ITEM 1A. RISK FACTORS
An investment in our securities involves a
high degree of risk. You should consider carefully all of the risks described below, together with the other information contained in
this Report, before making a decision to invest in our securities. If any of the following events occur, our business, financial condition
and operating results may be materially adversely affected. In that event, the trading price of our securities could decline, and you
could lose all or part of your investment.
Risks Related to Our Business
Pogo’s producing properties are located
in the Permian Basin, making it vulnerable to risks associated with operating in a single geographic area.
All of Pogo’s producing properties are
currently geographically concentrated in the Permian Basin. As a result of this concentration, Pogo may be disproportionately exposed
to the impact of regional supply and demand factors, delays or interruptions of production from wells in this area caused by governmental
regulation, processing or transportation capacity constraints, availability of equipment, facilities, personnel or services market limitations,
natural disasters, adverse weather conditions, plant closures for scheduled maintenance or interruption of the processing or transportation
of crude oil and natural gas. In addition, the effect of fluctuations on supply and demand may become more pronounced within specific
geographic crude oil and natural gas producing areas such as the Permian Basin, which may cause these conditions to occur with greater
frequency or magnify the effects of these conditions. Due to the concentrated nature of Pogo’s portfolio of properties, a number
of its properties could experience any of the same conditions at the same time, resulting in a relatively greater impact on its results
of operations than they might have on other companies that have a more diversified portfolio of properties. Such delays or interruptions
could have a material adverse effect on Pogo’s financial condition and results of operations.
As a result of Pogo’s exclusive focus on
the Permian Basin, it may be less competitive than other companies in bidding to acquire assets that include properties both within and
outside of that basin. Although Pogo is currently focused on the Permian Basin, it may from time to time evaluate and consummate the
acquisition of asset packages that include ancillary properties outside of that basin, which may result in the dilution of its geographic
focus.
Title to the properties in which Pogo is
acquiring an interest may be impaired by title defects.
Pogo is not required to, and under certain circumstances
it may elect not to, incur the expense of retaining lawyers to examine the title to its operating interests. In such cases, Pogo would
rely upon the judgment of oil and gas lease brokers or landmen who perform the fieldwork in examining records in the appropriate governmental
office before acquiring an operating interest. The existence of a material title deficiency can render an interest worthless and can
materially adversely affect Pogo’s results of operations, financial condition and cash flows. No assurance can be given that Pogo
will not suffer a monetary loss from title defects or title failure. Additionally, undeveloped acreage has a greater risk of title defects
than developed acreage. If there are any title defects in properties in which Pogo holds an interest, it may suffer a financial loss.
Pogo depends on various services for the
development and production activities on the properties it operates. Substantially all Pogo’s revenue is derived from these producing
properties. A reduction in the expected number of wells to be developed on Pogo’s acreage by or the failure of Pogo to develop
and operate the wells on its acreage could have an adverse effect on its results of operations and cash flows adequately and efficiently.
Pogo’s assets consists of operating interests.
The failure of Pogo to perform operations adequately or efficiently or to act in ways that are not in Pogo’s best interests could
reduce production and revenues. Additionally, certain investors have requested that operators adopt initiatives to return capital to
investors, which could also reduce the capital available to Pogo for investment in development and production activities. Moreover, should
a low commodity price environment incur, Pogo may also opt to reduce development activity that could further reduce production and revenues.
If production on Pogo acreage decreases due to
decreased development activities, because of a low commodity price environment, limited availability of development capital, production-related difficulties
or otherwise, Pogo’s results of operations may be adversely affected. Pogo is not obligated to undertake any development activities
other than those required to maintain their leases on Pogo’s acreage. In the absence of a specific contractual obligation, any
development and production activities will be subject to their reasonable discretion (subject to certain implied obligations to develop
imposed by the laws of some states). Pogo could determine to develop wells on Pogo’s acreage than is currently expected. The success
and timing of development activities on Pogo’s properties, depends on a number of factors that are largely outside of Pogo’s
control, including:
● the ability of Pogo to access capital;
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● prevailing commodity prices;
● the selection of technology;
● the selection of counterparties for the marketing and sale of production;
● and the rate of production of the reserves.
Pogo may elect not to undertake development activities,
or may undertake these activities in an unanticipated fashion, which may result in significant fluctuations in Pogo’s results of
operations and cash flows. Sustained reductions in production by Pogo on Pogo’s properties may also adversely affect Pogo’s
results of operations and cash flows. Additionally, if Pogo were to experience financial difficulty, Pogo might not be able to pay invoices
to continue its operations, which could have a material adverse impact on Pogo’s cash flows.
Pogo’s future success depends on
replacing reserves through acquisitions and the exploration and development activities.
Producing crude oil and natural gas wells are
characterized by declining production rates that vary depending upon reservoir characteristics and other factors. Pogo’s future
crude oil and natural gas reserves and Pogo’s production thereof and Pogo’s cash flows are highly dependent on the successful
development and exploitation of Pogo’s current reserves and its ability to successfully acquire additional reserves that are economically
recoverable. Moreover, the production decline rates of Pogo’s properties may be significantly higher than currently estimated if
the wells on its properties do not produce as expected. Pogo may also not be able to find, acquire or develop additional reserves to
replace the current and future production of its properties at economically acceptable terms. If Pogo is not able to replace or grow
its oil and natural gas reserves, its business, financial condition and results of operations would be adversely affected.
Pogo’s failure to successfully identify,
complete and integrate acquisitions of properties or businesses could materially and adversely affect its growth, results of operations
and cash flows.
Pogo depends, in part, on acquisitions to grow
its reserves, production and cash flows. Pogo’s decision to acquire a property will depend in part on the evaluation of data obtained
from production reports and engineering studies, geophysical and geological analyses and seismic data, and other information, the results
of which are often inconclusive and subject to various interpretations. The successful acquisition of properties requires an assessment
of several factors, including:
● recoverable reserves;
● future crude oil and natural gas prices and their applicable differentials;
● development plans;
The accuracy of these assessments is inherently
uncertain and Pogo may not be able to identify attractive acquisition opportunities. In connection with these assessments, Pogo performs
a review of the subject properties that it believes to be generally consistent with industry practices, given the nature of its interests.
Pogo’s review will not reveal all existing or potential problems, nor will it permit it to become sufficiently familiar with the
properties to assess fully their deficiencies and capabilities. Inspections are often not performed on every well, and environmental
problems, such as groundwater contamination, are not necessarily observable even when an inspection is undertaken. Even when problems
are identified, the seller may be unwilling or unable to provide effective contractual protection against all or part of the problems.
Even if Pogo does identify attractive acquisition opportunities, it may not be able to complete the acquisition or do so on commercially
acceptable terms. Unless Pogo further develops its existing properties, it will depend on acquisitions to grow its reserves, production
and cash flow.
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There is intense competition for acquisition
opportunities in Pogo’s industry. Competition for acquisitions may increase the cost of, or cause Pogo to refrain from, completing
acquisitions. Additionally, acquisition opportunities vary over time. Pogo’s ability to complete acquisitions is dependent upon,
among other things, its ability to obtain debt and equity financing and, in some cases, regulatory approvals. Further, these acquisitions
may be in geographic regions in which Pogo does not currently hold assets, which could result in unforeseen operating difficulties. In
addition, if Pogo acquires interests in new states, it may be subject to additional and unfamiliar legal and regulatory requirements.
Compliance with regulatory requirements may impose substantial additional obligations on Pogo and its management, cause it to expend
additional time and resources in compliance activities and increase its exposure to penalties or fines for non-compliance with such
additional legal requirements. Further, the success of any completed acquisition will depend on Pogo’s ability to effectively integrate
the acquired business into its existing business. The process of integrating acquired businesses may involve unforeseen difficulties
and may require a disproportionate amount of Pogo’s managerial and financial resources. In addition, potential future acquisitions
may be larger and for purchase prices significantly higher than those paid for earlier acquisitions.
No assurance can be given that Pogo will be able
to identify suitable acquisition opportunities, negotiate acceptable terms, obtain financing for acquisitions on acceptable terms or
successfully acquire identified targets. Pogo’s failure to achieve consolidation savings, to integrate the acquired assets into
its existing operations successfully or to minimize any unforeseen difficulties could materially and adversely affect its financial condition,
results of operations and cash flows. The inability to effectively manage these acquisitions could reduce Pogo’s focus on subsequent
acquisitions and current operations, which, in turn, could negatively impact its growth, results of operations and cash flows.
Pogo may acquire properties that do not
produce as projected, and it may be unable to determine reserve potential, identify liabilities associated with such properties or obtain
protection from sellers against such liabilities.
Acquiring crude oil and natural gas properties
requires Pogo to assess reservoir and infrastructure characteristics, including recoverable reserves, development and operating costs
and potential environmental and other liabilities. Such assessments are inexact and inherently uncertain. In connection with the assessments,
Pogo performs a review of the subject properties, but such a review will not necessarily reveal all existing or potential problems. In
the course of Pogo’s due diligence, it may not inspect every well or pipeline. Pogo cannot necessarily observe structural and environmental
problems, such as pipe corrosion, when an inspection is made. Pogo may not be able to obtain contractual indemnities from the seller
for liabilities created prior to its purchase of the property. Pogo may be required to assume the risk of the physical condition of the
properties in addition to the risk that the properties may not perform in accordance with its expectations.
Any acquisitions that Pogo completes will
be subject to substantial risks.
Even if Pogo makes acquisitions that it believes
will increase its cash generated from operations, these acquisitions may nevertheless result in a decrease in its cash flows. Any acquisition
involves potential risks, including, among other things:
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● mistaken assumptions about the overall cost of equity or debt;
● Pogo’s ability to obtain satisfactory title to the assets it acquires;
Pogo’s identified development activities
are susceptible to uncertainties that could materially alter the occurrence or timing of their development activities.
The ability of Pogo to perform development activities
depends on a number of uncertainties, including the availability of capital, construction of and limitations on access to infrastructure,
inclement weather, regulatory changes and approvals, crude oil and natural gas prices, costs, development activity results and the availability
of water. Further, Pogo’s identified potential development activities are in various stages of evaluation, ranging from wells that
are ready to be developed to wells that require substantial additional interpretation. The use of technologies and the study of producing
fields in the same area will not enable Pogo to know conclusively prior to development activities whether crude oil and natural gas will
be present or, if present, whether crude oil and natural gas will be present in sufficient quantities to be economically viable. Even
if enough crude oil or natural gas exist, Pogo may damage the potentially productive hydrocarbon-bearing formation or experience
mechanical difficulties while performing development activities, possibly resulting in a reduction in production from the well or abandonment
of the well. If Pogo performs additional development activities on wells that do not respond or they produce at quantities less than
desired these wells may materially harm Pogo’s business.
There is no guarantee that the conclusions Pogo
draws from available data and other wells near the Pogo acreage will be applicable to Pogo’s development activities. Further, initial
production rates reported by Pogo in the areas in which Pogo’s reserves are located may not be indicative of future or long-term production
rates. Additionally, actual production from wells may be less than expected. For example, a number of E&P operators have recently
announced that newer wells drilled close in proximity to already producing wells have produced less oil and gas than forecast. Because
of these uncertainties, Pogo does not know if the potential development activities that have been identified will ever be able to produce
crude oil and natural gas from these or any other potential development activities. As such, the actual development activities of Pogo
may materially differ from those presently identified, which could adversely affect Pogo’s business, results of operation and cash
flows.
Acquisitions and Pogo’s development
of Pogo’s leases will require substantial capital, and our company may be unable to obtain needed capital or financing on satisfactory
terms or at all.
The crude oil and natural gas industry is capital
intensive. Pogo made substantial capital expenditures in connection with the acquisition and development of its properties. Our company
may continue to make substantial capital expenditures in connection with the acquisition and development of properties. Our company will
finance capital expenditures primarily with funding from cash generated by operations and borrowings under its revolving credit facility.
In the future, Pogo may need capital more than
the amounts it retains in its business or borrows under its revolving credit facility. The level of borrowing base available under Pogo’s
revolving credit facility is largely based on its estimated proved reserves and its lenders’ price decks and underwriting standards
in the reserve-based lending space and may be reduced to the extent commodity prices decrease and cause underwriting standards to
tighten or the lending syndication market is not sufficiently liquid to obtain lender commitments to a full borrowing base in an amount
appropriate for Pogo’s assets. Furthermore, Pogo cannot assure you that it will be able to access other external capital on terms
favorable to it or at all. For example, a significant decline in prices for crude oil and broader economic turmoil may adversely impact
Pogo’s ability to secure financing in the capital markets on favorable terms. Additionally, Pogo’s ability to secure financing
or access the capital markets could be adversely affected if financial institutions and institutional lenders elect not to provide funding
for fossil fuel energy companies in connection with the adoption of sustainable lending initiatives or are required to adopt policies
that have the effect of reducing the funding available to the fossil fuel sector. If Pogo is unable to fund its capital requirements,
Pogo may be unable to complete acquisitions, take advantage of business opportunities or respond to competitive pressures, any of which
could have a material adverse effect on its results of operation and free cash flow.
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Pogo is also dependent on the availability of
external debt, equity financing sources and operating cash flows to maintain its development program. If those financing sources are
not available on favorable terms or at all, then Pogo expects the development of its properties to be adversely affected. If the development
of Pogo’s properties is adversely affected, then revenues from Pogo’s operations may decline. If we issue additional equity
securities or securities convertible into equity securities, existing stockholders will experience dilution and the new equity securities
could have rights senior to those of our Class A Common Stock.
The widespread outbreak of an illness,
pandemic (like COVID-19) or any other public health crisis may have material adverse effects on Pogo’s business, financial position,
results of operations and/or cash flows.
Pogo faces risks related to the outbreak of illnesses,
pandemics and other public health crises that are outside of its control and could significantly disrupt its operations and adversely
affect its financial condition. For example, the COVID-19 pandemic has caused a disruption to the oil and natural gas industry and
to Pogo’s business. The COVID-19 pandemic negatively impacted the global economy, disrupted global supply chains, reduced
global demand for oil and gas, and created significant volatility and disruption of financial and commodity markets, but has been improving
since 2020.
The degree to which the COVID-19 pandemic
or any other public health crisis adversely impacts Pogo’s operations, financial results and dividend policy will also depend on
future developments, which are highly uncertain and cannot be predicted. These developments include, but are not limited to, the duration
and spread of the pandemic, its severity, the actions to contain the virus or treat its impact, its impact on the economy and market
conditions, and how quickly and to what extent normal economic and operating conditions can resume. While this matter may disrupt its
operations in some way, the degree of the adverse financial impact cannot be reasonably estimated at this time.
Pogo currently plans to enter hedging
arrangements with respect to the production of crude oil, and possibly natural gas which is a smaller portion of the reserves. Pogo will
mitigate the exposure to the impact of decreases in the prices by establishing a hedging plan and structure that protects the earnings
to a reasonable level, and the debt service requirements.
Pogo does currently plan to enter into hedging
arrangements to establish, in advance, a price for the sale of the crude oil and possibly natural gas produced from its properties. The
hedging plan and structure will be at a level to balance the debt service requirements and also allow Pogo to realize the benefit of
any short-term increase in the price of crude oil and natural gas. A portion of the crude oil and natural gas produced from its
properties will not be protected against decreases in the price of crude oil and natural gas, or prolonged periods of low commodity prices.
Hedging arrangements may limit Pogo’s ability to realize the benefit of rising prices and may result in hedging losses.
The intent of the hedging arrangements is to
mitigate the volatility in its cash flows due to fluctuations in the price of crude oil and natural gas. However, these hedging activities
may not be as effective as our company intends in reducing the volatility of its cash flows and, if entered into, are subject to the
risks of the terms of the derivative instruments derivative contract, there may be a change in the expected differential between the
underlying commodity price in the derivative instrument and the actual price received, our company’s hedging policies and procedures
may not be properly followed and the steps our company takes to monitor its derivative financial instruments may not detect and prevent
violations of its risk management policies and procedures, particularly if deception or other intentional misconduct is involved. Further,
our company may be limited in receiving the full benefit of increases in crude oil as a result of these hedging transactions. The occurrence
of any of these risks could prevent Pogo from realizing the benefit of a derivative contract.
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Pogo’s estimated reserves are based
on many assumptions that may turn out to be inaccurate. Any material inaccuracies in these reserve estimates or underlying assumptions
will materially affect the quantities and present value of its reserves.
It is not possible to measure underground accumulation
of crude oil and natural gas in an exact way. Crude oil and natural gas reserve engineering is not an exact science and requires subjective
estimates of underground accumulations of crude oil and natural gas and assumptions concerning future crude oil and natural gas prices,
production levels, ultimate recoveries and operating and development costs. As a result, estimated quantities of proved reserves, projections
of future production rates and the timing of development expenditures may turn out to be incorrect. Estimates of Pogo’s proved
reserves and related valuations as of December 31, 2023 and December 31, 2022 were prepared by Cobb & Associates. Cobb
& Associates conducted a detailed review of all of Pogo’s properties for the period covered by its reserve report using information
provided by Pogo. Over time, Pogo may make material changes to reserve estimates taking into account the results of actual drilling,
testing and production and changes in prices. In addition, certain assumptions regarding future crude oil and natural gas prices, production
levels and operating and development costs may prove incorrect. For example, due to the deterioration in commodity prices and operator
activity in 2020 as a result of the COVID-19 pandemic and other factors, the commodity price assumptions used to calculate Pogo’s
reserves estimates declined, which in turn lowered its proved reserve estimates. A substantial portion of Pogo’s reserve estimates
are made without the benefit of a lengthy production history, which are less reliable than estimates based on a lengthy production history.
Any significant variance from these assumptions to actual figures could greatly affect Pogo’s estimates of reserves and future
cash generated from operations. Numerous changes over time to the assumptions on which Pogo’s reserve estimates are based, as described
above, often result in the actual quantities of crude oil and natural gas that are ultimately recovered being different from its reserve
estimates.
Furthermore, the present value of future net
cash flows from Pogo’s proved reserves is not necessarily the same as the current market value of its estimated reserves. In accordance
with rules established by the SEC and the Financial Accounting Standards Board (the “FASB”), Pogo bases the estimated discounted
future net cash flows from its proved reserves on the twelve-month average oil and gas index prices, calculated as the unweighted
arithmetic average for the first-day-of-the-month price for each month, and costs in effect on the date of the estimate, holding
the prices and costs constant throughout the life of the properties. Actual future prices and costs may differ materially from those
used in the present value estimate, and future net present value estimates using then current prices and costs may be significantly less
than the current estimate. In addition, the 10% discount factor Pogo uses when calculating discounted future net cash flows may not be
the most appropriate discount factor based on interest rates in effect from time to time and risks associated with Pogo or the crude
oil and natural gas industry in general.
Operating hazards and partially
insured or uninsured risks may result in substantial losses to Pogo and any losses could adversely affect Pogo’s results of
operations and cash flows.
The operations of Pogo will be subject to all
of the hazards and operating risks associated with drilling for and production of crude oil and natural gas, including the risk of fire,
explosions, blowouts, surface cratering, uncontrollable flows of crude oil and natural gas and formation water, pipe or pipeline failures,
abnormally pressured formations, casing collapses and environmental hazards such as crude oil spills, natural gas leaks and ruptures
or discharges of toxic gases. In addition, their operations will be subject to risks associated with hydraulic fracturing, including
any mishandling, surface spillage or potential underground migration of fracturing fluids, including chemical additives. The occurrence
of any of these events could result in substantial losses to Pogo due to injury or loss of life, severe damage to or destruction of property,
natural resources and equipment, pollution or other environmental damage, clean-up responsibilities, regulatory investigations and
penalties, suspension of operations and repairs required to resume operations.
Loss of Pogo’s information and computer
systems, including as a result of cyber-attacks, could materially and adversely affect Pogo’s business.
Pogo relies on electronic systems and networks
to control and manage Pogo’s respective businesses. If any of such programs or systems were to fail for any reason, including as
a result of a cyber-attack, or create erroneous information in Pogo’s hardware or software network infrastructure, possible consequences
could be significant, including loss of communication links and inability to automatically process commercial transaction or engage in
similar automated or computerized business activities. Although Pogo has multiple layers of security to mitigate risks of cyber-attacks,
cyber-attacks on business have escalated in recent years. Moreover, Pogo is becoming increasingly dependent on digital technologies
to conduct certain exploration, development, production and processing activities, including interpreting seismic data, managing drilling
rigs, production activities and gathering systems, conducting reservoir modeling and estimating reserves. The U.S. government has
issued public warnings that indicate that energy assets might be specific targets of cyber security threats. If Pogo becomes the target
of cyber-attacks of information security breaches, their business operations may be substantially disrupted, which could have an
adverse effect on Pogo’s results of operations. In addition, Pogo’s efforts to monitor, mitigate and manage these evolving
risks may result in increased capital and operating costs, and there can be no assurance that such efforts will be sufficient to prevent
attacks or breaches from occurring.
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A terrorist attack or armed conflict could
harm Pogo’s business.
Terrorist activities, anti-terrorist activities
and other armed conflicts involving the United States or other countries may adversely affect the United States and global
economies and could prevent Pogo from meeting its financial and other obligations. For example, on February 24, 2022, Russia launched
a large-scale invasion of Ukraine that has led to significant armed hostilities. As a result, the United States, the United
Kingdom, the member states of the European Union and other public and private actors have levied severe sanctions on Russia. To date,
this conflict has resulted in a decreased supply of hydrocarbons which has resulted in higher commodity prices. The geopolitical and
macroeconomic consequences of this invasion and associated sanctions cannot be predicted, and such events, or any further hostilities
in Ukraine or elsewhere, could severely impact the world economy. If any of these events occur, the resulting political instability and
societal disruption could reduce overall demand for crude oil and natural gas potentially putting downward pressure on demand for Pogo’s
services and causing a reduction in its revenues. Crude oil and natural gas related facilities, including those of Pogo, could be direct
targets of terrorist attacks, and, if infrastructure integral to Pogo is destroyed or damaged, they may experience a significant disruption
in their operations. Any such disruption could materially adversely affect Pogo’s financial condition, results of operations and
cash flows. Costs for insurance and other security may increase as a result of these threats, and some insurance coverage may become
more difficult to obtain, if available at all.
We believe Pogo currently has ineffective
internal control over its financial reporting.
A material weakness is a deficiency, or combination
of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement
of Pogo’s annual or interim consolidated financial statements may not be prevented or detected on a timely basis. We identified
a material weakness and believe that Pogo currently has ineffective internal control over financial reporting, primarily due to: not
maintaining a sufficient complement of personnel to permit segregation of duties among personnel with access to Pogo’s accounting
and information systems controls, lacking proper review evidence of controls over the reserves report prepared by the reservoir engineer,
and lacking the controls needed to ensure that the accounting for certain items is accurate and complete.
We intend to remediate these deficiencies by
putting into place proper internal controls and accounting systems to ensure effective internal control over its financial reporting.
Completion of remediation does not provide assurance that our remediation or other controls will continue to operate properly or remain
adequate and we cannot assure you that we will not identify additional material weaknesses in our internal control over financial reporting
in the future. If we are unable to maintain effective internal control over financial reporting or disclosure controls and procedures,
our ability to record, process and report financial information accurately, and to prepare financial statements within the time periods
specified by the rules and forms of the SEC, could be adversely affected. This failure could negatively affect the market price and trading
liquidity of our stock, cause investors to lose confidence in our reported financial information, subject us to civil and criminal investigations
and penalties and generally materially and adversely impact our business and financial condition.
Our independent registered public accounting
firm’s report contains an explanatory paragraph that expresses substantial doubt about our ability to continue as a “going
concern.”
As
of December 31, 2023, we had $3,505,454 in cash and a working capital deficit of $13,300,601. Further, we had positive cash flow from
operations of $8,675,037 on a combined Successor and Predecessor basis for the year ended December 31, 2023, on a pro forma basis of
the combined successor and predecessor periods. These factors raise substantial doubt about our ability to continue as a going concern.
Management’s plans to alleviate this substantial doubt include improving profitability through streamlining costs, maintaining
active hedge positions for its proven reserve production, and the issuance of additional shares of Class A Common Stock through the Common
Stock Purchase Agreement with White Lion, which can fund our operations and production growth, and be used to reduce our liabilities.
While there can be no assurance of success, our management believes that its plans and the overall outlook of the oil and gas industry
sufficiently alleviate the factors raising substantial doubt about its ability to continue as a going concern.
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We are dependent upon our executive officers
and directors and their departure could adversely affect our ability to operate.
Our operations are dependent upon a relatively
small group of individuals. We believe that our success depends on the continued service of our executive officers and directors. In
addition, our executive officers and directors are not required to commit any specified amount of time to our affairs and, accordingly,
will have conflicts of interest in allocating management time among various business activities. The unexpected loss of the services
of one or more of our directors or executive officers could have a detrimental effect on us.
Certain of our executive officers and directors
are now, and all of them may in the future become, affiliated with entities engaged in business activities similar to those conducted
by us.
Our executive officers and directors are, or
may in the future become, affiliated with entities that are engaged in business activities similar to our own.
Our officers and directors also may become aware
of business opportunities which may be appropriate for presentation to us and the other entities to which they owe certain fiduciary
or contractual duties. Accordingly, they may have conflicts of interest in determining to which entity a particular business opportunity
should be presented. These conflicts may not be resolved in our favor and a potential target business may be presented to another entity
prior to its presentation to us. Our Second A&R Charter provides that we renounce our interest in any corporate opportunity offered
to any director or officer unless such opportunity is expressly offered to such person solely in his or her capacity as a director or
officer of our company and such opportunity is one we are legally and contractually permitted to undertake and would otherwise be reasonable
for us to pursue.
Our executive officers, directors, security
holders and their respective affiliates may have competitive pecuniary interests that conflict with our interests.
We have not adopted a policy that expressly prohibits
our directors, executive officers, security holders or affiliates from having a direct or indirect pecuniary or financial interest in
any investment to be acquired or disposed of by us or in any transaction to which we are a party or have an interest. We also do not
have a policy that expressly prohibits any such persons from engaging for their own account in business activities of the types conducted
by us. Accordingly, such persons or entities may have a conflict between their interests and ours.
Increased costs of capital could adversely
affect Pogo’s business.
Pogo’s business and ability to make acquisitions
could be harmed by factors such as the availability, terms, and cost of capital, increases in interest rates or a reduction in its credit
rating. Changes in any one or more of these factors could cause Pogo’s cost of doing business to increase, limit its access to
capital, limit its ability to pursue acquisition opportunities, and place it at a competitive disadvantage. A significant reduction in
the availability of capital could materially and adversely affect Pogo’s ability to achieve its planned growth and operating results.
For example, during 2022 and the first half of
2023, the Federal Reserve raised the target range for the federal funds rate by 525 basis points to a range of 5.25% to 5.50% as of August,
2023. Furthermore, the Federal Reserve has signaled that additional rate increases are likely to occur for the foreseeable future. An
increase in the interest rates associated with our floating rate debt would increase our debt service costs and affect our results of
operations and cash flow available for payments of our debt obligations. In addition, an increase in interest rates could adversely affect
our future ability to obtain financing or materially increase the cost of any additional financing.
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Pogo may be involved in legal proceedings
that could result in substantial liabilities.
Like many crude oil and natural gas companies,
Pogo may from time to time be involved in various legal and other proceedings, such as title, royalty or contractual disputes, regulatory
compliance matters and personal injury or property damage matters, in the ordinary course of its business. Such legal proceedings are
inherently uncertain and their results cannot be predicted. Regardless of the outcome, such proceedings could have an adverse impact
on Pogo because of legal costs, diversion of management and other personnel and other factors. In addition, it is possible that a resolution
of one or more such proceedings could result in liability, penalties or sanctions, as well as judgments, consent decrees or orders requiring
a change in Pogo’s business practices, which could materially and adversely affect its business, operating results and financial
condition. Accruals for such liability, penalties or sanctions may be insufficient. Judgments and estimates to determine accruals or
range of losses related to legal and other proceedings could change from one period to the next, and such changes could be material.
The historical financial results of HNRA
and the unaudited pro forma condensed consolidated combined financial information included elsewhere in this report may not be indicative
of what HNRA’s actual financial position or results of operations would have been if it were a public company.
The historical financial results of HNRA included
in this report do not reflect the financial condition, results of operations or cash flows it would have achieved as a public company
during the periods presented or those we will achieve in the future. Our future financial condition, results of operations and cash flows
could be materially different from amounts reflected in HNRA’s historical financial statements included elsewhere in this report.
As such, it may be difficult for investors to compare our future results to historical results or to evaluate its relative performance
or trends in its business.
Similarly, the unaudited pro forma condensed
consolidated combined financial information in this report is presented for illustrative purposes only and has been prepared based on
a number of assumptions including, but not limited to, those assumptions described in the accompanying unaudited pro forma condensed
consolidated combined financial statements. Accordingly, such pro forma financial information may not be indicative of our future operating
or financial performance and Company’s actual financial condition and results of operations may vary materially from the pro
forma results of operations and balance sheet contained elsewhere in this report, including as a result of such assumptions not being
accurate.
Risks Related to Our Industry
A substantial majority of Pogo’s
revenues from crude oil and gas producing activities are derived from its operating properties that are based on the price at which crude
oil and natural gas produced from the acreage underlying its interests are sold. Prices of crude oil and natural gas are volatile due
to factors beyond Pogo’s control. A substantial or extended decline in commodity prices may adversely affect Pogo’s business,
financial condition, results of operations and cash flows.
Pogo’s revenues, operating results, discretionary
cash flows, profitability, liquidity and the carrying value of its interests depend significantly upon the prevailing prices for crude
oil and natural gas. Historically, crude oil and natural gas prices and their applicable basis differentials have been volatile and are
subject to fluctuations in response to changes in supply and demand, market uncertainty and a variety of additional factors that are
beyond Pogo’s control, including:
● the level of global crude oil and natural gas E&P;
● the level of U.S. domestic production;
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● speculative trading in crude oil and natural gas derivative contracts;
● the level of consumer product demand;
● domestic and foreign governmental regulations and taxes;
● the impact of energy conservation efforts;
● the price and availability of alternative fuels; and
● overall domestic and global economic conditions.
These factors and the volatility of the energy
markets make it extremely difficult to predict future crude oil and natural gas price movements with any certainty. For example, during
the past five years, the posted price for West Texas Intermediate (“WTI”) light sweet crude oil has ranged from a historic,
record low price of negative ($36.98) per barrel (“Bbl”) in April 2020 to a high of $123.64 per Bbl in March 2022,
and the Henry Hub spot market price for natural gas has ranged from a low of $1.33 per metric million British thermal unit (“MMBtu”)
in September 2020 to a high of $23.86 per MMBtu in February 2021. Certain actions by OPEC+ in the first half of 2020, combined
with the impact of the continued outbreak of the COVID-19 pandemic and a shortage in available storage for hydrocarbons in the U.S.,
contributed to the historic low price for crude oil in April 2020. While the prices for crude oil have begun to stabilize and also
increase, such prices have historically remained volatile, which has adversely affected the prices at which production from Pogo’s
properties is sold and may continue to do so in the future. This, in turn, has and will materially affect the amount of production payments
that Pogo receives.
Any substantial decline in the price of crude
oil and natural gas, or prolonged period of low commodity prices will materially adversely affect Pogo’s business, financial condition,
results of operations and cash flows. In addition, lower crude oil and natural gas may reduce the amount of crude oil and natural gas
that can be produced economically, which may reduce its Pogo’s willingness to develop its properties. This may result in Pogo having
to make substantial downward adjustments to its estimated proved reserves, which could negatively impact its ability to fund its operations.
If this occurs or if production estimates change or exploration or development results deteriorate, the successful efforts method of
accounting principles may require Pogo to write down, as a non-cash charge to earnings, the carrying value of its crude oil and
natural gas properties. Pogo could also determine during periods of low commodity prices to shut in or curtail production from wells
on Pogo’s properties. In addition, Pogo could determine during periods of low commodity prices to plug and abandon marginal wells
that otherwise may have been allowed to continue to produce for a longer period under conditions of higher prices. Specifically, they
may abandon any well if they reasonably believe that the well can no longer produce crude oil or natural gas in commercially paying quantities.
Pogo may choose to use various derivative instruments in connection with anticipated crude oil and natural gas to minimize the impact
of commodity price fluctuations. However, Pogo cannot hedge the entire exposure of its operations from commodity price volatility. To
the extent Pogo does not hedge against commodity price volatility, or its hedges are not effective, Pogo’s results of operations
and financial position may be diminished.
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If commodity prices decrease to a level
such that Pogo’s future undiscounted cash flows from its properties are less than their carrying value, Pogo may be required to
take write-downs of the carrying values of its properties.
Accounting rules require that Pogo periodically
review the carrying value of its properties for possible impairment. Based on specific market factors and circumstances at the time of
prospective impairment reviews, production data, economics and other factors, Pogo may be required to write down the carrying value of
its properties. Pogo evaluates the carrying amount of its proved oil and natural gas properties for impairment whenever events or changes
in circumstances indicate that a property’s carrying amount may not be recoverable. If the carrying value exceeds the estimated
undiscounted future cash flows Pogo would estimate the fair value of its properties and record an impairment charge for any excess of
the carrying value of the properties over the estimated fair value of the properties. Factors used to estimate fair value may include
estimates of proved reserves, future commodity prices, future production estimates and a commensurate discount rate. The risk that Pogo
will be required to recognize impairments of its crude oil and natural gas properties increases during periods of low commodity prices.
In addition, impairments would occur if Pogo were to experience sufficient downward adjustments to its estimated proved reserves or the
present value of estimated future net revenues. An impairment recognized in one period may not be reversed in a subsequent period. Pogo
may incur impairment charges in the future, which could materially adversely affect its results of operations for the periods in which
such charges are taken.
The unavailability, high cost or shortages
of rigs, equipment, raw materials, supplies or personnel may restrict or result in increased costs to develop and operate Pogo’s
properties.
The crude oil and natural gas industry is cyclical,
which can result in shortages of drilling/workover rigs, equipment, raw materials (particularly water and sand and other proppants),
supplies and personnel. When shortages occur, the costs and delivery times of rigs, equipment and supplies increase and demand for, and
wage rates of, qualified drilling/workover rig crews also rise with increases in demand. Pogo cannot predict whether these conditions
will exist in the future and, if so, what their timing and duration will be. In accordance with customary industry practice, Pogo relies
on independent third-party service providers to provide many of the services and equipment necessary to drill new development wells.
If Pogo is unable to secure a sufficient number of drilling/workover rigs at reasonable costs, Pogo’s financial condition and results
of operations could suffer. Shortages of drilling/workover rigs, equipment, raw materials, supplies, personnel, trucking services, tubulars,
hydraulic fracturing and completion services and production equipment could delay or restrict Pogo’s development operations, which
in turn could have a material adverse effect on Pogo’s financial condition, results of operations and cash flows.
The marketability of crude oil and natural
gas production is dependent upon transportation and processing and refining facilities, which Pogo cannot control. Any limitation in
the availability of those facilities could interfere with Pogo’s ability to market its production and could harm Pogo’s
business.
The marketability of Pogo’s production
depends in part on the availability, proximity and capacity of pipelines, gathering lines, tanker trucks and other transportation methods,
and processing and refining facilities owned by third parties. Pogo does not control these third-party facilities and Pogo’s
access to them may be limited or denied. Insufficient production from the wells on Pogo’s acreage or a significant disruption in
the availability of third-party transportation facilities or other production facilities could adversely impact Pogo’s ability
to deliver, to market or produce oil and natural gas and thereby cause a significant interruption in Pogo’s operations. If they
are unable, for any sustained period, to implement acceptable delivery or transportation arrangements or encounter production related
difficulties, they may be required to shut in or curtail production. In addition, the amount of crude oil that can be produced and sold
is subject to curtailment in certain other circumstances outside of Pogo’s control, such as pipeline interruptions due to scheduled
and unscheduled maintenance, excessive pressure, physical damage or lack of available capacity on these systems, tanker truck availability
and extreme weather conditions. Also, production from Pogo’s wells may be insufficient to support the construction of pipeline
facilities, and the shipment of Pogo’s crude oil and natural gas on third-party pipelines may be curtailed or delayed if it
does not meet the quality specifications of the pipeline owners. The curtailments arising from these and similar circumstances may last
from a few days to several months. In many cases, Pogo is provided only with limited, if any, notice as to when these circumstances
will arise and their duration. Any significant curtailment in gathering system or transportation, processing or refining-facility capacity,
or an inability to obtain favorable terms for delivery of the crude oil and natural gas produced from Pogo’s acreage, could reduce
Pogo’s ability to market the production from Pogo’s properties and have a material adverse effect on Pogo’s financial
condition, results of operations and cash flows. Pogo’s access to transportation options and the prices Pogo receives can also
be affected by federal and state regulation — including regulation of crude oil and natural gas production, transportation
and pipeline safety — as well by general economic conditions and changes in supply and demand.
In addition, the third parties on whom Pogo relies
for transportation services are subject to complex federal, state, tribal and local laws that could adversely affect the cost, manner
or feasibility of conducting Pogo’s business.
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Drilling for and producing crude oil and
natural gas are high-risk activities with many uncertainties that may materially adversely affect Pogo’s business, financial condition,
results of operations and cash flows.
The development drilling activities of Pogo’s
properties will be subject to many risks. For example, Pogo will not be able to assure you that wells drilled by the E&P operators
of its properties will be productive. Drilling for crude oil and natural gas often involves unprofitable efforts, not only from dry wells
but also from wells that are productive but do not produce sufficient crude oil and natural gas to return a profit at then realized prices
after deducting drilling, operating and other costs. The seismic data and other technologies used do not provide conclusive knowledge
prior to drilling a well that crude oil and natural gas are present or that a well can be produced economically. The costs of exploration,
exploitation and development activities are subject to numerous uncertainties beyond Pogo’s control and increases in those costs
can adversely affect the economics of a project. Further, Pogo’s development drilling and producing operations may be curtailed,
delayed, canceled or otherwise negatively impacted as a result of other factors, including:
● unusual or unexpected geological formations;
● loss of drilling fluid circulation;
● title problems;
● facility or equipment malfunctions;
● unexpected operational events;
● shortages or delivery delays of equipment and services;
● compliance with environmental and other governmental requirements; and
Any of these risks can cause substantial losses,
including personal injury or loss of life, damage to or destruction of property, natural resources and equipment, pollution, environmental
contamination or loss of wells and other regulatory penalties. In the event that planned operations, including the drilling of development
wells, are delayed or cancelled, or existing wells or development wells have lower than anticipated production due to one or more of
the factors above or for any other reason, Pogo’s financial condition, results of operations and cash flows may be materially adversely
affected.
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Competition in the crude oil and natural
gas industry is intense, which may adversely affect Pogo’s ability to succeed.
The crude oil and natural gas industry is intensely
competitive, and Pogo’s properties compete with other companies that may have greater resources. Many of these companies explore
for and produce crude oil and natural gas, carry on midstream and refining operations, and market petroleum and other products on a regional,
national or worldwide basis. In addition, these companies may have a greater ability to continue exploration activities during periods
of low crude oil and natural gas market prices. Pogo’s larger competitors may be able to absorb the burden of present and future
federal, state, local and other laws and regulations more easily than Pogo can, which would adversely affect Pogo’s competitive
position. Pogo may have fewer financial and human resources than many companies in Pogo’s industry and may be at a disadvantage
in bidding producing crude oil and natural gas properties. Furthermore, the crude oil and natural gas industry has experienced recent
consolidation among some operators, which has resulted in certain instances of combined companies with larger resources. Such combined
companies may compete against Pogo and thus limit Pogo’s ability to acquire additional properties and add reserves.
A deterioration in general economic, business,
political or industry conditions would materially adversely affect Pogo’s results of operations, financial condition and cash flows.
Concerns over global economic conditions, energy
costs, geopolitical issues, the impacts of the COVID-19 pandemic, inflation, the availability and cost of credit and slow economic
growth in the United States have contributed to economic uncertainty and diminished expectations for the global economy. Additionally,
acts of protest and civil unrest have caused economic and political disruption in the United States. Meanwhile, continued hostilities
in the Middle East, Ukraine and the occurrence or threat of terrorist attacks in the United States or other countries could adversely
affect the economies of the United States and other countries. Concerns about global economic growth have had a significant adverse
impact on global financial markets and commodity prices. An oversupply and decreased demand of crude oil in 2020 led to a severe decline
in worldwide crude oil prices in 2020.
If the economic climate in the United States
or abroad deteriorates, worldwide demand for petroleum products could further diminish, which could impact the price at which crude oil
and natural gas from Pogo’s properties are sold, affect the ability of Pogo’s to continue operations and ultimately materially
adversely impact Pogo’s results of operations, financial condition and cash flows.
Conservation measures, technological advances
and increasing attention to ESG matters could materially reduce demand for crude oil and natural gas, availability of capital and adversely
affect Pogo’s results of operations.
Fuel conservation measures, alternative fuel
requirements, increasing consumer demand for alternatives to crude oil and natural gas, technological advances in fuel economy and energy-generation devices
could reduce demand for crude oil and natural gas. The impact of the changing demand for crude oil and natural gas services and products
may have a material adverse effect on Pogo’s business, financial condition, results of operations and cash flows. It is also possible
that the concerns about the production and use of fossil fuels will reduce the sources of financing available to Pogo. For example,
certain segments of the investor community have developed negative sentiment towards investing in the oil and gas industry. Recent equity
returns in the sector versus other industry sectors have led to lower oil and gas representation in certain key equity market indices.
In addition, some investors, including investment advisors and certain sovereign wealth, pension funds, university endowments and family
foundations, have stated policies to divest from, or not provide funding to, the oil and gas sector based on their social and environmental
considerations. Furthermore, organizations that provide information to investors on corporate governance and related matters have developed
ratings processes for evaluating companies on their approach to environmental, social and governance (“ESG”) matters. Such
ratings are used by some investors and other financial institutions to inform their investment, financing and voting decisions, and unfavorable
ESG ratings may lead to increased negative sentiment toward oil and gas companies from such institutions. Additionally, the SEC proposed
rules on climate change disclosure requirements for public companies which, if adopted as proposed, could result in substantial compliance
costs. Certain other stakeholders have also pressured commercial and investment banks to stop financing oil and gas and related infrastructure
projects. Such developments, including environmental activism and initiatives aimed at limiting climate change and reducing air pollution,
could result in downward pressure on the stock prices of oil and gas companies, and also adversely affect Pogo’s availability of
capital.
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Risks Related to Environmental and Regulatory
Matters
Crude oil and natural gas operations are
subject to various governmental laws and regulations. Compliance with these laws and regulations can be burdensome and expensive for
Pogo, and failure to comply could result in Pogo incurring significant liabilities, either of which may impact its willingness to develop
Pogo’s interests.
Pogo’s activities on the properties in
which Pogo holds interests are subject to various federal, state and local governmental regulations that may change from time to time
in response to economic and political conditions. Matters subject to regulation include drilling operations, production and distribution
activities, discharges or releases of pollutants or wastes, plugging and abandonment of wells, maintenance and decommissioning of other
facilities, the spacing of wells, unitization and pooling of properties and taxation. From time to time, regulatory agencies have imposed
price controls and limitations on production by restricting the rate of flow of crude oil and natural gas wells below actual production
capacity to conserve supplies of crude oil and natural gas. For example, in January 2021, President Biden signed an Executive Order
that, among other things, instructed the Secretary of the Interior to pause new oil and natural gas leases on public lands or in offshore
waters pending completion of a comprehensive review and reconsideration of federal oil and natural gas permitting and leasing practices.
In August 2022, a federal judge in Louisiana issued a permanent injunction against the temporary halt to the leasing of federal lands
for oil and gas drilling in the thirteen states that challenged the Executive Order. In April 2022, the Biden Administration announced
it would resume selling leases to drill for oil and gas on federal lands, but with an 80% reduction in the number of acres offered and
an increase in the royalties companies must pay to drill. The Inflation Reduction Act, signed into law in August of 2022, expanded oil
and gas lease sales off the coast of Alaska and in the Gulf of Mexico. Substantially all of Pogo’s interests are located on state
or federal lands, therefore Pogo cannot predict the full impact of these developments or whether the Biden Administration may pursue
further restrictions. President Biden also issued an Executive Order directing all federal agencies to review and take action to address
any federal regulations, orders, guidance documents, policies and any similar agency actions during the prior administration that may
be inconsistent with the current administration’s policies. The United States Environmental Protection Agency has proposed strict
new methane emission regulations for certain oil and gas facilities and the IRA establishes a charge on methane emissions above certain
limits from the same facilities. Further actions of President Biden, and the Biden Administration, including actions focused on addressing
climate change, may negatively impact oil and gas operations and favor renewable energy projects in the United States, which may
negatively impact the demand for oil and natural gas.
In addition, the production, handling, storage
and transportation of crude oil and natural gas, as well as the remediation, emission and disposal of crude oil and natural gas wastes,
by-products thereof and other substances and materials produced or used in connection with crude oil and natural gas operations
are subject to regulation under federal, state and local laws and regulations primarily relating to protection of worker health and safety,
natural resources and the environment. Failure to comply with these laws and regulations may result in the assessment of sanctions on
Pogo, including administrative, civil or criminal penalties, permit revocations, requirements for additional pollution controls and injunctions