity upon a monetization event is accounted for as a liability award under ASC Topic 718, Compensation – stock compensation. During the six months ended June 30, 2023 and 2022, no payments were made in respect of the Class B Units and no incentive compensation was recognized because the payment conditions leading to expected future benefits, which relate to a monetization event, as well as distributions, are not probable of occurring. As of June 30, 2023 and 2022, there were 940 Class B Units granted and outstanding.

Advances on Units

As of June 30, 2023 and 2022, the Company issued an additional $1,166 thousand and $0 thousand, respectively in promissory notes to members of the organization through distributions. The value related to these notes are recorded to equity.

(9)

Commitments and Contingencies

(a)

Litigation

HIBERNIA ENERGY III, LLC

Notes to Consolidated Financial Statements

June 30, 2023

(Unaudited)

(b)

Environmental

(10)

Subsequent Events

On June 19, 2023, Hibernia Energy III Holdings, LLC, a Delaware limited liability company and Hibernia Energy III-B Holdings, LLC, a Delaware limited liability company entered into a membership interest purchase agreement with Civitas Resources, Inc., pursuant to which Civitas agreed to purchase all of the issued and outstanding equity ownership interests of Hibernia Energy III, LLC and Hibernia Energy III-B, LLC for an aggregate consideration of $2.25 billion in cash. The transaction was subject to certain customary purchase price adjustments and closing conditions. The transaction closed on August 2, 2023. At time of closing, the Company paid $13.66 million in incentive compensation.

The Company has evaluated subsequent events through August 17, 2023 which is the date the financial statements were available for issuance.

Exhibit 99.3

Tap Rock AcquisitionCo, LLC

Consolidated Financial Statements

As of December 31, 2022 and December 31, 2021 and for the Years Ended December 31, 2022 and December 31, 2021

Tap Rock AcquisitionCo, LLC

Consolidated Financial Statements

As of December 31, 2022 and December 31, 2021 and for the Years Ended December 31, 2022 and December 31, 2021

Page(s)

Index		1

Report of Independent Auditors		2-3

Consolidated Financial Statements and notes

Consolidated Balance Sheets		4

Consolidated Statements of Operations		6

Consolidated Statements of Changes in Equity		7

Consolidated Statements of Cash Flows		8

Notes to Consolidated Financial Statements		8–28

Report of Independent Auditors

To the Board of Managers

Tap Rock AcquisitionCo, LLC

We have audited the consolidated financial statements of Tap Rock AcquisitionCo, LLC, (the Company) which comprise the consolidated balance sheets as of December 31, 2022 and 2021, and the related consolidated statements of operations, changes in equity and cash flows for the years then ended, and the related notes (collectively referred to as the “financial statements”).

Basis for Opinion

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

Responsibilities of Management for the Financial Statements

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

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

Auditor’s Responsibilities for the Audit of the Financial Statements

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

In performing an audit in accordance with GAAS, we:

Exercise professional judgment and maintain professional skepticism throughout the audit.

Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control. Accordingly, no such opinion is expressed.

Conclude whether, in our judgment, there are conditions or events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern for a reasonable period of time.

August 31, 2023

Tap Rock AcquisitionCo, LLC

Consolidated Balance Sheets

Years Ending December 31, 2022 and December 31, 2021

(in thousands of dollars)

	December 31,
	2022		2021
Assets
Current assets
Cash and cash equivalents	$	5,256	$	4,685
Accounts receivable trade, net of allowance for doubtful accounts of $113 and $68, respectively		116,120		129,126
Accounts receivable, affiliates		2,934		2,157
Other		14,195		9,482
Total current assets		138,505		145,450

Long-term assets
Proved oil and natural gas property, net, full cost method		1,023,047		907,211
Unevaluated oil and natural gas property		16,963		20,181
Other property		26,010		15,187
Lease right-of-use asset		2,136		-
Total assets	$	1,206,661	$	1,088,029

Liabilities and equity
Current liabilities
Accounts payable		24,360		56,780
Accrued liabilities		70,197		74,691
Commodity derivative liability		10,245		15,580
Royalties payable		42,894		62,526
Deferred revenue		4,501		4,501
Term loan, current portion		7,000		7,000
Lease liability		1,010		-
Total current liabilities		160,207		221,078

Tap Rock AcquisitionCo, LLC

Consolidated Balance Sheets

As of December 31, 2022 and December 31, 2021

(in thousands of dollars)

Long-term liabilities
Term loan, net		8,659		15,615
Deferred revenue		48,391		52,892
Commodity derivative liability		-		6,452
Asset retirement obligation		3,943		3,161
Lease liability		1,127		-
Total long-term liabilities		62,120		78,120

Commitments and contingent liabilities (see Note 11)

Net parent investment		964,358		769,881
Non-controlling interest		19,976		18,950
Total equity		984,334		788,831
Total liabilities and equity	$	1,206,661	$	1,088,029

The accompanying notes are an integral part of these consolidated financial statements.

Tap Rock AcquisitionCo, LLC

Consolidated Statements of Operations

Years Ending December 31, 2022 and December 31, 2021

(in thousands of dollars)

	Year ended December 31,
	2022			2021
Revenues
Oil, natural gas, and NGL	$	1,069,308		$	704,778
Other		2,051			4,443
Total operating revenue		1,071,359			709,221

Expenses
Lease operating		138,410			86,173
Production taxes		90,034			60,036
Transportation, processing, and gathering		20,859			11,802
Depletion, depreciation, and accretion of ARO		160,103			140,264
General and administrative		32,511			17,850
Total operating expenses		441,917			316,125
Total operating income		629,442			393,096

Other expense
Commodity derivatives loss, net		(125,580	)		(432,581	)
Interest expense		(23,759	)		(10,563	)
Net income (loss)	$	480,103		$	(50,048	)
Net income attributable to non-controlling interest		19,792			8,371
Net income (loss) attributable to Tap Rock AcquisitionCo	$	460,311		$	(58,419	)

The accompanying notes are an integral part of these consolidated financial statements.

Tap Rock AcquisitionCo, LLC

Consolidated Statements of Changes in Equity

As of December 31, 2022 and December 31, 2021

(in thousands of dollars)

	Net parent investment			Non- controlling interests			Total
Balance at December 31, 2020	$	523,009		$	26,968		$	549,977

Contributions from non-controlling interests		-			7		$	7

Distributions to non-controlling interests		-			(16,396	)	$	(16,396	)

Net transfers from parent		305,291			-		$	305,291

Net income (loss)		(58,419	)		8,371		$	(50,048	)

Balance at December 31, 2021	$	769,881		$	18,950		$	788,831

Distributions to non-controlling interests		-			(18,766	)	$	(18,766	)

Net transfers to parent		(265,834	)		-		$	(265,834	)

Net income		460,311			19,792		$	480,103

Balance at December 31, 2022	$	964,358		$	19,976		$	984,334

The accompanying notes are an integral part of these consolidated financial statements.

Tap Rock AcquisitionCo, LLC

Consolidated Statements of Cash Flows

Years Ending December 31, 2022 and December 31, 2021

(in thousands of dollars)

	For the Years Ended December 31,
	2022			2021
Cash flows from operating activities
Net income (loss)	$	480,103		$	(50,048	)
Adjustments to reconcile net income to net cash provided by operating activities:
Unrealized (gain) loss on derivatives		(142,449	)		206,559
Depletion, depreciation, amortization and accretion of ARO		160,103			140,264
Amortization of debt issuance costs		1,354			763
Stock-based compensation		20,228			-
Changes in operating assets and liabilities:
Accounts receivable		12,229			(93,341	)
Other assets		(6,850	)		(6,056	)
Accounts payable and other current liabilities		(49,911	)		84,371
Accrued liabilities		17,820			15,027
Deferred revenue		(4,501	)		(4,501	)
Net cash provided by operating activities		488,126			293,038

Cash flows from investing activities
Acquisition of proved and unproved oil and gas properties		(47,987	)		(11,092	)
Expenditures for oil and natural gas properties and equipment		(246,246	)		(371,822	)
Expenditures for other property and equipment		(10,846	)		(2,601	)
Net cash used in investing activities		(305,079	)		(385,515	)

Cash flows from financing activities
Proceeds from capital contributions		-			7
Distributions to non-controlling interest owners		(18,766	)		(16,396	)
Repayments under term loan		(7,000	)		(3,500	)
Net transfers (from) to parent		(156,710	)		114,057
Net cash (used in) provided by financing activities		(182,476	)		94,168

Net increase in cash		571			1,691
Cash, cash equivalents, and restricted cash at beginning of period		4,685			2,994
Cash, cash equivalents, and restricted cash at ending of period	$	5,256		$	4,685

Supplemental disclosures of cash flow information:
Cash paid for interest	$	793		$	929
Supplemental disclosures of noncash investing activities:
Accrued property additions	$	22,314		$	(19,760	)

Tap Rock AcquisitionCo, LLC

Notes to Consolidated Financial Statements

Organization and Basis of Presentation

Organization

On June 20, 2023, Civitas Resources, Inc. (“Civitas”) entered into a Membership Interest Purchase Agreement (“MIPA”) with Tap Rock AcquisitionCo, LLC (“the Company”). The MIPA closed on August 2, 2023, with an effective date of July 1, 2023. Tap Rock Resources, LLC created the Company for purposes of the sale. The purpose of the creation of the Company was to carve-out the oil and gas properties and related net assets being purchased by Civitas into the Company. Civitas agreed to purchase the Company for a cash consideration of $753.1 million and 6,796,866 shares of common equity, before purchase price adjustments. Civitas also agreed to purchase Tap Rock NM10 Legacy Holdings, LLC for $88.8 million in cash consideration and 801,256 shares of common equity, before purchase price adjustments.

Tap Rock Resources, LLC (“Tap Rock Resources” or “Parent”) and its wholly owned subsidiaries, Tap Rock Holdings, LLC, Tap Rock Operating, LLC, Tap Rock Midstream, LLC, and Tap Rock Minerals, LP are Delaware Limited Liability Companies and a Delaware Limited Partnership, respectively. In addition, the Company has a consolidated subsidiary, Tap Rock NM10 Minerals, LLC (“NM10”), which is a Delaware Limited Liability Company. Tap Rock Resources was founded in September of 2016 with an equity contribution from Natural Gas Partners XI, L.P and is engaged in the acquisition, exploration, development, and production of crude oil and natural gas in Eddy and Lea counties in New Mexico and Pecos and Reeves Counties in Texas.

The accompanying consolidated financial statements (“the financial statements”) were prepared for the purpose of reflecting historical net assets along with operations that were transferred into the Company that Civitas is purchasing through the MIPA. The Company consolidates NM10 due to its status as a variable interest entity. See Note 12 – Variable Interest Entities for more information. The assets, liabilities, revenues and expenses, and cash flows of the sold assets as of December 31, 2022 and 2021 and for the years then ended are representative of the Company.

Basis of Presentation

The Company’s net assets have historically operated as part of Tap Rock Resources and not as a standalone entity. The accompanying financial statements represent the historical operations of certain acquired oil and gas properties and related net assets of Tap Rock Resources and have been derived from Tap Rock Resource’s historical accounting records. All revenues and costs as well as assets and liabilities directly associated with the business activity of the Company are included in the financial statements.

The financial statements have been prepared in accordance with Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin (“SAB”) Topic 1-B. These rules require allocation of certain general costs for salaries and benefits, depletion, depreciation, and amortization (“DD&A”), rent, accounting, legal services, and other expenses.

The Company has allocated certain of Tap Rock Resources’ general and administrative and depletion expenses within the financial statements as they are a function of overall operations. These expenses have been allocated using a ratio of oil and gas volumes produced by the Company to the total oil and gas volumes produced by all properties owned by Tap Rock Resources for the years ended December 31, 2022 and 2021.

In March 2022, incentive units previously granted to Tap Rock Resources employees were modified to allow employees to retain incentive units upon voluntary resignation under a 10-year, quarterly vesting period. This modification, in accordance with authoritative accounting guidance, caused Tap Rock to begin recognizing stock-based compensation expense based on the fair value of the awards determined at the time of modification quarterly, ratably over the 10-year vesting period. As the services rendered by employees, for which the units were granted, relate to both assets carved-out to the Company and retained by Tap Rock Resources, noncash stock compensation expense has been allocated using a ratio of oil and gas volumes produced by the Company to the total oil and gas volumes produced by all properties owned by Tap Rock Resources for the year ended December 31, 2022.

Tap Rock AcquisitionCo, LLC

Notes to Consolidated Financial Statements

Tap Rock Resources uses over-the-counter swaps and collar agreements to manage the commodity price risk associated with forecasted sale of its crude, natural gas, and NGL production, including production on the properties within the Company. Because the operations and properties of the Company benefited from the hedging protection provided by these derivatives, Management determined that both unrealized and realized gains and losses should be allocated to the Company by utilizing production volumes for each respective commodity (i.e., oil, gas, NGLs) in the Company to the total production volumes for each commodity of all properties owned by Tap Rock Resources.

Tap Rock Resources is the legal obligor of a Credit Facility and Bonds Payable that are used to help finance capital spend and acquisitions, including for properties within the Company. Due to the Company benefitting from the financing that these debt instruments provided for capital additions and acquisitions, and because borrowings and/or repayments from debt are primarily driven by capital spend rather than production, interest expense and loan cost amortization related to these debt instruments have been allocated to the Company using a ratio of capital additions and acquisitions of the Company to the total capital additions and acquisitions of all properties owned by Tap Rock Resources.

The Parent’s net investment in the consolidated balance sheets represents Tap Rock Resources’ historical net investment in the Company resulting from various transactions with and allocations from the Parent. Balances due to and due from the Parent and accumulated earnings attributable to the Company’s operations have been presented as components of Parent investment. Tap Rock Resources uses a centralized approach to cash management and financing of its operations. Financial transactions related to the Company are accounted for through the parent investment account. Accordingly, cash, cash equivalents and debt at Tap Rock Resources have not been included within these financial statements. The cash generated by the Company’s operations and expenses paid by the Parent on its behalf are reflected as a net change in Parent investment in the consolidated statement of cash flows.

Management believes the allocation methodologies used are reasonable and result in an allocation of the cost of doing business borne by Tap Rock Resources on behalf of the Company. However, amounts recognized by the Company are not necessarily representative of the amounts that would have been reflected in the financial statements had the Company operated independently of Tap Rock Resources. These allocations may not be indicative of the cost of future operations or the amount of future allocations.

Summary of Significant Accounting Policies

Principles of Consolidation

The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP” or “GAAP”) and include the assets and liabilities that have been determined to be specifically identifiable or otherwise attributable to the Company, its wholly owned subsidiaries and variable interest entities (VIE) for which the Company is the primary beneficiary. All intercompany accounts and transactions have been eliminated in consolidation.

Tap Rock AcquisitionCo, LLC

Notes to Consolidated Financial Statements

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the accompanying financial statements and disclosures. Items subject to such estimates and assumptions include (1) cash flow estimates used in the ceiling test for oil and natural gas properties; (2) volumes of oil, natural gas, and natural gas liquid (NGL) reserves used in calculating DD&A expense; (3) asset retirement obligations; (4) accrued oil, natural gas, and NGL sales and other receivables; and (5) fair values of derivative instruments. Actual results could differ from estimates.

Cash and Cash Equivalents

Cash equivalents consist of cash and highly liquid investments, which are readily convertible into cash and have maturities of three months or less. The cash presented on the consolidated balance sheets is attributable to NM10. Tap Rock Resources uses a centralized approach to cash management and financing of its operations. These arrangements are not reflective of the manner in which the business would have financed its operations had it been a standalone entity separate from Tap Rock Resources during the periods presented. Cash pooling, related interest, and intercompany arrangements are excluded from the asset and liability balances in the consolidated balance sheets. These amounts have instead been reported as Net parent investment as a component of Equity.

Accounts Receivable

The Company records estimated oil, natural gas, and NGL revenue receivable from third parties at its net revenue interest. For receivables due from working interest owners, the Company generally has the ability to withhold future revenue disbursements to recover non-payment of working interest billings. Management periodically reviews accounts receivable amounts for collectability. At both December 31, 2022 and December 31, 2021, the Company’s allowance for doubtful accounts related to accounts receivable was $0.1 million. Generally, the Company’s oil, natural gas, and NGL receivables are collected within 30 to 90 days. The Company monitors the credit quality of its counterparties through review of collections, credit ratings, and other analyses. The Company develops its estimated allowance for expected credit losses primarily using an aging method and analyses of historical loss rates as well as consideration of current and future conditions that could impact its counterparties’ credit quality and liquidity. The Company did not record credit losses for the years ended December 31, 2022 and 2021.

Although diversified among many purchasers, collectability is dependent upon the financial wherewithal of each individual company and is influenced by the general economic conditions of the industry. Receivables are not collateralized.

As of December 31, 2022 and December 31, 2021, the accounts receivable balance includes (in thousands):

	As of December 31,
	2022		2021
Trade Accounts Receivable
Oil, natural gas, and NGL revenues	$	83,658	$	114,419
Amounts due from working interest owners		32,462		14,707
Trade Accounts Receivable, net	$	116,120	$	129,126

Tap Rock AcquisitionCo, LLC

Notes to Consolidated Financial Statements

Accounts receivable, affiliate, relates to reimbursements from Tap Rock Resources II, LLC, an affiliate of the Company. The reimbursements relate primarily to billable costs paid by the Company on behalf of Tap Rock Resources II.

Proved Oil and Natural Gas Properties, including Ceiling Test

The Company’s oil and natural gas exploration and production activities are accounted for using the full cost method of accounting for exploration and development activities as defined by the SEC Release No. 33-8995, Modernization of Oil and Gas Reporting Requirements and Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 932, Extractive Activities – Oil and Gas. Under this method, all property acquisition, direct geophysical and geological costs, and costs of drilling exploratory and development wells are capitalized when incurred as oil and natural gas properties.

The carrying amount of oil and natural gas properties also includes estimated asset retirement costs recorded based on the fair value of the asset retirement obligation when incurred. Gain or loss on the sale or other disposition of oil and natural gas properties is not recognized, unless the gain or loss would significantly alter the relationship between capitalized costs and proved reserves of oil, natural gas, and NGLs attributable to a country.

Producing properties, including associated infrastructure and capitalized asset retirement costs for Tap Rock Resources, are depleted on a country basis using the units-of-production method based on estimated total proved reserves. Depletion was allocated to the Company using a ratio of oil and gas volumes produced by the Company to the total oil and gas volumes produced by all properties owned by Tap Rock Resources.

The Company reviews its oil and natural gas properties for impairment via a ceiling test annually. Impairment is deemed to have occurred when the carrying value of the properties exceeds the full cost ceiling, which is estimated at the present value of future cash flows from proved reserves, discounted at 10 percent, using a 12-month average price, calculated as the unweighted arithmetic average of the first-day-of-the-month price for each month, adjusted for realized hedge proceeds plus costs excluded from amortization. In such circumstances the cost of the property (full cost pool) is written down to the ceiling.

During the years ended December 31, 2022 and December 31, 2021, the Company recognized no write-down of oil and natural gas properties as a result of the full cost ceiling test.

Unevaluated Properties

The costs of unevaluated properties are withheld from the depletion base until such time as the properties are either developed or impaired. Unevaluated properties are carried at cost and are reviewed for impairment whenever events or circumstances indicate a likely loss of the right of use of those assets or at least annually. In determining whether a significant unevaluated property is impaired, the Company considers numerous factors including, but not limited to, current exploration plans, favorable or unfavorable exploration activity on adjacent leaseholds, in-house geologists’ evaluations of the lease, and the remaining lease term. If an unevaluated property is impaired, the Company will add the costs to the asset pool and depletion will begin. Capitalized costs of unevaluated properties are reclassified as developed properties when the associated acreage is developed through the drilling and completion of wells or added to the full cost pool when impaired. During the year ended December 31, 2022, the Company impaired, and therefore added to the depletable base, $0.6 million related to the expirations of leases. There were no impairments for the year ended December 31, 2021.

Tap Rock AcquisitionCo, LLC

Notes to Consolidated Financial Statements

Other Property

Other property consists of land and surface rights and yard inventory. The Company evaluates its other property for impairment when events or changes in circumstances indicate that the related carrying amount may not be recoverable. Useful lives are determined based on the shorter of the life of the asset or the reserves serviced by the equipment.

Deferred Debt Issuance Costs

Debt issuance costs include origination, legal, engineering, and other fees incurred to issue the debt in connection with NM10’s term loan. Debt issuance costs are amortized to interest expense using the straight-line method, which approximates the effective interest method over the term of the debt. See Note 9 – Long-Term Debt for information regarding the term loan. Loan cost amortization related to Tap Rock Resources’ credit facility and bonds payable are allocated to the Company using a ratio of capital additions and acquisitions of the Company to the total capital additions and acquisitions of all properties owned by Tap Rock Resources.

Acquisitions of Proved and Unevaluated Properties

Assets acquired and liabilities assumed under transactions that do not meet the criteria of a business combination are accounted for as an asset acquisition and are recorded based on the fair value of the total consideration transferred on the acquisition date using the lowest observable inputs available. Acquisitions that qualify as business combinations are recorded based on the fair value of the assets acquired and liabilities assumed at the acquisition date, which is considered the date on which the Company obtains control of the properties. The fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements utilize assumptions of market participants and the Company’s valuations are made using a discounted cash flow model based on an income approach and market assumptions such as: (1) future commodity prices, (2) projections of estimated quantities of oil, natural gas, and NGL reserves, (3) expectations for timing and amount of future development and operating costs, (4) projections of future rates of production, (5) expected recovery rates, (6) estimated costs for undeveloped acreage and (7) market participant discount rates.

Asset Retirement Obligation

The Company’s asset retirement obligations (“ARO”) relate to future costs associated with plugging and abandoning oil and natural gas wells, removal of equipment and facilities from leased acreage, and returning such land to its original condition. The initial estimated retirement obligation of properties is recognized as a liability with an associated increase in oil and natural gas properties for the asset retirement cost. Accretion expense is recognized over the estimated productive life of the related assets. If the fair value of the estimated asset retirement obligation changes, an adjustment is recorded to both the asset retirement obligation and the asset retirement cost. Revisions in estimated liabilities can result from changes of estimated inflation rates, changes in service and equipment costs, and changes in the estimated timing of settling asset retirement obligations. As a full cost company, settlements for asset retirement obligations for abandonment are adjusted to the full cost pool. See Note 6 – Asset Retirement Obligations for a summary of the Company’s ARO balance.

Commodity Derivative Instruments

NM10 uses commodity derivative instruments to reduce the effect of price changes on a portion of NM10’s future oil and natural gas sales. The derivative instruments include commodity price swaps and basis differential swaps. NM10’s commodity derivative instruments are measured at fair value and are included in the accompanying consolidated balance sheets as commodity derivative assets and commodity derivative liabilities and are classified as current or noncurrent based on the timing of expected future cash flows of settlement of individual trades. NM10 has not designated any of the derivative contracts as fair value or cash flow hedges. Net gains and losses on commodity derivative instruments are recorded based on the changes in the fair values of the derivative instruments. NM10’s net gains and losses on commodity derivative instruments are recorded in the commodity derivative loss, net line on the consolidated statements of operations and included in cash flows from operating activities. Both unrealized and realized gains and losses related to derivative instruments owned by Tap Rock Resources are allocated by utilizing production volumes for each respective commodity (i.e., oil, gas, NGLs) of the Company to the total production volumes for each commodity of all properties owned by Tap Rock Resources.

Tap Rock AcquisitionCo, LLC

Notes to Consolidated Financial Statements

Non-controlling Interests

Non-controlling interests in the accompanying financial statements represent minority interest ownership in NM10 and are presented as a component of equity. NM10 was created by NGP to acquire mineral interests. The Company identified NM10 as a Variable Interest Entity, with the Company as the primary beneficiary. As of December 31, 2022 and 2021, Tap Rock Resources held a 60% interest in NM10. The Company, post divisive merger, acts as the manager of NM10 and is responsible for managing, directing, and controlling the overall operations.

Oil, Natural Gas, and NGL Revenue Recognition

The Company derives revenue primarily from the sale of produced oil, natural gas, and NGLs. Revenue is recognized when the Company’s performance obligations under the sales contracts are satisfied, which generally occurs at the point in time at which control of the oil, natural gas, or NGLs transfers to the customer, which differs depending on the contractual terms of each of the Company’s arrangements. Revenue is recorded in the month when contractual performance obligations are satisfied. Revenue accruals are recorded monthly and are based on estimated production delivered to a purchaser and the expected price to be received. Variances between estimates and the actual amounts received are recorded in the month payment is received.

Deferred Revenue

Tap Rock Resources received a one-time payment of $60 million and a subsequent payment of $3.1 million in cash from Salt Creek Midstream (“SCM”) in September of 2018 and November of 2018 respectively. The cash was related to the dedication of acreage to SCM’s gas gathering system. The acreage dedicated to SCM, and assets associated with the acreage, are a part of the Company and therefore are included in the accompanying financial statements. Additionally, in 2020 and 2019, respectively, the Company received $1.0 million and $2.5 million in cash for completing wells under the agreement with SCM that were ready to be connected to SCM’s pipeline. The Company is recognizing the revenue ratably over the 15-year contract.

Income Taxes

The Company is a single member limited liability company that is treated as a partnership for federal and state income tax purposes by the Internal Revenue Service. A partnership is not a tax-paying entity for federal and state income tax purposes. Income, losses, deductions and credits pass through proportionately to the Company’s members and are taxed at each members’ income tax rate. Accordingly, no provision for income taxes is provided in the Company’s financial statements.

Leases

In February 2016, the FASB issued Accounting Standards Update (“ASU”) No. 2016-02, “Leases” (Topic 842), followed by other related ASUs that provided targeted improvements and additional practical expedient options (collectively “ASU 2016-02”). The Company adopted ASU 2016-02 on January 1, 2022, using the modified retrospective method. The Company elected as part of its adoption to also use the optional transition methodology whereby lease accounting for previously reported periods continues to be reported in accordance with historical accounting guidance for leases in effect for those prior periods. Policy elections and practical expedients the Company implemented in connection with the adoption of ASU 2016-02 include (a) excluding from the balance sheet leases with terms that are less than one year, (b) the package of practical expedients, which among other requirements, allows the Company to avoid reassessing contracts that commenced prior to adoption that were properly evaluated under legacy GAAP, and (c) excluding land easements that existed or expired before adoption of ASU 2016-02. The scope of ASU 2016-02 does not apply to leases used in the exploration or use of minerals, oil, natural gas, or other similar non-regenerative resources.

Tap Rock AcquisitionCo, LLC

Notes to Consolidated Financial Statements

Upon adoption on January 1, 2022, the Company recognized approximately $2.1 million in right-of-use (“ROU”) assets and related lease liabilities for its operating leases with terms greater than 12 months. As of December 31, 2022, the Company did not have any agreements in place that were classified as finance leases. Arrangements classified as operating leases are included on the accompanying consolidated balance sheets within the other long-term assets, other current liabilities, and other long-term liabilities line items. Aside from the recognition of ROU assets and corresponding lease liabilities on the accompanying balance sheets, the adoption of ASC 842 does not have a material impact on the timing or classification of costs incurred for those agreements considered to be leases in comparison to guidance under previous ASC 840.

As outlined in ASC 842, a 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 Company evaluates a contractual arrangement at its inception to determine if it is a lease or contains an identifiable lease component. When evaluating a contract to determine appropriate classification and recognition, significant judgment may be necessary to determine, among other criteria, if an embedded leasing arrangement exists, the length of the term, classification as either an operating or financing lease, which options are reasonably likely to be exercised, fair value of the underlying ROU asset or assets, upfront costs, and future lease payments that are included or excluded in the initial measurement of the ROU asset. Certain assumptions and judgments made by the Company when evaluating a contract that meets the definition of a lease include:

Discount Rate - Unless implicitly defined, the Company determines the present value of future lease payments using an estimated incremental borrowing rate based on average borrowing rates of the Company.

Lease Term - The Company evaluates each contract containing a lease arrangement at inception to determine the length of the lease term when recognizing a 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. Because of the Company’s intent to maintain financial and operational flexibility, there are no available options to extend that the Company is reasonably certain it will exercise. Additionally, based on expectations for those agreements with early termination options, there are no leases in which early termination options are reasonably certain to be exercised.

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. Excluded from the initial measurement are certain variable lease payments, which for the Company’s drilling rigs and equipment rental agreements, may be a significant component of the total lease costs.

Tap Rock AcquisitionCo, LLC

Notes to Consolidated Financial Statements

As of December 31, 2022, the Company had operating leases for drilling rigs and equipment rentals used in field operations. For those operating leases included on the accompanying consolidated balance sheets, which only includes leases with terms greater than 12 months at commencement, remaining lease terms range from less than two years to less than three years. The weighted-average lease term remaining for these leases is 2.1 years. An early termination option also exists for certain leases, some of which allow for the Company to terminate a lease within one year. Exercising an early termination option may also result in an early termination penalty depending on the terms of the underlying agreement.

For the year ended December 31, 2022, payments made for leases with initial lease terms greater than 12 months and short-term leases, were $19.5 million. This total does not reflect amounts that may be reimbursed by other third-parties in the normal course of business, such as non-operating working interest owners. Operating lease costs were $0.9 million and short-term lease costs were $18.6 million. Operating cash flows from operating leases included in the measurement of lease liabilities were $0.7 million.

Future minimum lease payments as of December 31, 2022, were as follows (in thousands):

	As of December 31, 2022
2023		1,185
2024		816
2025		250
Total lease payments	$	2,251
Less: Imputed Interest ⁽¹⁾		(115	)
Total	$	2,136

(1)

The weighted-average discount rate used to determine the operating lease liability as of December 31, 2022 was 5 percent.

Tap Rock AcquisitionCo, LLC

Notes to Consolidated Financial Statements

Contracts with Customers

Oil, natural gas, and NGL revenues

The Company recognizes its share of revenue from the sale of produced oil, natural gas, and NGLs from its assets in Eddy and Lea Counties in New Mexico and Pecos and Reeves Counties in Texas. Oil, natural gas, and NGL production revenue presented within the accompanying consolidated statements of operations is reflective of the revenue generated from contracts with customers. The table below presents the oil, natural gas, and NGL production revenue by product type for the years ended December 31, 2022 and December 31, 2021 (in thousands):

	Year Ended December 31,
	2022		2021
Oil Production Revenue	$	851,929	$	599,935
Gas Production Revenue		100,251		34,078
NGL Production Revenue		112,627		66,264
Deferred Revenue Recognition (SCM)		4,501		4,501
Total	$	1,069,308	$	704,778

Revenue is recognized when the Company’s performance obligations under the sales contracts are satisfied, which generally occurs at the point in time at which control of the oil, natural gas, or NGLs transfers to the customer, which differs depending on the contractual terms of each of the Company’s arrangements. Transfer of control drives the presentation of transportation, processing, and gathering expenses (“fees and other deductions”) within the accompanying consolidated statements of operations. Fees and other deductions incurred by the Company prior to control transfer are recorded within the transportation, processing, and gathering expenses line item on the accompanying consolidated statements of operations. When control is transferred at or near the wellhead, sales are based on a wellhead market price that is impacted by fees and other deductions incurred by the purchaser subsequent to the transfer of control.

The Company’s performance obligations arise upon the production of hydrocarbons from wells in which the Company has an ownership interest. The performance obligations are considered satisfied upon control transferring to a purchaser at the wellhead or inlet of the midstream processor’s processing facility, or other contractually specified delivery point. The time period between production and satisfaction of performance obligations is generally less than one day; thus, there are no material unsatisfied or partially unsatisfied performance obligations at the end of the reporting period.

Revenue is recorded in the month when contractual performance obligations are satisfied. However, settlement statements from the purchasers of hydrocarbons and the related cash consideration are received 30 to 90 days after production has occurred. As a result, the Company must estimate the amount of production delivered to the customer and the consideration that will ultimately be received for sale of the product. Estimated revenue due to the Company is recorded within the accounts receivable line item on the accompanying consolidated balance sheets until payment is received. The accounts receivable balances from contracts with customers within the accompanying consolidated balance sheets as of December 31, 2022, and December 31, 2021, were $83.7 million and $114.4 million, respectively. To estimate accounts receivable from contracts with customers, the Company uses knowledge of its properties and historical performance factors as the basis for these estimates. Differences between estimates and actual amounts received for product sales are recorded in the month that payment is received from the purchaser.

Concentrations, Risks, and Uncertainties

Concentrations of Credit Risk

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of accounts receivable and commodity derivative instruments. For the years ended December 31, 2022 and 2021, the Company had two and three customers, respectively, each exceeding 10% of total oil, natural gas, and NGL sales. The Company does not believe the loss of any single customer would materially impact its operating results because oil, natural gas, and NGLs are fungible products with well-established markets and numerous purchasers. The Company continually monitors the receipt of funds and the general business activities of current customers and other purchasers in the areas of its operations.

Tap Rock AcquisitionCo, LLC

Notes to Consolidated Financial Statements

As of December 31, 2022, NM10 had commodity derivative contracts with one counterparty. By using derivative instruments that are not traded on an exchange, NM10 is exposed to the credit risk from counterparties. Credit risk is the risk of loss from counterparties not performing under the terms of the derivative instrument. NM10 does not require collateral or other security from counterparties to support derivative instruments; however it is NM10’s policy to enter into derivative contracts only with counterparties that are creditworthy financial institutions deemed by management as competent. NM10’s counterparties all have investment grade senior unsecured debt ratings. Additionally, NM10 uses master netting agreements to minimize credit risk exposure. For the years ended December 31, 2022 and December 31, 2021, NM10 did not incur any credit losses.

Fair Value Measurements

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between independent and knowledgeable parties who are willing and able to transact for an asset or liability at the measurement date. The Company uses valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs when determining fair value and then ranks the estimated values based on the reliability of the inputs used following the fair value hierarchy.

The three input levels in the hierarchy of fair value measurements are as follows:

Input Level		Description of Input
Level 1		Observable inputs such as quoted market prices in active markets.

Level 2		Inputs other than quoted prices in active markets that are either directly or indirectly observable.

Level 3		Unobservable inputs in which little or no market data exists.

A financial instrument’s level within the fair value hierarchy is based upon the lowest level of any input that is significant to the fair value measurement. Unobservable inputs reflect the assumptions of the Company with regard to what assumptions a market participant would use to price an asset or liability based on the best information available under the circumstances. The guidance requires the evaluator to maximize the use of observable inputs.

Recurring Fair Value Measurements

The Company’s recurring fair value instruments consist of cash and cash equivalents, accrued oil, natural gas, and NGL receivables and other receivables, accounts payable, debt, and commodity derivative instruments. The carrying amounts of cash and cash equivalents, accounts receivable, and accounts payable approximate fair value due to the short-term maturity of these instruments. The Company’s carrying value of the term loan balance approximates fair value (Level 2 measurement).

Commodity derivative contracts are marked-to-market each quarter and are thus stated at fair value in the consolidated balance sheets and in Note 8 – Commodity Derivative Instruments. The fair values of NM10’s commodity derivative instruments are classified as Level 2 measurements as they are calculated using industry standard models using assumptions and inputs which are substantially observable in active markets throughout the full term of the instruments. These include market price curves, quoted market prices in active markets, credit risk adjustments, implied market volatility, and discount factors.

Tap Rock AcquisitionCo, LLC

Notes to Consolidated Financial Statements

The following table presents NM10’s financial assets and liabilities that were accounted for at fair value on a recurring basis as of December 31, 2022 by level within the fair value hierarchy (in thousands):

	As of December 31, 2022
	Level 1		Level 2		Level 3		Total
Financial Assets:
Commodity derivative assets	$	-	$	551	$	-	$	551
Financial liabilities:
Commodity derivative liabilities	$	-	$	10,796	$	-	$	10,796

The following table presents NM10’s financial assets and liabilities that were accounted for at fair value on a recurring basis as of December 31, 2021 by level within the fair value hierarchy (in thousands):

	As of December 31, 2021
	Level 1		Level 2		Level 3		Total
Financial Assets:
Commodity derivative assets	$	-	$	156	$	-	$	156
Financial liabilities:
Commodity derivative liabilities	$	-	$	22,188	$	-	$	22,188

Nonrecurring Fair Value Measurements

The Company applies fair value to its nonrecurring, nonfinancial measurements including business combinations and asset retirement obligations. These assets and liabilities are subject to fair value only in certain circumstances and are not subject to recurring valuations. Given the unobservable nature of these inputs, they are deemed to be Level 3. Refer to the fair value measurements for asset retirement obligations in Note 6 – Asset Retirement Obligations. Assets acquired and liabilities assumed under transactions that do not meet the criteria of a business combination are accounted for as an asset acquisition and are recorded based on the fair value of the total consideration transferred on the acquisition date using the lowest observable inputs available.

Asset Retirement Obligations

The Company estimates the fair value of asset retirement obligations at the point they are incurred by calculating the present value of estimated future plugging and abandonment costs. Such present value calculations use cash flow models and include various assumptions (Level 3 inputs) such as estimated amounts and timing of abandonment cash flows, the credit-adjusted risk-free rates and future inflation rates. Revisions to the liability could occur due to changes in estimated abandonment costs or well economic lives, or if regulators enact new requirements regarding the abandonment of wells.

Tap Rock AcquisitionCo, LLC

Notes to Consolidated Financial Statements

The following table summarizes the activities of the Company’s asset retirement obligations for the years ended December 31, 2022 and 2021 (in thousands):

	Year Ended December 31,
	2022		2021
Beginning asset retirement obligation	$	3,161	$	1,670
Obligations incurred or acquired		536		1,350
Accretion expense		246		141
Ending asset retirement obligation		3,943		3,161

Acquisitions

November 2022 Delaware Barley, LLC Acquisition

In November 2022, Tap Rock Resources entered into an agreement with Delaware Barley, LLC for certain working interests in producing properties in Eddy and Lea County, New Mexico (the “Delaware Barley Properties,” and the acquisition thereof, the “Delaware Barley Acquisition”), which included assets that were transferred and were allocated a purchase price of $16.9 million. The sale closed on November 23, 2022, with an effective date of October 1, 2022. The acquisition was accounted for as an asset acquisition under ASC 805, Business Combinations, which required the acquired assets to be allocated on a relative fair value basis to proved oil, natural gas, and NGL working interests as of the date of acquisition.

November 2022 Delaware Hops, LLC Acquisition

In November 2022, Tap Rock Resources entered into an agreement with Delaware Hops, LLC for certain working interests in producing properties in Eddy and Lea County, New Mexico (the “Delaware Hops Properties,” and the acquisition thereof, the “Delaware Hops Acquisition”) which included assets that were transferred and were allocated a purchase price of $30.5 million. The sale closed on November 23, 2022, with an effective date of October 1, 2022. The acquisition was accounted for as an asset acquisition under ASC 805.

There were no individually material acquisitions or divestitures during the year ended December 31, 2021.

Commodity Derivatives Instruments

NM10 uses over-the-counter swaps to manage the commodity price risk associated with forecasted sale of its crude and natural gas production.

Fixed swaps are settled monthly based on differences between the fixed price specified in the contract and the referenced settlement price. When the referenced settlement price is less than the price specified in the contract, NM10 receives an amount from the counterparty based on the price difference multiplied by the volume. Similarly, when the referenced settlement price exceeds the price specified in the contract, NM10 pays the counterparty an amount based on the price difference multiplied by the volume.

Fixed price oil basis swaps are entered into in order to mitigate exposure to adverse pricing differentials between certain industry benchmark prices and the actual physical pricing points where NM10’s production volumes are sold. The weighted-average fixed price differential represents the amount of net addition (reduction) to delivery month prices for the notional volumes covered by the swap contracts.

Tap Rock AcquisitionCo, LLC

Notes to Consolidated Financial Statements

Below is a summary of NM10’s open fixed swap positions as of December 31, 2022:

	2023
NYMEX WTI Crude Oil Swaps:
Notional volume (MBbl)		286
Weighted average fixed price ($/Bbl)	$	43.44

NYMEX Henry Hub Natural Gas Swaps:
Notional volume (MMBtu)		263
Weighted average fixed price ($/MBtu)	$	2.49

Below is a summary of NM10’s open basis swap positions as of December 31, 2022:

	2023
WTI Midland-Cushing Crude Oil Basis Swaps ⁽¹⁾:
Notional volume (MBbl)		257
Weighted average contract price ($/Bbl) ⁽²⁾	$	0.36

Waha Natural Gas Basis Swaps ⁽³⁾:
Notional volume (MMBtu)		292
Weighted average contract price ($/MBtu) ⁽⁴⁾	$	(0.40	)

(1)

Represents the swaps that fix the basis differentials between the index prices at Midland WTI price (the price at which NM10 oil is sold) and the Cushing WTI price.

(2)

Represents the weighted average fixed price among basis swap contracts for NM10 based on bbls per contract.

(3)

Represents swap contracts that fix the basis differential between Natural Gas prices at the Waha Hub (in West Texas – the price at which NM10 natural gas is sold) and the Henry Hub (in Louisiana).

(4)

Represents the weighted average fixed price among basis swap contracts for NM10 based on mbtu per contract.

The following table presents the fair value of NM10’s derivative instruments on a gross and net basis as of December 31, 2022 and 2021 (in thousands):

	Gross Amounts of Recognized Assets and Liabilities						Net Amounts of Assets and Liabilities Presented in the Balance Sheet ⁽¹⁾
	As of December 31,						As of December 31,
Location on Balance Sheet	2022			2021			2022			2021
Current assets	$	551		$	73		$	-		$	-
Long-term assets		-			83			-			-
Current liabilities		(10,796	)		(15,653	)		(10,245	)		(15,580	)
Long-term liabilities		-			(6,535	)		-			(6,452	)

(1)

All amounts subject to an enforceable master netting arrangement which are netted in these amounts. There are no amounts of related financial collateral received or pledged.

Tap Rock AcquisitionCo, LLC

Notes to Consolidated Financial Statements

The following table summarizes the Company’s net loss on commodity derivative instruments for the years ended December 31, 2022 and 2021 (in thousands), which was allocated unrealized and realized gains (losses) by utilizing production volumes for each respective commodity (i.e., oil, gas, NGLs) in the Company to the total production volumes for each commodity of all properties owned by Tap Rock Resources. NM10’s unrealized and realized gains and (losses) are also included below:

	Year Ended December 31,
	2022			2021
Unrealized derivative gain (loss)	$	142,449		$	(206,559	)
Realized derivative loss		(268,029	)		(226,022	)
Commodity derivative loss, net	$	(125,580	)	$	(432,581	)

Long-Term Debt

Term Loan

In January 2020, NM10 entered into a loan agreement for a 5-year, $35 million term loan (“Term Loan”). The loan agreement was subsequently amended most recently on April 30, 2021 and is referred to as the Amended Agreement.

The Term Loan amortizes in an amount equal to $1.75 million per quarter for the fiscal quarters ending September 30, 2021 through January 27, 2025. Any unpaid amounts must be repaid by the maturity dates. As of December 31, 2022 and 2021, the total balance outstanding under the Term Loan was $15.8 million and $22.8 million, respectively. As of December 31, 2022 and 2021, $7.0 million and $7.0 million, respectively, of the Term Loan was classified as a current liability, as these amounts were due within one year from the respective balance sheet dates.

NM10's aggregate scheduled maturities of the Term Loan as of December 31, 2022, are as follows (in thousands):

	Payments Due
2023		7,000
2024		7,000
2025		1,750
Total	$	15,750

Guarantees and Collateral. The indebtedness and other obligations under the Amended Agreement are unconditionally guaranteed by NM10 and are secured by a first-priority lien on substantially all of NM10’s tangible and intangible assets. The creditors have no recourse to the Company’s general credit and the Company does not guarantee NM10’s term loan.

Voluntary Prepayments. NM10 may voluntarily prepay the Term Loan in whole or in part at any time without premium or penalty, subject to the payment of customary breakage costs under certain conditions. Voluntary prepayments of the Term Loan will be applied to the remaining installments thereof as directed by NM10.

Tap Rock AcquisitionCo, LLC

Notes to Consolidated Financial Statements

Covenants. The Amended Agreement contains customary covenants, including covenants that, under certain circumstances and subject to certain qualifications and exceptions: limit or restrict NM10’s ability to incur additional indebtedness; merge, dissolve, liquidate, or consolidate; make acquisitions, investments, advances or loans; dispose of or transfer assets; pay dividends; redeem or repurchase certain debt; and enter into certain restrictive agreements.

In addition, NM10 is required to maintain (a) a Current Ratio greater than or equal to 1.0 to 1.0. “Current Ratio” is defined as the ratio of Borrower’s (i) current assets, divided by (ii) current liabilities (excluding current maturities of long-term debt); provided, however, that the mark-to-market values for hedging positions shall be excluded from this calculation until such time as the gains or losses from the hedge transactions are actually realized or the hedge transactions expire, and (b) a Leverage Ratio, wherein the total principal amount outstanding divided by EBITAX of less than or equal to 3.5 to 1.0. NM10 was in compliance with all covenants related to the Amended Agreement as of December 31, 2022.

Interest Rates and Fees. Outstanding borrowings under the Amended Agreement accrue interest, at NM10’s option, at a per annum rate of (i) LIBOR plus the LIBOR spread, which ranges from 2.75% to 3.5% depending on the leverage ratio, or (ii) a prime rate plus the applicable margin, which ranges from 0% to 0.75% depending on the leverage ratio. The interest rate floor under the Amended Agreement at December 31, 2022 was 4.25%. For the years ended December 31, 2022 and 2021, respectively, NM10 incurred $1.0 million and $0.9 million, respectively, in interest expense.

Carrying Value and Fair Value. The fair value of the Term Loan approximates the carrying value as of December 31, 2022 and 2021 because the debt bears interest at a floating rate of interest, based on prevailing market rates (Level 2 measurement). The fair value is based on observable inputs of interest rates that are currently available to NM10 for debt with similar terms and maturities for non-public debt.

10.

Equity

During the years ended December 31, 2022 and 2021, the Company distributed $18.8 million and $16.4 million, respectively, back to non-controlling interests. Additionally, there were no contributions received from non-controlling interests during the year ended December 31, 2022. During the year ended December 31, 2021, the Company received less than $0.1 million in contributions from non-controlling interests.

Net Parent Investment

All significant intercompany transactions between the Company and Tap Rock Resources have been included in the financial statements and are considered to be effectively settled for cash at the time the transaction is recorded. The total net effect of the settlement of these intercompany transactions is reflected in the consolidated statements of cash flows as a financing activity and in the consolidated balance sheets as component of Net parent investment.

11.

Commitments and Contingencies

In the ordinary course of business, the Company may at times be subject to possible loss contingencies arising from federal, state, and local environmental, health, and safety laws and regulations and third-party litigation. There are no matters pending that in the opinion of the Company will have a material adverse effect on the financial position, results of operations, or cash flows of the Company as of December 31, 2022.

Tap Rock AcquisitionCo, LLC

Notes to Consolidated Financial Statements

12.

Variable Interest Entities

In January 2020, Tap Rock Resources obtained a 60% membership interest in NM10 in order for NM10 to purchase certain mineral interests and surface acreage in Lea County, New Mexico. The remaining 40% of NM10 is owned by Tap Rock NM10 Holdings, LLC (“NM10 Holdings”), which is owned 97% by NGP XI Minerals Holdings, LLC and 3% by Tap Rock Resources management and other investors. In the LLC agreement for NM10, Tap Rock Resources was appointed as Managing Member. As Managing Member, Tap Rock Resources has full and complete authority, power, and discretion to manage and control the business, affairs, and properties of NM10, to make all determinations regarding those matters, and to perform any and all other acts or activities customary or incident to the management of NM10’s business. NM10’s creditors have no recourse to Tap Rock Resources’ general credit and Tap Rock Resources does not guarantee NM10’s term loan. Through the divisive merger, the 60% membership interest in NM10 transferred to the Company.

The Company has determined that NM10 is a VIE as they are the primary beneficiary. The Company retains 100% of the voting rights given its Managing Member status, which causes a disproportion between voting rights and economics in NM10. Further, all investors involved (the Company and NM10 Holdings) are related parties. As such, substantially all of NM10’s activities are conducted on behalf of the Company and its related party NM10 Holdings. Due to this, NM10 is structured with non-substantive voting rights, one of the criteria that, if met, indicates that an entity is a VIE. As the Company has both the power and the benefits, it is the primary beneficiary of the VIE. As the Company is the primary beneficiary, NM10 is consolidated in the financial statements presented herein. All intercompany balances and transactions between the Company and NM10 are eliminated in the consolidated financial statements.

13.

Subsequent Events

In February and March 2023, the Company distributed a total of $3.1 million back to non-controlling interests.

On June 20, 2023, Civitas entered into a purchase agreement to purchase the Company and all of their interests in certain oil and gas properties and related net assets for cash consideration of $841.8 million and 7,598,122 shares of common equity, before purchase price adjustments. The closing with the Company occurred on August 2, 2023 with the effective date of July 1, 2023 and included $57.8 million in upward purchase price adjustments. Final post-close adjustments will be settled in December 2023.

Cash from the closing on August 2, 2023, was used to pay off the remainder of NM10’s Term Loan and the outstanding interest in the amount of $12.3 million.

NM10 closed out all their open commodity derivatives as of July 31, 2023. The resulting impact was a loss of $3.4 million.

In preparing the accompanying consolidated financial statements of the Company, management has evaluated all subsequent events and transactions for potential recognition or disclosure through August 31, 2023, the date the consolidated financial statements of the Company were available for issuance and concluded there were no other material subsequent events other than as described above.

Tap Rock AcquisitionCo, LLC

Notes to Consolidated Financial Statements

14.

Supplemental Oil and Gas Information (Unaudited)

Costs Incurred

Tap Rock AcquisitionCo, LLC (the “Company”) incurred costs in relation to oil and gas property acquisition and development activities as follows:

	For the Years Ended December 31,
	2022		2021

	(in thousands)
Development costs	$	224,719	$	393,731
Acquisitions of proved properties		48,451		11,251
Total, including asset retirement obligations ⁽¹⁾	$	273,170	$	404,982

_{(1) Includes amounts relating
to estimated asset retirement obligations of $1.1 million and $0.5 million for the years ended December 31, 2022 and 2021, respectively.}

Net Proved Oil, NGL and Natural Gas Reserves

Proved reserves are the estimated quantities of oil, gas, and NGLs 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 that renewal is reasonably certain, regardless of whether deterministic or probabilistic methods are used for the estimation. Existing economic conditions include prices and costs at which economic producibility from a reservoir is to be determined, and the price to be used is the average price during the 12-month period prior to the ending date of the period covered by the report, determined as an unweighted arithmetic average of the first-day-of-the-month price for each month within such period, unless prices are defined by contractual arrangements, excluding escalations based upon future conditions. All of the Company’s estimated proved reserves are located in the United States.

	For the Year Ended December 31, 2021
	Oil			Gas			NGLs			Total
	(MBbl)			(MMcf)			(MBbl)			(MBOE)
Total proved reserves:
Beginning of year		36,944.7			78,948.5			15,456.5			65,559.2
Revisions of previous estimates		3,099.4			16,207.4			(81.3	)		5,719.3
Extensions		15,502.4			44,226.8			6,890.1			29,763.7
Production		(8,174.2	)		(17,929.0	)		(1,998.2	)		(13,160.5	)
End of year		47,372.3			121,453.7			20,267.1			87,881.7

Proved developed reserves:
Beginning of year		13,350.9			37,915.9			7,842.3			27,512.5
End of year		36,116.6			76,071.7			13,460.3			62,255.6
Proved undeveloped reserves:
Beginning of year		23,593.8			41,032.7			7,614.1			38,046.6
End of year		11,255.7			45,382.0			6,806.7			25,626.1

Tap Rock AcquisitionCo, LLC

Notes to Consolidated Financial Statements

	For the Year Ended December 31, 2022
	Oil		Gas		NGLs		Total
	(MBbl)		(MMcf)		(MBbl)		(MBOE)
Total proved reserves:
Beginning of year	47,372.4		121,453.6		20,267.1		87,881.6
Revisions of previous estimates	(3,817.5	)	4,367.4		(3,814.6	)	(6,904.2	)
Extensions	9,035.5		33,856.9		5,162.5		19,840.8
Divestitures	(196.8	)	(489.3	)	(84.5	)	(362.9	)
Acquisitions	1,407.2		8,395.4		2,434.7		5,241.2
Production	(8,532.1	)	(29,926.0	)	(2,663.7	)	(16,183.4	)
End of year	45,268.7		137,658.0		21,301.5		89,513.1

Proved developed reserves:
Beginning of year	36,116.6		76,071.7		13,460.3		62,255.6
End of year	37,900.3		118,804.7		18,727.2		76,428.2
Proved undeveloped reserves:
Beginning of year	11,255.7		45,382.0		6,806.7		25,626.1
End of year	7,368.4		18,853.3		2,574.2		13,084.8

Standardized Measure of Discounted Future Net Cash Flows

Tap Rock AcquisitionCo, LLC

Notes to Consolidated Financial Statements

	For the Years Ended December 31,
	2022		2021

Oil (per Bbl)	$	94.49	$	64.50
Gas (per Mcf)	$	4.98	$	3.04
NGLs (per Bbl)	$	48.67	$	24.14

The following summary sets forth the Company’s future net cash flows relating to proved oil, gas, and NGL reserves based on the standardized measure of discounted future net cash flows:

	As of December 31,
	2022			2021

	(in thousands)
Future cash inflows	$	5,999,214		$	3,912,105
Future production costs		(2,172,611	)		(1,227,196	)
Future development costs		(205,794	)		(143,677	)
Future net cash flows	$	3,620,809		$	2,541,232
10 percent annual discount		(1,448,185	)		(1,021,444	)
Standardized measure of discounted future net cash flows ⁽¹⁾	$	2,172,624		$	1,519,788

_{(1) The Company is treated
as a partnership and therefore is not subject to federal income taxes.}

Tap Rock AcquisitionCo, LLC

Notes to Consolidated Financial Statements

The principal sources of changes in the standardized measure of discounted future net cash flows were:

	As of December 31,
	2022			2021

	(in thousands)
Standardized measure of discounted future net cash flows, beginning of year	$	1,519,788		$	482,514
Net changes in prices and production costs		867,396			740,972
Changes in estimated future development costs		3,413			(95,294	)
Sales of oil, gas, and NGLs produced, net of production costs		(795,022	)		(505,269	)
Extensions		410,753			459,424
Purchase of reserves in place		61,519			-
Sales of reserves in place		(3,998	)		-
Revisions of previous quantity estimates		(129,056	)		109,014
Previously estimated development costs incurred during the period		47,076			286,469
Accretion of discount		151,979			48,251
Changes in timing and other		38,777			(6,293	)
Standardized measure of discounted future net cash flows, end of year ⁽¹⁾	$	2,172,625		$	1,519,788

_{(1) The Company is treated
as a partnership and therefore is not subject to federal income taxes.}

Exhibit 99.4

Tap Rock AcquisitionCo, LLC

Consolidated Financial Statements (Unaudited)

As of June 30, 2023 and December 31, 2022 and for the Six Months Ended June 30, 2023 and June 30, 2022

Tap Rock AcquisitionCo, LLC

Consolidated Financial Statements (Unaudited)

As of June 30, 2023 and December 31, 2022 and for the Six Months Ended June 30, 2023 and June 30, 2022

	Page(s)

Index	1

Consolidated Financial Statements and notes

Consolidated Balance Sheets	2

Consolidated Statements of Operations	3

Consolidated Statements of Changes in Equity	4

Consolidated Statements of Cash Flows	5

Notes to Consolidated Financial Statements	6–14

Tap Rock AcquisitionCo, LLC

Consolidated Balance Sheets (Unaudited)

As of June 30, 2023 and December 31, 2022

(in thousands of dollars)

	June 30,		December 31,
	2023		2022
Assets
Current assets
Cash and cash equivalents	$	6,682		5,256
Accounts receivable trade, net of allowance for doubtful accounts of $679 and $68, respectively		88,365		116,120
Accounts receivable, affiliates		-		2,934
Other		16,309		14,195
Total current assets		111,356		138,505

Long-term assets
Proved oil and natural gas property, net, full cost method		1,123,961		1,023,047
Unevaluated oil and natural gas property		15,246		16,963
Other property		37,450		26,010
Lease right-of-use asset		1,125		2,136
Total assets	$	1,289,138	$	1,206,661

Liabilities and equity
Current liabilities
Accounts payable		22,944		24,360
Accounts payable, affiliates		2,896		-
Accrued liabilities		103,141		70,197
Commodity derivative liability		3,448		10,245
Royalties payable		39,545		42,894
Deferred revenue		4,501		4,501
Term loan, current portion		7,000		7,000
Lease liability		642		1,010
Total current liabilities		184,117		160,207

Long-term liabilities
Term loan, net		5,181		8,659
Deferred revenue		46,140		48,391
Asset retirement obligation		6,387		3,943
Lease liability		483		1,127
Total long-term liabilities		58,191		62,120

Commitments and contingent liabilities (see Note 8)

Net parent investment		1,022,652		964,358
Non-controlling interest		24,178		19,976
Total equity		1,046,830		984,334
Total liabilities and equity	$	1,289,138	$	1,206,661

The accompanying notes are an integral part of these consolidated financial statements.

Tap Rock AcquisitionCo, LLC

Consolidated Statements of Operations (Unaudited)

Six Months Ending June 30, 2023 and June 30, 2022

(in thousands of dollars)

	Six months ended June 30,
	2023			2022
Revenues
Oil, natural gas, and NGL	$	332,995		$	569,701
Other		576			1,143
Total operating revenue		333,571			570,844

Expenses
Lease operating		58,882			61,941
Production taxes		26,891			49,501
Transportation, processing, and gathering		8,462			7,643
Depletion, depreciation, and accretion of ARO		79,301			79,141
General and administrative		15,163			19,660
Total operating expenses		188,699			217,886
Total operating income		144,872			352,958

Other income (expense)
Commodity derivatives gain (loss), net		35,292			(269,715	)
Interest expense		(40,026	)		(7,095	)
Net income	$	140,138		$	76,148
Net income attributable to non-controlling interest		7,264			7,365
Net income attributable to Tap Rock AcquisitionCo	$	132,874		$	68,783

The accompanying notes are an integral part of these consolidated financial statements.

Tap Rock AcquisitionCo, LLC

Consolidated Statements of Changes in Equity (Unaudited)

As of June 30, 2023 and June 30, 2022

(in thousands of dollars)

	Net parent investment			Non- controlling interests			Total
Balance at December 31, 2021	$	769,881		$	18,950		$	788,831

Distributions to non-controlling interests		-			(11,062	)	$	(11,062	)

Net transfers from parent		17,463			-		$	17,463

Net income		68,783			7,365		$	76,148

Balance at June 30, 2022	$	856,127		$	15,253		$	871,380

Balance at December 31, 2022	$	964,358		$	19,976		$	984,334

Distributions to non-controlling interests		-			(3,062	)	$	(3,062	)

Net transfers to parent		(74,580	)		-		$	(74,580	)

Net income		132,874			7,264		$	140,138

Balance at June 30, 2023	$	1,022,652		$	24,178		$	1,046,830

The accompanying notes are an integral part of these consolidated financial statements.

Tap Rock AcquisitionCo, LLC

Consolidated Statements of Cash Flows (Unaudited)

Years Ending December 31, 2022 and December 31, 2021

(in thousands of dollars)

	For the Six Months Ended June 30,
	2023			2022
Cash flows from operating activities
Net income	$	140,138		$	76,148
Adjustments to reconcile net income to net cash provided by operating activities:
Unrealized (gain) loss on derivatives		(36,990	)		58,391
Depletion, depreciation, amortization and accretion of ARO		79,301			79,141
Amortization of debt issuance costs		1,757			450
Stock-based compensation		7,846			12,265
Changes in operating assets and liabilities:
Accounts receivable		30,689			(3,771	)
Other assets		(1,568	)		(2,888	)
Accounts payable and other current liabilities		(2,414	)		(22,276	)
Accrued liabilities		(22,234	)		6,353
Deferred revenue		(2,251	)		(2,251	)
Net cash provided by operating activities		194,274			201,562

Cash flows from investing activities
Acquisition of proved and unproved oil and gas properties		(9,389	)		(777	)
Expenditures for oil and natural gas properties and equipment		(111,479	)		(128,297	)
Expenditures for other property and equipment		(11,451	)		(8,986	)
Net cash used in investing activities		(132,319	)		(138,060	)

Cash flows from financing activities
Distributions to non-controlling interest owners		(3,062	)		(11,062	)
Repayments under term loan		(3,500	)		(3,500	)
Net transfers from parent		(53,967	)		(52,571	)
Net cash used in financing activities		(60,529	)		(67,133	)

Net decrease in cash		1,426			(3,631	)
Cash, cash equivalents, and restricted cash at beginning of period		5,256			4,685
Cash, cash equivalents, and restricted cash at ending of period	$	6,682		$	1,054

Supplemental disclosures of cash flow information:
Cash paid for interest	$	696		$	369
Supplemental disclosures of noncash investing activities:
Accrued property additions	$	(55,179	)	$	(1,918	)

The accompanying notes are an integral part of these consolidated financial statements.

Tap Rock AcquisitionCo, LLC

Notes to Consolidated Financial Statements

1.	Organization and Basis of Presentation

Organization

The accompanying consolidated financial statements (“the financial statements”) were prepared for the purpose of reflecting historical net assets along with operations that were transferred into the Company that Civitas is purchasing through the MIPA. The Company consolidates NM10 due to its status as a variable interest entity. See Note 9 – Variable Interest Entities for more information. The assets and liabilities of the sold assets as of June 30, 2023 and December 31, 2022, and the revenues and expenses and cash flows of the sold assets for the years ended June 30, 2023 and June 30, 2022 are representative of the Company.

Basis of Presentation

Tap Rock AcquisitionCo, LLC

Notes to Consolidated Financial Statements

2.	Summary of Significant Accounting Policies

The significant accounting policies followed by the Company are set forth in Note 2 – Summary of Significant Accounting Policies in the 2022 consolidated financial statements and are supplemented by the notes to the unaudited consolidated financial statements included in this report. These unaudited consolidated financial statements (“the financial statements”) should be read in conjunction with the 2022 consolidated financial statements.

Tap Rock AcquisitionCo, LLC

Notes to Consolidated Financial Statements

3.	Contracts with Customers

Oil, natural gas, and NGL revenues

The Company recognizes its share of revenue from the sale of produced oil, natural gas, and NGLs from its assets in Eddy and Lea Counties in New Mexico and Pecos and Reeves Counties in Texas. Oil, natural gas, and NGL production revenue presented within the accompanying consolidated statements of operations is reflective of the revenue generated from contracts with customers. The table below presents the oil, natural gas, and NGL production revenue by product type for the six months ended June 30, 2023 and June 30, 2022 (in thousands):

	Six Months Ended June 30,
	2023		2022
Oil Production Revenue	$	282,349	$	460,783
Gas Production Revenue		3,042		45,188
NGL Production Revenue		45,353		61,479
Deferred Revenue Recognition (SCM)		2,251		2,251
Total	$	332,995	$	569,701

Revenue is recorded in the month when contractual performance obligations are satisfied. However, settlement statements from the purchasers of hydrocarbons and the related cash consideration are received 30 to 90 days after production has occurred. As a result, the Company must estimate the amount of production delivered to the customer and the consideration that will ultimately be received for sale of the product. Estimated revenue due to the Company is recorded within the accounts receivable line item on the accompanying consolidated balance sheets until payment is received. The accounts receivable balances from contracts with customers within the accompanying consolidated balance sheets as of June 30, 2023, and December 31, 2022, were $57.3 million and $83.7 million, respectively. To estimate accounts receivable from contracts with customers, the Company uses knowledge of its properties and historical performance factors as the basis for these estimates. Differences between estimates and actual amounts received for product sales are recorded in the month that payment is received from the purchaser.

4.	Fair Value Measurements

Tap Rock AcquisitionCo, LLC

Notes to Consolidated Financial Statements

The three input levels in the hierarchy of fair value measurements are as follows:

Input Level	Description of Input
Level 1	Observable inputs such as quoted market prices in active markets.

Level 2	Inputs other than quoted prices in active markets that are either directly or indirectly observable.

Level 3	Unobservable inputs in which little or no market data exists.

Recurring Fair Value Measurements

Commodity derivative contracts are marked-to-market each quarter and are thus stated at fair value in the consolidated balance sheets and in Note 5 – Commodity Derivative Instruments. The fair values of NM10’s commodity derivative instruments are classified as Level 2 measurements as they are calculated using industry standard models using assumptions and inputs which are substantially observable in active markets throughout the full term of the instruments. These include market price curves, quoted market prices in active markets, credit risk adjustments, implied market volatility, and discount factors.

The following table presents NM10’s financial assets and liabilities that were accounted for at fair value on a recurring basis as of June 30, 2023 by level within the fair value hierarchy (in thousands):

	As of June 30, 2023
	Level 1		Level 2		Level 3		Total
Financial Assets:
Commodity derivative assets	$	-	$	354	$	-	$	354
Financial liabilities:
Commodity derivative liabilities	$	-	$	3,803	$	-	$	3,803

Tap Rock AcquisitionCo, LLC

Notes to Consolidated Financial Statements

	As of December 31, 2022
	Level 1		Level 2		Level 3		Total
Financial Assets:
Commodity derivative assets	$	-	$	551	$	-	$	551
Financial liabilities:
Commodity derivative liabilities	$	-	$	10,796	$	-	$	10,796

Nonrecurring Fair Value Measurements

The Company applies fair value to its nonrecurring, nonfinancial measurements including business combinations and asset retirement obligations. These assets and liabilities are subject to fair value only in certain circumstances and are not subject to recurring valuations. Given the unobservable nature of these inputs, they are deemed to be Level 3. Assets acquired and liabilities assumed under transactions that do not meet the criteria of a business combination are accounted for as an asset acquisition and are recorded based on the fair value of the total consideration transferred on the acquisition date using the lowest observable inputs available.

5.	Commodity Derivatives Instruments

NM10 uses over-the-counter swaps to manage the commodity price risk associated with forecasted sale of its crude and natural gas production.

Below is a summary of NM10’s open fixed swap positions as of June 30, 2023:

	2023
NYMEX WTI Crude Oil Swaps:
Notional volume (MBbl)
Buy		(132	)
Sell		132
Weighted average fixed price ($/Bbl)
Buy	$	68.22
Sell	$	43.39

NYMEX Henry Hub Natural Gas Swaps:
Notional volume (MMBtu)
Buy		(111	)
Sell		111
Weighted average fixed price ($/MBtu)
Buy	$	2.96
Sell	$	2.49

Tap Rock AcquisitionCo, LLC

Notes to Consolidated Financial Statements

Below is a summary of NM10’s open basis swap positions as of June 30, 2023:

	2023
WTI Midland-Cushing Crude Oil Basis Swaps ⁽¹⁾:
Notional volume (MBbl)
Buy		(108	)
Sell		108
Weighted average contract price ($/Bbl) ⁽²⁾
Buy	$	1.60
Sell	$	0.36

Waha Natural Gas Basis Swaps ⁽³⁾:
Notional volume (MMBtu)
Buy		(111	)
Sell		135
Weighted average contract price ($/MBtu) ⁽⁴⁾
Buy	$	(0.53	)
Sell	$	(0.40	)

(1)

Represents the swaps that fix the basis differentials between the index prices at Midland WTI price (the price at which NM10 oil is sold) and the Cushing WTI price.

(2)

Represents the weighted average fixed price among basis swap contracts for NM10 based on bbls per contract.

(3)

Represents swap contracts that fix the basis differential between Natural Gas prices at the Waha Hub (in West Texas – the price at which NM10 natural gas is sold) and the Henry Hub (in Louisiana).

(4)

Represents the weighted average fixed price among basis swap contracts for NM10 based on mbtu per contract.

Tap Rock AcquisitionCo, LLC

Notes to Consolidated Financial Statements

The following table presents the fair value of NM10’s derivative instruments on a gross and net basis as of June 30, 2023 and December, 31 2022 (in thousands):

	Gross Amounts of Recognized Assets and Liabilities						Net Amounts of Assets and Liabilities Presented in the Balance Sheet ⁽¹⁾
	As of June 30,			As of December 31,			As of June 30,			As of December 31,
Location on Balance Sheet	2023			2022			2023			2022
Current assets	$	354		$	551		$	-		$	-
Current liabilities		(3,803	)		(10,796	)		(3,449	)		(10,245	)

(1)

All amounts subject to an enforceable master netting arrangement which are netted in these amounts. There are no amounts of related financial collateral received or pledged.

The following table summarizes the Company’s net loss on commodity derivative instruments for the six months ended June 30, 2023 and 2022 (in thousands), which was allocated unrealized and realized gains (losses) by utilizing production volumes for each respective commodity (i.e., oil, gas, NGLs) in the Company to the total production volumes for each commodity of all properties owned by Tap Rock Resources. NM10’s unrealized and realized gains and (losses) are also included below:

	Six Months Ended June 30,
	2023			2022
Unrealized derivative gain (loss)	$	36,990		$	(58,391	)
Realized derivative loss		(1,698	)		(211,324	)
Commodity derivative loss, net	$	35,292		$	(269,715	)

6.	Long-Term Debt

Term Loan

The Term Loan amortizes in an amount equal to $1.75 million per quarter for the fiscal quarters ending September 30, 2021 through January 27, 2025. Any unpaid amounts must be repaid by the maturity dates. As of June 30, 2023 and December 31, 2022, the total balance outstanding under the Term Loan was $12.3 million and $15.8 million, respectively. As of June 30, 2023 and December 31, 2022, $7.0 million and $7.0 million, respectively, of the Term Loan was classified as a current liability, as these amounts were due within one year from the respective balance sheet dates.

NM10's aggregate scheduled maturities of the Term Loan as of December 31, 2022, are as follows (in thousands):

	Payments Due
2023		3,500
2024		7,000
2025		1,750
Total	$	12,250

Tap Rock AcquisitionCo, LLC

Notes to Consolidated Financial Statements

Interest Rates and Fees. Outstanding borrowings under the Amended Agreement accrue interest, at NM10’s option, at a per annum rate of (i) LIBOR plus the LIBOR spread, which ranges from 2.75% to 3.5% depending on the leverage ratio, or (ii) a prime rate plus the applicable margin, which ranges from 0% to 0.75% depending on the leverage ratio. The interest rate floor under the Amended Agreement at December 31, 2022 was 4.25%. For the six months ended June 30, 2023 and 2022, respectively, NM10 incurred $0.6 million and $0.4 million, respectively, in interest expense.

Carrying Value and Fair Value. The fair value of the Term Loan approximates the carrying value as of June 30, 2023 and December 31, 2022 because the debt bears interest at a floating rate of interest, based on prevailing market rates (Level 2 measurement). The fair value is based on observable inputs of interest rates that are currently available to NM10 for debt with similar terms and maturities for non-public debt.

7.	Equity

During the six months ended June 30, 2023 and 2022, the Company distributed $3.1 million and $11.1 million, respectively, back to non-controlling interests. There were no contributions received from non-controlling interests during the six months ended June 30, 2023 or 2022.

Net Parent Investment

Tap Rock AcquisitionCo, LLC

Notes to Consolidated Financial Statements

8.	Commitments and Contingencies

9.	Variable Interest Entities

10.

Subsequent Events

On June 20, 2023, Civitas entered into a purchase agreement with the Company to purchase all of their interest in certain oil and gas properties and related net assets for cash consideration of $841.8 million and 7,598,122 shares of common equity, before purchase price adjustments. The closing with the Company occurred on August 2, 2023 with the effective date of July 1, 2023 and included $57.8 million in upward purchase price adjustments. Final post-close adjustments will be settled in December 2023.

Cash from the closing on August 2, 2023 was used to pay off the remainder of NM10’s Term Loan and the outstanding interest in the amount of $12.3 million.

NM10 closed out all their open commodity derivatives as of July 31, 2023. The resulting impact was a loss of $3.4 million.

Exhibit 99.5

Tap Rock Resources II, LLC

Consolidated Financial Statements

As of December 31, 2022 and December 31, 2021 and for the Years Ended December 31, 2022 and December 31, 2021

Tap Rock Resources II, LLC

Consolidated Financial Statements

As of December 31, 2022 and December 31, 2021 and for the Years Ended December 31, 2022 and December 31, 2021

		Page(s)

Index		1

Report of Independent Auditors		2-3

Consolidated Financial Statements

Consolidated Balance Sheets		4

Consolidated Statements of Operations		5

Consolidated Statements of Changes in Members’ Equity		6

Consolidated Statements of Cash Flows		7

Notes to Consolidated Financial Statements		8–25

Report of Independent Auditors

To the Board of Managers

Tap Rock Resources II, LLC

We have audited the consolidated financial statements of Tap Rock Resources II, LLC, (the Company) which comprise the consolidated balance sheets as of December 31, 2022 and 2021, and the related consolidated statements of operations, changes in members’ equity and cash flows for the years then ended, and the related notes (collectively referred to as the “financial statements”).

Basis for Opinion

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

Responsibilities of Management for the Financial Statements

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

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

Auditor’s Responsibilities for the Audit of the Financial Statements

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

In performing an audit in accordance with GAAS, we:

Exercise professional judgment and maintain professional skepticism throughout the audit.

Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control. Accordingly, no such opinion is expressed.

March 30, 2023

Tap Rock Resources II, LLC

Consolidated Balance Sheets

As of December 31, 2022 and December 31, 2021

(in thousands of dollars)

	December 31,
	2022		2021
Assets
Current assets
Cash and cash equivalents	$	212	$	-
Accounts receivable, trade		39,643		16,791
Other		4,773		1,753
Total current assets		44,628		18,544

Long-term assets
Proved oil and natural gas property, net, full cost method		479,109		232,039
Unevaluated oil and natural gas property		112		4,660
Commodity derivative asset		2,106		-
Other		1,507		740
Total assets	$	527,462	$	255,983

Liabilities and Members' Equity
Current liabilities
Accounts payable	$	15,523	$	14,000
Accounts payable, affiliates		2,925		2,147
Accrued liabilities		65,991		45,987
Commodity derivative liability		88		6,483
Royalties payable		27,448		5,920
Total current liabilities		111,975		74,537

Long-term liabilities
Credit facility		108,000		-
Commodity derivative liability		-		621
Asset retirement obligation		739		481
Total long-term liabilities		108,739		1,102

Commitments and contingent liabilities (see Note 12)

Members' Equity
Capital contributions, net of management loan		192,849		174,254
Additional paid-in capital		6,539		-
Accumulated earnings		107,360		6,090
Total members' equity		306,748		180,344
Total liabilities and members' equity	$	527,462	$	255,983

The accompanying notes are an integral part of these consolidated financial statements.

Tap Rock Resources II, LLC

Consolidated Statement of Operations

Years ending December 31, 2022 and December 31, 2021

(in thousands of dollars)

	Year Ended December 31,
	2022			2021
Revenues
Oil, natural gas, and NGL	$	322,702		$	64,563
Other		15			42
Total revenue		322,717			64,605

Expenses
Lease operating		60,326			15,148
Production taxes		27,790			5,636
Transportation, processing, and gathering		3,916			1,053
Depletion and accretion of ARO		83,959			15,344
General and administrative		12,869			3,932
Total operating expenses		188,860			41,113
Total operating income		133,857			23,492

Other income (expense)
Commodity derivatives loss, net		(28,610	)		(15,870	)
Interest Expense		(3,977	)		(266	)
Net income	$	101,270		$	7,356

The accompanying notes are an integral part of these consolidated financial statements.

Tap Rock Resources II, LLC

Consolidated Statement of Changes in Members’ Equity

As of December 31, 2022 and December 31, 2021

(in thousands of dollars)

	Total Members' Equity
Balance at December 31, 2020	$	67,314

Capital contributions		105,958

Loan to management		(284	)

Net income		7,356

Balance at December 31, 2021		180,344

Capital contributions		16,096

Repayment of loan to management		2,499

Additional paid-in capital		6,539

Net income		101,270

Balance at December 31, 2022	$	306,748

The accompanying notes are an integral part of these consolidated financial statements.

Tap Rock Resources, LLC

Consolidated Statement of Cash Flows

Years Ending December 31, 2022 and December 31, 2021

(in thousands of dollars)

	Year Ended December 31,
	2022			2021
Cash flows from operating activities
Net income	$	101,270		$	7,356
Adjustments to reconcile net income to net cash provided by operating activities:
Unrealized loss (gain) on derivatives		(9,123	)		5,984
Depletion and accretion of ARO		83,959			15,344
Amortization of debt issuance costs		370			45
Stock-based compensation		6,539			-
Changes in operating assets and liabilities:
Accounts receivable		(22,851	)		(11,790	)
Other assets		(2,952	)		(1,666	)
Accounts payable and other current liabilities		31,508			22,443
Net cash provided by operating activities		188,720			37,716

Cash flows from investing activities
Acquisition of proved and unproved oil and gas properties		(131,650	)		(38,669	)
Expenditures for oil and natural gas properties and equipment		(182,247	)		(107,140	)
Net cash used in investing activities		(313,897	)		(145,809	)

Cash flows from financing activities
Proceeds from capital contributions		18,595			105,674
Borrowings under credit facility		435,000			37,000
Repayments under credit facility		(327,000	)		(37,000	)
Debt issuance costs		(1,206	)		(717	)
Net cash provided by financing activities		125,389			104,957

Net increase (decrease) in cash		212			(3,136	)
Cash, cash equivalents at beginning of period		-			3,136
Cash, cash equivalents at ending of period	$	212		$	-

Supplemental Disclosures of Cash Flow Information:
Cash paid for interest	$	(3,028	)	$	(184	)
Supplemental Disclosures of Noncash Investing Activities:
Accrued property expenditures	$	(12,325	)	$	(35,182	)

The accompanying notes are an integral part of these consolidated financial statements.

Tap Rock Resources II, LLC

Notes to Consolidated Financial Statements

As of December 31, 2022 and December 31, 2021

Organization and Nature of Business

Tap Rock Resources II, LLC (the “Company”) and its wholly owned subsidiaries Tap Rock Holdings II, LLC, and Tap Rock Minerals II, LLC are Delaware Limited Liability Companies. The Company was founded in December of 2019 with an equity contribution in 2020 from Natural Gas Partners XII, L.P. The Company is engaged in the acquisition, exploration, development, and production of crude oil and natural gas in Eddy and Lea counties in New Mexico and in Loving county in Texas.

Summary of Significant Accounting Policies

Principles of Consolidation

The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP” or “GAAP”) and include the accounts of the Company and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the accompanying financial statements and disclosures. Items subject to such estimates and assumptions include (1) cash flow estimates used in Ceiling test for oil, natural gas, and natural gas liquid (NGL) properties; (2) volumes of oil, natural gas, and NGL reserves used in calculating depletion; (3) evaluation of asset retirement obligations; (4) accrued oil, natural gas, and NGL sales and other receivables; and (5) fair values of derivative instruments. Actual results could differ from estimates.

Cash and Cash Equivalents

Cash equivalents consist of cash and highly liquid investments, which are readily convertible into cash and have maturities of three months or less.

Accounts Receivable

The Company records estimated oil, natural gas, and NGL revenue receivable from third parties at its net revenue interest. The Company’s accounts receivable consists mainly of receivables from oil, natural gas, and NGL purchasers and from working interest partners on properties the Company operates. For receivables due from working interest owners, the Company generally has the ability to withhold future revenue disbursements to recover non-payment of working interest billings. Management periodically reviews accounts receivable amounts for collectability. Generally, the Company’s oil, natural gas, and NGL receivables are collected within 30 to 90 days and the Company has had no bad debts for periods ended December 31, 2022 and 2021.

Although diversified among several purchasers, collectability is dependent upon the financial wherewithal of each individual company and is influenced by the general economic conditions of the industry. Receivables are not collateralized.

Tap Rock Resources II, LLC

Notes to Consolidated Financial Statements

As of December 31, 2022 and December 31, 2021

For the years ended December 31, 2022 and December 31, 2021, the accounts receivable balance includes (in thousands):

	Year Ended December 31,
	2022		2021
Trade accounts receivable
Oil, natural gas, and NGL revenues	$	33,854	$	10,493
Amounts due from working interest owners		4,531		6,298
Other	$	1,258		-
Trade accounts receivable	$	39,643	$	16,791

Inventories

Inventories are primarily comprised of crude oil held in tanks. The Company’s inventories are valued at the lower of cost or net realizable value. Inventory costs are determined using the weighted-average cost method. Inventory is included in the Other current assets line item on the consolidated balance sheets.

Proved Oil and Natural Gas Properties, including Ceiling Test

The Company’s oil and natural gas exploration and production activities are accounted for using the full cost method of accounting for exploration and development activities as defined by the Securities and Exchange Commission (“SEC”) Release No. 33-8995, Modernization of Oil and Gas Reporting Requirements and Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 932, Extractive Activities – Oil and Gas. Under this method, all property acquisition, direct geophysical and geological costs, and costs of drilling exploratory and development wells are capitalized when incurred as oil and natural gas properties.

The carrying amount of oil and natural gas properties also includes estimated asset retirement costs recorded based on the fair value of the asset retirement obligation when incurred. Gain or loss on the sale or other disposition of oil and natural gas properties is not recognized unless the gain or loss would significantly alter the relationship between capitalized costs and proved reserves of oil, natural gas and NGLs attributable to a country.

Producing properties, including associated infrastructure and capitalized asset retirement costs, are depleted on a country basis using the units-of-production method based on estimated total proved reserves.

During the years ended December 31, 2022 and December 31, 2021, the Company recognized no write-down of oil and natural gas properties as a result of the full cost ceiling test.

Tap Rock Resources II, LLC

Notes to Consolidated Financial Statements

As of December 31, 2022 and December 31, 2021

Unevaluated Properties

The costs of unevaluated properties are withheld from the full cost pool until such time as the properties are either developed or impaired. Unevaluated properties are carried at cost and are reviewed for impairment whenever events or circumstances indicate a likely loss of the right of use of those assets or at least annually. In determining whether a significant unevaluated property is impaired, the Company considers numerous factors including, but not limited to, current exploration plans, favorable or unfavorable exploration activity on adjacent leaseholds, in-house geologists’ evaluations of the lease, and the remaining lease term. If an unevaluated property is impaired, the Company will add the costs to the full cost pool and depletion will begin. Capitalized costs of unevaluated properties are reclassified as developed properties when the associated acreage is developed through the drilling and completion of wells or added to the full cost pool when impaired. During the years ended December 31, 2022 and 2021, respectively, the Company impaired, and therefore added to the full cost pool, $2.1 million and less than $0.1 million, respectively, related to the expirations of leases.

Deferred Debt Issuance Costs

Debt issuance costs include origination, legal, and other fees incurred to issue the debt in connection with the Company’s credit facility. Debt issuance costs are amortized to interest expense using the straight-line method, which approximates the effective interest method over the term of the debt. See Note 9 – Long-Term Debt for information regarding the credit facility.

Acquisitions of Proved and Unevaluated Properties

Acquisitions that qualify as business combinations are recorded based on the fair value of the assets acquired and liabilities assumed at the acquisition date, which is considered the date on which the Company obtains control of the properties. The fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements utilize assumptions of market participants and the Company’s valuations are made using a discounted cash flow model based on an income approach and market assumptions such as: (1) future commodity prices, (2) projections of estimated quantities of oil, natural gas, and NGL reserves, (3) expectations for timing and amount of future development and operating costs, (4) projections of future rates of production, (5) expected recovery rates, (6) estimated costs for undeveloped acreage and (7) market participant discount rates.

Asset Retirement Obligation

The Company’s asset retirement obligations (“ARO”) relate to future costs associated with plugging and abandoning oil and natural gas wells, removal of equipment and facilities from leased acreage, and returning such land to its original condition. The initial estimated retirement obligation of properties is recognized as a liability with an associated increase in oil and natural gas properties for the asset retirement cost. Accretion expense is recognized over the estimated productive life of the related assets. If the fair value of the estimated asset retirement obligation changes, an adjustment is recorded to both the asset retirement obligation and the asset retirement cost. Revisions in estimated liabilities can result from revisions of estimated inflation rates, changes in service and equipment costs, and changes in the estimated timing of settling asset retirement obligations. As a full cost company, settlements for asset retirement obligations for abandonment are adjusted to the full cost pool. See Note 6 – Asset Retirement Obligations for a summary of the Company’s ARO balance.

Commodity Derivative Instruments

The Company uses commodity derivative instruments to reduce the effect of price changes on a portion of the Company’s future oil and natural gas sales. The derivative instruments include commodity price swaps, basis differential swaps, and price collars. The commodity derivative instruments are measured at fair value and are included in the accompanying consolidated balance sheets as commodity derivative assets and commodity derivative liabilities and are classified as current or noncurrent based on the timing of expected future cash flows of settlement of individual trades. The Company has not designated any of the derivative contracts as fair value or cash flow hedges. Net gains and losses on commodity derivative instruments are recorded based on the changes in the fair values of the derivative instruments. Net gains and losses on commodity derivative instruments are recorded in the commodity derivative loss, net line on the consolidated statements of operations and included in cash flows from operating activities.

Tap Rock Resources II, LLC

Notes to Consolidated Financial Statements

As of December 31, 2022 and December 31, 2021

Oil, Natural Gas, and NGL Revenue Recognition

Stock-Based Compensation

At December 31, 2022, the Company had incentive units for employees in consideration of services rendered and to be rendered for the Company. The Company records expense associated with the fair value of stock-based compensation in accordance with authoritative accounting guidance, which is based on the estimated fair value of these awards determined at the time of grant and is included within the general and administrative expense line item in the accompanying consolidated statements of operations. The Company accounts for forfeitures of incentive units as they occur. Please refer to Note 11 – Employee Share Based Compensation for additional discussion.

Income Taxes

The Company is a single member limited liability company that is treated as a partnership for federal and state income tax purposes by the Internal Revenue Service. A partnership is not a tax-paying entity for federal and state income tax purposes. Income, losses, deductions, and credits pass through proportionately to the Company’s members and are taxed at each members’ income tax rate. Accordingly, no provision for income taxes is provided in the Company’s consolidated financial statements.

Reclassifications

Certain amounts in prior year have been reclassified to 2022 presentation. The reclassified amounts were not material to the financials.

Recently Adopted Accounting Pronouncements

In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848), which provides temporary optional guidance to companies impacted by the transition away from the London Interbank Offered Rate (“LIBOR”). The amendment provides certain expedients and exceptions to applying GAAP in order to lessen the potential accounting burden when contracts, hedging relationships, and other transactions that reference LIBOR as a benchmark rate are modified. Furthermore, in January 2021, the FASB issued ASU No. 2021-01, Reference Rate Reform (Topic 848), which clarifies the scope of Topic 848 so that derivatives affected by the discounting transition are explicitly eligible for certain optional expedients and exceptions in Topic 848. These amendments are effective upon issuance and expire on December 31, 2022. The transition from LIBOR did not have a material impact on interest expense or borrowing activities under the Credit Agreement, or to otherwise have a material adverse impact on the business.

Tap Rock Resources II, LLC

Notes to Consolidated Financial Statements

As of December 31, 2022 and December 31, 2021

There are no other ASUs that would have a material effect on the Company’s consolidated financial statements and related disclosures that have been issued but not yet adopted by the Company as of December 31, 2022, or through the issuance of this report.

Contracts with Customers

The Company recognizes its share of revenue from the sale of produced oil, natural gas, and NGLs from its assets in Eddy and Lea counties in New Mexico and Loving county in Texas. Oil, natural gas, and NGL production revenue presented within the accompanying consolidated statements of operations is reflective of the revenue generated from contracts with customers. The table below presents the oil, natural gas, and NGL production revenue by product type for the years ended December 31, 2022 and December 31, 2021 (in thousands):

	Year Ended December 31,
	2022		2021
Oil Production Revenue	$	285,053	$	58,680
Gas Production Revenue		12,986		1,655
NGL Production Revenue		24,663		4,228
Total	$	322,702	$	64,563

Revenue is recognized when the Company’s performance obligations under the sales contracts are satisfied, which generally occurs at the point in time at which control of the oil, natural gas, or NGLs transfers to the customer, which differs depending on the contractual terms of each of the Company’s arrangements. Transfer of control drives the presentation of transportation, processing, and gathering expenses (“fees and other deductions”) within the accompanying consolidated statements of operations. Fees and other deductions incurred by the Company prior to control transfer are recorded within the transportation, processing, and gathering expenses line item on the accompanying consolidated statements of operations. When control is transferred at or near the wellhead, sales are based on a wellhead market price that is reduced by fees and other deductions incurred by the purchaser subsequent to the transfer of control.

Revenue is recorded in the month when contractual performance obligations are satisfied. However, settlement statements from the purchasers of hydrocarbons and the related cash consideration are received 30 to 90 days after production has occurred. As a result, the Company must estimate the amount of production delivered to the customer and the consideration that will ultimately be received for sale of the product. Estimated revenue due to the Company is recorded within the accounts receivable line item on the accompanying balance sheets until payment is received. The accounts receivable balances from contracts with customers within the accompanying balance sheets as of December 31, 2022, and 2021, were $33.9 million and $10.5 million, respectively. To estimate accounts receivable from contracts with customers, the Company uses knowledge of its properties and historical performance factors as the basis for these estimates. Differences between estimates and actual amounts received for product sales are recorded in the month that payment is received from the purchaser.

Tap Rock Resources II, LLC

Notes to Consolidated Financial Statements

As of December 31, 2022 and December 31, 2021

Concentrations, Risks, and Uncertainties

Concentrations of Credit Risk

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of accounts receivable and commodity derivative instruments. For the years ended December 31, 2022 and 2021, although substantially all revenue is attributable to two customers, respectively, the Company does not believe the loss of any single purchaser would materially impact its operating results because oil, natural gas, and NGLs are fungible products with well-established markets and numerous purchasers. Further, the risk related to accounts receivable is mitigated as the short-term nature of the receivables which are paid within 30 to 90 days of the sales month. The Company continually monitors the receipt of funds and the general business activities of current purchasers and other purchasers in the areas of its operations.

As of December 31, 2022, the Company had commodity derivative contracts with three counterparties. By using derivative instruments that are not traded on an exchange, the Company is exposed to the credit risk from counterparties. Credit risk is the risk of loss from counterparties not performing under the terms of the derivative instrument. The Company does not require collateral or other security from counterparties to support derivative instruments; however, all derivative counterparties are lenders under the Company’s credit facility. The Company’s counterparties have investment grade senior unsecured debt ratings. Additionally, the Company uses master netting agreements to minimize credit risk exposure. For the years ended December 31, 2022 and December 31, 2021, the Company did not record any credit losses.

Fair Value Measurements

Tap Rock Resources II, LLC

Notes to Consolidated Financial Statements

As of December 31, 2022 and December 31, 2021

The three input levels in the hierarchy of fair value measurements are as follows:

Input Level		Description of Input
Level 1		Observable inputs such as quoted market prices in active markets.
Level 2		Inputs other than quoted prices in active markets that are either directly or indirectly observable.
Level 3		Unobservable inputs in which little or no market data exists.

Recurring Fair Value Measurements

The Company’s recurring fair value instruments consist of cash and cash equivalents, accrued oil, natural gas, and NGL receivables and other receivables, accounts payable, debt, and commodity derivative instruments. The carrying amounts of cash and cash equivalents, accounts receivable, and accounts payable approximate fair value due to the short-term maturity of these instruments. The Company’s carrying value of the credit facility balance approximates fair value (Level 2 measurement).

Commodity derivative contracts are marked-to-market each quarter and are thus stated at fair value in the Company’s consolidated balance sheets and in Note 8 – Commodity Derivative Instruments. The fair values of the Company’s commodity derivative instruments are classified as Level 2 measurements as they are calculated using industry standard models using assumptions and inputs which are substantially observable in active markets throughout the full term of the instruments. These include market price curves, quoted market prices in active markets, credit risk adjustments, implied market volatility, and discount factors.

The following table presents the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis as of December 31, 2022 by level within the fair value hierarchy (in thousands):

	Year Ended December 31, 2022
	Level 1		Level 2		Level 3		Total
Financial Assets:
Commodity derivative assets	$	-	$	18,250	$	-	$	18,250
Financial liabilities:
Commodity derivative liabilities	$	-	$	16,232	$	-	$	16,232

Tap Rock Resources II, LLC

Notes to Consolidated Financial Statements

As of December 31, 2022 and December 31, 2021

The following table presents the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis as of December 31, 2021 by level within the fair value hierarchy (in thousands):

	Year Ended December 31, 2021
	Level 1		Level 2		Level 3		Total
Financial Assets:
Commodity derivative assets	$	-	$	539	$	-	$	539
Financial liabilities:
Commodity derivative liabilities	$	-	$	7,644	$	-	$	7,644

Nonrecurring Fair Value Measurements

The Company applies fair value to its nonrecurring, nonfinancial measurements including business combinations. These assets and liabilities are subject to fair value only in certain circumstances and are not subject to recurring valuations. Given the unobservable nature of these inputs, they are deemed to be Level 3. Assets acquired and liabilities assumed under transactions that do not meet the criteria of a business combination are accounted for as an asset acquisition and are recorded based on the fair value of the total consideration transferred on the acquisition date using the lowest observable inputs available.

Asset Retirement Obligations

The Company estimates the fair value of asset retirement obligations at the point they are incurred by calculating the present value of estimated future plugging and abandonment costs. The calculation includes estimated amounts and timing of abandonment cash flows, the credit-adjusted risk-free rate, and future inflation rates. Revisions to the liability could occur due to changes in estimated abandonment costs, well economic lives, or regulation requirements regarding the abandonment of wells.

The following table summarizes the activities of the Company’s asset retirement obligations for the periods indicated (in thousands):

	Year Ended December 31,
	2022		2021
Beginning asset retirement obligation	$	481	$	215
Obligations incurred or acquired		214		244
Accretion expense		44		22
Obligations settled		-		-
Revisions in previous estimates		-		-
Ending asset retirement obligation		739		481
Less, current portion		-		-
Long-term portion	$	739	$	481

Tap Rock Resources II, LLC
Notes to Consolidated Financial Statements
As of December 31, 2022 and December 31, 2021

Acquisitions

April 2022 Colgate Acquisition

In April 2022 the Company acquired 1,337 net leasehold acres in Lea County, New Mexico from Colgate Production LLC for a purchase price of $27.6 million. The sale closed on April 14, 2022 with an effective date of March 1, 2022. The acquisition was accounted for as an asset acquisition under ASC 805 Business Combinations and therefore, was recorded based on the fair value of the total consideration transferred on the acquisition date.

August 2022 EOG Acquisition

In August 2022 the Company acquired 1,280 net leasehold acres in Loving County, Texas from EOG Resources Inc for a purchase price of $56.8 million. The sale closed on August 1, 2022 with an effective date of August 1, 2022. The acquisition was accounted for as an asset acquisition under ASC 805 Business Combinations.

September 2022 Viper Acquisition

In September 2022 the Company acquired 373 net leasehold acres in Loving County, Texas from Viper Energy Partners for a purchase price of $29.9 million. The sale closed on September 20, 2022 with an effective date of September 1, 2022. The acquisition was accounted for as an asset acquisition under ASC 805 Business Combinations.

September 2022 Basin Minerals Acquisition

In September 2022 the Company acquired 257 net leasehold acres in Loving County, Texas from Basin Minerals LLC for a purchase price of $10.7 million. The sale closed on September 23, 2022 with an effective date of September 15, 2022. The acquisition was accounted for as an asset acquisition under ASC 805 Business Combinations.

June 2021 Energen Acquisition

In June 2021 the Company acquired 1,328 net leasehold acres in Lea County, New Mexico from Energen Resources Corporation for a purchase price of $29.4 million. The sale closed on June 7, 2021 with an effective date of February 1, 2021. The acquisition was accounted for as an asset acquisition under ASC 805 Business Combinations.

Commodity Derivatives Instruments

The Company uses over-the-counter (“OTC”) swaps to manage the commodity price risk associated with forecasted sale of its crude and natural gas production. The Company has entered into fixed swap and basis swap contracts for both oil and gas production, as well as oil and gas collar contracts.

Fixed swaps are settled monthly based on differences between the fixed price specified in the contract and the referenced settlement price. When the referenced settlement price is less than the price specified in the contract, the Company receives an amount from the counterparty based on the price difference multiplied by the volume. Similarly, when the referenced settlement price exceeds the price specified in the contract, the Company pays the counterparty an amount based on the price difference multiplied by the volume.

Tap Rock Resources II, LLC
Notes to Consolidated Financial Statements
As of December 31, 2022 and December 31, 2021

For collar arrangements, the Company receives the difference between an agreed upon index price and the floor price if the index price is below the floor price. The Company pays the difference between the agreed upon ceiling price and the index price if the index price is above the ceiling price. No amounts are paid or received if the index price is between the floor and ceiling prices.

Below is a summary of the Company’s open fixed swap positions as of December 31, 2022:

	2023		2024		2025
NYMEX WTI Crude Oil Swaps:
Notional volume (MBbl)		1,588		1,394		301
Weighted average fixed price ($/Bbl)	$	75.82	$	74.69	$	72.55

NYMEX Henry Hub Natural Gas Swaps:
Notional volume (MMBtu)		801		350		-
Weighted average fixed price ($/MBtu)	$	3.74	$	4.31	$	-

Below is a summary of the Company’s open basis swap positions as of December 31, 2022:

	2023			2024			2025
WTI Midland-Cushing Crude Oil Basis Swaps ⁽¹⁾:
Notional volume (MBbl)		1,800			1,563			332
Weighted average contract price ($/Bbl) ⁽²⁾	$	0.59		$	0.33		$	0.17

Waha Natural Gas Basis Swaps ⁽³⁾:
Notional volume (MMBtu)		3,553			2,165			609
Weighted average contract price ($/MBtu) ⁽⁴⁾	$	(1.56	)	$	(1.05	)	$	(0.76	)

(1)

Represents the swaps that fix the basis differentials between the index prices at Midland WTI price (the price at which the Company sells its oil) and the Cushing WTI price.

(2)

Represents the weighted average fixed price among basis swap contracts for the Company based on bbls per contract.

(3)

Represents swap contracts that fix the basis differential between Natural Gas prices at the Waha Hub (in West Texas – the price at which the Company sells its natural gas) and the Henry Hub (in Louisiana).

(4)

Represents the weighted average fixed price among basis swap contracts for the Company based on mbtu per contract.

Tap Rock Resources II, LLC
Notes to Consolidated Financial Statements
As of December 31, 2022 and December 31, 2021

Below is a summary of the Company’s open oil roll differential swap positions as of December 31, 2022:

	2023		2024		2025
Oil Roll Differentials NYMEX WTI Basis Swaps:
Notional volume (MBbl)		1,800		1,563		332
Weighted average contract price ($/Bbl)	$	0.76	$	0.49	$	0.35

Below is a summary of the Company’s oil collar positions as of December 31, 2022:

	2023		2024		2025
NYMEX WTI Crude Oil Volumes (MBbl)		392		169		31

Weighted-Average Floor Price (per MBbl)	$	71.91	$	70.00	$	65.00

Weighted Average Ceiling Price (per MBbl)	$	94.55	$	87.65	$	83.35

Below is a summary of the Company’s gas collar positions as of December 31, 2022:

	2023		2024		2025
NYMEX Henry Hub Volumes (MMBtu)		2,412		1,815		609

Weighted-Average Floor Price (per MMBtu)	$	4.54	$	3.91	$	3.99

Weighted Average Ceiling Price (per MMBtu)	$	8.25	$	6.82	$	5.56

The following table presents the fair value of the Company’s derivative instruments on a gross and net basis as of December 31, 2022 and December 31, 2021 (in thousands):

	Gross Amounts of Recognized Assets and Liabilities						Net Amounts of Assets and Liabilities Presented in the Balance Sheet ⁽¹⁾
	Year Ended December 31,						Year Ended December 31,
Location on Balance Sheet	2022			2021			2022			2021
Current assets	$	10,816		$	444		$	-		$	-
Long-term assets		7,434			96			-			-
Current liabilities		(10,904	)		(6,927	)		(88	)		(6,483	)
Long-term liabilities		(5,328	)		(717	)		2,106			(621	)

(1)

All amounts subject to an enforceable master netting arrangement which are netted in these amounts. There are no amounts of related financial collateral received or pledged.

Tap Rock Resources II, LLC
Notes to Consolidated Financial Statements
As of December 31, 2022 and December 31, 2021

The following table summarizes the Company’s net gain (loss) on commodity derivatives instruments for the years ended December 31, 2022 and December 31, 2021 (in thousands):

	Year Ended December 31,
	2022			2021
Unrealized derivative gain (loss)	$	9,123		$	(5,983	)
Realized derivative loss	$	(37,733	)	$	(9,887	)
Commodity derivative loss, net	$	(28,610	)	$	(15,870	)

Long-Term Debt

The Company’s Credit Agreement provides for a senior secured revolving credit facility with a maximum loan of $500.0 million and matures on September 23, 2025. As of December 31, 2022, the borrowing base and the elected commitment under the Credit Agreement was $210.0 million. As of December 31, 2022, the Company had $108.0 million in outstanding borrowings. As of December 31, 2021, the Company had no outstanding borrowings.

The credit facility has semi-annual borrowing base redeterminations by November 1 and May 1 based upon quantification of the Company’s reserves at June 30 and December 31 and is also subject to a redetermination upon the occurrence of certain events. The credit facility is secured by mortgages of certain producing crude oil and natural gas properties and substantially all of assets of the Company and its wholly owned subsidiaries.

Interest on the credit facility is either (i) Secured Overnight Finance Rate (“SOFR”) plus a margin between 2.75% and 3.75% or (ii) the American Banking Prime Rate plus a margin between 1.75% and 2.75%. The use of LIBOR as a global reference rate was discontinued with the March 2022 amendment. The transition from LIBOR did not have a material impact on interest expense or borrowing activities under the Credit Agreement, or to otherwise have a material adverse impact on the business.

The credit facility provides for an annual commitment fee of 0.50% depending on the unused borrowing base amount. At December 31, 2022 and 2021, the Company had a weighted average interest rate of 5.64% and 3.18%, respectively. The credit facility contains representations, warranties, covenants, conditions and defaults customary for transactions of this type, including but not limited to: (i) limitations on liens and incurrence of debt covenants; (ii) limitations on the sale of property, mergers, consolidations, and other similar transactions covenants; (iii) limitations on investments, loans, and advances covenants; and (iv) limitations on dividends, distributions, redemptions, and restricted payments covenants.

The credit facility also contains financial covenants requiring the Company to comply with a consolidated leverage ratio of 3.25 to 1.0 and a current ratio of over 1 to 1. Additionally, the Company must provide audited financial statements no later than 120 days after the end of the fiscal year and unaudited financial statements no later than 60 days after the end of each fiscal quarter. The Company was in compliance with the terms and covenants of the credit facility at December 31, 2022.

Tap Rock Resources II, LLC
Notes to Consolidated Financial Statements
As of December 31, 2022 and December 31, 2021

10.

Members’ Equity

During the years ended December 31, 2022 and 2021, the Company received $18.6 million and $105.7 million, respectively, in Members’ contributions from all partners to fund its asset acquisitions and drilling activities. Note, member liability is limited to ownership in the LLC.

11.

Share Based Compensation

The Company has created and granted incentive units for employees in consideration of services rendered and to be rendered for the Company. The incentive units are broken into four tiers: Tier I, Tier II, Tier III, and Tier IV. All incentive units are non-voting and subject to vesting. The vesting schedule is 1/5th per year on the anniversary of the grant date for Tiers I and II with Tier III and Tier IV vesting upon payout of Tier III and Tier IV respectively. As of December 31, 2022, 1.0 million shares of each tier are outstanding.

On March 30, 2022, the owners modified the LLC agreement to allow all 76 employees to retain incentive units upon voluntary resignation under a 10-year, quarterly vesting period. Fair value of the incentive units was determined on a hypothetical liquidation scenario of the company from a market participant perspective at the modification date. The valuation of the incentive units utilized a Monte Carlo simulation model in a risk-neutral framework. The fair value of the incentive units was based on the conventional method, which considered the reinvestment of any potential dividends in the equity of the Company. Significant assumptions used in this simulation include the Company’s expected volatility (based on guideline public companies), dividend yield, and risk-free interest rate based on U.S. Treasury yield curve rates with maturities consistent with a three-year vesting period, as well as the volatilities and dividend yields for each of the Company’s peers.

Compensation expense will be recognized quarterly, ratably over the 10-year, vesting period. During the year ended December 31, 2022, the Company recognized $6.5 million in stock-based compensation expense, which is included within general and administrative expense in the statements of operations. The remaining compensation cost on nonvested awards yet to be recognized as of December 31, 2022 was $80.6 million which will be recognized over the next 9.25 years. The Company will be recognizing forfeitures as they occur. There were 65,000 units granted and 26,250 units forfeited during the year ended December 31, 2022. Cash is only distributed to incentive unit holders upon declaration of a distribution at the discretion of the Board. There have been no distributions to incentive unit holders as of December 31, 2022.

Tap Rock Resources II, LLC
Notes to Consolidated Financial Statements
As of December 31, 2022 and December 31, 2021

A summary of incentive unit activity is presented in the following table:

	For the Year Ended December 31, 2022
	Incentive Units			Weighted-Average Grant- Date Fair Value
Non-vested at March 30, 2022		3,872,500		$	22.51
Granted		65,000		$	14.83
Vested		(291,719	)	$	22.42
Forfeited		(26,250	)	$	11.73
Non-vested at December 31, 2022		3,619,531		$	22.28

12.

Commitments and Contingencies

In the ordinary course of business, the Company may at times be subject to possible loss contingencies arising from federal, state and local environmental, health and safety laws and regulations and third-party litigation. There are no matters pending that in the opinion of the Company will have a material adverse effect on the financial position, results of operations, or cash flows of the Company as of December 31, 2022.

13.

Related Party Transa ctions

Tap Rock Resources, LLC, a Delaware limited liability company (“Tap I”), which has a similar owner structure to Natural Gas Partners XII, L.P., provides its employees as personnel to operate the business of the Company and its direct and indirect subsidiaries. In addition, Tap I and subsidiaries provide access to certain assets of Tap I and its subsidiaries in order for personnel to perform the services.

During 2021 and 2020, the Company loaned members of management $0.2 million and $1.8 million, respectively, for their portion of capital calls made during the year. The loan was determined to be due at the earliest of either: i) The occurrence of a Fundamental Change (as defined in the LLC agreement); ii) The date on which the Company receives proceeds from the sale of all or substantially all of the assets of the Company and distributes such proceeds to its equity owners; iii) December 31, 2026 for the original loan made or February 21, 2027 for subsequent loans made; or iv) The date that the loan shall otherwise become due and payable full, whether by acceleration or otherwise. During the year ended December 31, 2022, $2.5 million was repaid and there was less than $0.1 million of accrued interest at a rate of 1.69% left unpaid on the loans.

14.

Subsequent Events

Subsequent events have been evaluated through March 30, 2023, the date the financial statements were available to be issued.

On February 16, 2023, the company traded out of 317 net acres, paid $23.0 million in cash, and acquired approximately 1,100 net acres in Lea county in New Mexico.

Tap Rock Resources II, LLC
Notes to Consolidated Financial Statements
As of December 31, 2022 and December 31, 2021

15.

Supplemental Oil and Gas Information (Unaudited)

Costs Incurred

Tap Rock Resources II, LLC (the “Company”) incurred costs in relation to oil and gas property acquisition and development activities as follows:

	For the Years Ended December 31,
	2022		2021

	(in thousands)
Development costs	$	194,785	$	142,053
Acquisitions
Proved properties		129,767		32,240
Unproved properties		1,884		6,789
Total, including asset retirement obligations ⁽¹⁾	$	326,436	$	181,082

(1) Includes amounts relating to estimated asset retirement obligations of $0.2 million for both of the years ended December 31, 2022 and 2021.

Net Proved Oil, NGL and Natural Gas Reserves

Proved reserves are the estimated quantities of oil, gas, and NGLs 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 that renewal is reasonably certain, regardless of whether deterministic or probabilistic methods are used for the estimation. Existing economic conditions include prices and costs at which economic producibility from a reservoir is to be determined, and the price to be used is the average price during the 12-month period prior to the ending date of the period covered by the report, determined as an unweighted arithmetic average of the first-day-of-the-month price for each month within such period, unless prices are defined by contractual arrangements, excluding escalations based upon future conditions. All of the Company estimated proved reserves are located in the United States.

Tap Rock Resources II, LLC
Notes to Consolidated Financial Statements
As of December 31, 2022 and December 31, 2021

	For the Year Ended December 31, 2021
	Oil			Gas			NGLs			Total
	(MBbl)			(MMcf)			(MBbl)			(MBOE)
Total proved reserves:
Beginning of year		8,426.1			9,144.2			1,674.5			11,624.6
Revisions of previous estimates		(1,144.8	)		(361.9	)		(137.7	)		(1,342.7	)
Extensions		4,585.0			8,957.4			1,496.1			7,574.0
Acquisitions		4,848.1			18,219.0			2,982.0			10,866.7
Production		(808.3	)		(742.4	)		(135.0	)		(1,067.0	)
End of year		15,906.1			35,216.3			5,879.9			27,655.6

Proved developed reserves:
Beginning of year		1,932.9			1,852.5			371.4			2,613.0
End of year		3,925.6			5,133.9			887.3			5,668.7
Proved undeveloped reserves:
Beginning of year		6,493.2			7,291.7			1,303.1			9,011.5
End of year		11,980.6			30,082.3			4,992.6			21,986.8

	For the Year Ended December 31, 2022
	Oil			Gas			NGLs			Total
	(MBbl)			(MMcf)			(MBbl)			(MBOE)
Total proved reserves:
Beginning of year		15,906.2			35,216.2			5,880.0			27,655.5
Revisions of previous estimates		301.2			(10,374.7	)		(1,599.8	)		(3,027.7	)
Extensions		4,279.6			8,407.7			1,397.7			7,078.6
Acquisitions		7,480.9			14,023.5			2,367.5			12,185.6
Production		(2,942.4	)		(4,292.8	)		(644.5	)		(4,302.3	)
End of year		25,025.5			42,979.9			7,400.9			39,589.7

Proved developed reserves:
Beginning of year		3,925.6			5,133.9			887.3			5,668.7
End of year		12,865.0			18,139.7			3,387.9			19,276.2
Proved undeveloped reserves:
Beginning of year		11,980.6			30,082.3			4,992.6			21,986.8
End of year		12,160.5			24,840.2			4,012.8			20,313.4

Tap Rock Resources II, LLC
Notes to Consolidated Financial Statements
As of December 31, 2022 and December 31, 2021

Standardized Measure of Discounted Future Net Cash Flows

	For the Years Ended December 31,
	2022		2021
Oil (per Bbl)	$	94.49	$	64.50
Gas (per Mcf)	$	4.98	$	3.04
NGLs (per Bbl)	$	48.67	$	24.14

The following summary sets forth the Company’s future net cash flows relating to proved oil, gas, and NGL reserves based on the standardized measure of discounted future net cash flows:

	As of December 31,
	2022			2021

	(in thousands)
Future cash inflows	$	2,938,736		$	1,273,714
Future production costs		(1,003,895	)		(441,388	)
Future development costs		(273,508	)		(129,709	)
Future income taxes		(3,646	)		-
Future net cash flows	$	1,657,687		$	702,617
10 percent annual discount		(673,894	)		(294,593	)
Standardized measure of discounted future net cash flows ⁽¹⁾	$	983,793		$	408,024

(1) The Company is treated as a partnership and therefore is not subject to federal income taxes.

Tap Rock Resources II, LLC
Notes to Consolidated Financial Statements
As of December 31, 2022 and December 31, 2021

The principal sources of changes in the standardized measure of discounted future net cash flows were:

	As of December 31,
	2022			2021

	(in thousands)
Standardized measure of discounted future net cash flows, beginning of year	$	408,024		$	95,299
Net changes in prices and production costs		318,089			93,660
Changes in estimated future development costs		14,823			52,435
Sales of oil, gas, and NGLs produced, net of production costs		(231,195	)		(41,279	)
Extensions		168,255			114,786
Purchase of reserves in place		254,371			101,061
Revisions of previous quantity estimates		(56,602	)		(14,871	)
Previously estimated development costs incurred during the period		43,124			-
Accretion of discount		40,802			9,530
Changes in timing and other		26,130			(2,598	)
Standardized measure of discounted future net cash flows, end of year ⁽¹⁾	$	985,821		$	408,023

(1) The Company is treated as a partnership and therefore is not subject to federal income taxes.

Exhibit 99.6

Tap Rock Resources II, LLC

Condensed Consolidated Financial Statements

(Unaudited)

As of June 30, 2023 and December 31, 2022 and for the Six Months Ended June 30, 2023 and June 30, 2022

Tap Rock Resources II, LLC

Consolidated Financial Statements (Unaudited)

As of June 30, 2023 and December 31, 2022 and for the Six Months Ended June 30, 2023 and June 30, 2022

Page(s)

Index	1

Condensed Consolidated Financial Statements

Condensed Consolidated Balance Sheets	2

Condensed Consolidated Statements of Operations	3

Condensed Consolidated Statements of Changes in Members’ Equity	4

Condensed Consolidated Statements of Cash Flows	5

Notes to Condensed Consolidated Financial Statements	6–13

Tap Rock Resources II, LLC

Condensed Consolidated Balance Sheets (Unaudited)

As of June 30, 2023 and December 31, 2022

(in thousands of dollars)

	June 30,		December 31,
	2023		2022
Assets
Current assets
Cash and cash equivalents	$	5,269	$	212
Accounts receivable, trade		64,852		39,643
Accounts receivable, affiliates		2,906		-
Commodity derivative asset		13,321		-
Other		4,516		4,773
Total current assets		90,864		44,628

Long-term assets
Proved oil and natural gas property, net, full cost method		633,011		479,109
Unevaluated oil and natural gas property		146		112
Other property		-		-
Commodity derivative asset		5,740		2,106
Other		1,426		1,507
Total assets	$	731,187	$	527,462

Liabilities and Members' Equity
Current liabilities
Accounts payable	$	13,929	$	15,523
Accounts payable, affiliates		-		2,925
Accrued liabilities		103,419		65,991
Commodity derivative liability		-		88
Royalties payable		20,941		27,448
Other		2,744		-
Total current liabilities		141,033		111,975

Long-term liabilities
Credit facility		215,000		108,000
Commodity derivative liability		-		-
Asset retirement obligation		1,596		739
Total long-term liabilities		216,596		108,739

Commitments and contingent liabilities (see Note 12)

Members' Equity
Capital contributions, net of management loan		215,706		192,849
Additional paid-in capital		10,898		6,539
Accumulated earnings		146,954		107,360
Total members' equity		373,558		306,748
Total liabilities and members' equity	$	731,187	$	527,462

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

Tap Rock Resources II, LLC

Condensed Consolidated Statement of Operations (Unaudited)

Six Months Ending June 30, 2023 and June 30, 2022

(in thousands of dollars)

	Six Months Ended June 30,
		2023			2022
Revenues
Oil, natural gas, and NGL	$	144,021		$	165,950
Total revenue		144,021			165,950

Expenses
Lease operating		37,724			22,653
Production taxes, transportion, processing and gathering		13,369			15,769
Depletion and accretion of ARO		56,825			29,679
General and administrative		14,130			3,972
Total operating expenses		122,048			72,073
Total operating income		21,973			93,877

Other income (expense)
Commodity derivatives gain (loss), net		25,482			(56,986	)
Interest Expense		(7,861	)		(785	)
Net income	$	39,594		$	36,106

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

Tap Rock Resources II, LLC

Condensed Consolidated Statement of Changes in Members’ Equity (Unaudited)

As of June 30, 2023 and June 30, 2022

(in thousands of dollars)

	Total Members' Equity

Balance at December 31, 2021	$	180,344

Capital contributions		10,682

Repayment of loan to management		2,287

Additional paid-in capital		2,180

Net income		36,106

Balance at June 30, 2022	$	231,599

Balance at December 31, 2022	$	306,748.00

Capital contributions		22,857

Additional paid-in capital		4,359

Net income		39,594

Balance at June 30, 2023	$	373,558

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

Tap Rock Resources II, LLC

Condensed Consolidated Statement of Cash Flows (Unaudited)

Six Months Ending June 30, 2023 and June 30, 2022

(in thousands of dollars)

	Six Months Ended June 30,
	2023			2022
Cash flows from operating activities
Net income	$	39,594		$	36,106
Adjustments to reconcile net income to net cash provided by operating activities:
Unrealized (gain) loss on derivatives		(17,043	)		26,817
Depletion and accretion of ARO		56,825			29,679
Amortization of debt issuance costs		281			146
Stock-based compensation		4,359			2,180
Changes in operating assets and liabilities:
Accounts receivable		(28,115	)		(29,204	)
Other assets		257			(5,440	)
Accounts payable and other current liabilities		32,787			33,774
Net cash provided by operating activities		88,945			94,058

Cash flows from investing activities
Acquisition of proved and unproved oil and gas properties		(23,800	)		(28,517	)
Expenditures for oil and natural gas properties and equipment		(189,745	)		(78,713	)
Net cash used in investing activities		(213,545	)		(107,230	)

Cash flows from financing activities
Proceeds from capital contributions		22,857			12,969
Borrowings under credit facility		207,000			181,000
Repayments under credit facility		(100,000	)		(180,000	)
Debt issuance costs		(200	)		(797	)
Net cash provided by financing activities		129,657			13,172

Net increase (decrease) in cash		5,057			-
Cash, cash equivalents at beginning of period		212			-
Cash, cash equivalents at ending of period	$	5,269		$	-

Supplemental Disclosures of Cash Flow Information:
Cash paid for interest	$	(7,252	)	$	(670	)
Supplemental Disclosures of Noncash Investing Activities:
Accrued property expenditures	$	3,643		$	11,642

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

Tap Rock Resources II, LLC

Notes to Condensed Consolidated Financial Statements (Unaudited)

Organization and Nature of Business

On June 20, 2023, Civitas Resources, Inc. (“Civitas”) announced its intent to purchase the Company for $658.2 million in cash and 5,940,350 shares of common equity through a Membership Interest Purchase Agreement (“the MIPA”). On August 2, 2023, the MIPA was executed between the Company and Civitas.

In conjunction with the announcement of the Company’s MIPA with Civitas on June 20, 2023, all members equity contributions and management incentive units were transferred from Tap Rock Resources II, LLC to Tap Rock Resources II Legacy, LLC ("Tap Rock II Legacy”) and Tap Rock Resources II Intermediate, LLC with a 99.9% and 0.1% ownership of the Company, respectively.

Summary of Significant Accounting Policies

The significant accounting policies followed by the Company are set forth in Note 2 – Summary of Significant Accounting Policies in the 2022 consolidated financial statements and are supplemented by the notes to the unaudited condensed consolidated financial statements included in this report. These unaudited condensed consolidated financial statements should be read in conjunction with the 2022 consolidated financial statements. The financial statements reflect all adjustments that are of a normal recurring nature and are necessary for a fair presentation of the results for the interim periods presented herein.

Contracts with Customers

The Company recognizes its share of revenue from the sale of produced oil, natural gas, and NGLs from its assets in Eddy and Lea counties in New Mexico and Loving county in Texas. Oil, natural gas, and NGL production revenue presented within the accompanying consolidated statements of operations is reflective of the revenue generated from contracts with customers. The table below presents the oil, natural gas, NGL production and other revenue by product type for the six months ended June 30, 2023 and June 30, 2022 (in thousands):

	Six Months Ended June 30,
	2023			2022
Oil Production Revenue	$	134,263		$	148,891
Gas Production Revenue		(2,569	)		4,613
NGL Production Revenue		12,327			12,446
Total	$	144,021		$	165,950

Revenue is recorded in the month when contractual performance obligations are satisfied. However, settlement statements from the purchasers of hydrocarbons and the related cash consideration are received 30 to 90 days after production has occurred. As a result, the Company must estimate the amount of production delivered to the customer and the consideration that will ultimately be received for sale of the product. Estimated revenue due to the Company is recorded within the accounts receivable line item on the accompanying balance sheets until payment is received. The accounts receivable balances from contracts with customers within the accompanying balance sheets as of June 30, 2023, and December 31, 2022, were $31.0 million and $33.9 million, respectively. To estimate accounts receivable from contracts with customers, the Company uses knowledge of its properties and historical performance factors as the basis for these estimates. Differences between estimates and actual amounts received for product sales are recorded in the month that payment is received from the purchaser.

Tap Rock Resources II, LLC

Notes to Condensed Consolidated Financial Statements (Unaudited)

Fair Value Measurements

The three input levels in the hierarchy of fair value measurements are as follows:

Input Level		Description of Input
Level 1		Observable inputs such as quoted market prices in active markets.
Level 2		Inputs other than quoted prices in active markets that are either directly or indirectly observable.
Level 3		Unobservable inputs in which little or no market data exists.

Recurring Fair Value Measurements

The Company’s recurring fair value instruments consist of cash and cash equivalents, accrued oil, natural gas, and NGL receivables and other receivables, accounts payable, debt, and commodity derivative instruments. The carrying amounts of cash and cash equivalents, accounts receivable, and accounts payable approximate fair value due to the short-term maturity of these instruments. The Company’s carrying value of the credit facility balance approximates fair value (Level 2 measurement).

Commodity derivative contracts are marked-to-market each quarter and are thus stated at fair value in the Company’s consolidated balance sheets and in Note 6 – Commodity Derivative Instruments. The fair values of the Company’s commodity derivative instruments are classified as Level 2 measurements as they are calculated using industry standard models using assumptions and inputs which are substantially observable in active markets throughout the full term of the instruments. These include market price curves, quoted market prices in active markets, credit risk adjustments, implied market volatility, and discount factors.

Tap Rock Resources II, LLC

Notes to Condensed Consolidated Financial Statements (Unaudited)

The following table presents the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis as of June 30, 2023 by level within the fair value hierarchy (in thousands):

	As Of June 30, 2023
	Level 1		Level 2		Level 3		Total
Financial Assets:
Commodity derivative assets	$	-	$	27,262	$	-	$	27,262
Financial liabilities:
Commodity derivative liabilities	$	-	$	8,201	$	-	$	8,201

	As Of December 31, 2022
	Level 1		Level 2		Level 3		Total
Financial Assets:
Commodity derivative assets	$	-	$	18,250	$	-	$	18,250
Financial liabilities:
Commodity derivative liabilities	$	-	$	16,232	$	-	$	16,232

Nonrecurring Fair Value Measurements

Acquisitions

February 2023 ConocoPhillips Acquisition

In February 2023, the Company acquired approximately 1,100 net leasehold acres in Lea County, New Mexico through consideration of 317 net acres and cash of $23.0 million to COG Operating LLC, ConocoPhillps Company and Concho Oil & Gas LLC (collectively “COG”). The sale closed on February 16, 2023 with an effective date of February 1, 2023. The acquisition was accounted for as an asset acquisition under Accounting Standards Codification 805 Business Combinations..

Commodity Derivatives Instruments

Tap Rock Resources II, LLC

Notes to Condensed Consolidated Financial Statements (Unaudited)

Fixed swaps are settled monthly based on differences between the fixed price specified in the contract and the referenced settlement price. When the referenced settlement price is less than the price specified in the contract, the Company receives an amount from the counterparty based on the price difference multiplied by the volume. Similarly, when the referenced settlement price exceeds the price specified in the contract, the Company pays the counterparty an amount based on the price difference multiplied by the volume.

The Company has entered into fixed price oil basis swaps in order to mitigate exposure to adverse pricing differentials between certain industry benchmark prices and the actual physical pricing points where the Company’s production volumes are sold. Currently, the Company has basis swap contracts with fixed price differentials for oil between Argus WTI Midland and WTI Cushing, and for gas between Argus Henry Hub and Waha, for a portion of its Permian Basin production with contracts that settle at WTI Midland prices. The Company has also entered into oil swap contracts to fix the differential in pricing between the NYMEX WTI calendar month average and the physical oil delivery month (“Roll Differential”) in which the Company pays the periodic variable Roll Differential and receives a weighted-average fixed price differential. As of June 30, 2023, the Company neutralized all swap positions to prepare for the impending sale to Civitas (see FN 1 – Organization and Nature of the Business for more information), meaning the buy side volumes and the sell side volumes of all swap positions net to zero notional volumes. In the tables below, both the buy side volumes and the sell side volumes are represented separately to show such netting. The weighted-average fixed price represents the amount of addition (reduction) to delivery month prices for both buy side and sell side notional volumes covered by the swap contracts. All cash settlements related to the neutralization of the swap positions occurred in July 2023.

Below is a summary of the Company’s open fixed swap positions as of June 30, 2023:

	2023			2024			2025
NYMEX WTI Crude Oil Swaps:
Notional volume (MBbl)
Buy		1,273			1,638			446
Sell		(1,273	)		(1,638	)		(446	)
Weighted average fixed price ($/Bbl)
Buy	$	69.05		$	67.42		$	65.43
Sell	$	76.23		$	74.87		$	71.04

NYMEX Henry Hub Natural Gas Swaps:
Notional volume (MMBtu)
Buy		483			350			-
Sell		(483	)		(350	)		-
Weighted average fixed price ($/MBtu)
Buy	$	2.83		$	3.32		$	-
Sell	$	3.91		$	4.32		$	-

Tap Rock Resources II, LLC

Notes to Condensed Consolidated Financial Statements (Unaudited)

Below is a summary of the Company’s open basis swap positions as of June 30, 2023:

	2023			2024			2025
WTI Midland-Cushing Crude Oil Basis Swaps ⁽¹⁾:
Notional volume (MBbl)
Buy		1,225			1,807			477
Sell		(1,225	)		(1,807	)		(477	)
Weighted average contract price ($/Bbl) ⁽²⁾
Buy	$	1.54		$	1.51		$	1.44
Sell	$	0.75		$	0.41		$	0.33

Waha Natural Gas Basis Swaps ⁽³⁾:
Notional volume (MMBtu)
Buy		1,442			2,165			609
Sell		(1,737	)		(2,165	)		(609	)
Weighted average contract price ($/MBtu) ⁽⁴⁾
Buy	$	(0.53	)	$	(0.56	)	$	(0.54	)
Sell	$	(1.57	)	$	(1.05	)	$	(0.76	)

(1)

Represents the swaps that fix the basis differentials between the index prices at Midland WTI price (the price at which the Company sells its oil) and the Cushing WTI price.

(2)

Represents the weighted average fixed price among basis swap contracts for the Company based on bbls per contract.

(3)

(4)

Represents the weighted average fixed price among basis swap contracts for the Company based on mbtu per contract.

Below is a summary of the Company’s open oil roll differential swap positions as of June 30, 2023:

	2023			2024			2025
Oil Roll Differentials NYMEX WTI Basis Swaps:
Notional volume (MBbl)
Buy		1,225			1,807			477
Sell		(1,225	)		(1,807	)		(477	)
Weighted average contract price ($/Bbl)
Buy	$	0.30		$	0.30		$	0.30
Sell	$	0.72		$	0.52		$	0.31

Tap Rock Resources II, LLC

Notes to Condensed Consolidated Financial Statements (Unaudited)

The following table presents the fair value of the Company’s derivative instruments on a gross and net basis as of June 30, 2023 and December 31, 2022 (in thousands):

	Gross Amounts of Recognized Assets and Liabilities						Net Amounts of Assets and Liabilities Presented in the Balance Sheet ⁽¹⁾
	As of June 30,			As of December 31,			As of June 30,		As of December 31,
Location on Balance Sheet	2023			2022			2023		2022
Current assets	$	19,133		$	10,816		$	13,321	$	-
Long-term assets		8,129			7,435			5,740		2,106
Current liabilities		(5,811	)		(10,904	)		-		88
Long-term liabilities		(2,390	)		(5,328	)		-		-

(1)

All amounts subject to an enforceable master netting arrangement which are netted in these amounts. There are no amounts of related financial collateral received or pledged.

The following table summarizes the Company’s net gain (loss) on commodity derivatives instruments for the six months ended June 30, 2023 and June 30, 2022 (in thousands):

	Six Months Ended June 30,
	2023		2022
Unrealized derivative gain (loss)	$	17,043	$	(26,817	)
Realized derivative gain (loss)	$	8,439	$	(30,169	)
Commodity derivative gain (loss), net	$	25,482	$	(56,986	)

Long-Term Debt

The Company’s Credit Agreement provides for a senior secured revolving credit facility with a maximum loan of $500.0 million and matures on September 23, 2025. As of June 30, 2023, the borrowing base and the elected commitment under the Credit Agreement was $250.0 million. As of June 30, 2023, the Company had $215.0 million in outstanding borrowings. As of December 31, 2022, the Company had $108.0 million in outstanding borrowings.

The credit facility provides for an annual commitment fee of 0.50% depending on the unused borrowing base amount. At June 30, 2023 and December 31, 2022, the Company had a weighted average interest rate of 8.31% and 5.64%, respectively. The credit facility contains representations, warranties, covenants, conditions and defaults customary for transactions of this type, including but not limited to: (i) limitations on liens and incurrence of debt covenants; (ii) limitations on the sale of property, mergers, consolidations, and other similar transactions covenants; (iii) limitations on investments, loans, and advances covenants; and (iv) limitations on dividends, distributions, redemptions, and restricted payments covenants.

Tap Rock Resources II, LLC

Notes to Condensed Consolidated Financial Statements (Unaudited)

The credit facility contains financial covenants requiring the Company to comply with a consolidated leverage ratio of 3.25 to 1.0 and a current ratio of over 1 to 1. Additionally, the Company must provide audited financial statements no later than 120 days after the end of the fiscal year and unaudited financial statements no later than 60 days after the end of each fiscal quarter. In conjunction with the sale to Civitas, the Company paid down all remaining debt as of August 2, 2023. Therefore, compliance requirements with the terms and covenants of the credit facility were eradicated by the time of reporting.

Members’ Equity

During the six months ended June 30, 2023 and 2022, the Company received $22.9 million and $13.0 million, respectively, in Members’ contributions from all partners to fund its asset acquisitions and drilling activities. Note, member liability is limited to ownership in the LLC.

Share Based Compensation

The Company has created and granted incentive units for employees in consideration of services rendered and to be rendered for the Company. The incentive units are broken into four tiers: Tier I, Tier II, Tier III, and Tier IV. All incentive units are non-voting and subject to vesting. The vesting schedule is 1/5^th per year on the anniversary of the grant date for Tiers I and II with Tier III and Tier IV vesting upon payout of Tier III and Tier IV respectively. As of June 30, 2022, 1.0 million shares of each tier are outstanding.

Compensation expense is recognized quarterly, ratably over the 10-year, vesting period. During the six months ended June 30, 2023, the Company recognized $4.4 million in stock-based compensation expense, which is included within general and administrative expense in the statements of operations. The remaining compensation cost on nonvested awards yet to be recognized as of June 30, 2023 was $76.3 million which will be recognized over the next 8.75 years. The Company recognizes forfeitures as they occur. There were zero units granted and zero units forfeited during the six months ended June 30, 2023. Cash is only distributed to incentive unit holders upon declaration of a distribution at the discretion of the Board. There have been no distributions to incentive unit holders as of June 30, 2023.

As of June 20, 2023, all management incentive units were moved from the Company to Tap Rock II Legacy, as mentioned in FN 1 – Organization and Nature of the Business. Therefore, no share based compensation expense will exist for the Company going forward.

Tap Rock Resources II, LLC

Notes to Condensed Consolidated Financial Statements (Unaudited)

10.

Commitments and Contingencies

11.

Related Party Transactions

During 2021 and 2020, the Company loaned members of management $0.2 million and $1.8 million, respectively, for their portion of capital calls made during the year. The loan was determined to be due at the earliest of either: i) The occurrence of a Fundamental Change (as defined in the LLC agreement); ii) The date on which the Company receives proceeds from the sale of all or substantially all of the assets of the Company and distributes such proceeds to its equity owners; iii) December 31, 2026 for the original loan made or February 21, 2027 for subsequent loans made; or iv) The date that the loan shall otherwise become due and payable full, whether by acceleration or otherwise. During the year ended December 31, 2022, $2.5 million of the loan and all associated interest was repaid.

12.

Subsequent Events

As stated in FN 1 - Organization and Nature of Business, on August 2, 2023, the Company finalized and closed the MIPA with Civitas to sell the Company for $658.2 million in cash and 5,940,350 shares of common equity. Refer above for more information.

Cash from the closing on August 2, 2023 was used to pay off the remainder of the Company’s borrowing base and related outstanding interest in the amount of $203 million.

The Company closed out all their open commodity derivatives as of July 31, 2023 in preparation for the closing of this sale. The resulting impact was a gain of $18.3 million.

Subsequent events have been evaluated through August 31, 2023, the date the financial statements were available to be issued.

Exhibit 99.7

UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

The unaudited pro forma condensed combined financial information and related footnotes (the “Pro Forma Financial Statements”) have been prepared in accordance with Article 11 of Regulation S-X, Pro Forma Financial Information, which is herein referred to as Article 11. The Pro Forma Financial Statements of Civitas Resources, Inc., a Delaware corporation (“Civitas” or the “Company”) present the combination of the financial information and the pro forma effect with respect to the following transactions (collectively, the “Transactions”), further details of which are included within the footnotes to the Pro Forma Financial Statements.

On June 19, 2023, the Company entered into a membership interest purchase agreement (the “Hibernia Acquisition Agreement”) with Hibernia Energy III Holdings, LLC and Hibernia Energy III-B Holdings, LLC, pursuant to which the Company agreed to purchase all of the issued and outstanding equity interests of Hibernia Energy III, LLC (“HE3”) and Hibernia Energy III-B, LLC (“HE3-B” and, together with HE3, “Hibernia”).

On August 2, 2023 (the “Closing Date”), the Company completed the transactions contemplated by the Hibernia Acquisition Agreement (the “Hibernia Acquisition”) for aggregate consideration of $2.25 billion in cash, subject to certain customary purchase price adjustments set forth in the Hibernia Acquisition Agreement.

On June 19, 2023, the Company entered into a membership interest purchase agreement (as amended from time to time, the “Tap Rock Acquisition Agreement”) with Tap Rock Resources Legacy, LLC, a Delaware limited liability company (“Tap Rock I Legacy”), Tap Rock Resources Intermediate, LLC, a Delaware limited liability company (“Tap Rock I Intermediate” and, together with Tap Rock I Legacy, the “Tap Rock I Sellers”), Tap Rock Resources II Legacy, LLC, a Delaware limited liability company (“Tap Rock II Legacy”), Tap Rock Resources II Intermediate, LLC, a Delaware limited liability company (“Tap Rock II Intermediate” and, together with Tap Rock II Legacy, the “Tap Rock II Sellers”), Tap Rock NM10 Legacy Holdings, LLC, a Delaware limited liability company (“NM10 Legacy”), and Tap Rock NM10 Holdings Intermediate, LLC, a Delaware limited liability company (“NM10 Intermediate” and together with NM10 Legacy, the “NM10 Sellers”, and the NM10 Sellers, together with the Tap Rock I Sellers and Tap Rock II Sellers, the “Tap Rock Sellers”), solely in its capacity as “Sellers’ Representative” (as defined therein), Tap Rock I Legacy, and solely for the limited purposes set forth therein, Tap Rock Resources, LLC a Delaware limited liability company, pursuant to which the Company agreed to purchase all of the issued and outstanding equity interests of Tap Rock AcquisitionCo, LLC, a Delaware limited liability company, Tap Rock Resources II, LLC, a Delaware limited liability company, and Tap Rock NM10 Holdings, LLC, a Delaware limited liability company (collectively, “Tap Rock”), from the Tap Rock I Sellers, the Tap Rock II Sellers and the NM10 Sellers, respectively.

On the Closing Date, the Company completed the transactions contemplated by the Tap Rock Acquisition Agreement (the “Tap Rock Acquisition”) for aggregate consideration of approximately $2.49 billion, which was comprised of (i) $1.50 billion in cash, subject to certain customary purchase price adjustments set forth in the Tap Rock Acquisition Agreement and (ii) 13,538,472 shares of common stock, par value $0.01 per share, of the Company valued at approximately $990.2 million, subject to certain customary anti-dilution and purchase price adjustments.

The Pro Forma Financial Statements of Civitas present the combination of the financial information and the pro forma effects with respect to the Hibernia Acquisition and the Tap Rock Acquisition (collectively, the “Acquisitions”), further details of which are included within the notes to the Pro Forma Financial Statements. The Pro Forma Financial Statements have been prepared from the respective historical consolidated financial statements of Civitas, Hibernia and Tap Rock adjusted to give effect to the Acquisitions and exclude historical financial data from the HE3-B historical financial statements. The unaudited pro forma condensed combined balance sheet (the “Pro Forma Balance Sheet”) combines the historical condensed consolidated balance sheets of Civitas, Hibernia and Tap Rock as of June 30, 2023, giving effect to the Acquisitions as if they had been consummated on June 30, 2023.

The unaudited pro forma condensed combined statements of operations (the “Pro Forma Statements of Operations”) for the six months ended June 30, 2023 and the year ended December 31, 2022, have been prepared to give effect to the Acquisitions as if they had been consummated on January 1, 2022. The Pro Forma Financial Statements contain certain reclassification adjustments to conform the historical Hibernia and Tap Rock financial statement presentation to Civitas’ financial statement presentation.

The Pro Forma Financial Statements are presented to reflect the Acquisitions and do not represent what Civitas’ results of operations would have been had the Acquisitions occurred on the date noted above, nor do they project the results of operations of the combined company following the effective dates. The Pro Forma Financial Statements are intended to provide information about the continuing impact of the Acquisitions as if they had been consummated earlier. The transaction accounting adjustments are based on information and certain estimates and assumptions that management believes are reasonable based on currently available information. In the opinion of management, all adjustments necessary to present fairly the Pro Forma Financial Statements have been made.

The Acquisitions have been accounted for using the acquisition method of accounting, with Civitas identified as the acquirer. The acquisition method of accounting requires fair values to be estimated and determined for the merger consideration, as well as the assets acquired and liabilities assumed by Civitas. As of the date of this filing, the determination of these fair value estimates is still preliminary as Civitas continues to complete the detailed valuation analysis to arrive at the required final estimates, which will be completed as soon as practicable, and will not extend beyond the one-year measurement period from the close of the Transactions provided under Accounting Standards Codification 805, Business Combinations (“ASC 805”). Any increases or decreases in the fair values of assets acquired and liabilities assumed upon completion of the final valuation analysis may be materially different from the information reflected in the Pro Forma Financial Statements herein. The Pro Forma Financial Statement should be read in conjunction with:

●

the audited consolidated financial statements contained in Civitas’ Annual Report on Form 10-K as of and for the year ended December 31, 2022 filed with the Securities and Exchange Commission on February 22, 2023;

●

the unaudited condensed consolidated financial statements contained in Civitas’ Quarterly Report on Form 10-Q as of and for the quarter ended June 30, 2023 filed with the Securities and Exchange Commission on February 22, 2023;

●

the audited consolidated financial statements of HE3 as of and for the year ended December 31, 2022, which are included elsewhere in this filing;

●

the unaudited consolidated financial statements and notes of HE3 as of and for the six months ended June 30, 2023, which are included elsewhere in this filing;

●

the audited consolidated financial statements of Tap Rock AcquisitionCo, LLC as of and for the year ended December 31, 2022, which are included elsewhere in this filing;

●

the unaudited consolidated financial statements of Tap Rock AcquisitionCo, LLC as of and for the six months ended June 30, 2023, which are included elsewhere in this filing;

●

the audited consolidated financial statements of Tap Rock Resources II, LLC as of and for the year ended December 31, 2022, which are included elsewhere in this filing; and

●

the unaudited consolidated financial statements and notes of Tap Rock Resources II, LLC as of and for the six months ended June 30, 2023, which are included elsewhere in this filing.

CIVITAS RESOURCES, INC. AND SUBSIDIARIES

UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET

As of June 30, 2023

(in thousands)

	Historical													Pro Forma Combined
	Civitas Resources			Hibernia			Hibernia Reclass Adjustments (Note 2)			Hibernia Transaction Accounting Adjustments (Note 3)				Civitas Resources (Excluding Tap Rock)

	(in thousands, except per share data)
ASSETS
Current assets:
Cash and cash equivalents	$	2,702,897		$	11,074		$	-		$	(1,626,708	)	(a)(b)(c)	$	1,087,263
Accounts receivable, net:
Oil and gas sales		201,248			-			49,052			-				250,300
Joint interest and other		100,664			-			54,029			-				154,693
Accounts receivable		-			103,082			(103,082	)		-				-
Accounts receivable, trade		-			-			-			-				-
Accounts receivable, affiliates		-			-			-			-				-
Derivative assets		4,335			-			-			-				4,335
Prepaid income taxes		2,266			-			-			-				2,266
Deposits for acquisitions		352,500			-			-			(168,750	)	(b)		183,750
Prepaid assets and other		-			389			(389	)		-				-
Inventory		-			778			(778	)		-				-
Prepaid expenses and other		49,297			-			1,168			3,127		(c)		53,592
Total current assets		3,413,207			115,323			-			(1,792,331	)			1,736,199
Property and equipment (successful efforts method):		-			-			-			-				-
Proved properties		7,390,897			1,160,700			78,977			918,625		(d)		9,549,199
Less: accumulated depreciation, depletion, and amortization		(1,628,303	)		(212,306	)		(4,407	)		216,713		(d)		(1,628,303	)
Total proved properties, net		5,762,594			948,394			74,570			1,135,338				7,920,896
Proved oil and natural gas properties, net, full cost method		-			-			-			-				-
Unproved properties		578,508			29,484			-			85,216		(d)		693,208
Unevaluated oil and natural gas property		-			-			-			-				-
Wells in progress		316,119			-			-			-				316,119
Other property and equipment, at cost		-			80,961			(80,961	)		-				-
Less: Accumulated depreciation		-			(5,683	)		5,683			-				-
Other property and equipment, net		49,619			-			708			-				50,327
Total property and equipment, net		6,706,840			1,053,156			-			1,220,554				8,980,550
Long-term derivative assets		1,800			-			-			-				1,800
Debt issuance costs, net of accumulated amortization		-			1,414			(1,414	)		-				-
Deposits		-			20			(20	)		-				-
Right-of-use assets		41,572			3,561			-			-				45,133
Other noncurrent assets		7,567			-			1,434			11,356		(c)(e)		20,357
Total assets	$	10,170,986		$	1,173,474		$	-		$	(560,421	)		$	10,784,039

See accompanying “Notes to Unaudited Pro Forma Condensed Combined Financial Statements”

CIVITAS RESOURCES, INC. AND SUBSIDIARIES

UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET (Continued)

As of June 30, 2023

(in thousands)


	Historical											Pro Forma Combined
	Civitas Resources		Hibernia		Hibernia Reclass Adjustments (Note 2)			Hibernia Transaction Accounting Adjustments (Note 3)				Civitas Resources (Excluding Tap Rock)

	(in thousands, except per share data)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses	$	240,555	$	33,643	$	83,932		$	9,726		(e)(f)	$	367,856
Accounts payable, affiliates		-		-		-			-				-
Production taxes payable		389,392		-		5,043			-				394,435
Oil and gas revenue distribution payable		522,308		-		78,941			-				601,249
Oil and gas royalties payable		-		78,941		(78,941	)		-				-
Royalties payable		-		-		-			-				-
Interest payable		-		1,248		(1,248	)		-				-
Derivative liability		21,438		-		-			-				21,438
Obligations from commodity derivatives, current		-		-		-			-				-
Asset retirement obligations		25,557		-		-			-				25,557
Accrued liabilities		-		87,727		(87,727	)		-				-
Related party payable		-		-		-			-				-
Deferred revenue		-		-		-			-				-
Term loan, current portion		-		-		-			-				-
Lease liability		21,841		2,487		-			-				24,328
Other		-		-		-			-				-
Total current liabilities		1,221,091		204,046		-			9,726				1,434,863
Long-term liabilities:		-		-		-			-				-
Senior notes		3,048,511		-		-			-				3,048,511
Term loan, net		-		-		-			-				-
Long-term debt		-		310,000		(310,000	)		-				-
Credit facility		-		-		310,000			90,000		(e)		400,000
Ad valorem taxes		153,371		-		-			-				153,371
Derivative liability		2,973		-		-			-				2,973
Obligations from commodity derivatives, long-term		-		-		-			-				-
Deferred income taxes (franchise)		-		4,601		(4,601	)		-				-
Deferred income tax liabilities		409,593		-		4,601			(16,477	)	(g)		397,717
Asset retirement obligations		268,366		9,229		-			-				277,595
Deferred Revenue		-		-		-			-				-
Lease liability		20,394		1,004		-			-				21,398
Total liabilities		5,124,299		528,880		-			83,248				5,736,427
Stockholders’ equity:		-		-		-			-				-
Preferred stock		-											-
Common stock		4,869											4,869
Members' equity		-		39,902		-			(39,902	)	(h)		-
Net parent investment		-		-		-			-				-
Non-controlling interest		-		-		-			-				-
Capital contributions, net of management loan		-		-		-			-				-
Additional paid-in capital		3,957,513		-		-			-				3,957,513
Retained earnings		1,084,305		604,692		-			(603,768	)	(f)(h)		1,085,229
Total stockholders’ equity		5,046,687		644,594		-			(643,670	)			5,047,611
Total liabilities and stockholders’ equity	$	10,170,986	$	1,173,474	$	-		$	(560,421	)		$	10,784,039

See accompanying “Notes to Unaudited Pro Forma Condensed Combined Financial Statements”

CIVITAS RESOURCES, INC. AND SUBSIDIARIES

UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET (Continued)

As of June 30, 2023

(in thousands)

	Civitas Resources Pro Forma (Excluding Tap Rock)			Tap Rock AcquisitionCo Historical		Tap Rock II Historical		Tap Rock AcquisitionCo Reclass Adjustments (Note 2)			Tap Rock II Reclass Adjustments (Note 2)			Tap Rock Transaction Accounting Adjustments (Note 4)				Civitas Resources Pro Forma Combined

	(in thousands, except per share data)
ASSETS
Current assets:
Cash and cash equivalents	$	1,087,263		$	6,682	$	5,269	$	-		$	-		$	(988,304	)	(a)(b)(c)	$	110,910
Accounts receivable, net:
Oil and gas sales		250,300			-		-		69,195			28,602			-				348,097
Joint interest and other		154,693			-		-		19,170			36,250			(1,114	)	(d)		208,999
Accounts receivable		-			-		-		-			-			-				-
Accounts receivable, trade		-			88,365		64,852		(88,365	)		(64,852	)		-				-
Accounts receivable, affiliates		-			-		2,906		-			-			(2,906	)	(e)		-
Derivative assets		4,335			-		13,321		-			-			(13,321	)	(d)		4,335
Prepaid income taxes		2,266			-		-		-			-			-				2,266
Deposits for acquisitions		183,750			-		-		-			-			(183,750	)	(b)		-
Prepaid assets and other		-			-		-		-			-			-				-
Inventory		-			-		-		-			-			-				-
Prepaid expenses and other		53,592			16,309		4,516		-			-			2,736		(c)		77,154
Total current assets		1,736,199			111,356		90,864		-			-			(1,186,658	)			751,761
Property and equipment (successful efforts method):
Proved properties		9,549,199			-		-		1,554,726			790,020			(123,550	)	(f)		11,770,394
Less: accumulated depreciation, depletion, and amortization		(1,628,303	)		-		-		(430,765	)		(157,009	)		587,774		(f)		(1,628,303	)
Total proved properties, net		7,920,896			-		-		1,123,961			633,011			464,224				10,142,091
Proved oil and natural gas property, net, full cost method		-			1,123,961		633,011		(1,123,961	)		(633,011	)		-				-
Unproved properties		693,208			-		-		15,246			146			405,108		(f)		1,113,708
Unevaluated oil and natural gas property		-			15,246		146		(15,246	)		(146	)		-				-
Wells in progress		316,119			-		-		-			-			-				316,119
Other property and equipment, at cost		-			-		-		-			-			-				-
Less: Accumulated depreciation		-			-		-		-			-			-				-
Other property and equipment, net		50,327			37,450		-		-			-			-				87,777
Total property and equipment, net		8,980,550			1,176,657		633,157		-			-			869,332				11,659,695
Long-term derivative assets		1,800			-		5,740		-			-			(5,740	)	(d)		1,800
Debt issuance costs, net of accumulated amortization		-			-		-		-			-			-				-
Deposits		-			-		-		-			-			-				-
Right-of-use assets		45,133			1,125		-		-			-			-				46,258
Other noncurrent assets		20,357			-		1,426		-			-			11,174		(c)		32,957
Total assets	$	10,784,039		$	1,289,138	$	731,187	$	-		$	-		$	(311,892	)		$	12,492,471

See accompanying “Notes to Unaudited Pro Forma Condensed Combined Financial Statements”

CIVITAS RESOURCES, INC. AND SUBSIDIARIES

UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET (Continued)

As of June 30, 2023

(in thousands)

	Civitas Resources Pro Forma (Excluding Tap Rock)		Tap Rock AcquisitionCo Historical		Tap Rock II Historical		Tap Rock AcquisitionCo Reclass Adjustments (Note 2)			Tap Rock II Reclass Adjustments (Note 2)			Tap Rock Transaction Accounting Adjustments (Note 4)				Civitas Resources Pro Forma Combined

	(in thousands, except per share data)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses	$	367,856	$	22,944	$	13,929	$	103,141		$	106,163		$	13,597		(d)(g)	$	627,630
Accounts payable, affiliates		-		2,896		-		-			-			(2,896	)	(e)		-
Production taxes payable		394,435		-		-		-			-			-				394,435
Oil and gas revenue distribution payable		601,249		-		-		39,545			20,941			-				661,735
Oil and gas royalties payable		-		-		-		-			-			-				-
Royalties payable		-		39,545		20,941		(39,545	)		(20,941	)		-				-
Interest payable		-		-		-		-			-			-				-
Derivative liability		21,438		3,448		-		-			-			(3,448	)	(d)		21,438
Obligations from commodity derivatives, current		-		-		-		-			-			-				-
Asset retirement obligations		25,557		-		-		-			-			-				25,557
Accrued liabilities		-		103,141		103,419		(103,141	)		(103,419	)		-				-
Related party payable		-		-		-		-			-			-				-
Deferred revenue		-		4,501		-		-			-			-				4,501
Term loan, current portion		-		7,000		-		-			-			(7,000	)	(h)		-
Lease liability		24,328		642		-		-			-			-				24,970
Other		-		-		2,744		-			(2,744	)		-				-
Total current liabilities		1,434,863		184,117		141,033		-			-			253				1,760,266
Long-term liabilities:
Senior notes		3,048,511		-		-		-			-			-				3,048,511
Term loan, net		-		5,181		-		-			-			(5,181	)	(h)		-
Long-term debt		-		-		-		-			-			-				-
Credit facility		400,000		-		215,000		-			-			135,000		(h)		750,000
Ad valorem taxes		153,371		-		-		-			-			-				153,371
Derivative liability		2,973		-		-		-			-			-				2,973
Obligations from commodity derivatives, long-term		-		-		-		-			-			-				-
Deferred income taxes (franchise)		-		-		-		-			-			-				-
Deferred income tax liabilities		397,717		-		-		-			-			9,255		(i)		406,971
Asset retirement obligations		277,595		6,387		1,596		-			-			-				285,578
Deferred revenue		-		46,140		-		-			-			-				46,140
Lease liability		21,398		483		-		-			-			-				21,881
Total liabilities		5,736,427		242,308		357,629		-			-			139,327				6,475,691
Stockholders’ equity:
Preferred stock		-		-		-		-			-			-				-
Common stock		4,869		-		-		-			-			135		(j)		5,004
Members' equity		-		-		-		-			-			-				-
Net parent investment		-		1,022,652		-		-			-			(1,022,652	)	(k)		-
Non-controlling interest		-		24,178		-		-			-			(24,178	)	(l)		-
Capital contributions, net of management loan		-		-		215,706		-			-			(215,706	)	(k)		-
Additional paid-in capital		3,957,513		-		10,898		-			-			979,170		(j)		4,947,581
Retained earnings		1,085,229		-		146,954		-			-			(167,989	)	(g)(k)		1,064,194
Total stockholders’ equity		5,047,611		1,046,830		373,558		-			-			(451,219	)			6,016,780
Total liabilities and stockholders’ equity	$	10,784,039	$	1,289,138	$	731,187	$	-		$	-		$	(311,892	)		$	12,492,471

See accompanying “Notes to Unaudited Pro Forma Condensed Combined Financial Statements”

CIVITAS RESOURCES, INC. AND SUBSIDIARIES

UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS

Six Months Ended June 30, 2023

(in thousands, except per share data)

	Historical													Pro Forma Combined
	Civitas Resources			Hibernia			Hibernia Reclass Adjustments (Note 2)			Hibernia Transaction Accounting Adjustments (Note 3)				Civitas Resources (Excluding Tap Rock)

	(in thousands, except per share data)
Operating net revenues:
Oil and gas sales	$	1,316,548		$	-		$	373,409		$	-			$	1,689,957
Oil		-			311,896			(311,896	)		-				-
Natural gas		-			14,651			(14,651	)		-				-
Natural gas liquids		-			46,862			(46,862	)		-				-
Realized gain on commodity derivatives		-			22,910			(22,910	)		-				-
Other		-			-			-			-				-
Operating expenses:		-			-			-			-				-
Lease operating expense		97,068			29,417			1,796			-				128,281
Midstream operating expense		23,380			-			-			-				23,380
Gathering, transportation, and processing		132,225			-			18,819			-				151,044
Production taxes, transportation, processing and gathering		-			-			-			-				-
Workover		-			1,796			(1,796	)		-				-
Severance and ad valorem taxes		104,805			-			21,493			-				126,298
Production, ad valorem and severance tax		-			21,493			(21,493	)		-				-
Production taxes		-			-			-			-				-
Revenue deductions		-			18,819			(18,819	)		-				-
Exploration		1,117			-			-			-				1,117
Depreciation, depletion, and amortization		434,089			77,046			-			10,407		(i)		521,542
Unused commitments		754			-			-			-				754
Bad debt expense		583			-			-			-				583
Merger transaction costs		31,627			-			-			-				31,627
General and administrative expense		70,399			5,793			226			-				76,418
Equity compensation expense		-			226			(226	)		-				-
Total operating expenses		896,047			154,590			-			10,407				1,061,044
Other income (expense):
Derivative gain		30,087			-			52,410			(52,410	)	(j)		30,087
Interest expense		(16,202	)		(15,427	)		-			(67,232	)	(k)		(98,861	)
Gain (loss) on property transactions, net		(254	)		9			-			199		(l)		(46	)
Other income		17,068			72			-			-				17,140
Unrealized gain on commodity derivatives		-			29,500			(29,500	)		-				-
Total other income (expense)		30,699			14,154			22,910			(119,443	)			(51,680	)
Income from operations before income taxes		451,200			255,883			-			(129,850	)			577,233
Income tax expense		(109,452	)		(1,729	)		-			(25,998	)	(g)		(137,179	)
Net income	$	341,748		$	254,154		$	-		$	(155,849	)		$	440,053
Net income attributable to non-controlling interest		-			-			-			-				-
Net Income attributable to controlling interest	$	341,748		$	254,154		$	-		$	(155,849	)		$	440,053

Net income per common share:
Basic	$	4.22												$	5.43
Diluted	$	4.18												$	5.38
Weighted-average common shares outstanding:															-
Basic		81,052													81,052.00
Diluted		81,824													81,824.00

See accompanying “Notes to Unaudited Pro Forma Condensed Combined Financial Statements”

CIVITAS RESOURCES, INC. AND SUBSIDIARIES

UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS (Continued)

Six Months Ended June 30, 2023

(in thousands, except per share data)

	Civitas Resources Pro Forma (Excluding Tap Rock)			Tap Rock AcquisitionCo Historical			Tap Rock II Historical			Tap Rock AcquisitionCo Reclass Adjustments (Note 2)			Tap Rock II Reclass Adjustments (Note 2)			Tap Rock Transaction Accounting Adjustments (Note 4)				Civitas Resources Pro Forma Combined

	(in thousands, except per share data)
Operating net revenues:
Oil and gas sales	$	1,689,957		$	332,995		$	144,021		$	-		$	-		$	-			$	2,166,973
Oil		-			-			-			-			-			-				-
Natural gas		-			-			-			-			-			-				-
Natural gas liquids		-			-			-			-			-			-				-
Realized gain on commodity derivatives		-			-			-			-			-			-				-
Other		-			576			-			(576	)		-			-				-
Operating expenses:								-						-
Lease operating expense		128,281			58,882			37,724			-			-			-				224,887
Midstream operating expense		23,380			-			-			-			-			-				23,380
Gathering, transportation, and processing		151,044			8,462			-			-			1,870			-				161,376
Production taxes, transportation, processing and gathering		-			-			13,369			-			(13,369	)		-				-
Workover		-			-			-			-			-			-				-
Severance and ad valorem taxes		126,298			-			-			26,891			11,499			-				164,688
Production, ad valorem and severance tax		-			-			-			-			-			-				-
Production taxes		-			26,891			-			(26,891	)		-			-				-
Revenue deductions		-			-			-			-			-			-				-
Exploration		1,117			-			-			-			-			-				1,117
Depreciation, depletion, and amortization		521,542			79,301			56,825			-			-			44,839		(m)		702,507
Unused commitments		754			-			-			-			-			-				754
Bad debt expense		583			-			-			-			-			-				583
Merger transaction costs		31,627			-			-			-			-			-				31,627
General and administrative expense		76,418			15,163			14,130			-			-			-				105,711
Equity compensation expense		-			-			-			-			-			-				-
Total operating expenses		1,061,044			188,699			122,048			-			-			44,839				1,416,630
Other income (expense):		-			-			-			-			-			-				-
Derivative gain		30,087			35,292			25,482			-			-			(60,774	)	(f)		30,087
Interest expense		(98,861	)		(40,026	)		(7,861	)		-			-			(19,098	)	(n)		(165,846	)
Gain (loss) on property transactions, net		(46	)		-			-			-			-			-				(46	)
Other income		17,140			-			-			576			-			-				17,716
Unrealized gain on commodity derivatives		-			-			-			-			-			-				-
Total other income (expense)		(51,680	)		(4,734	)		17,621			576			-			(79,872	)			(118,089	)
Income from operations before income taxes		577,233			140,138			39,594			-			-			(124,710	)			632,254
Income tax expense		(137,179	)		-			-			-			-			(16,572	)	(i)		(153,752	)
Net income	$	440,053		$	140,138		$	39,594		$	-		$	-		$	(141,283	)		$	478,503
Net income attributable to non-controlling interest		-			7,264			-			-			-			(7,264	)	(l)		-
Net Income attributable to controlling interest	$	440,053		$	132,874		$	39,594		$	-		$	-		$	(134,019	)		$	478,503

Net income per common share:
Basic	$	5.43																		$	5.06
Diluted	$	5.38																		$	5.02
Weighted-average common shares outstanding:		-
Basic		81,052																			94,590
Diluted		81,824																			95,362

See accompanying “Notes to Unaudited Pro Forma Condensed Combined Financial Statements”

CIVITAS RESOURCES, INC. AND SUBSIDIARIES

UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS

Year Ended December 31, 2022

(in thousands, except per share data)

	Historical													Pro Forma Combined
	Civitas Resources			Hibernia			Hibernia Reclass Adjustments (Note 2)			Hibernia Transaction Accounting Adjustments (Note 3)				Civitas Resources (Excluding Tap Rock)

	(in thousands, except per share data)
Operating net revenues:
Oil and gas sales	$	3,791,398		$	-		$	647,983		$	-			$	4,439,381
Oil		-			509,874			(509,874	)		-				-
Natural gas		-			58,746			(58,746	)		-				-
Natural gas liquids		-			79,363			(79,363	)		-				-
Realized loss on commodity derivatives		-			(111,712	)		111,712			-				-
Other		-			-			-			-				-
Operating expenses:
Lease operating expense		169,986			32,576			3,018			-				205,580
Midstream operating expense		31,944			-			-			-				31,944
Gathering, transportation, and processing		287,474			-			22,980			-				310,454
Workover		-			3,018			(3,018	)		-				-
Severance and ad valorem taxes		305,701			-			38,495			-				344,196
Production, ad valorem and severance tax		-			38,495			(38,495	)		-				-
Production taxes		-			-			-			-				-
Revenue deductions		-			22,980			(22,980	)		-				-
Exploration		6,981			-			-			-				6,981
Depreciation, depletion, and amortization		816,446			86,411			-			22,857		(i)		925,714
Abandonment and impairment of unproved properties		17,975			-			-			-				17,975
Unused commitments		3,641			-			-			-				3,641
Bad debt expense		(950	)		-			-			-				(950	)
Merger transaction costs		24,683			-			-			10,974		(f)		35,657
General and administrative expense		143,477			7,455			2,102			-				153,034
Equity compensation expense		-			2,102			(2,102	)		-				-
Total operating expenses		1,807,358			193,037			-			33,830				2,034,225
Other income (expense):
Derivative loss		(335,160	)		-			(82,623	)		82,623		(j)		(335,160	)
Interest expense		(32,199	)		(11,255	)		-			(154,062	)	(k)		(197,516	)
Gain on property transactions, net		15,880			20			-			(1,679	)	(l)		14,221
Other income		21,217			37			-			-				21,254
Unrealized gain on commodity derivatives		-			29,089			(29,089	)		-				-
Total other income (expense)		(330,262	)		17,891			(111,712	)		(73,118	)			(497,201	)
Income from operations before income taxes		1,653,778			361,125			-			(106,948	)			1,907,955
Income tax expense		(405,698	)		(3,012	)		-			(44,716	)	(g)		(453,426	)
Net income	$	1,248,080		$	358,113		$	-		$	(151,664	)		$	1,454,529
Net income attributable to non-controlling interest		-			-			-			-				-
Net income attributable to controlling interest	$	1,248,080		$	358,113		$	-		$	(151,664	)		$	1,454,529

Net income per common share:
Basic	$	14.68												$	17.11
Diluted	$	14.58												$	16.99
Weighted-average common shares outstanding:
Basic		85,005													85,005
Diluted		85,604													85,604

See accompanying “Notes to Unaudited Pro Forma Condensed Combined Financial Statements”

CIVITAS RESOURCES, INC. AND SUBSIDIARIES

UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS (Continued)

Year Ended December 31, 2022

(in thousands, except per share data)

	Civitas Resources Pro Forma (Excluding Tap Rock)			Tap Rock AcquisitionCo Historical			Tap Rock II Historical			Tap Rock AcquisitionCo Reclass Adjustments (Note 2)			Tap Rock II Reclass (Note 2)			Tap Rock Transaction Accounting Adjustments (Note 4)				Civitas Resources Pro Forma Combined

	(in thousands, except per share data)
Operating net revenues:
Oil and gas sales	$	4,439,381		$	1,069,308		$	322,702		$	-		$	-		$	-			$	5,831,391
Oil		-			-			-			-			-			-				-
Natural gas		-			-			-			-			-			-				-
Natural gas liquids		-			-			-			-			-			-				-
Realized loss on commodity derivatives		-			-			-			-			-			-				-
Other		-			2,051			15			(2,051	)		(15	)		-				-
Operating expenses:								-						-
Lease operating expense		205,580			138,410			60,326			-			-			-				404,316
Midstream operating expense		31,944			-			-			-			-			-				31,944
Gathering, transportation, and processing		310,454			20,859			3,916			-			-			-				335,229
Workover		-			-			-			-			-			-				-
Severance and ad valorem taxes		344,196			-			-			90,034			27,790			-				462,020
Production, ad valorem and severance tax		-			-			-			-			-			-				-
Production taxes		-			90,034			27,790			(90,034	)		(27,790	)		-				-
Revenue deductions		-			-			-			-			-			-				-
Exploration		6,981			-			-			-			-			-				6,981
Depreciation, depletion, and amortization		925,714			160,103			83,959			-			-			132,899		(k)		1,302,675
Abandonment and impairment of unproved properties		17,975			-			-			-			-			-				17,975
Unused commitments		3,641			-			-			-			-			-				3,641
Bad debt expense		(950	)		-			-			-			-			-				(950	)
Merger transaction costs		35,657			-			-			-			-			11,781		(e)		47,437
General and administrative expense		153,034			32,511			12,869			-			-			-				198,414
Equity compensation expense		-			-			-			-			-			-				-
Total operating expenses		2,034,225			441,917			188,860			-			-			144,680				2,809,682
Other income (expense):								-						-
Derivative loss		(335,160	)		(125,580	)		(28,610	)		-			-			154,190		(d)		(335,160	)
Interest expense		(197,516	)		(23,759	)		(3,977	)		-			-			(106,234	)	(n)		(331,486	)
Gain on property transactions, net		14,221			-			-			-			-			-				14,221
Other income		21,254			-			-			2,051			15			-				23,320
Unrealized gain on commodity derivatives		-			-			-			-			-			-				-
Total other income (expense)		(497,201	)		(149,339	)		(32,587	)		2,051			15			47,956				(629,104	)
Income from operations before income taxes		1,907,955			480,103			101,270			-			-			(96,724	)			2,392,604
Income tax expense		(453,426	)		-			-			-			-			(128,408	)	(g)		(581,834	)
Net income	$	1,454,529		$	480,103		$	101,270		$	-		$	-		$	(225,132	)		$	1,810,771
Net income attributable to non-controlling interest		-			19,792			-			-			-			(19,792	)	(j)		-
Net Income attributable to controlling interest	$	1,454,529		$	460,311		$	101,270		$	-		$	-		$	(205,340	)		$	1,810,771

Net income per common share:
Basic	$	17.11																		$	18.38
Diluted	$	16.99																		$	18.26
Weighted-average common shares outstanding:
Basic		85,005																			98,543
Diluted		85,604																			99,142

See accompanying “Notes to Unaudited Pro Forma Condensed Combined Financial Statements”

NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

NOTE 1 – BASIS OF PRESENTATION

The Civitas, Hibernia, and Tap Rock historical financial information has been derived from each respective company’s historical financial statements which have been filed by the Company with the Securities and Exchange Commission or included elsewhere in this filing, as applicable. Certain of Hibernia’s and Tap Rock’s historical amounts have been reclassified to conform to Civitas’ financial statement presentation, as discussed further in Note 2. The Pro Forma Financial Statements should be read in conjunction with each company’s historical financial statements and the notes thereto. The Pro Forma Balance Sheet gives effect to the Acquisitions as if they had been completed on June 30, 2023. The Pro Forma Statements of Operations for the six months ended June 30, 2023 and the year ended December 31, 2022 give effect to the Acquisitions as if they had been completed on January 1, 2022.

The Pro Forma Financial Statements do not purport to be indicative of the results of operations of the combined company that would have occurred if the Acquisitions had occurred on the date indicated, nor are they indicative of Civitas’ future results of operations. In addition, future results may differ significantly from those reflected in the Pro Forma Financial Statements. Further, the Pro Forma Financial Statements exclude historical financial data from HE3-B’s historical financial statements.

NOTE 2 - RECLASSIFICATION ADJUSTMENTS

The Pro Forma Financial Statements have been adjusted as follows to reflect reclassifications of Hibernia’s and Tap Rock’s historical financial statements to conform to Civitas’ financial statement presentation.

(a)

Hibernia Reclassification Adjustments

Pro Forma Condensed Combined Balance Sheet as of June 30, 2023

●

Reclassification of approximately $49.1 million from Accounts receivable to Accounts receivable, net – Oil and gas sales;

●

Reclassification of approximately $54.0 million from Accounts receivable to Accounts receivable, net – Joint interest and other;

●

Reclassification of approximately $0.4 million from Prepaid assets and other and approximately $0.8 million from Inventory to Prepaid expenses and other;

●

Reclassification of approximately $2.0 million from Other property and equipment, at cost and approximately $1.3 million from Accumulated depreciation to Other property and equipment, net of accumulated depreciation;

●

Reclassification of approximately $79.0 from Other property and equipment, at cost and approximately $4.4 million of Accumulated depreciation to Proved properties and Accumulated depreciation, depletion, and amortization;

●

Reclassification of approximately $1.4 million from Debt issuance costs, net of accumulated amortization and approximately $0.02 million from Deposits to Other noncurrent assets;

●

Reclassification of approximately $78.9 million from Oil and gas royalties payable to Oil and gas revenue distribution payable;

●

Reclassification of approximately $1.2 million from Interest payable and approximately $87.7 million from Accrued liabilities to Accounts payable and accrued expenses;

●

Reclassification of approximately $5.0 million from Accrued liabilities to Production taxes payable;

●

Reclassification of approximately $310.0 million from Long-term debt to Credit facility; and

●

Reclassification of approximately $4.6 million from Deferred income taxes (franchise) to Deferred income tax liabilities.

Pro Forma Condensed Combined Statement of Operations for the six months ended June 30, 2023

●

Reclassification of approximately $311.9 million from Revenues – Oil, approximately $14.7 million from Revenues – Natural gas, and approximately $46.9 million from Revenues – Natural gas liquids to Oil and gas sales;

●

Reclassification of approximately $29.5 million from Unrealized gain on commodity derivatives and approximately $22.9 million from Revenues – Realized gain on commodity derivatives to Derivative gain;

●

Reclassification of approximately $1.8 million from Workover to Lease operating expense;

●

Reclassification of approximately $21.5 million from Production, ad valorem and severance tax to Severance and ad valorem taxes;

●

Reclassification of approximately $18.8 million from Revenue deductions to Gathering, transportation, and processing; and

●

Reclassification of approximately $0.2 million from Equity compensation expense to General and administrative expense.

Pro Forma Condensed Combined Statement of Operations for the year ended December 31, 2022

●

Reclassification of approximately $509.9 million from Revenues – Oil, approximately $58.7 million from Revenues – Natural gas and approximately $79.4 million from Revenues – Natural gas liquids to Oil and gas sales;

●

Reclassification of approximately $29.1 million from Unrealized gain on commodity derivatives and approximately $111.7 million Revenues – Realized loss on commodity derivatives to Derivative loss;

●

Reclassification of approximately $3.0 million from Workover to Lease operating expense;

●

Reclassification of approximately $38.5 million from Production, ad valorem and severance tax to Severance and ad valorem taxes;

●

Reclassification of approximately $23.0 million from Revenue deductions to Gathering, transportation, and processing; and

●

Reclassification of approximately $2.1 million from Equity compensation expense to General and administrative expense.

(b)

Tap Rock AcquisitionCo Reclassification Adjustments

Pro Forma Condensed Combined Balance Sheet as of June 30, 2023

●

Reclassification of approximately $69.2 million from Accounts receivable, trade to Accounts receivable – Oil and gas sales;

●

Reclassification of approximately $19.2 million from Accounts receivable, trade to Accounts receivable – Joint interest and other;

●

Reclassification of approximately $1.6 billion from Proved oil and natural gas property, net, full cost method to Proved properties;

●

Reclassification of approximately $430.8 million from Proved oil and natural gas property, net, full cost method to accumulated depreciation, depletion, and amortization;

●

Reclassification of approximately $15.2 million from Unevaluated oil and natural gas property to Unproved properties;

●

Reclassification of approximately $103.1 million from Accrued liabilities to Accounts payable and accrued expenses; and

●

Reclassification of approximately $39.5 million from Royalties payable to Oil and gas revenue distribution payable.

Pro Forma Condensed Combined Statement of Operations for the six months ended June 30, 2023

●

Reclassification of approximately $0.6 million from Revenues – Other to Other Income; and

●

Reclassification of approximately $26.9 million from Production taxes to Severance and ad valorem taxes.

Pro Forma Condensed Combined Statement of Operations for the year ended December 31, 2022

●

Reclassification of approximately $2.1 million from Revenues – Other to Other Income; and

●

Reclassification of approximately $90.0 million from Production taxes to Severance and ad valorem taxes.

(c)

Tap Rock Resources II, LLC Reclassification Adjustments

Pro Forma Condensed Combined Balance Sheet as of June 30, 2023

●

Reclassification of approximately $28.6 million from Accounts receivable, trade to Accounts receivable – Oil and gas sales;

●

Reclassification of approximately $36.3 million from Accounts receivable, trade to Accounts receivable – Joint interest and other;

●

Reclassification of approximately $790.0 million from Proved oil and natural gas property, net, full cost method to Proved properties;

●

Reclassification of approximately $157.0 million from Proved oil and natural gas property, net, full cost method to accumulated depreciation, depletion, and amortization;

●

Reclassification of approximately $0.1 million from Unevaluated oil and natural gas property to Unproved properties;

●

Reclassification of approximately $20.9 million from Royalties payable to Oil and gas revenue distribution payable; and

●

Reclassification of approximately $103.4 million from Accrued liabilities and approximately $2.7 million from Current liabilities - Other to Accounts payable and accrued expenses.

Pro Forma Condensed Combined Statement of Operations for the six months ended June 30, 2023

●

Reclassification of approximately $1.9 million from Production taxes, transportation, processing, and gathering to Gathering, transportation, and processing; and

●

Reclassification of approximately $11.5 million from Production taxes, transportation, processing, and gathering to Severance and ad valorem taxes.

Pro Forma Condensed Combined Statement of Operations for the year ended December 31, 2022

●

Reclassification of approximately $0.02 million from Revenues – Other to Other Income; and

●

Reclassification of approximately $27.8 million from Production taxes to Severance and ad valorem taxes.

NOTE 3 – HIBERNIA PRELIMINARY ACQUISITION ACCOUNTING AND PRO FORMA ADJUSTMENTS

Civitas has determined it is the accounting acquirer for the Hibernia Acquisition which will be accounted for under the acquisition method of accounting for business combinations in accordance with ASC 805. The allocation of the preliminary purchase price with respect to the Hibernia Acquisition is based upon management’s estimates of and assumptions related to the fair values of assets acquired and liabilities assumed as of June 30, 2023, using currently available information. Due to the fact that the Pro Forma Financial Statements have been prepared based on these preliminary estimates, the final purchase price allocation and the resulting effect on Civitas’ financial position and results of operations are subject to modification as additional information becomes available and additional analyses are performed.

The final purchase price allocation and the resulting effect on Civitas’ results of operations may differ significantly from the pro forma amounts included herein, which are based on preliminary estimates and assumptions. Civitas expects to finalize the purchase price allocation as soon as practicable subsequent to the Closing Date, which will not extend beyond the one-year measurement period provided under ASC 805.

The preliminary purchase price allocation is subject to change due to several factors, including, but not limited to:

●

changes in the estimated fair value of Hibernia’s identifiable assets acquired and liabilities assumed as of the Closing Date; and

●

the tax bases of Hibernia’s identifiable assets and liabilities as of the Closing Date.

The following tables present the merger consideration and preliminary purchase price allocation of the assets acquired and the liabilities assumed in the Hibernia Acquisition:

Preliminary Merger Consideration (in thousands )
Merger consideration paid in cash	$	400,000
Draw on revolving credit facility		350,000
Aggregate principal amount of 8.375% senior notes due 2028		750,000
Aggregate principal amount of 8.75% senior notes due 2031		750,000
Adjustment to purchase price		(70,439	)
Total merger consideration	$	2,179,561

	Preliminary Purchase Price Allocation
		(in thousands)
Assets Acquired
Cash and cash equivalents	$	11,074
Oil and gas sales		49,052
Joint interest and other		54,029
Prepaid expenses and other		1,168
Proved properties, net		2,158,302
Unproved properties		114,700
Other property and equipment, net		708
Right-of-use assets		3,561
Other noncurrent assets		20
Total assets acquired	$	2,392,614

Liabilities Assumed
Accounts payable and accrued expenses	$	116,327
Production taxes payable		5,043
Oil and gas revenue distribution payable		78,941
Lease liability		2,487
Deferred income tax liabilities		22
Asset retirement obligations		9,229
Lease liability		1,004
Total liabilities assumed	$	213,053
Net assets acquired	$	2,179,561

The purchase price allocation is preliminary, and Civitas is continuing to assess the fair values of certain of Hibernia’s assets acquired and liabilities assumed. In particular, assets and liabilities subject to potential adjustment in amounts that could be material to the Pro Forma Financial Statements include oil and gas properties of approximately $2.3 billion. Civitas expects that the fair value of the acquired oil and gas properties will range from approximately $2.2 billion to approximately $2.3 billion.

Hibernia Acquisition Accounting Adjustments

The Pro Forma Financial Statements have been adjusted to give effect to the Hibernia Acquisition as follows:

(a)

Reflect the pro forma change in cash and cash equivalents as follows (in thousands):

Hibernia Transaction consideration payment in cash	$	(2,081,250	)
Adjustment to purchase price		70,439
Draw on the Civitas Credit Facility		400,000
Payment of issuance costs for the Civitas Revolving Credit Facility		(15,897	)
Pro forma change in cash and cash equivalents	$	(1,626,708	)

(b)

Reflect the application of the Hibernia cash deposit towards the aggregate cash consideration.

(c)

Reflect the increase to debt issuance costs of approximately $15.9 million of which approximately $3.1 million is included within Prepaid expenses and other and $12.8 million within Other noncurrent assets related to the $350 million draw under the Civitas Credit Facility.

(d)

Reflect the adjustment to recognize the preliminary estimated fair value of Proved and Unproved properties.

(e)

Reflect the adjustment to remove liabilities not assumed which include:

●

the decrease to long-term debt of $310.0 million within Credit Facility related to the Hibernia Credit Facility which will not convey with the Hibernia Acquisition.

●

the elimination of the historical debt issuance costs of $1.4 million within Other noncurrent assets related to the Hibernia Credit Facility; and

●

the elimination of interest payable of $1.2 million within Accounts payable and accrued expenses related to the Hibernia Credit Facility.

(f)

Reflect the accrual of non-recurring costs of approximately $11.0 million related to the Hibernia Acquisition including, among others, fees paid for financial advisors, legal services, and professional accounting services. These costs are not reflected in the historical June 30, 2023 consolidated balance sheets of Civitas and Hibernia, but are reflected in the Pro Forma Condensed Combined Balance Sheet as of June 30, 2023 as an increase to Accounts payable and accrued expenses, and a decrease to Retained earnings, with a corresponding increase to Merger transaction costs in the Pro Forma Condensed Combined Statement of Operations for the year ended December 31, 2022 as these are nonrecurring in nature.

(g)

Reflect the pro forma tax adjustments based upon a statutory federal and blended state tax rate of 23.77% for the six months ended June 30, 2023 and the year ended December 31, 2022. The adjustments include:

●

the decrease to deferred tax liabilities as a result of the Hibernia Acquisition, primarily related to a decrease in the overall blended tax rate of Civitas due to the change in state tax footprint; and

●

the income tax expense effect of the Hibernia Acquisition accounting adjustments.

(h)

Reflect the elimination of Hibernia’s historical equity balances in accordance with the acquisition method of accounting.

(i)

Reflect the pro forma adjustments to Depreciation, depletion, and amortization to calculate depletion expense based on the preliminary fair value of the proved properties acquired in accordance with the successful efforts method of accounting.

(j)

Reflect the adjustment to remove the effect of derivatives not assumed with the Hibernia Acquisition.

(k)

Reflect the following pro forma adjustments related to Interest expense for the six months ended June 30, 2023 and the year ended December 31, 2022, respectively:

●

an increase to Interest expense of approximately $14.4 million and approximately $28.9 million, respectively related to the draw on the Civitas Credit Facility;

●

an increase to Interest expense of approximately $64.2 million and approximately $128.4 million, respectively related to the issuance of $1.5 billion in Acquisition Senior Notes;

●

an increase to Interest expense of approximately $1.5 million and approximately $3.0 million, respectively related to the amortization of the debt discount associated with the Acquisition Senior Notes;

●

an increase to Interest expense of approximately $2.5 million and approximately $5.0 million, respectively related to the amortization of debt issuance costs associated with the Acquisition Senior Notes and borrowings on the Civitas Credit Facility;

●

a decrease to Interest Expense of approximately $15.4 million and approximately $11.3 million related to the elimination of historical interest expense on the Hibernia Credit Facility; and

●

a one-eighth percent increase or decrease in the interest rate would have changed interest expense related to the Civitas Credit Facility by $0.3 million and $0.5 million respectively.

(l)

Reflect the pro forma adjustments to Gain on property transactions, net to reclassify certain amounts previously capitalized by Hibernia under the full cost method of accounting in order to conform to the presentation to the successful efforts method of accounting used by Civitas for oil and gas properties.

NOTE 4 – TAP ROCK PRELIMINARY ACQUISITION ACCOUNTING AND PRO FORMA ADJUSTMENTS

Civitas has determined it is the accounting acquirer for the Tap Rock Acquisition which will be accounted for under the acquisition method of accounting for business combinations in accordance with ASC 805. The allocation of the preliminary purchase price with respect to the Tap Rock Acquisition is based upon management’s estimates of and assumptions related to the fair values of assets acquired and liabilities assumed as of June 30, 2023, using currently available information. Due to the fact that the Pro Forma Financial Statements have been prepared based on these preliminary estimates, the final purchase price allocation and the resulting effect on Civitas’ financial position and results of operations are subject to modification as additional information becomes available and additional analyses are performed.

The preliminary purchase price allocation is subject to change due to several factors, including, but not limited to:

●

changes in the estimated fair value of Tap Rock’s identifiable assets acquired and liabilities assumed as of the Closing Date; and

●

the tax bases of Tap Rock’s identifiable assets and liabilities as of the Closing Date.

The following tables present the merger consideration and preliminary purchase price allocation of the assets acquired and the liabilities assumed in the Tap Rock Acquisition:

Preliminary Merger Consideration (in thousands except per share amount)
Merger consideration paid in shares of Civitas Resources common stock	$	990,204
Draw on revolving credit facility		300,000
Aggregate principal amount of 8.375% senior notes due 2028		600,000
Aggregate principal amount of 8.75% senior notes due 2031		600,000
Adjustment to purchase price		8,143
Total merger consideration	$	2,498,347

	Preliminary Purchase Price Allocation
		(in thousands)
Assets Acquired
Cash and cash equivalents	$	11,951
Oil and gas sales		97,797
Joint interest and other		54,306
Prepaid expenses and other		20,825
Proved properties		2,221,196
Unproved properties		420,500
Other property and equipment, net		37,450
Right-of-use assets		1,125
Other noncurrent assets		1,426
Total assets acquired	$	2,866,576

Liabilities Assumed
Accounts payable and accrued expenses		247,994
Oil and gas revenue distribution payable		60,486
Deferred revenue		4,501
Lease liability		642
Asset retirement obligations		7,983
Deferred revenue		46,140
Lease liability		483
Deferred income tax liabilities		-
Total liabilities assumed	$	368,229
Net assets acquired	$	2,498,347

The purchase price allocation is preliminary, and Civitas is continuing to assess the fair values of certain of Tap Rock’s assets acquired and liabilities assumed. In particular, assets and liabilities subject to potential adjustment in amounts that could be material to the Pro Forma Financial Statements include oil and gas properties of approximately $2.6 billion. Civitas expects that the fair value of the acquired oil and gas properties will range from approximately $2.5 billion to approximately $2.7 billion.

Tap Rock Acquisition Accounting Adjustments

The Pro Forma Financial Statements have been adjusted to give effect to the Tap Rock Acquisition as follows:

(a)

Reflect the pro forma change in cash and cash equivalents as follows (in thousands):

Tap Rock Transaction consideration payment	$	(1,316,250	)
Adjustment to purchase price		(8,143	)
Draw on the Civitas Credit Facility		350,000
Payment of issuance costs for the Civitas Revolving Credit Facility		(13,910	)
Pro forma change in cash and cash equivalents	$	(988,304	)

(b)

Reflect the application of the Tap Rock cash deposit towards the aggregate cash consideration.

(c)

Reflect the increase to debt issuance costs of approximately $13.9 million of which approximately $2.7 million is included within Prepaid expenses and other and $11.2 million within Other noncurrent assets related to the draw under the Civitas Credit Facility.

(d)

Reflect the adjustment to remove the effect of derivatives not assumed with the Tap Rock Acquisition.

(e)

Reflect the adjustment to eliminate intercompany balances between Tap Rock AcquisitionCo, LLC and Tap Rock Resources II, LLC.

(f)

Reflect the adjustment to recognize the preliminary estimated fair value of Proved and Unproved properties.

(g)

Reflect the accrual of non-recurring costs of approximately $11.8 million related to the Tap Rock Acquisition including, among others, fees paid for financial advisors, legal services, and professional accounting services. These costs are not reflected in the historical June 30, 2023 consolidated balance sheets of Civitas and Tap Rock, but are reflected in the Pro Forma Condensed Combined Balance Sheet as of June 30, 2023 as an increase to Accounts payable and accrued expenses, and a decrease to Retained earnings, with a corresponding increase to Merger transaction costs in the Pro Forma Condensed Combined Statement of Operations for the year ended December 31, 2022 as these are nonrecurring in nature.

(h)

Reflect the adjustment to remove liabilities not assumed which include:

●

the decrease to Term loan, current portion of $7.0 million and Term loan, net of $5.2 million related to the Tap Rock Term Loan that will not convey with the Tap Rock Acquisition; and

●

the decrease to long-term debt of $215.0 million within Credit Facility related to the Tap Rock Credit Facility which will not convey with the Tap Rock Acquisition.

(i)

Reflect the pro forma tax adjustments based upon a statutory federal and blended state tax rate of 24.32% for the six months ended June 30, 2023 and the year ended December 31, 2022. The adjustments include:

●

the increase to deferred tax liabilities as a result of the Tap Rock Acquisition, primarily related to an increase in the overall blended tax rate of Civitas due to the change in state tax footprint; and

●

the income tax expense effect of the Tap Rock Acquisition accounting adjustments.

(j)

Reflect the adjustment resulting from the issuance of shares of Civitas Common Stock to Tap Rock investors to effect the Tap Rock Acquisition.

(k)

Reflect the elimination of Tap Rock’s historical equity balances in accordance with the acquisition method of accounting.

(l)

Reflect the elimination of the non-controlling interests as Civitas acquired 100% of Tap Rock.

(m)

(n)

Reflect the following pro forma adjustments related to Interest expense for the six months ended June 30, 2023 and the year ended December 31, 2022, respectively:

●

an increase to Interest expense of approximately $12.5 million and approximately $25.1 million, respectively related to the draw on the Civitas Credit Facility;

●

an increase to Interest expense of approximately $51.4 million and approximately $102.8 million, respectively related to the issuance of $1.2 billion in Acquisition Senior Notes;

●

an increase to Interest expense of approximately $1.2 million and approximately $2.4 million, respectively related to the amortization of the debt discount associated with the Acquisition Senior Notes;

●

an increase to Interest expense of approximately $1.8 million and approximately $3.7 million, respectively related to the amortization of debt issuance costs associated with the Acquisition Senior Notes and borrowings on the Civitas Credit Facility;

●

a decrease to Interest expense of approximately $47.9 million and approximately $27.7 million, respectively related to elimination of historical interest expense on the Tap Rock Term Loan and Credit Facility and

●

a one-eighth percent increase or decrease in the interest rate would have changed interest expense related to the Civitas Credit Facility by $0.2 million and $0.4 million respectively.

NOTE 5 – SUPPLEMENTAL PRO FORMA OIL AND GAS RESERVES INFORMATION

The following tables present the estimated pro forma combined net proved developed and undeveloped oil and gas reserves information as of December 31, 2022, along with a summary of changes in quantities of net remaining proved reserves during the year ended December 31, 2022.

The following estimated pro forma combined oil and gas reserves information is not necessarily indicative of the results that might have occurred had the Transactions been completed on January 1, 2022 and is not intended to be a projection of future results.

	Oil (MBbl)
	Civitas			Hibernia			Tap Rock			Civitas Resources Pro Forma Combined
Balance-December 31, 2021		143,579			60,372			63,279			267,229
Extensions, discoveries, and other additions		12,408			25,601			13,315			51,324
Production		(27,651	)		(5,192	)		(11,475	)		(44,318	)
Sales of minerals in place		-			(501	)		(197	)		(697	)
Removed from capital program		(105	)		-			-			(105	)
Purchases of minerals in place		17,479			4,131			8,888			30,498
Revisions to previous estimates		6,892			(10,530	)		(3,516	)		(7,154	)
Balance-December 31, 2022		152,602			73,881			70,294			296,778

Proved developed reserves:
December 31, 2021		104,078			20,385			40,042			164,505
December 31, 2022		117,768			33,651			50,765			202,185

Proved undeveloped reserves:
December 31, 2021		39,501			39,986			23,236			102,724
December 31, 2022		34,834			40,230			19,529			94,593

	Natural Gas (MMcf)
	Civitas			Hibernia			Tap Rock			Civitas Resources Pro Forma Combined
Balance-December 31, 2021		888,499			213,891			156,670			1,259,060
Extensions, discoveries, and other additions		51,358			99,309			42,265			192,932
Production		(112,478	)		(10,700	)		(34,219	)		(157,397	)
Sales of minerals in place		-			(5,835	)		(489	)		(6,324	)
Removed from capital program		(459	)		-			-			(459	)
Purchases of minerals in place		31,872			34,900			22,419			89,191
Revisions to previous estimates		8,708			10,829			(6,007	)		13,529
Balance-December 31, 2022		867,500			342,394			180,638			1,390,532

Proved developed reserves:
December 31, 2021		748,762			88,702			81,206			918,670
December 31, 2022		750,793			172,307			136,944			1,060,044

Proved undeveloped reserves:
December 31, 2021		139,737			125,189			75,464			340,390
December 31, 2022		116,707			170,088			43,694			330,488

	NGLs (MBbl)
	Civitas			Hibernia			Tap Rock			Civitas Resources Pro Forma Combined
Balance-December 31, 2021		106,028			46,426			26,147			178,602
Extensions, discoveries, and other additions		6,936			20,152			6,560			33,648
Production		(15,666	)		(2,245	)		(3,308	)		(21,220	)
Sales of minerals in place		-			(1,059	)		(85	)		(1,143	)
Removed from capital program		(46	)		-			-			(46	)
Purchases of minerals in place		4,478			6,926			4,802			16,206
Revisions to previous estimates		17,104			(2,974	)		(5,414	)		8,716
Balance-December 31, 2022		118,834			67,227			28,702			214,763

Proved developed reserves:
December 31, 2021		88,967			18,732			14,348			122,046
December 31, 2022		102,004			33,473			22,115			157,592

Proved undeveloped reserves:
December 31, 2021		17,061			27,695			11,799			56,555
December 31, 2022		16,830			33,754			6,587			57,171

Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil and Gas Reserve Quantities

The following tables present the estimated pro forma discounted future net cash flows at December 31, 2022. The pro forma standardized measure information set forth below gives effect to the Transactions as if the Transactions had been completed on January 1, 2022. With respect to the disclosures below for Civitas, the amounts were determined by referencing the “Standardized Measure of Discounted Future Net Cash Flows” reported in Civitas’ Annual Report on Form 10-K for the year ended December 31, 2022. An explanation of the underlying methodology applied, as required by SEC regulations, can be found within the Annual Report on Form 10-K. With respect to the disclosures below for Hibernia and Tap Rock, the amounts were determined by referencing the “Unaudited Supplemental Oil and Gas Disclosures” reported in their respective annual financial statements for the year ended December 31, 2022, included elsewhere in this filing. The calculations assume the continuation of existing economic, operating and contractual conditions at December 31, 2022. Therefore, the following estimated pro forma standardized measure is not necessarily indicative of the results that might have occurred had the Transactions been completed on January 1, 2022 and is not intended to be a projection of future results. Future results may vary significantly from the results reflected herein.

Discounted Future Net Cash Flows

The standardized measure of discounted future net cash flows relating to proved oil and natural gas reserves for the year ended December 31, 2022 are as follows:

	For the Year Ended December 31, 2022
	Civitas			Hibernia			Tap Rock			Civitas Resources Pro Forma Combined
Future cash flows	$	23,225,188		$	10,729,509		$	8,937,950		$	42,892,647
Future production costs		(6,490,522	)		(1,962,712	)		(3,176,506	)		(11,629,740	)
Future development costs		(1,337,494	)		(974,037	)		(479,302	)		(2,790,833	)
Future income tax expense		(2,870,178	)		(56,330	)		(3,646	)		(2,930,154	)
Future net cash flows		12,526,994			7,736,429			5,278,496			25,541,919
10% annual discount for estimated timing of cash flows		(4,599,504	)		(3,759,906	)		(2,122,079	)		(10,481,489	)
Standardized measure of discounted future net cash flows	$	7,927,490		$	3,976,523		$	3,156,417		$	15,060,430

The changes in the standardized measure of discounted future net cash flows relating to proved oil and natural gas reserves areas follows (in thousands):

	For the Year Ended December 31, 2022
	Civitas			Hibernia			Tap Rock			Civitas Resources Pro Forma Combined
Beginning of period	$	4,412,104		$	1,812,275		$	1,927,812		$	8,152,191
Sale of oil and gas produced, net of production costs		(2,980,527	)		(525,438	)		(1,026,217	)		(4,532,182	)
Net changes in prices and production costs		5,016,678			883,321			1,185,485			7,085,484
Net changes in extensions, discoveries, and other additions		638,537			1,358,437			579,008			2,575,982
Development costs incurred		411,138			130,529			90,200			631,867
Changes in estimated development cost		(87,466	)		(67,863	)		18,236			(137,093	)
Purchases of minerals in place		627,833			267,980			315,890			1,211,703
Sales of minerals in place		-			(21,561	)		(3,998	)		(25,559	)
Revisions of previous quantity estimates		619,800			(113,124	)		(185,658	)		321,018
Net change in income taxes		(991,734	)		(15,257	)		-			(1,006,991	)
Accretion of discount		532,716			182,659			192,781			908,156
Changes in production rates and other		(271,589	)		84,564			64,907			(122,118	)
End of period	$	7,927,490		$	3,976,523		$	3,158,446		$	15,062,459

Cover	Aug. 02, 2023
Cover [Abstract]
Document Type	8-K/A
Amendment Flag	false
Document Period End Date	Aug. 02, 2023
Entity File Number	001-35371
Entity Registrant Name	Civitas Resources, Inc.
Entity Central Index Key	0001509589
Entity Tax Identification Number	61-1630631
Entity Incorporation, State or Country Code	DE
Entity Address, Address Line One	555 17th Street
Entity Address, Address Line Two	Suite 3700
Entity Address, City or Town	Denver
Entity Address, State or Province	CO
Entity Address, Postal Zip Code	80202
City Area Code	303
Local Phone Number	293-9100
Written Communications	false
Soliciting Material	false
Pre-commencement Tender Offer	false
Pre-commencement Issuer Tender Offer	false
Title of 12(b) Security	Common Stock, par value $0.01 per share
Trading Symbol	CIVI
Security Exchange Name	NYSE
Entity Emerging Growth Company	false

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