PHXE-P

Phoenix Energy One, LLC - 2025 Annual Report (10-K) Summary

Business Context and Reporting Period

Company: Phoenix Energy One, LLC (Phoenix Energy)
Reporting Period: Fiscal year ended December 31, 2025
Industry: Oil and Gas Exploration and Production (E&P)
Strategy: Three-pronged approach involving (i) direct drilling operations via subsidiary PhoenixOp, (ii) acquisition of royalty assets, and (iii) acquisition of non-operated working interest assets. Operations are concentrated in the Williston, Powder River, Denver-Julesburg, Permian, and Uinta Basins.
Key Milestone: In September 2025, the Company completed an offering of Series A Cumulative Redeemable Preferred Shares (PHXE.P) on the NYSE American.

Key Financial Metrics (Year Ended Dec 31, 2025)

Material Changes vs. Prior Period

• Revenue Growth: Revenue increased 144.4% year-over-year, driven primarily by a $311.8 million increase in product sales from direct drilling operations (PhoenixOp) and $113.4 million in new purchased crude oil sales. This was partially offset by an 18.3% decrease in mineral and royalty revenues due to lower realized prices and volumes.
• Profitability: The Company returned to profitability with $66.1 million in net income, compared to a net loss of $24.8 million in 2024. This turnaround was supported by a $52.8 million gain on derivatives and significant revenue growth.
• Debt Expansion: Total indebtedness increased by approximately $542 million to $1.53 billion to fund aggressive asset acquisitions and the expansion of direct drilling operations. This includes significant borrowings under the Fortress Credit Agreement and various Reg D/Reg A bond offerings.
• Reserve Growth: Proved reserves increased by 78% to 113.6 million Boe, primarily due to extensions and discoveries of 71.1 million Boe.
• Operational Scale: Direct drilling operations expanded significantly, with PhoenixOp drilling 97 gross wells in 2025. Total employee count grew from 135 in 2024 to 206 in 2025.

Guidance, Outlook, and Risks

2026 Outlook:

• Revenue: Estimated between $1.19 billion and $1.49 billion.
• Net Income: Estimated between a loss of $40 million and income of $65 million (highly sensitive to derivative mark-to-market adjustments).
• EBITDA: Estimated between $475 million and $605 million.
• Production: Targeting 15.5 to 16.8 million Boe (42,352 to 46,128 Boe/d).
• Capital Needs: The Company estimates a need to raise approximately $459.6 million in capital in 2026 to fund development plans, as operating cash flows alone are insufficient for the planned capital expenditure program.

Management Commentary: Management emphasizes a shift toward direct drilling to capture more upside and control cash flows. However, they note that capital expenditures will exceed operating cash flow in certain periods, necessitating continued access to capital markets. The Company recently amended its Fortress Credit Agreement in February 2026 to secure additional liquidity and received waivers for certain financial covenants.

Key Risks and Contingencies:

• Liquidity and Debt Service: High leverage ($1.53 billion debt) creates significant risk. The Company has historically failed to meet certain financial covenants under the Fortress Credit Agreement, requiring waivers. Failure to generate sufficient cash flow could lead to default.
• Commodity Price Volatility: Operations are highly sensitive to oil and gas prices. The 2026 guidance assumes oil prices of $63.90/Bbl; sustained lower prices could materially impact cash flows and require plan adjustments.
• Internal Control Weaknesses: The Company identified material weaknesses in internal controls over financial reporting, including inadequate segregation of duties and ineffective IT general controls. These were remediated in part by implementing a new accounting system in January 2026.
• Restatements: The Company restated prior financial statements (2022-2024) due to errors in accounting for debt issuance costs and capitalized interest.
• Regulatory and Environmental: Subject to evolving regulations regarding methane emissions, hydraulic fracturing, and climate change, which could increase compliance costs or restrict operations.

Investor Verification Checklist

• Debt Covenant Compliance: Verify the status of waivers obtained for the Fortress Credit Agreement covenants (leverage, current ratio, asset coverage) and the sustainability of these arrangements.
• Capital Raise Execution: Monitor the Company's ability to raise the projected $459.6 million in 2026 capital through debt or equity markets to fund the development of proved undeveloped reserves.
• Derivative Impact on Earnings: Scrutinize the volatility of net income caused by mark-to-market adjustments on commodity derivatives, which can obscure underlying operational performance.
• Internal Control Remediation: Assess the effectiveness of the new accounting system and remediation efforts regarding the identified material weaknesses in internal controls.
• Reserve Accuracy: Note that reserve estimates are based on internal engineering and have not been verified by an independent third-party report, introducing estimation risk.
• Concentration Risk: Review the concentration of revenue and accounts receivable among a limited number of purchasers and third-party E&P operators.