PEDEVCO Corp. — FY2022 Form 10-K
Business and period: Annual report for the fiscal year ended December 31, 2022, compared with FY2021. PEDEVCO develops and produces oil, natural gas and NGLs in the Permian Basin of New Mexico and the Denver-Julesburg (D-J) Basin of Colorado.
Key financial and operating results
| Metric | FY2022 | FY2021 |
|---|---|---|
| Oil and gas revenue | $30.0 million | $15.9 million |
| Net income (loss) | $2.8 million | $(1.3) million |
| Operating income (loss) | $2.6 million | $(1.9) million |
| Net cash from operating activities | $16.0 million | $6.0 million |
| Net cash used in investing activities | $(12.3) million | $(2.8) million |
| Net cash from financing activities | $0.04 million | $14.7 million |
| Cash at year-end | $29.4 million | $25.9 million |
| Current assets / current liabilities | $32.1 million / $17.0 million | $28.0 million / $5.2 million |
- Revenue increased 89%, reflecting both higher production volumes and higher realized prices. Total production rose 37% to 999 Boe/d. Oil production increased 34%; natural gas 28%; and NGLs 269% from a lower base.
- Average realized prices rose 40% for oil to $90.86/Bbl, 36% for natural gas to $6.41/Mcf, and 13% for NGLs to $40.87/Bbl.
- Operating margin was approximately 8.8% and net margin approximately 9.5%, calculated from reported GAAP operating income and net income divided by revenue.
- Lease operating expense rose 75% to $10.4 million; DD&A and accretion rose 51% to $11.2 million. Cash G&A was unchanged at $3.8 million; total G&A, including share-based compensation, was $5.9 million.
- Operating cash flow increased to $16.0 million. Cash paid for drilling and completion was $12.3 million, while FY2022 capital costs incurred were $23.1 million; the cash-flow statement reports a $10.9 million increase in accrued oil and gas development costs.
- Working capital was $15.1 million, down from $22.8 million, largely reflecting accrued D-J Basin drilling and completion costs. The company reported no outstanding debt at year-end. Asset retirement obligations were $3.2 million, including $0.5 million current.
- Proved reserves increased to 16.1 MMBoe from 14.7 MMBoe. Reported PV-10 was approximately $374.5 million, including $268.7 million of proved undeveloped reserves; the GAAP standardized measure was $274.9 million. The filing attributes much of the increase in reserve value to higher commodity-price assumptions.
Material changes versus FY2021
- PEDEVCO returned to profitability from a $1.3 million net loss. Revenue rose $14.2 million, supported by a $7.9 million favorable volume variance and a $6.3 million favorable price variance.
- Production growth was driven by two operated Permian wells brought online in Q2 and production from non-operated D-J wells beginning in Q1.
- Operating expenses increased $7.9 million overall. FY2022 had no property-sale gain or PPP-loan forgiveness gain, both of which contributed to FY2021 results; FY2021 also included a $1.8 million gain on sale and $0.4 million PPP-loan forgiveness gain.
- FY2022 capital costs included Permian production-enhancement work and D-J Basin acquisitions and development, including participation in six third-party-operated wells. The company also acquired D-J acreage and mineral interests.
Outlook, risks and unusual items
- Management estimated FY2023 net capital expenditures of $25 million to $35 million, including $23 million to $33 million for drilling and completion. The program is subject to commodity prices, liquidity, permits, contractor availability, partner decisions and capital-allocation changes.
- Management expected to have sufficient funds for the next 12 months, citing operating cash flow and cash on hand, but also identifying potential financing sources. CEO Simon Kukes is under no obligation to provide funding; the company also cited debt or equity financings, an ATM offering, credit facilities, asset sales and farm-outs.
- Management expects to spend $170 million to $190 million developing proved undeveloped reserves through 2027. It expects to fund this through operating cash flow and cash on hand, supplemented as needed by financing or asset transactions.
- New Mexico compliance orders cover approximately 333 legacy vertical wells that must be restored to production or plugged and abandoned by specified deadlines. The amended order for 49 EOR wells sets a December 31, 2024 deadline and requires $50,000 in escrow; failure to meet deadlines could result in forfeiture and penalties.
- Two customers represented 63% and 20% of FY2022 oil and gas revenue, respectively. PEDEVCO stated that alternative buyers are available, but customer concentration remains a risk.
- Inflation and supply-chain issues increased estimated per-well costs by approximately 25%–30% in the Permian and 10%–20% in the D-J Basin. Management said costs appeared relatively flat into early 2023, but warned that cost pressure could persist.
- Other significant exposures include volatile commodity prices, limited geographic concentration, water handling and disposal, permitting delays, environmental and emissions regulation, and potential development and funding needs. The company stated it does not expect the federal methane fee under the Inflation Reduction Act to have a material effect.
- FY2022 included approximately $0.7 million of one-time Permian water-handling work and $0.5 million of environmental cleanup and reclamation costs. DD&A also rose partly because of a higher Permian depletion rate; ARO accretion increased as the plugging program was accelerated.
- The independent auditor issued an unqualified opinion on the financial statements. Management concluded disclosure controls and internal control over financial reporting were effective; the auditor did not provide an internal-control attestation because PEDEVCO is a smaller reporting company. The auditor identified proved reserves’ effect on oil and gas property accounting as a critical audit matter.
Important facts for investors to verify
- Whether operating cash flow and available liquidity can support the $25 million–$35 million FY2023 capital program, given the gap between capital costs incurred and cash paid in FY2022.
- Progress and cash requirements for the New Mexico well-restoration and plugging obligations, including all deadlines, escrow terms and any additional compliance orders.
- The development schedule, financing plan and economic assumptions behind the large proved undeveloped reserve base and the projected $170 million–$190 million development spend.
- Whether production growth and realized prices can be sustained, and how oil-price volatility, basis differentials and customer concentration affect revenue; the filing notes the company may not hedge these exposures.
- Potential dilution and governance implications: CEO Simon Kukes beneficially owned approximately 66.6% of voting common stock as of March 29, 2023, and the company had an ATM offering and equity awards outstanding.