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
There is substantial doubt about our ability to continue as a “going
concern.”
As of December 31, 2024, we had $2,971,558 in
cash and a working capital deficit of $31,231,674. Further, we had positive cash flow from operations of $3,700,686 for the year ended
December 31, 2024. 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 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, there can be no assurance of success.
Our producing properties are located in
the Permian Basin, making it vulnerable to risks associated with operating in a single geographic area.
All of our producing properties are currently
geographically concentrated in the Permian Basin. As a result of this concentration, we 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 our 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 our financial condition and results of operations.
As a result of our 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 we are 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.
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Title to the properties in which we have
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, we 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 our 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 we holds an interest, it may suffer a financial loss.
We depends on various services for the development
and production activities on the properties it operates. Substantially all our 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 EON 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.
Our assets consist primarily of operating interests.
The failure of the Company to perform operations adequately or efficiently or to act in ways that are not in our 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 us for investment in development and production activities. Moreover, should a low commodity
price environment incur, we may also opt to reduce development activity that could further reduce production and revenues.
If production on our acreage decreases due to
decreased development activities, because of a low commodity price environment, limited availability of development capital, production-related difficulties
or otherwise, our 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 our 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 our acreage than is currently expected. The success and timing of development
activities on our properties, depends on a number of factors that are largely outside of our control, including:
● the ability to access capital;
● 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.
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Our 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. Our future crude oil
and natural gas reserves and our production thereof and our cash flows are highly dependent on the successful development and exploitation
of our urrent reserves and its ability to successfully acquire additional reserves that are economically recoverable. Moreover, the production
decline rates of our properties may be significantly higher than currently estimated if the wells on its properties do not produce as
expected. We 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 we are not able to replace or grow its oil and natural gas reserves, its business, financial
condition and results of operations would be adversely affected.
Our 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.
We depend, in part, on acquisitions to grow its
reserves, production and cash flows. Our 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 we may not be able to identify attractive acquisition opportunities. In connection with these assessments, we perform a
review of the subject properties that it believes to be generally consistent with industry practices, given the nature of its interests.
Our 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 we do identify
attractive acquisition opportunities, it may not be able to complete the acquisition or do so on commercially acceptable terms. Unless
we further develop our existing properties, we will depend on acquisitions to grow our reserves, production and cash flow.
There is intense competition for acquisition opportunities
in our industry. Competition for acquisitions may increase the cost of, or cause us to refrain from, completing acquisitions. Additionally,
acquisition opportunities vary over time. Our ability to complete acquisitions is dependent upon, among other things, our 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 we acquire 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 Pourability 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 our 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 we will be able
to identify suitable acquisition opportunities, negotiate acceptable terms, obtain financing for acquisitions on acceptable terms or successfully
acquire identified targets. Our 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 Our focus on subsequent acquisitions and current operations,
which, in turn, could negatively impact its growth, results of operations and cash flows.
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We 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 us 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,
we perform a review of the subject properties, but such a review will not necessarily reveal all existing or potential problems. In the
course of due diligence, we may not inspect every well or pipeline. We cannot necessarily observe structural and environmental problems,
such as pipe corrosion, when an inspection is made. We may not be able to obtain contractual indemnities from the seller for liabilities
created prior to its purchase of the property. We 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 we makes acquisitions that we 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:
● mistaken assumptions about the overall cost of equity or debt;
● Our ability to obtain satisfactory title to the assets it acquires;
Our identified development activities are
susceptible to uncertainties that could materially alter the occurrence or timing of our development activities.
The ability of the Company 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, any 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 we 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, we 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 our business.
There is no guarantee that the conclusions we
draw from available data and other wells near the Pogo acreage will be applicable to our development activities. Further, initial production
rates reported by us in the areas in which ours 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 our business, results of operation and cash flows.
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Acquisitions and development of our 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 our
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 our 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 our ability
to secure financing in the capital markets on favorable terms. Additionally, our 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.
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 our properties is adversely affected, then revenues from our 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 our 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 our 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 our 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.
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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 our 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.
Our 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 our proved reserves and
related valuations as of December 31, 2024 and December 31, 2023 were prepared by Cobb. Cobb conducted a detailed review of
all of our 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 our reserves estimates declined, which in turn lowered its proved
reserve estimates. A substantial portion of our 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 our estimates of reserves and future cash generated from operations. Numerous changes over time to the assumptions
on which our 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 our 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.
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Operating hazards and partially insured
or uninsured risks may result in substantial losses to Pogo and any losses could adversely affect our 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 our information and computer systems,
including as a result of cyber-attacks, could materially and adversely affect our business.
Pogo relies on electronic systems and networks
to control and manage our 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 our 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 our results
of operations. In addition, our 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.
A terrorist attack or armed conflict could
harm our 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 our services and causing a reduction in our 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 our 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 our 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 our 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. We plan
to enhance our processes to identify and appropriately apply applicable accounting requirements to better evaluate and understand the
nuances of the complex accounting standards that apply to our financial statements. Our plans at this time include providing enhanced
access to accounting literature, research materials and documents and increased communication among our personnel and third-party professionals
with whom we consult regarding complex accounting applications. The elements of our remediation plan can only be accomplished over time,
and we can offer no assurance that these initiatives will ultimately have the intended effects.
However, 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.
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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 our business.
Our business and ability to raise capital and
make acquisitions could be harmed by factors such as the availability, terms, and cost of capital, increases in interest rates or a reduction
in our credit rating. Changes in any one or more of these factors could cause our 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 our ability to achieve our planned growth and operating results.
For example, since March 2022, the Federal Reserve
has raised its target range for the federal funds rate multiple times, and additional rate hikes may continue to occur. 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.
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 our business practices, which could materially and adversely affect our 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.
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Risks Related to Our Industry
A substantial majority of our 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
our control. A substantial or extended decline in commodity prices may adversely affect our business, financial condition, results of
operations and cash flows.
Our 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
our control, including:
● the level of global crude oil and natural gas E&P;
● the level of U.S. domestic production;
● 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.
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These factors and the volatility
of the energy markets make it extremely difficult to predict future oil and natural gas price movements accurately. Lower commodity prices
may reduce our operating margins, cash flow and borrowing ability. If we are unable to obtain needed capital or financing on satisfactory
terms, our ability to develop future reserves or make acquisitions could be adversely affected. Also, using lower prices in estimating
proved reserves may result in a reduction in proved and reserve volumes due to economic limits. In addition, sustained periods with oil
and natural gas prices at levels lower than current West Texas Intermediate (“WTI”) and Henry Hub strip prices may adversely
affect our drilling economics, cash flow and our ability to raise capital, which may require us to re-evaluate and postpone or substantially
restrict our development program, and result in the reduction of some of our proved undeveloped reserves and related PV-10.
Any substantial decline in the price of crude
oil and natural gas, or prolonged period of low commodity prices will materially adversely affect our 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 our willingness to develop its properties. This may result in Pogo having to make substantial
downward adjustments to our 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 our properties. In addition,
we 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, we cannot hedge
the entire exposure of our operations from commodity price volatility. To the extent we does not hedge against commodity price volatility,
or its hedges are not effective, our results of operations and financial position may be diminished.
If commodity prices decrease to a level
such that our 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 our 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, our 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 our development operations, which in turn could have
a material adverse effect on our financial condition, results of operations and cash flows.
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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 our ability to market its production and could harm our business.
The marketability of our 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 our access to them may be
limited or denied. Insufficient production from the wells on our acreage or a significant disruption in the availability of third-party transportation
facilities or other production facilities could adversely impact our ability to deliver, to market or produce oil and natural gas and
thereby cause a significant interruption in our operations. If we 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 our
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 our wells may be insufficient
to support the construction of pipeline facilities, and the shipment of our 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 our acreage, could reduce our ability to market the production from our properties and have a material adverse effect on
our financial condition, results of operations and cash flows. our access to transportation options and the prices we 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 our business.
Drilling for and producing crude oil and
natural gas are high-risk activities with many uncertainties that may materially adversely affect our business, financial condition, results
of operations and cash flows.
The development drilling activities of our 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 our control and increases in those costs can adversely affect
the economics of a project. Further, our 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, our 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 our ability to succeed.
The crude oil and natural gas industry is intensely
competitive, and our 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. our larger competitors may be able to absorb the burden of present and future federal,
state, local and other laws and regulations more easily than we can, which would adversely affect our competitive position. Pogo may have
fewer financial and human resources than many companies in our 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 our ability to acquire additional properties and add reserves.
A deterioration in general economic, business,
political or industry conditions would materially adversely affect our 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 our properties are sold, affect the ability of the Company to continue operations and ultimately materially adversely
impact our 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 our 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 our 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 our availability of capital.
36
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 our
interests.
Our 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. Further actions, 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
limiting or prohibiting some or all of our operations on our properties. Moreover, these laws and regulations have generally imposed increasingly
strict requirements related to water use and disposal, air pollution control, species protection, and waste management, among other matters.
Laws and regulations governing E&P may also
affect production levels. Pogo must comply with federal and state laws and regulations governing conservation matters, including, but
not limited to:
● the establishment of maximum rates of production from wells;
● the spacing of wells;
● the plugging and abandonment of wells; and
● the removal of related production equipment.
Additionally, federal and state regulatory authorities
may expand or alter applicable pipeline-safety laws and regulations, compliance with which may require increased capital costs for
third-party crude oil and natural gas transporters. These transporters may attempt to pass on such costs to Pogo, which in turn could
affect profitability on the properties in which Pogo owns an interest.
Pogo must also comply with laws and regulations
prohibiting fraud and market manipulations in energy markets. To the extent our properties are shippers on interstate pipelines, they
must comply with the tariffs of those pipelines and with federal policies related to the use of interstate capacity.
Pogo may be required to make significant expenditures
to comply with the governmental laws and regulations described above and may be subject to potential fines and penalties if they are found
to have violated these laws and regulations. Pogo believes the trend of more expansive and stricter environmental legislation and regulations
will continue. The laws and regulations that affect Pogo could increase the operating costs of Pogo and delay production and may
ultimately impact our ability and willingness to develop our properties.
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Federal and state legislative and regulatory
initiatives relating to hydraulic fracturing could cause Pogo to incur increased costs, additional operating restrictions or delays and
have fewer potential development locations.
Pogo engages in hydraulic fracturing. Hydraulic
fracturing is a common practice that is used to stimulate production of hydrocarbons from tight formations, including shales. The process
involves the injection of water, sand and chemicals under pressure into formations to fracture the surrounding rock and stimulate production.
Currently, hydraulic fracturing is generally exempt from regulation under the Underground Injection Control program of the U.S. Safe
Drinking Water Act (“SDWA”) and is typically regulated by state oil and gas commissions or similar agencies.
However, several federal agencies have asserted
regulatory authority over certain aspects of the process. For example, in June 2016, the Environmental Protection Agency (the “EPA”)
published an effluent limit guideline final rule prohibiting the discharge of wastewater from onshore unconventional oil and gas extraction
facilities to publicly owned wastewater treatment plants. Also, from time to time, legislation has been introduced, but not enacted, in
the U.S. Congress to provide for federal regulation of hydraulic fracturing and to require disclosure of the chemicals used in the
hydraulic fracturing process. This or other federal legislation related to hydraulic fracturing may be considered again in the future,
though Pogo cannot predict the extent of any such legislation at this time.
Moreover, some states and local governments have
adopted, and other governmental entities are considering adopting, regulations that could impose more stringent permitting, disclosure
and well-construction requirements on hydraulic fracturing operations, including states in which our properties are located. For
example, Texas, among others, has adopted regulations that impose new or more stringent permitting, disclosure, disposal and well construction
requirements on hydraulic fracturing operations. States could also elect to prohibit high volume hydraulic fracturing altogether. In addition
to state laws, local land use restrictions, such as city ordinances, may restrict drilling in general and/or hydraulic fracturing in particular.
Increased regulation and attention given to the
hydraulic fracturing process, including the disposal of produced water gathered from drilling and production activities, could lead to
greater opposition to, and litigation concerning, crude oil and natural gas production activities using hydraulic fracturing techniques