18. RISK MANAGEMENT AND FINANCIAL INSTRUMENTS

The future results of the Company's crude oil and natural gas operations will be affected by market prices of crude oil and natural gas which is affected by numerous factors beyond the control of the Company, including weather, imports, marketing of competitive fuels, proximity and capacity of crude oil and natural gas pipelines and other transportation facilities, any oversupply or undersupply of crude oil, natural gas and natural gas liquid products, economic disruptions, the regulatory environment, the economic environment, and other regional and political events, none of which can be predicted with certainty.

The Company's operations are also subject to concentration risk due to the fact that all of its oil and natural gas revenue is sourced from its operations in the United States. Further, three of the Company’s customers reflect 91.25% of its oil and gas revenues, with each of these customers representing 49.8%, 31.4%, and 10.0% of the revenues, which represents further concentration risk in specific customers.

Credit Risks

Financial instruments which potentially subject the Company to credit risk consist principally of cash balances, accounts receivable, and derivatives.

The Company maintains cash balances at financial institutions, which may at times exceed the federally insured limits. The Company has not experienced any significant losses from such investments, and the Company believes the credit quality of the financial institutions to be high.

The Company's accounts receivables are subject to normal industry credit risk. The accounts receivables are mainly due from participants in the oil and gas industry, who may be affected by periodic downturns in the economy, in general, or in their specific segment of the crude oil or natural gas industry. The Company believes that its level of credit-related losses due to such economic fluctuations have been immaterial.

The Company's derivative contracts are with established financial institutions with investment grade credit ratings which are believed to have minimal credit risk. As such, the Company is exposed to credit risk to the extent of nonperformance by the counterparties in the derivative contracts; however, the Company does not anticipate such nonperformance.

Commodity Price Risk and Interest Rate Risk

The Company utilizes various commodity price derivative instruments to reduce commodity price risk being the risk that future cash flows will fluctuate as a result of changes in commodity prices. In addition, from time to time the Company utilizes interest rate swaps to mitigate exposure to changes in interest rates on the Company's variable rate indebtedness.

All derivative instruments are recorded in the Company's consolidated balance sheet as either assets or liabilities measured at their fair value (Note 2). The Company has not designated any derivative instruments as hedges for accounting purposes and does not enter into such instruments for speculative trading purposes. The changes in the fair value are recognized in the Company's consolidated statements of operations and comprehensive income (loss).

The location and amounts of the Company's realized and unrealized gains and losses on derivative contracts in the Company's consolidated statements of operations and comprehensive income (loss) are as follows:

Year ended December 31,	Statements of Operations Location		2022			2021
Commodity derivative contracts
Unrealized gain (loss)	Gain / (loss) on derivative instruments	$	26,246,351		$	(15,903,217	)
Realized gain (loss)	Gain / (loss) on derivative instruments		(36,269,846	)		(17,622,236	)
Total gain (loss), net		$	(10,023,495	)	$	(33,525,453	)

Interest rate derivative contracts
Unrealized gain	Finance and interest expense	$	-		$	43,421
Realized gain	Finance and interest expense		623,579			-
Total gain (loss), net		$	623,579		$	43,421

Gains and losses on derivative instruments are included in the operating section of the consolidated statements of cash flows.

The open commodity derivative positions as at December 31, 2022, are as follows, for the settlement periods presented:

			2023			2024			2025		Total Volumes
Crude Oil:
	WTI NYMEX - Swaps:
	Volumes (Bbl)		542,548			286,150			129,642		958,340
	Weighted Average Price ($/Bbl)	$	69.79		$	65.97		$	58.98
Natural Gas and Natural Gas Liquids:
	Natural Gas NYMEX - Swaps:
	Volumes (MMBtu)		5,306,902			2,606,643			1,331,415		9,244,960
	Weighted Average Price ($/MMBtu)	$	5.43		$	5.43		$	5.33
	Natural Gas NYMEX vs. Houston Ship Channel - Basis Swaps:
	Volumes (MMBtu)		465,214			325,088			177,009		967,311
	Weighted Average Price ($/MMBtu)	$	(0.07	)	$	(0.07	)	$	(0.07	)
	Mont Belvieu Natural Gas - Swaps:
	Volumes (Gal)		1,560,711			857,027			326,472		2,744,210
	Weighted Average Price ($/Gal)	$	1.30		$	1.57		$	1.65
	Mont Belvieu Ethane - Swaps:
	Volumes (Gal)		5,818,913			3,195,317			1,217,209		10,231,439
	Weighted Average Price ($/Gal)	$	0.30		$	0.34		$	0.36
	Mont Belvieu Propane - Swaps:
	Volumes (Gal)		3,466,691			1,903,650			725,170		6,095,511
	Weighted Average Price ($/Gal)	$	0.80		$	0.92		$	0.95
	Mont Belvieu Isobutane - Swaps:
	Volumes		673,486			369,828			140,880		1,184,194
	Weighted Average Price ($/Gal)	$	0.89		$	1.06		$	1.10
	Mont Belvieu N. Butane - Swaps
	Volumes		1,426,461			783,308			298,388		2,508,157
	Weighted Average Price ($/Gal)	$	0.87		$	1.04		$	1.08

The Company uses interest rate swaps to effectively convert a portion of its variable rate indebtedness to fixed rate indebtedness. As of December 31, 2022, the Company had interest rate swaps with a total notional amount of $nil (December 31, 2021 - $25,237,409).

The asset and liability fair values of the Company's derivative assets (liabilities), presented on the consolidated balance sheets is as follows:

As at December 31,		2022		2021
Derivative Assets:
Current assets	$	2,019,600	$	-
Noncurrent assets		1,057,479		-
Total Derivative Assets:	$	3,077,079	$	-
Derivative Liabilities:
Current liabilities	$	-	$	6,479,508
Noncurrent liabilities		-		13,901,672
Total Derivative Liabilities:	$	-	$	20,381,180

Liquidity Risk

Liquidity risk is the risk that the Company will encounter difficulty in meeting obligations associated with the financial liabilities as they become due.

At December 31, 2022 the Company had negative working capital of $162,980,101. The Company expects to repay its financial liabilities in the normal course of operations and to fund future operational and capital requirements through operating cash flows and through issuance of debt and/or equity.

The Company may need to conduct asset sales and/or issuances of debt and/or equity if liquidity risk increases in a given period. The Company believes it has sufficient funds to meet foreseeable obligations by actively monitoring its credit facilities through use of the loans, asset sales, and coordinating payment and revenue cycles.

The Company is required to meet certain financial covenants under its debt facilities (Note 7). As at December 31, 2022, the Company was not in breach of financial covenants.