Form: 8-K/A

Current report

February 6, 2026

Documents

EXHIBIT 99.2
Condensed Consolidated Financial
Statements 
For the year to date period ended September 30, 2025
Canvas Energy Inc.
Glossary
The terms defined in this section are used throughout this document:
ASU
Accounting Standards Update.
Bbl
One stock tank barrel of 42 U.S. gallons liquid volume used herein in reference to crude
oil, condensate, or natural gas liquids.
BBtu
One billion British thermal units.
Boe
One barrel of crude oil equivalent, determined using the ratio of six thousand cubic feet of
natural gas to one barrel of oil.
Btu
British thermal unit, which is the heat required to raise the temperature of one pound of
water from 58.5 to 59.5 degrees Fahrenheit.
CEI Representative LLC
A Delaware limited liability company, as the Canvas equity holders’ representative under
the Merger Agreement
Completion
The process of treating a drilled well followed by the installation of permanent equipment
for the production of oil or natural gas, or in the case of a dry well, the reporting to the
appropriate authority that the well has been abandoned.
Corsair Merger Sub, Inc.
A new wholly owned subsidiary of Diversified Buyer.
Credit Agreement
Credit Agreement, dated as of June 27, 2023, among Canvas Energy Inc. and Bank of
America, N.A., as administrative agent for the Lenders thereto.
Diversified
Together Diversified Buyer and Diversified Parent,  independent energy companies
engaged in the production, transportation and marketing of primarily natural gas in the
U.S.
Diversified Buyer
Diversified Production, LLC, a wholly-owned subsidiary of Diversified Parent.
Diversified Parent
Diversified Energy Company plc.
Horizontal drilling
A drilling technique used in certain formations where a well is drilled vertically to a
certain depth and then drilled at a right angle within a specified interval.
MBbls
One thousand barrels of crude oil, condensate, or natural gas liquids.
MBoe
One thousand barrels of crude oil equivalent.
MBoe/d
One thousand barrels of crude oil equivalent per day.
Mcf
One thousand cubic feet of natural gas.
Merger
The plan of merger as defined under the Merger Agreement.
Merger Agreement
The plan of merger, dated as of September 8, 2025, entered into by and among Diversified
Production LLC, Diversified Energy Company PLC, Corsair Merger Sub, Inc., Canvas
Energy Inc., and CEI Representative LLC.
MMBoe
One million barrels of crude oil equivalent.
MMBtu
One million British thermal units.
MMcf
One million cubic feet of natural gas.
Natural gas liquids (NGLs)
Those hydrocarbons in natural gas that are separated from the gas as liquids through the
process of absorption, condensation, adsorption or other methods in gas processing or
cycling plants. Natural gas liquids primarily include propane, butane, isobutane, pentane,
hexane and natural gasoline.
Net acres
The sum of fractional working interests owned in gross acres or gross wells.
NYMEX
The New York Mercantile Exchange.
OPEC+
In 2016, The Organization of Petroleum Exporting Countries Plus, also known as OPEC
signed an agreement with 10 other oil-producing countries to create what is now known as
OPEC+.
Glossary
Proved developed reserves
Reserves that can be expected to be recovered (i) through existing wells with existing
equipment and operating methods, or in which the cost of the required equipment is
relatively minor compared to the cost of a new well and (ii) through installed extraction
equipment and infrastructure operational at the time of the reserves estimate if the
extraction is by means not involving a well.
Proved reserves
The quantities of oil and natural gas which, by analysis of geoscience and engineering
data, can be estimated with reasonable certainty to be economically producible—from a
given date forward, from known reservoirs, and under existing economic conditions,
operating methods, and government regulations—prior to the time at which contracts
providing the right to operate expire, unless evidence indicates that renewal is reasonably
certain, regardless of whether deterministic or probabilistic methods are used for
estimation. The project to extract the hydrocarbons must have commenced or the operator
must be reasonably certain that it will commence the project within a reasonable time. For
additional information, see the SEC’s definition in Rule 1-10(a)(22) of Regulation S-X, a
link for which is available at the SEC’s website.
Proved undeveloped reserves
Reserves that are expected to be recovered from new wells on undrilled acreage or from
existing wells where a relatively major expenditure is required for recompletion.
PV-10 value
When used with respect to oil and natural gas reserves, PV-10 value means the estimated
future gross revenue to be generated from the production of proved reserves, net of
estimated production and future development costs, excluding escalations of prices and
costs based upon future conditions, before income taxes, and without giving effect to non-
property-related expenses, discounted to a present value using an annual discount rate of
10%.
Rabbi Trust
A trust created pursuant to the Rabbi Trust Agreement entered into between Canvas
Energy Inc., as employer, and BOKF, NA., as trustee, on June 14th, 2022 to fund future
obligations with respect to dividend equivalents that accrue to certain employee restricted
stock units.
SEC
The Securities Exchange Commission.
Secular Trust
A trust created pursuant to the Secular Trust Agreement entered into between Canvas
Energy Inc., as employer, and BOKF, NA., as trustee, on June 14th, 2022 for which the
funds held are dedicated to future employee compensation.
Seismic
Also known as a seismograph, it is a survey of an area by means of an instrument which
records the vibrations of the earth. By recording the time interval between the source of
the shock wave and the reflected or refracted shock waves from various formations,
geophysicists are able to define the underground configurations.
Undeveloped acreage
Lease acreage on which wells have not been drilled or completed to a point that would
permit the production of economic quantities of oil or natural gas regardless of whether
such acreage contains proved reserves.
Working interest
The right granted to the lessee of a property to explore for and to produce and own oil,
natural gas, or other minerals. The working interest owners bear the exploration,
development, and operating costs on a cash, penalty, or carried basis.
5
Canvas Energy Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited)
FINANCIAL STATEMENTS
(dollars in thousands, except share data)
September 30, 2025
December 31, 2024
Assets
Current assets:
Cash and cash equivalents
$23,607
$27,580
Accounts receivable:
Accounts receivable, gross
29,193
46,830
Allowance for credit losses
(585)
(1,136)
Accounts receivable, net
28,608
45,694
Inventories
6,920
8,158
Prepaid expenses
1,338
2,328
Derivative instruments
3,655
937
Total current assets
64,128
84,697
Property and equipment, net
4,517
4,572
Right of use assets from operating leases
147
463
Oil and natural gas properties, using the full cost method:
Proved
857,330
787,589
Unevaluated (excluded from the amortization base)
49,343
39,612
Accumulated depreciation, depletion, amortization and impairment
(297,155)
(241,170)
Total oil and natural gas properties, net
609,518
586,031
Derivative instruments
567
106
Other assets
7,970
7,026
Total assets
$686,847
$682,895
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable and accrued liabilities
$17,628
39,888
Accrued payroll and benefits payable
5,439
7,673
Accrued interest payable
132
683
Revenue distribution payable
16,641
20,967
Long-term debt and financing leases, current
639
572
Derivative instruments
57
499
Total current liabilities
40,536
70,282
Long-term debt and financing leases, less current maturities
83,509
147,400
Derivative instruments
317
416
Noncurrent operating lease obligations
—
38
Other noncurrent liabilities
5,348
5,360
Asset retirement obligations
13,648
12,949
Deferred income taxes
64,286
43,343
Commitments and contingencies (Note 9)
Stockholders’ equity:
Preferred stock, 100,000 shares authorized, none issued and outstanding
—
—
Common stock, $0.01 par value, 8,000,000 shares authorized; 4,757,709 issued and outstanding at
September 30, 2025 and December 31, 2024.
48
48
Additional paid in capital
178,232
174,807
Retained earnings
300,923
228,252
Total stockholders’ equity
479,203
403,107
Total liabilities and stockholders’ equity
$686,847
$682,895
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
Canvas Energy Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
 
Nine Months Ended September 30,
(in thousands)
2025
2024
Revenues:
Commodity sales
$221,110
$202,833
Costs and expenses:
Lease operating
34,812
30,510
Transportation and processing
6,266
4,034
Production taxes
12,364
11,916
Depreciation, depletion, accretion and amortization
57,578
46,150
General and administrative
15,819
14,043
Total costs and expenses
126,839
106,653
Operating income
94,271
96,180
Non-operating income (expense):
Interest expense
(5,840)
(5,044)
Derivative gains, net
4,749
2,155
Gain on sale of assets
118
102
Other income, net
1,225
586
Net non-operating income (expense)
252
(2,201)
Income before income taxes
94,523
93,979
Income tax expense (benefit) - current
545
(401)
Income tax expense - deferred
20,943
29,140
Net income
$73,035
$65,240
The accompanying notes are an integral part of these condensed consolidated financial statements.
7
Canvas Energy Inc. and Subsidiaries
Condensed Consolidated Statement of Stockholders’ Equity
(Unaudited)
Common stock
(dollars in thousands)
Shares
Outstanding
Amount
Additional
Paid in
Capital
Retained
Earnings
Total
Balance at January 1, 2025
4,757,709
$48
$174,807
$228,252
$403,107
Stock-based compensation
—
—
3,425
—
3,425
Dividends (1)
—
—
—
(364)
(364)
Net income
—
—
—
73,035
73,035
Balance at September 30, 2025
4,757,709
$48
$178,232
$300,923
$479,203
_______________________________
(1) Dividend equivalents on outstanding restricted stock units that were funded in a prior period with respect to which the associated restricted stock
units vested in the current period.
Common stock
(dollars in thousands)
Shares
Outstanding
Amount
Additional
Paid in
Capital
Retained
Earnings
Total
Balance at January 1, 2024
4,757,709
$48
$173,108
$266,191
$439,347
Stock-based compensation
—
—
1,422
—
1,422
Dividends
—
—
—
(125,380)
(125,380)
Net income
—
—
—
65,240
65,240
Balance at September 30, 2024
4,757,709
$48
$174,530
$206,051
$380,629
The accompanying notes are an integral part of these condensed consolidated financial statements.
8
Canvas Energy Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
 
Nine Months Ended September 30,
(in thousands)
2025
2024
Cash flows from operating activities
Net income
$73,035
$65,240
Adjustments to reconcile net income to net cash provided by operating
activities
Depreciation, depletion and amortization
57,578
46,150
Deferred income tax expense
20,943
29,140
Derivative gains, net
(4,749)
(2,155)
Gain on sale of assets
(118)
(102)
Other
793
830
Change in assets and liabilities
Accounts receivable
14,175
3,158
Inventories
1,238
1,688
Prepaid expenses and other assets
45
(1,063)
Accounts payable and accrued liabilities
(4,773)
(2,922)
Revenue distribution payable
(4,325)
(8,505)
Deferred compensation
2,776
1,197
Net cash provided by operating activities
156,618
132,656
Cash flows from investing activities
Expenditures for property, plant, and equipment and oil and natural gas
properties
(108,264)
(117,021)
Proceeds from asset dispositions
12,396
1,228
Proceeds from derivative settlements, net
1,028
2,134
Net cash used in investing activities
(94,840)
(113,659)
Cash flows from financing activities
Proceeds from long-term debt
—
130,000
Repayment of long-term debt
(65,000)
(25,000)
Principal payments under financing lease obligations
(511)
(369)
Payment of debt issuance costs and other financing fees
(240)
(1,460)
Dividends paid
—
(125,062)
Net cash used in financing activities
(65,751)
(21,891)
Net decrease in cash and cash equivalents
(3,973)
(2,894)
Cash and cash equivalents, at beginning of period
27,580
23,779
Cash and cash equivalents, at end of period
$23,607
$20,885
The accompanying notes are an integral part of these condensed consolidated financial statements.
9
Canvas Energy Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
Note 1: Nature of operations, summary of significant accounting policies and other
Nature of operations
Canvas Energy Inc. and its subsidiaries, (collectively, “we”, “our”, “us”, “Canvas”, or the “Company”) are engaged in the
acquisition, exploration, development, production and operation of oil and natural gas properties. Our properties are located in
Oklahoma, where we produce crude oil, natural gas and natural gas liquids. The commodities produced are primarily sold to refineries
and gas processing plants within close proximity to our producing properties.
Merger
On September 8, 2025, Canvas and Diversified entered into the Merger Agreement pursuant to which Diversified would acquire
Canvas for aggregate consideration of $550 million, comprised of both cash and shares of Diversified Parent, subject to customary
closing and post-closing adjustments. The Merger closed on November 24, 2025. Under the Merger Agreement, Canvas survived as a
direct or indirect wholly-owned subsidiary of Diversified Buyer and Diversified Parent. As of the closing date, all outstanding shares
of common stock of Canvas (as well as restricted stock unit awards) converted into the right to receive the merger consideration.
Interim financial statements
The accompanying unaudited condensed consolidated interim financial statements, while prepared in a manner consistent with
GAAP, do not include all of the financial information and disclosures required for complete financial statements under GAAP. These
financial statements and the notes thereto should be read in conjunction with our annual report for the year ended December 31, 2024.
The financial information as of September 30, 2025, and for the nine months ended September 30, 2025 and 2024, is unaudited.
The financial information as of December 31, 2024 has been derived from the audited financial statements contained in our annual
report for the year ended December 31, 2024. In management’s opinion, such information contains all adjustments considered
necessary for a fair presentation of the results of the interim periods. The results of operations for the nine months ended September
30, 2025 are not necessarily indicative of the results of operations that will be realized for the year ended December 31, 2025.
The preparation of financial statements in accordance with GAAP necessitates management to make estimates and assumptions.
These judgments impact the reported values of assets and liabilities, the disclosure of contingent assets and liabilities as of the balance
sheet date, and the reported amounts of revenues and expenses during the reporting period.
Dividends
The Company has not declared or paid any dividends on its common stock in 2025. During 2024, the Company’s board of
directors (the “Board”) declared and paid dividends on the Company’s common stock as follows: (i) $13.59 per share with a record
date of March 21, 2024; (ii) $9.70 per share with a record date of June 10, 2024; and (iii) $1.455 per share with a record date of
August 30, 2024.
Units under the Company’s equity incentive plan, including both issued awards (consisting of restricted stock units) and
unallocated award units, were also entitled to the dividends in the form of dividend equivalents, which the Company has funded (see
“Note 8: Deferred compensation”).
Cash and cash equivalents
We classify as cash equivalents all highly liquid investments with an original maturity of three months or less. Our cash and cash
equivalents are held in diversified bank deposit accounts and money market funds, which may not be fully insured by the Federal
Deposit Insurance Corporation (FDIC). We have not experienced any losses on these accounts and believe our exposure to credit risk
10
Canvas Energy Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
associated with them is insignificant. Included in the balance of cash and cash equivalents are money market securities as of
September 30, 2025 and December 31, 2024 of $1.5 million deposited in the Secular Trust that may only be used for employee
compensation (see “Note 8: Deferred compensation”).
Accounts receivable
Our accounts receivable are carried at gross cost, representing amounts due, less an allowance for expected credit losses. We write
off accounts receivable when they are determined to be uncollectible. When we recover amounts that were previously written off,
those amounts are offset against the allowance and reduce expense in the year of recovery.
The Company has four components constituting its total accounts receivable: (i) joint interest receivables; (ii) commodity sales
receivables; (iii) derivative settlement receivables; and (iv) other receivables. Please see “Note 1: Nature of operations and summary
of significant accounting policies” in our annual report for the year ended December 31, 2024, for a discussion of the nature of these
four receivable components and our accounting policies with respect to them. The table below discloses balances of the four
components and the allowance:
(in thousands)
September 30,
2025
December 31,
2024
Joint interests
$7,240
$15,839
Commodity sales
20,236
29,339
Derivative settlements
417
327
Other
1,300
1,325
Allowance for credit losses
(585)
(1,136)
Total accounts receivable, net
$28,608
$45,694
 
Presentation of credit (gain) loss expense. Our credit (gain) loss expense is included as a component of “General and
administrative expenses” on our condensed consolidated statement of operations and is as follows:
Nine Months Ended September 30,
(in thousands)
2025
2024
Credit (gains) losses on receivables
$(114)
$(24)
Accounts payable and accrued liabilities
Accounts payable and accrued liabilities consists of the following:
(in thousands)
September 30,
2025
December 31,
2024
Trade accounts payable
$3,204
$4,817
Derivative settlement payable
27
137
Asset retirement obligations
903
640
Litigation accrual
4,500
4,500
Capital Accrual
1,187
19,913
LOE Accrual
3,118
3,845
Other accrued liabilities
4,689
6,036
Total accounts payable and accrued liabilities
$17,628
$39,888
11
Canvas Energy Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
Property and equipment, net
Major classes of property and equipment are shown in the following:
(in thousands)
September 30,
2025
December 31,
2024
Machinery and equipment
$1,506
$1,471
Office and computer equipment
3,307
3,136
Automobiles and trucks
2,682
2,475
Building and improvements
367
367
Furniture and fixtures
4
4
Total depreciable property and equipment
7,866
7,453
Accumulated depreciation, amortization and impairment
(4,924)
(4,456)
Total depreciable property and equipment, net
2,942
2,997
Land
1,575
1,575
Total property and equipment, net
$4,517
$4,572
Oil and natural gas properties
Capitalized Costs. We use the full cost method of accounting for oil and natural gas properties and activities. Accordingly, we
capitalize all costs incurred in connection with the exploration for and development of oil and natural gas reserves. Proceeds from the
disposition of oil and natural gas properties are accounted for as a reduction in capitalized costs, with no gain or loss generally
recognized unless such dispositions involve a significant deviation in the depletion rate. We capitalize internal costs that can be
directly identified with exploration and development activities, but do not include any costs related to production, general corporate
overhead or similar activities. Capitalized costs include geological and geophysical work, 3D seismic, delay rentals, and drilling,
completing and equipping oil and natural gas wells, including salaries, benefits, and other internal costs directly attributable to these
activities.
Costs associated with unevaluated oil and natural gas properties, which may include leasehold acquisition costs, capitalized
interest, seismic data costs and development costs for wells which reserve volumes are not classified as proved, are excluded from the
amortizable base until a determination has been made as to the existence of proved reserves. Quarterly, unevaluated leasehold costs,
along with seismic data costs and capitalized interest that were previously allocated to the unevaluated acreage parcels, are transferred
to the amortization base with the costs of drilling the related well upon proving up reserves of a successful well or upon determination
of a dry or uneconomic well. Furthermore, unevaluated oil and natural gas properties are reviewed for impairment if events and
circumstances exist that indicate a possible decline in the recoverability of the carrying amount of such property. The impairment
assessment is conducted at least once annually and whenever there are indicators that impairment may have occurred. In assessing
whether impairment has occurred, we consider factors such as intent to drill; remaining lease term; geological and geophysical
evaluations; drilling results and activity; assignment of proved reserves; and economic viability of development if proved reserves are
assigned. Upon determination of impairment, all or a portion of the associated leasehold costs are transferred to the full cost pool and
become subject to amortization. The processes above are applied to unevaluated oil and natural gas properties on an individual basis or
as a group if properties are individually insignificant. Our future depreciation, depletion and amortization rate would increase or we
may incur ceiling test write-downs if costs are transferred to the amortization base without any associated reserves. The impairment
for unevaluated oil and natural gas properties was not material for the nine months ended September 30, 2025. No impairment was
recorded for the nine months ended September 30, 2024.
12
Canvas Energy Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
The costs of unevaluated oil and natural gas properties consisted of the following:
(in thousands)
September 30,
2025
December 31,
2024
Leasehold acreage
$41,629
$34,755
Capitalized interest
7,714
4,557
Wells and facilities in progress of completion
—
300
Total unevaluated oil and natural gas properties excluded from amortization
$49,343
$39,612
The carrying value of wells in progress of completion will be transferred to the amortization base upon completion in 2025. Subject
to industry conditions and the level of the Company’s activities, the inclusion of most of the leasehold acreage and capitalized interest
costs referenced above in the Company’s amortization calculation typically occurs within three years to five years.
Depreciation, depletion and amortization. Depreciation, depletion and amortization (“DD&A”) of oil and natural gas properties are
provided using the units-of-production method based on estimates of proved oil and natural gas reserves and production. Our cost
basis for depletion includes estimated future development costs to be incurred on proved undeveloped properties. The computation of
DD&A takes into consideration restoration, dismantlement, and abandonment costs, and the anticipated proceeds from salvaging
equipment. Depreciation expense is as follows for the periods indicated:
Nine Months Ended September 30,
(in thousands)
2025
2024
Oil and natural gas properties
$56,780
$45,276
Property and equipment
798
874
Total DD&A
$57,578
$46,150
Ceiling Test. In accordance with the full cost method of accounting, the net capitalized costs of oil and natural gas properties are
not to exceed their related PV-10 value, net of tax considerations, plus the cost of unproved properties not being amortized.
Our estimates of oil and natural gas reserves as of September 30, 2025, and the related PV-10 value, were prepared using an
average price for oil and natural gas on the first day of each month for the prior twelve months as required by the SEC. We did not
record any ceiling test impairments during the nine month periods ended September 30, 2025 and 2024.
Revenue recognition
Midstream processing plants, to which we sell our natural gas and natural gas liquids, deduct transportation and processing costs
from the sales proceeds remitted to us. These deductions are for costs to prepare and transport production from the wellhead to a
specified sales point and processing costs of gas into natural gas liquids. For gas sold at the wellhead, these costs are deducted from
gross sales to arrive at net sales (as disclosed in the table below), and for gas that we take in-kind at the tailgate of the processing plant
(which we sell to various energy marketing entities), these costs are recorded as operating expenses on our condensed consolidated
statement of operations.
13
Canvas Energy Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
The following table displays the revenue disaggregated and reconciles the disaggregated revenue to the revenue reported:
Nine Months Ended September 30,
(in thousands)
2025
2024
Revenues:
Oil
$136,203
$143,547
Natural gas
53,231
30,555
Natural gas liquids
46,885
44,892
Gross commodity sales
236,319
218,994
Transportation and processing deducts
(15,209)
(16,161)
Net commodity sales
$221,110
$202,833
Income taxes
The following table presents the income tax expense (benefit) and the effective income tax rate:
Nine Months Ended September 30,
(in thousands)
2025
2024
Income before income taxes
$94,523
$93,979
Current income tax expense (benefit)
545
(401)
Deferred income tax expense (benefit)
20,943
29,140
Total income tax expense (benefit)
$21,488
$28,739
Effective income tax rate
22.7%
30.6%
The provision for income taxes is based on a current estimate of the annual effective income tax rate adjusted to reflect the impact
of permanent differences and discrete items. Management’s judgment is required in estimating operating income in order to determine
our effective income tax rate.
The Company recorded income tax expense of $21.5 million and $28.7 million for the nine months ended September 30, 2025 and
2024, respectively. The effective tax rate was approximately 22.7% for the nine months ended September 30, 2025 compared to 30.6%
for the nine months ended September 30, 2024.  The difference between the Company's effective tax rate for the nine months ended
September 30, 2024 and the U.S. statutory tax rate of 21% was primarily due to the adjustment of December 31, 2023 deferred
balances related to IRC Section 174 and corresponding attributes. This prior period adjustment was due to a change in tax planning
related to IRC Section 174.
14
Canvas Energy Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
At each reporting period, the Company weighs all available positive and negative evidence to determine whether its deferred tax
assets are more likely than not to be realized. A valuation allowance for deferred tax assets, including net operating losses (“NOLs”),
is recognized when it is more likely than not that some or all of the benefit from the deferred tax assets will not be realized. To assess
that likelihood, the Company uses estimates and judgment regarding future taxable income and considers the tax laws in the
jurisdiction where such taxable income is generated, to determine whether a valuation allowance is required. Such evidence can
include current financial position, results of operations, both actual and forecasted, the reversal of deferred tax liabilities and tax
planning strategies as well as the current and forecasted business economics of the oil and gas industry. Based upon the Company’s
analysis, the Company believes that it is more likely than not that a portion of the Company's federal and state deferred tax assets will
be utilized. As of September 30, 2025 and December 31, 2024, the Company’s valuation allowance was $100.3 million associated
with its federal and state deferred tax assets.
The Company will continue to evaluate both the positive and negative evidence on a quarterly basis in determining the need for a
valuation allowance with respect to the deferred tax assets. Changes in positive and negative evidence, including differences between
estimated and actual results, could result in changes in the valuation of the deferred tax assets that could have a material impact on the
condensed consolidated financial statements. Changes in existing tax laws could also affect actual tax results and the realization of
deferred tax assets over time.
The Internal Revenue Code (“IRC”) provides an annual limitation with respect to the ability of a corporation to utilize its tax
attributes, as well as certain built-in-losses, against future taxable income in the event of a change in ownership. Emergence from
Chapter 11 bankruptcy proceedings resulted in a change in ownership for purposes of the IRC Section 382. As a result, NOLs
occurring prior to our ownership change can only offset taxable income of $0.7 million annually. Losses generated after our
emergence from bankruptcy in October 2020 are not subject to this limitation and can offset additional taxable income generated.
On July 4, 2025, the United States Congress passed budget reconciliation bill H.R. 1 referred to as the One Big Beautiful Bill
(“OBBB”). The OBBB contains several changes to corporate taxation including modifications to capitalization of research and
development expenses, limitations on deductions for interest expense and accelerated fixed asset depreciation. During the nine months
ended September 30, 2025, the Company evaluated the impact of the OBBB on its financial statements, including related income tax
accounting and disclosures. As a result of the OBBB, the Company recorded an increase in depreciation expense of $11.9 million from
the reinstatement of bonus depreciation, fully expensed its $1.6 million of unamortized Internal Revenue Cost (IRC) 174 costs, and
calculated the IRS 163(j) business interest expense limitation based on the updated limit of EBITDA.
Acquisitions and divestitures
In May 2025 we entered into a purchase and sale agreement to divest certain non-operated interests in Oklahoma for approximately
$10.1 million in cash subject to customary closing terms and adjustments. The transaction, which had an effective date of March 1,
2025, closed in May 2025. As these properties did not comprise a material portion of our oil and natural gas reserves, we did not
record any gain or loss on this transaction pursuant to accounting guidance under the full cost method of accounting.
In August 2025, we entered into a purchase and sale agreement to acquire oil and natural gas properties located primarily in
Canadian and Garfield Counties, Oklahoma, for a purchase price of $11.25 million subject to customary closing and post-closing
adjustments. The closing of the transaction occurred contemporaneously with the execution of the purchase and sale agreement. The
Company utilized cash held in escrow for the purpose of a like-kind exchange under Section 1031 of the Internal Revenue Code as a
source of funding for this transaction, thereby deferring the recognition of capital gains on the divested non-operated interests above.
15
Canvas Energy Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
Recently issued accounting standards not yet adopted
In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. ASU
2023-09 intends to provide investors with additional information about an entity’s income taxes by requiring disclosure of items such
as disaggregation of the effective tax rate reconciliation as well as information regarding income taxes paid. This ASU is effective for
annual reporting periods beginning after December 15, 2025 for non-public entities, with early adoption permitted for annual financial
statements that have not yet been issued or made available for issuance. We are still evaluating the impact this ASU will have on our
disclosures and do not expect it to have a material impact on our condensed consolidated financial statements.
Note 2: Supplemental disclosures to the condensed consolidated statements of cash flows
Nine Months Ended September 30,
(in thousands)
2025
2024
Net cash provided by operating activities included:
Cash payments for interest
$8,881
$6,269
Interest capitalized
(3,403)
(2,217)
Cash payments for income taxes
—
900
Non-cash investing activities included:
Asset retirement obligation additions and revisions (1)
630
852
Increase (decrease) in accrued oil and gas capital expenditures
(17,099)
9,716
Increase in right of use asset from financing lease (2)
486
394
Non-cash financing activities included:
Discharge or modification of financing lease obligations (see Note 4)
—
33
Increase (decrease) in accrued debt issuance costs
$(408)
$(1,056)
_______________________________
(1) Excludes asset retirement obligations incurred though oil and natural gas asset acquisitions.
(2)Consists of new financing leases on fleet trucks.
Note 3: Debt
As of the dates indicated, long-term debt and financing leases consisted of the following:
(in thousands)
September 30,
2025
December 31,
2024
Revolving credit facility
$85,000
$150,000
Financing lease obligations
1,281
1,307
Unamortized debt issuance costs
(2,133)
(3,335)
Total debt, net
84,148
147,972
Current portion
(639)
(572)
Total long-term debt, net
$83,509
$147,400
On June 27, 2023, we entered into a new revolving credit agreement (the “Credit Agreement”) with Bank of America, N.A., as
administrative agent, and various lender parties to replace an existing credit agreement with Royal Bank of Canada, as administrative
agent, that was scheduled to mature in February 2024. Our prior agreement with Royal Bank of Canada was terminated on June 27,
2023. As of the closing date of the Merger, the Credit Agreement was terminated and there were no outstanding borrowings.
16
Canvas Energy Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
The Credit Agreement provided for an aggregate maximum principal amount of up to $500.0 million collateralized by our oil and
natural gas properties, and a borrowing base of $250.0 million. The fees associated with establishing the new Credit Agreement were
recorded as debt issuance costs and were amortized over the term of the Credit Agreement as a component of interest expense. The
Credit Agreement had a maturity date of June 27, 2027 and bore interest at a term rate based on either the secured overnight financing
rate established by the Federal Reserve Bank of New York (“SOFR”) or alternate base rate (“ABR”) plus, in each case a rate per
annum set based on commitment utilization (“Applicable Margin”). ABR was equal to the highest of (a) the Bank of America prime
rate, (b) the federal funds effective rate plus 0.50% and (c) SOFR plus 1%, with certain exceptions. The Company was required to pay
a commitment fee of 0.50% per annum on the average daily unused portion of the current aggregate commitments under the Credit
Agreement.
Availability of the revolver under our Credit Agreement was subject to the lower of the borrowing base that was based on, among
other things, the value of our oil and natural gas properties and set by the banks semi-annually on or around May 1 and November 1 of
each year. In addition, the Company or the lenders were able request a borrowing base redetermination once between each scheduled
redetermination. The Company could also add banks once between each scheduled redetermination to increase the borrowing base
without an interim redetermination process. Our borrowing base was reaffirmed at $250.0 million in April 2025 as a part of the spring
redetermination process. The Credit Agreement was terminated prior to the fall 2025 redetermination process. As of September 30,
2025, we had outstanding borrowings of $85.0 million and availability of $165.0 million under the Credit Agreement. As of December
31, 2024, we had outstanding borrowings of $150.0 million under the Credit Agreement, resulting in an unused amount of $100.0
million.
As of September 30, 2025, our outstanding borrowings were accruing interest at the SOFR plus the Applicable Margin, which
resulted in a weighted average interest rate of 7.76% on the amount outstanding. As of December 31, 2024, our outstanding
borrowings were accruing interest at the SOFR plus the Applicable Margin, which resulted in a weighted average interest rate of
8.23% on the amount outstanding.
The Credit Agreement contained covenants and events of default customary for oil and natural gas reserve-based lending facilities
including restrictions on additional debt, guarantees, liens, restricted payments, investments and hedging activity. Additionally, our
Credit Agreement specified events of default, including non-payment, breach of warranty, non-performance of covenants, default on
other indebtedness or swap agreements, restrictions on paying dividends, certain adverse judgments, bankruptcy events and change of
control, among others.
The financial covenants required, as of the last day of each fiscal quarter, that we maintain (i) a Ratio of Total Net Debt to
EBITDAX (as defined in the Credit Agreement) of no greater than 2.75 to 1.00 calculated on a trailing four-quarter basis and (ii) a
Current Ratio (as defined in the Credit Agreement) of no less than 1.00 to 1.00. As of September 30, 2025 and December 31, 2024, we
were in compliance with all financial covenants under the Credit Agreement.
Affirmative hedging covenants under the Credit Agreement required, among other items, that 45 days following the last day of
each fiscal quarter, the Company have in place commodity hedging agreements covering not less than (a) 25% of Projected PDP
Volume (as defined in the Credit Agreement) of oil and natural gas for 24 consecutive months and (b) 25% of the Projected PDP
Revenue (as defined in the Credit Agreement) of natural gas liquids for 12 consecutive months. If our Ratio of Total Debt to
EBITDAX exceeded 1.00 to 1.00 or Commitment Utilization Percentage (as defined in the Credit Agreement) exceeded 50%, then the
foregoing references above to “25%” of the Projected PDP Volume or Projected PDP Revenue, as applicable, are “50%”. As of
September 30, 2025, the Company was not subject to the 50% minimum hedging requirement referenced above. As of December 31,
2024, the Company was subject to the 50% minimum hedging requirement referenced above.
17
Canvas Energy Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
Restricted payments, such as dividends and stock repurchases, were able to be made under the Credit Agreement as long as (i) no
default or event of default existed at the time of such payment or resulted therefrom, (ii) the Commitment Utilization Percentage did
not exceed 75% immediately after giving effect to such payment and (iii) the Ratio of Total Debt to EBITDAX as of the date of such
payment did not exceed 1.00 to 1.00 immediately after giving effect to such payment. The Company was able to make restricted
payments from Distributable Free Cash Flow (as defined in the Credit Agreement) if (a) the above limitations (i) and (ii) were met and
(b) the Ratio of Total Debt to EBITDAX as of the date of such payment did not exceed 1.75 to 1.00 immediately after giving effect to
such payment.
Note 4: Leases
Our outstanding financing leases are for our fleet trucks. The fleet truck financing obligations are for 36 to 48 month terms with the
option for us to purchase the vehicle at any time during the lease term by paying the lessor’s remaining unamortized cost in the
vehicle. In many instances, at the end of the lease term, the lessor’s remaining unamortized cost in the vehicle will be a de minimis
amount and hence ownership of the vehicle can be transferred to us at minimal cost. There are no residual value guarantees or non-
lease components under these leases.
We commenced a lease on office space for our headquarters in February 2021 for a period of three years with annual rent of $0.4
million. The Company extended the lease in August 2023 for an additional two years, which extended the expiration date to January
2026.
Our short-term leases are those with lease terms of 12 months or less and generally consist of wellhead compressors, generators
and drilling rigs with terms ranging from one month to six months. We do not recognize right of use assets or lease liabilities for
leases with durations of 12 months or less. Please see “Note 13: Leases” in our annual report for the year ended December 31, 2024,
for a further discussion on our leases.
Lease assets and liabilities
Our operating and financing lease assets and liabilities recorded on our balance sheet were as follows:
As of September 30, 2025
As of December 31, 2024
(in thousands)
Operating Leases
Financing Leases
Operating Leases
Financing Leases
Right of use asset:
Right of use assets from operating leases
$147
$—
$463
$—
Plant, property and equipment, net
—
1,554
—
1,470
Total lease assets
$147
$1,554
$463
$1,470
Lease liability:
Account payable and accrued liabilities
$150
$—
$433
$—
Long-term debt and financing leases, classified
as current
—
639
—
572
Long-term debt and financing leases, less
current maturities
—
642
—
735
Noncurrent operating lease obligations
—
—
38
—
Total lease liabilities
$150
$1,281
$471
$1,307
18
Canvas Energy Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
Our income, expenses and cash flows related to our leases is as follows:
Nine Months Ended September 30,
(in thousands)
2025
2024
Lease cost
Finance lease cost:
Amortization of right-of-use assets
$454
$381
Interest on lease liabilities
93
77
Operating lease cost
335
337
Short-term lease cost
501
278
Total lease cost
$1,383
$1,073
Other information
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows for finance leases
$(93)
$(77)
Operating cash flows for operating leases
(340)
(330)
Financing cash flows for finance leases
(487)
(369)
Decrease in right-of-use asset from finance lease modification or termination (1)
78
31
Decrease in lease liability from finance lease modification or termination (1)
—
33
Right of use assets obtained in exchange for new financing lease liabilities (2)
$486
$394
________________________________
(1)Amounts reflect early termination of fleet truck leases where the trucks were sold and the proceeds were partially utilized to pay off the
remaining lease liability.
(2)Amounts reflect the addition of new fleet truck leases.
Our rent expense for the nine months ended September 30, 2025 and 2024, was $5.9 million and $5.0 million, respectively.
Note 5: Derivative instruments
Our results of operations, financial condition and capital resources are highly dependent upon the prevailing market prices of, and
demand for, oil, natural gas and natural gas liquids. These commodity prices are subject to wide fluctuations and market uncertainties.
To mitigate a portion of this exposure, we enter into various types of derivative instruments. As of September 30, 2025, our natural
gas, NGL, and oil derivative instruments consisted of the following types of instruments:
•Swaps: We receive a fixed price for the hedged commodity and pay a variable market price to the contract counterparty.
•Collars: Collars contain a fixed floor price (put) and ceiling price (call). If the market price exceeds the call strike price or
falls below the put strike price, we receive the fixed floor or ceiling price, as applicable, and pay the market price. If the
market price is between the put and the call strike prices, no payments are due from either party.
•Basis Swaps: These instruments are arrangements that guarantee a fixed price differential to NYMEX from a specified
delivery point. We receive the fixed price differential and pay the floating market price differential to the counterparty for the
hedged commodity. Basis swaps also include oil swap contracts to fix the differential in pricing between the WTI NYMEX
calendar month average and the physical crude oil delivery month (“oil roll”) pursuant to which we pay the periodic variable
oil roll and receive a weighted-average fixed price differential.
19
Canvas Energy Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
The following tables summarize our derivatives outstanding as of September 30, 2025:
Natural Gas Contracts
Volume
BBtu
Weighted Average
Floor Price per
MMBtu
Weighted Average
Ceiling Price per
MMBtu
Weighted Average
Fixed Price per
MMBtu
2025
Natural gas basis swaps
1,270
$—
$—
$(0.33)
Natural gas collars
2,265
$3.56
$4.90
$—
2026
Natural gas basis swaps
580
$—
$—
$0.40
Natural gas collars
8,115
$3.25
$4.72
$—
2027
Natural gas collars
3,905
$3.36
$4.72
$—
Crude Oil Contracts
Volume
MBbls
Weighted Average
Floor Price per Bbl
Weighted Average
Ceiling Price per Bbl
Weighted Average
Fixed Price per Bbl
2025
Oil swaps
63
$—
$—
$66.90
Oil collars
187
$61.39
$78.55
$—
Oil basis swaps
250
$—
$—
$0.41
2026
Oil collars
632
$59.08
$76.33
$—
Oil basis swaps
334
$—
$—
$0.11
2027
Oil collars
234
$56.06
$71.45
$—
NGL Contracts
Volume
Thousands of Gallons
Weighted Average
Fixed Price per
Gallon
2025
Propane swap
3,100
$0.75
Butane swap
890
$0.90
Natural gasoline swap
1,110
$1.42
2026
Propane swap
4,805
$0.71
Butane swap
1,595
$0.83
Natural gasoline swap
1,860
$1.29
20
Canvas Energy Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
Effect of derivative instruments on the condensed consolidated balance sheets
All derivative financial instruments are recorded on the balance sheet at fair value. See “Note 6: Fair value measurements” for
additional information regarding fair value measurements. The estimated fair values of derivative instruments are provided below. The
carrying amounts of these instruments are equal to the estimated fair values.
As of September 30, 2025
As of December 31, 2024
(in thousands)
Assets
Liabilities
Net Value
Assets
Liabilities
Net Value
Natural gas derivative contracts
$1,626
$(1,555)
$71
$1,315
$(1,835)
$(520)
Crude oil derivative contracts
3,314
(33)
3,281
1,497
(125)
1,372
NGL derivative contracts
577
(81)
496
104
(828)
(724)
Total derivative instruments
5,517
(1,669)
3,848
2,916
(2,788)
128
Less:
Netting adjustments (1)
(1,295)
1,295
—
(1,873)
1,873
—
Derivative instruments - current
3,655
(57)
3,598
937
(499)
438
Derivative instruments - long-term
$567
$(317)
$250
$106
$(416)
$(310)
________________________________
(1)Amounts represent the impact of master netting agreements that allow us to net settle positive and negative positions with the same
counterparty. Positive and negative positions with counterparties are netted only to the extent that they relate to the same current versus
noncurrent classification on the balance sheet.
Effect of derivative instruments on the condensed consolidated statements of operations
We do not apply hedge accounting to any of our derivative instruments. As a result, all gains and losses associated with our
derivative contracts are recognized immediately as “Derivative gains (losses)” in the condensed consolidated statements of operations.
“Derivative gains (losses), net” in the condensed consolidated statements of operations consist of the following:
Nine Months Ended September 30,
2025
2024
(in thousands)
Non-cash
Fair Value
Adjustment
Settlements
(Paid) Received
Total
Non-cash
Fair Value
Adjustment
Settlements
(Paid) Received
Total
Derivative gains (losses):
Crude oil derivatives
$1,909
$231
$2,140
$1,546
$(524)
$1,022
Natural gas derivatives
591
1,035
1,626
(1,580)
3,613
2,033
NGL derivatives
1,221
(238)
983
55
(955)
(900)
Derivative gains (losses)
$3,721
$1,028
$4,749
$21
$2,134
$2,155
Subsequent to September 30, 2025, Canvas terminated all outstanding derivative contracts effective October 14, 2025 and
generated net proceeds of $6.3 million as a result of the terminations.
Note 6: Fair value measurements
We categorize fair value measurements based upon the level of judgment associated with the inputs used to measure the fair value
of the assets and liabilities as follows:
•Level 1 inputs are unadjusted quoted prices in active markets for identical assets or liabilities at the measurement date.
•Level 2 inputs include quoted prices for identical or similar instruments in markets that are not active and inputs other than
quoted prices that are observable for the asset or liability.
21
Canvas Energy Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
•Level 3 inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any, market
activity for the asset or liability.
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the
asset or liability is categorized based on the lowest level input that is significant to the fair value measurement in its entirety. Our
assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and may affect the
placement of assets and liabilities within the levels of the fair value hierarchy.
Recurring fair value measurements
Currently our financial instruments recorded at fair value on a recurring basis consist of commodity derivative contracts (see “Note
5: Derivative instruments”) and assets in our Rabbi Trust and Secular Trust (see “Note: 8 Deferred compensation”). They are
categorized according to the fair value hierarchy described above as either Level 1, Level 2 or Level 3 estimates. Our derivative
contracts classified as Level 2 as of September 30, 2025, and December 31, 2024 consisted of commodity price swaps, including our
oil roll contracts (see “Note 5: Derivative instruments”), which are valued using an income approach. Future cash flows from these
derivatives are estimated based on the difference between the fixed contract price and the underlying published forward market price
and are discounted at a rate that captures our own nonperformance risk for derivative liabilities or that of our counterparties for
derivative assets.
Our derivative contracts classified as Level 3 currently consists of collars and from time to time, may consist of gas basis swaps
and put options. The fair value of these contracts is developed by a third-party pricing service using a proprietary valuation model,
which we believe incorporates the assumptions that market participants would have made at the end of each period. Observable inputs
include contractual terms, published forward pricing curves, and yield curves. Significant unobservable inputs are implied volatilities
and proprietary pricing curves. Significant increases (decreases) in implied volatilities in isolation would result in a significantly
higher (lower) fair value measurement. We review these valuations and the changes in the fair value measurements for reasonableness.
All derivative instruments are recorded at fair value and include a measure of our own nonperformance risk for derivative liabilities or
our counterparty credit risk for derivative assets.
The fair value hierarchy for our derivative assets and liabilities is shown in the following table:
As of September 30, 2025
As of December 31, 2024
(in thousands)
Derivative
Assets
Derivative
Liabilities
Net Assets
(Liabilities)
Derivative
Assets
Derivative
Liabilities
Net Assets
(Liabilities)
Significant other observable inputs (Level 2)
$597
$(113)
$484
$138
$(885)
$(747)
Significant unobservable inputs (Level 3)
4,920
(1,556)
3,364
2,778
(1,903)
875
Netting adjustments (1)
(1,295)
1,295
—
(1,873)
1,873
—
$4,222
$(374)
3,848
$1,043
$(915)
$128
________________________________
(1)Amounts represent the impact of master netting agreements that allow us to net settle positive and negative positions with the same
counterparty. Positive and negative positions with counterparties are netted on the balance sheet only to the extent that they relate to the
same current versus noncurrent classification.
Nonrecurring fair value measurements
Asset retirement obligations. Additions to the asset and liability associated with our asset retirement obligations are measured at
fair value on a nonrecurring basis. Our asset retirement obligations consist of the estimated present value of future costs to plug and
abandon or otherwise dispose of our oil and natural gas properties and related facilities. Significant inputs used in determining such
obligations include estimates of plugging and abandonment costs, inflation rates, discount rates, and well life, all of which are Level 3
22
Canvas Energy Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
inputs according to the fair value hierarchy. The table below discloses the inflation and discount rate assumptions for the period
presented:
Nine Months Ended
September 30, 2025
Twelve Months Ended
December 31, 2024
Inflation rate
2.57%
2.57%
Credit-adjusted risk-free discount rate (low)
7.28%
7.28%
Credit-adjusted risk-free discount rate (high)
8.97%
9.96%
These estimates may change based upon future inflation rates and changes in statutory remediation rules. See “Note 7: Asset
retirement obligations” for additional information regarding our asset retirement obligations.
Fair value of other financial instruments
Our significant financial instruments, other than derivatives, consist primarily of cash and cash equivalents, accounts receivable,
accounts payable, and debt. We believe the carrying values of cash and cash equivalents, accounts receivable, and accounts payable
approximate fair values due to the short-term maturities of these instruments. The carrying value and estimated fair value of our debt
and Rabbi Trust assets were as follows:
 
September 30, 2025
December 31, 2024
(in thousands)
Carrying
Value
Estimated
Fair Value
Carrying
Value
Estimated
Fair Value
Revolving credit facility (1) (2)
$85,000
$85,000
$150,000
$150,000
Rabbi Trust assets (3)
7,056
7,056
6,090
6,090
______________________            ___
(1)The carrying value excludes deductions for debt issuance costs.
(2)The carrying value of our credit facility approximates fair value as the rates are comparable to those at which we could borrow under similar
terms, are variable and incorporate a measure of our credit risk.
(3)The assets of the Rabbi Trust consists of investments in a variety of mutual funds, which are classified as Level 1 equity securities.
Counterparty credit risk
Financial instruments that potentially subject us to concentrations of credit risk consist principally of derivative instruments and
accounts receivable. Derivative instruments are exposed to credit risk from counterparties. Our derivative contracts are executed with
institutions, or affiliates of institutions, all of whom are parties to our credit facility, and we believe the credit risks associated with all
of these institutions are acceptable. We do not require collateral or other security from counterparties to support derivative
instruments. Master agreements are in place with each of our derivative counterparties that provide the right to set off in the event of
default or termination of the contracts under each respective agreement. As a result of the set off provisions, our maximum amount of
loss under derivative transactions due to credit risk is limited to the net amounts due from the counterparties under the derivatives. Our
loss is further limited as any amounts due from a defaulting counterparty that is a lender, or an affiliate of a lender, under our credit
facilities could have been offset against amounts owed to such counterparty lender. As of September 30, 2025, we had five
counterparties to our open derivative contracts of which all were lenders under our Credit Agreement.
The following table summarizes our derivative assets and liabilities which are offset in the condensed consolidated balance sheets
under our master netting agreements. It also reflects the amounts outstanding under our credit facilities that are available to offset our
net derivative assets due from counterparties that are lenders under our credit facilities.
23
Canvas Energy Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
Offset in the Condensed Consolidated Balance Sheets
Gross Amounts not Offset in the Condensed
Consolidated Balance Sheets
(in thousands)
Gross Assets
(Liabilities)
Offsetting Assets
(Liabilities)
Net Assets
(Liabilities)
Derivatives (1)
Amounts
Outstanding
Under Credit
Facilities (2)
Net Amount
September 30, 2025
Derivative assets
$5,517
$(1,295)
$4,222
$(159)
$(4,063)
$—
Derivative liabilities
(1,669)
1,295
(374)
159
4,063
3,848
$3,848
$—
$3,848
$—
$—
$3,848
December 31, 2024
Derivative assets
$2,916
$(1,873)
$1,043
$(316)
$(727)
$—
Derivative liabilities
(2,788)
1,873
(915)
316
727
128
$128
$—
$128
$—
$—
$128
________________________________
(1)Since positive and negative positions with a counterparty are netted on the balance sheet only to the extent that they relate to the same
current versus noncurrent classification, these represent remaining amounts that could have been offset under our master netting agreements.
(2)The amount outstanding under our credit facility that is available to offset our net derivative assets due from counterparties that are lenders
under our credit facility.
We did not post additional collateral under any of these contracts. Payment on our derivative contracts could have been accelerated
in the event of a default under our Credit Agreement. The aggregate fair value of our derivative liabilities subject to acceleration in the
event of default was $1.7 million before offsets at September 30, 2025.
Note 7: Asset retirement obligations
The following table provides a summary of our asset retirement obligation activity:
(in thousands)
Nine Months Ended
September 30, 2025
Asset retirement obligations as of beginning of period
$13,589
Liabilities incurred
605
Liabilities settled or disposed in current period
(463)
Revisions in estimated cash flows
25
Accretion expense
795
Asset retirement obligations as of end of period
$14,551
Current portion included in accounts payable and accrued liabilities
(903)
Asset retirement obligations, long-term
$13,648
See “Note 6: Fair value measurements” for additional information regarding fair value assumptions associated with our asset
retirement obligations.
Note 8: Deferred compensation
Our deferred compensation includes cash awards and equity-based awards which are settled in either cash or in shares. As of the
closing date of the Merger, all outstanding shares of common stock of Canvas, as well as restricted stock units (“RSUs”), converted
into the right to receive the merger consideration.
Cash Awards
    From time to time, we have granted cash awards with long term service-based vesting requirements. We accrue for the cost over
the period that service is required to vest. The cash awards are subject to a graded vesting schedule over four annual installments
24
Canvas Energy Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
where expense is recognized under the accelerated method. Compensation cost for our cash awards is reflected in general and
administrative expenses in the condensed consolidated statements of operations and was not material for the nine months ended 2025
and 2024. Unrecognized cash award compensation cost is approximately $0.1 million as of September 30, 2025. As of September 30,
2025, the outstanding liability accrued for our long term service-based cash awards, based on requisite service provided, was not
material. The unrecognized cash award compensation cost is expected to be recognized over a weighted-average period of 2.0 years.
Equity Awards
In December 2020, we adopted the Canvas Energy Inc. Equity Incentive Plan (the “2020 EIP”), and in conjunction with the
adoption, we issued RSUs to participants. Currently, the 2020 EIP provides for the issuance of equity and/or equity based awards for
up to 385,819 shares of common stock in the aggregate with respect to awards of options, stock appreciation rights, restricted stock,
restricted stock units or stock bonus awards under the plan increased by 16,000 for potential awards to independent directors of the
Board, provided, however, that no more than 385,819 shares of common stock may be delivered in respect of Incentive Stock Options
awarded under the Plan.
RSUs granted generally consists of RSUs subject to either a service-based vesting condition (the “Time Units”) or a combined
performance-based and market-based vesting condition (the “Performance Units”). The Time Units vest in one year or over four equal
annual installments. The Performance Units vest upon achievement of a change in control event (or under the amendment noted
below) that yields a threshold multiple of investment, where different levels of the multiple of investment above the threshold result in
different vesting percentages. Effective January 1, 2025, the Company amended provisions of its Performance Units to (i) provide for
the vesting of Performance Units in the absence of a change in control if, at the seventh anniversary of the grant date, the cumulative
cash distributions plus, as appropriate, the fair market value of the equity retained in the Company exceed performance thresholds and
(ii) avoid a partial cash-out change in control resulting in the forfeiture of Performance Units if cash proceeds to the date of the partial
cash-out change in control plus residual Company equity exceed performance thresholds.
The Time Units are to be settled in cash or shares at the Company’s election on the earlier of (i) the seventh anniversary of the
grant date or (ii) when a change in control occurs. The Performance Units are to be settled in cash or shares at the Company’s election
on the earlier of a change in control or seventh anniversary of the grant date, assuming the multiple of investment threshold is met.
Please see “Note 1: Nature of operations and summary of significant accounting policies” and “Note 10: Deferred compensation” in
our annual report for the year ended December 31, 2024, for a discussion of our policies with respect to these RSUs.
Effective January 1, 2025, the Company’s Performance Units were modified as a result of the amendment described above. To
reflect the change in number of fair value Performance Units expected to vest based on the modified terms of the awards, the affected
Performance Units have been noted as forfeited and re-granted in the table below. A summary of the RSU activity under our 2020 EIP
is presented below:
Restricted Stock Units
Time Units
Performance Units
Weighted
Average
Grant Date
Fair Value
Restricted
Units
Vest Date
Fair Value 
(in thousands)
Weighted
Average
Grant Date
Fair Value
Restricted
Units
($ per unit)
($ per unit)
Unvested and outstanding at January 1, 2025
$115.44
20,868
$71.24
205,646
Granted
$66.21
6,454
$59.73
209,145
Vested
$110.06
(9,356)
$1,160
$—
—
Forfeited
$—
—
$71.24
(202,162)
Unvested and outstanding at September 30, 2025
$92.46
17,966
$59.73
212,629
25
Canvas Energy Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
The Performance Units were re-valued as a result of the amended provisions effective January 1, 2025 with the vested portion
recorded to stock-based compensation within the condensed consolidated statement of stockholders’ equity in the nine months ended
September 30, 2025.
Dividend equivalents
As disclosed in “Note 1: Nature of operations and summary of significant accounting policies” the Company paid cash dividends at
various times during 2024. The Company has not declared or paid any dividends on its common stock in 2025. The 2020 EIP and the
grants made thereunder specify that, in the event cash dividends on common stock are paid, dividend equivalents are to be paid with
respect to outstanding equity grants and unallocated units.
Performance Units — Dividend equivalents are paid to participants immediately in cash and are not subject to any further vesting
requirement. The Company shall initially charge these dividends to retained earnings. However, since these dividend equivalents are
non-forfeitable and the Company's accounts for forfeitures when they occur, the Company shall reclassify to compensation cost, in the
period in which any forfeitures occur, the amount of dividend equivalents previously charged to retained earnings to the extent related
to awards that are forfeited.
Time Units — Dividend equivalents on all outstanding Time Units (vested and unvested) are paid in cash into the Rabbi Trust,
which is an irrevocable trust used to fund the Company's future obligations with respect to dividend equivalents that accrue to the
Time Units. The dividend equivalents are settled at the same time as settlement of the Time Units and only the portion of dividends
equivalents associated with vested units will be paid to the participant. Whenever forfeitures of Time Units occur, the portion of
dividend equivalents within the Rabbi Trust associated with the forfeited units are transferred to the Secular Trust. The assets of the
Rabbi Trust, which are to be invested in a variety of mutual funds and classified as equity securities, will be consolidated by the
Company. These assets are recorded at fair value with changes in fair value recognized in “Other income (loss), net” in our condensed
consolidated statement of operations. The Company shall recognize a deferred compensation obligation for the portion of dividend
equivalents associated with vested Time Units, as each vesting occurs, with a corresponding charge to retained earnings.
Unallocated units — Dividend equivalents equal to the cash dividends that would otherwise have been paid with respect to
unallocated equity award units will be deposited into the Secular Trust. Funds held in the Secular Trust are meant to fund future
employee compensation actions under the 2020 EIP. The assets of the Secular Trust are consolidated by the Company and since the
funds are invested in money market securities, they will be included within cash and cash equivalents on the condensed consolidated
balance sheet with interest income recognized as a component of “Other income (loss), net” in our condensed consolidated statement
of operations.
26
Canvas Energy Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
The table below discloses certain dividend equivalent activity and balances related to our equity grants:
(in thousands)
Nine Months Ended
September 30, 2025
Dividend Equivalents on Performance Units
Amount charged to retained earnings
$—
Dividend Equivalents on Time Units
Deferred compensation obligation related to vested units - charged to retained earnings
$364
Balance of Rabbi Trust assets as of beginning of period (“Other assets”)
6,090
Unrealized gain (loss) on Rabbi Trust assets ( “Other income (loss), net”)
966
Balance of Rabbi Trust assets as of period end (“Other assets”)
$7,056
Dividend Equivalents on Unallocated Units
Balance of Secular Trust assets as of beginning of period (“Cash and cash equivalents”)
$1,536
Interest income on Secular Trust assets ( “Other income (loss), net”)
20
Cash award compensation
(91)
Balance of Secular Trust assets as of period end (“Cash and cash equivalents”)
$1,465
    Stock-based compensation cost
Compensation cost is calculated net of forfeitures. We recognize the impact of forfeitures due to employee terminations in expense
as those forfeitures occur instead of incorporating an estimate of such forfeitures.
Effective January 1, 2025, the Company’s Performance Units were modified as a result of the amendment described above. The
Company categorized this revision as a Type III modification under accounting guidance. The modified award was valued on the
modification date and the Company will recognize compensation cost beginning on the modification date over the requisite service
period of the modified award under the straight line method.
The Time Units either vest in one year and are expensed over that time frame or are subject to a graded vesting schedule over four
annual installments where expense is recognized under the accelerated method. Compensation cost for service-based awards is
recognized and measured based on a fair value estimate of the Company’s equity, adjusted for lack of marketability as the Company is
a private entity.
A portion of stock-based compensation cost associated with employees involved in our acquisition, exploration, and development
activities has been capitalized as part of our oil and natural gas properties. The remaining cost is reflected in general and
administrative expenses in the condensed consolidated statements of operations. Stock-based compensation expense is as follows for
the periods indicated:
Nine Months Ended September 30,
2025
2024
Stock-based compensation cost
$3,425
$1,422
Less: stock-based compensation cost capitalized
(667)
(250)
Stock-based compensation expense
$2,758
$1,172
We did not make any cash payments with respect to settlements of our equity based awards for the nine month periods ended
September 30, 2025. Unrecognized stock-based compensation cost is approximately $10.5 million as of September 30, 2025 and is
expected to be recognized over a weighted-average period of 2.7 years.
27
Canvas Energy Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
Valuation of Awards
Compensation cost is generally recognized and measured according to the grant date fair value of the awards. Effective January 1,
2025, the Company’s Performance Units were modified as a result of the amendment described above. The fair value and associated
assumptions, which are considered to be Level 3 inputs within the fair value hierarchy, for these Performance Units included the
following:
Valuation Date
Valuation assumptions of Performance Units
January 1, 2025
Risk free rate
4.33%
Volatility
70.0%
Estimated fair value per Performance Unit
$59.73
Time till change in control event (years)
5
Discount for lack of marketability (Finnerty model)
30%
Note 9: Commitments and contingencies
We have numerous contractual commitments in the ordinary course of business including debt service requirements, operating
leases, financing leases and purchase obligations.
Surety bonds. Surety bonds totaling $5.7 million were posted on our behalf as of September 30, 2025 and we have posted cash
collateral in respect of the bonds totaling $0.2 million.
Litigation and Claims
The Company is named as a defendant in a lawsuit filed in the U.S. District Court for the Eastern District of Oklahoma (the
“Eastern District Court”), styled Wake Energy, LLC (“Plaintiff”) v Canvas Energy LLC. The case, originally filed in the Western
District of Oklahoma (the “Western District Action”), is a purported class action pursuant to which the Plaintiff seeks to represent a
group of persons who are alleged to be owed statutory interest on late paid revenues; however, the purported class has not been
certified yet. Specifically, the suit asserts claims in excess of $5.0 million for interest alleged to be due under Oklahoma’s Production
Revenue Standards Act. In December 2023, during the pendency of the Western District Action, the Company and Plaintiff reached a
memorandum of understanding with respect to the settlement of the claims, and the full and final terms of a stipulation and agreement
of settlement were formalized in January 2024 (the “Initial Settlement”). In July 2025, the Plaintiff dismissed the Western District
Action, and filed an identical claim in the Eastern District Court.  At that time, the Company and Plaintiff terminated the Initial
Settlement and entered into a new stipulation and agreement of settlement with terms identical to the Initial Settlement. Pursuant to the
settlement, the Company will, among other things, pay $4.5 million into a settlement fund upon the Court’s entry of a final approval
order. The final approval order will be preceded by certification of the settlement class by the Court for the purposes of the settlement
only, preliminary approval by the Court of the settlement, approval by the Court of notices related to the settlement, the provision of
notices to class members, and the opportunity for class members to opt out of the settlement. The timing of these actions is largely
dependent on the Court’s schedule. As of September 30, 2025, the Company has recorded a $4.5 million accrual for the cost of this
case, which is reflected on the condensed consolidated balance sheet as “Accounts payable and accrued liabilities.”
We are involved in various other legal proceedings including, but not limited to, commercial disputes, claims from royalty and
surface owners (including those alleging damages from induced earthquakes), property damage claims, personal injuries, quiet title
actions, personal injury claims, employment claims, and other matters which arise in the ordinary course of business. While the
outcome of these legal proceedings cannot be predicted with certainty, we do not expect any of them individually to have a material
effect on our financial condition, results of operations or cash flows.
28
Canvas Energy Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
Note 10: Subsequent Events
The Company has evaluated subsequent events through February 6, 2026, the date the financial statements were available to be
issued. Other than events disclosed above in accompanying notes to the financial statements, there were no material subsequent events
that required recognition or additional disclosure in these financial statements.