It could have been a signature quarter. The quarter that could have turned the page. The quarter that could have shed some sunlight and happiness on our governance malaise.
Instead, cold, icy clouds moved in and blocked out the sun.
What could have been. Sunny day! Everything was working. Record production. Record royalties. Water business comes alive! Here comes the sun!
And then all of the sudden. A $19mm cloud full of freezing rain and cold wind appears on the horizon. Poor accounting controls. Bad depletion accounting! A ~$2.50 per share drag on EPS. A miss below estimates!
Ouch! Who’s accountable? Was this discovered before or after the comp agreements were finalized?
The ETF of the Permian deserves better.
They have the golden goose in a headlock.
The material weakness identified by management relates to the design of internal controls over the periodic evaluation of historical tax returns for uncertain tax positions in accounting for income taxes. As a result of this design gap, management did not timely identify the incorrect tax treatment of depletion related to our oil and gas royalty interests in our filed income tax returns related to prior periods until the fourth quarter of 2021. The material weakness led to the understatement of income tax expense and income taxes payable for the years ended December 31, 2018, 2019, and 2020 and the quarterly periods ended March 31, 2021, June 30, 2021, and September 30, 2021. Management evaluated the effects of the out-of-period adjustment related to prior periods, both quantitatively and qualitatively, and concluded that this adjustment was not material to the Company’s financial position or results of operations for the current or any prior periods. As of December 31, 2021, this material weakness had not been remediated. During the first quarter of 2022, we implemented a remediation plan to update the design and implementation of controls to remediate the above-mentioned deficiency and enhance the Company’s internal control environment. If our remedial measures are insufficient, or if additional material weakness or significant deficiencies in our internal control over financial reporting or in our disclosure controls occur in the future, our future consolidated financial statements or other information filed with the SEC may contain material misstatements and could require a restatement of our consolidated financial statements, cause us to fail to meet our reporting obligations or cause investors to lose confidence in our reported financial information, leading to a decline in the market value of our securities.