PEDEVCO Corp. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Amounts are in U.S. dollars; financial statement figures are in millions unless noted. The interim statements are unaudited.
Business context and reporting period
PEDEVCO is an oil and gas company operating in the Permian Basin of New Mexico and the Denver-Julesburg Basin of Colorado. At June 30, 2019, it reported approximately 40,200 net Permian acres and 11,700 net D-J Basin acres. Its 2019 development plan prioritizes Permian Basin drilling.
During the first half, the company completed four horizontal wells, acquired additional Permian assets, and sold a small Colorado lease position. Management reported production of 816 Boe per day in Q2, up 325% from 158 Boe per day in Q2 2018.
Financial and operating results
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Oil and gas revenue | $4.070 | $0.898 | $5.638 | $1.542 |
| Operating income (loss) | ($2.466) | ($0.864) | ($4.535) | ($1.862) |
| Net income (loss) | ($2.460) | $66.290 | ($5.455) | $62.056 |
| Operating cash flow | Not separately presented | Not separately presented | $2.085 | ($0.276) |
| Capital spending, cash-flow basis | Not separately presented | Not separately presented | $24.197 used | $0.000 |
- Q2 oil sales revenue was $4.037 million; natural gas and NGL sales contributed $0.026 million and $0.007 million. Six-month oil revenue was $5.490 million.
- Q2 oil production volume rose 459% year over year, while the average oil price fell 13% to $56.50 per barrel. Six-month average oil price fell 13% to $54.00 per barrel.
- Q2 operating expenses were $6.536 million, including $2.095 million of lease operating costs, $1.644 million of SG&A, and $2.784 million of depreciation, depletion, amortization and accretion. The filing reports an operating loss, not a positive operating margin.
- At June 30, cash was $13.370 million; restricted cash was $3.297 million, classified in other assets. Current assets were $14.813 million and current liabilities $5.124 million, yielding reported working capital of $9.7 million. Total assets were $92.929 million.
- Notes payable were zero at June 30, compared with $38.294 million net at December 31, 2018. Long-term asset retirement obligations were $2.516 million. Six-month financing cash flow was $33.000 million, including $15.000 million from a related-party note subsequently converted to equity and $18.000 million from stock sales.
Changes versus the prior comparable period
- Revenue increased 353% in Q2 and 266% for the first half, primarily from higher oil volumes following well completions and the 2018 Permian acquisition; lower oil prices partly offset volume gains.
- Net results swung from 2018 profits to 2019 losses. The prior-year periods included a one-time $70.309 million gain on debt restructuring. Excluding that item, management says the net loss improved by $1.6 million in Q2 and $2.8 million for the first half, helped by lower interest expense and higher revenue, partly offset by higher operating costs.
- First-half operating cash flow improved to $2.085 million from a $0.276 million use. Investing cash use increased to $24.197 million, mainly for drilling, development and property acquisitions.
- Debt conversions and stock sales substantially increased shares outstanding: 53.827 million at June 30, compared with 15.808 million at December 31, 2018. Debt principal and accrued interest converted to shares included approximately $55.1 million in the first half.
Outlook, management commentary, risks and unusual items
- Management’s 2019 development plan contemplated approximately $50 million of capital, of which it said approximately $40 million had been raised. Phase Two began in July and planned four new horizontal San Andres wells, one saltwater disposal well, completion of one drilled but uncompleted well, and first production from a Phase One well held back by disposal constraints.
- Management anticipated approximately $1 million of 2019 spending to participate in non-operated D-J Basin drilling. It expected sufficient cash for the foreseeable future, relying on operating cash flow, cash on hand, potential SK Energy funding, or credit facilities. SK Energy is under no obligation to provide additional funding; the company may also pursue asset sales, farm-outs or further debt or equity. If markets do not permit financing, drilling and spending could extend into 2020.
- Management expects commodity prices to remain volatile for the rest of 2019. Results depend on prices, production, drilling success and costs, and the timing of bringing discoveries into production.
- Colorado Senate Bill 19-181 and other potential environmental and oil-and-gas regulations could increase costs, constrain or delay development, and adversely affect cash flows and results. The filing also highlights potential dilution from future securities issuances and dependence on financing.
- A purchaser of Colorado leases sold in March had not yet delivered the required replacement acreage; the agreement provides for repayment of up to $0.2 million, adjusted for acreage delivered. The filing reports no material legal proceedings.
- There was no material change in the company’s previously disclosed risk factors other than the environmental-regulation and dilution risks discussed in this report. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether Phase Two drilling, completions, disposal capacity and production targets proceed as planned, and at what cost.
- Whether operating cash flow and available financing can support the stated capital plan without further material dilution; SK Energy’s funding is discretionary, and it held 81.0% of common stock after its May investment.
- Actual production, realized prices, lease operating costs and unit economics as the production base expands.
- Resolution of the replacement-acreage obligation from the Colorado sale and the status and use of $3.297 million of restricted cash pledged for surety bonds.
- Impact and implementation of Colorado regulatory changes on the company’s D-J Basin acreage and operations.
- Reconciliation of reported cash and restricted cash, working capital, and share counts across the filing: the balance sheet reports $13.370 million cash and $3.297 million restricted cash at June 30, while cash and restricted cash totaled $16.667 million in the cash-flow statement; 53.827 million shares were outstanding at June 30 and 53.877 million at August 9.