PEDEVCO CORP. — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. This is an annual report, not a standalone fourth-quarter report. The financial statements were audited; the auditor gave an unqualified opinion on the financial statements but did not opine on internal-control effectiveness.
Business context and reporting period
PEDEVCO is a U.S. oil and gas company focused on acquiring and developing legacy properties using modern drilling and completion methods. During 2018 it shifted strategy toward conventional assets, principally the San Andres formation in New Mexico’s Permian Basin and the D-J Basin in Colorado. At year-end it reported approximately 23,441 net Permian acres and 11,948 net D-J Basin acres.
The major change was the September 2018 acquisition of the Permian Basin properties for approximately $21.3 million in total consideration. The company also acquired four operated D-J Basin wells and approximately 2,340 net acres in August 2018. Because the Permian acquisition closed late in the year, 2018 results include only a partial year of its production.
Financial and operating metrics
| Metric | 2018 | 2017 |
|---|---|---|
| Oil and gas revenue | $4.523 million | $3.015 million |
| Operating loss | $9.004 million | $23.572 million |
| Net income (loss) | $53.607 million | $(36.370) million |
| Basic / diluted EPS | $4.80 / $4.74 | $(6.22) / $(6.22), as reported in the statements of operations |
| Cash from operations | $(1.494) million | $(0.236) million |
| Cash used in investing | $(23.118) million | $0 |
| Cash from financing | $29.474 million | $0.494 million |
| Cash and restricted cash at year-end | $5.779 million | $0.917 million |
| Total assets / total liabilities | $67.525 million / $50.553 million | $36.401 million / $73.541 million |
- Revenue rose 50%, primarily from higher oil volumes and prices. Oil sales volumes increased 35% to 70,395 barrels; total production rose 15% to 92,985 Boe, or 255 Boe per day. Average oil price was $59.00 per barrel versus $47.15; gas and NGL prices declined.
- Lease operating costs increased 109% to $2.821 million and DD&A increased 74% to $6.519 million, mainly reflecting acquired properties, additional wells and production. General and administrative expense rose 64% to $4.140 million.
- Production costs were about 62% of revenue, before DD&A, corporate overhead, taxes and other items. Operating results remained loss-making before the gain on debt restructuring.
- Net income was driven by a one-time $70.309 million debt-restructuring gain. Without that gain, the company reported that it would have had a $16.7 million net loss. The 2017 comparison included a $18.950 million oil and gas impairment; no such impairment was recorded in 2018.
- At December 31, 2018, current assets of $6.825 million were below current liabilities of $8.850 million, a $2.025 million working-capital deficit. Cash was $3.463 million, including $2.316 million of restricted cash for New Mexico plugging and abandonment bonds.
- Year-end notes payable totaled $38.294 million, including $30.2 million in related-party convertible notes and $7.855 million under the SK Energy note, net of discount. Subsequent conversions eliminated the debt by March 1, 2019, as described below.
- Proved reserves increased to 12.436 million Boe from 3.674 million Boe, principally due to the acquisition. More than 96% of year-end proved reserves were proved undeveloped. The filing gives a pre-tax PV-10 of approximately $181.3 million; the standardized after-tax discounted measure was $130.818 million.
Material changes versus the prior comparable period
- In June 2018, PEDEVCO restructured legacy debt: approximately $78.3 million of debt and accrued interest was retired for about $7.8 million in cash plus warrants, while the company incurred a $7.7 million SK Energy note. The transaction materially reduced liabilities and generated the reported gain.
- Operations and reserves expanded through the Permian acquisition. Reserves rose sharply, but production growth was more modest because the acquisition contributed only part-year production.
- Operating cash use increased to $1.494 million from $0.236 million, while investment spending reached $23.118 million, mainly for acquisitions and development. The company relied on financing to fund this spending.
- In February and March 2019, SK Energy and another noteholder converted outstanding notes and accrued interest into common shares. The filing reports that the conversions covered $31.3 million of principal and $1.463 million of accrued interest; after the transactions PEDEVCO reported no debt and 45,288,828 shares outstanding as of the filing date.
Outlook, management commentary, risks and unusual items
- Development plan: The 2019 budget was approximately $52.1 million, including $39.5 million for Permian development, $7.6 million for D-J development and $5.0 million for facilities. The filing said approximately $22 million had been raised to date; the balance depended partly on operating cash flow and additional funding. Four initial Permian horizontal wells were drilled in December 2018 and January 2019; a further eight-well phase was contingent on results and available capital. No specific production or earnings guidance is provided.
- Liquidity and funding: Management anticipated sufficient resources for the foreseeable future from operating cash flow, cash on hand and potential SK Energy support, but SK Energy had no obligation to provide additional funds. The filing estimated $65 million of liquidity needs for the planned drilling program and operations. If financing is unavailable, PEDEVCO may delay or reduce drilling; management warned this could also lead to impairment of proved undeveloped properties and impair its ability to meet obligations.
- Concentration and ownership: One customer represented 47% of 2018 oil and gas revenue. SK Energy, controlled by CEO Simon Kukes, provided substantial related-party financing and beneficially owned approximately 81.2% of common stock as of March 27, 2019; Kukes reported beneficial ownership of 82.4%. The post-year-end conversions materially increased share count and concentrated control.
- Reserves and execution: The large PUD share requires substantial development capital. Approximately 3.3 million Boe of prior D-J PUD estimates were transferred to probable undeveloped reserves because development had not occurred within five years. Reserve realization depends on funding, drilling results, commodity prices and timely development.
- Controls: Management concluded disclosure controls and internal control over financial reporting were not effective as of December 31, 2018. The auditor was not required to, and did not, attest to internal-control effectiveness.
- Other risks: Key exposures include oil-price volatility, concentrated operations in two basins, water handling and disposal requirements, environmental and hydraulic-fracturing regulation, transportation constraints, lease expirations, acquisition integration, and reliance on third-party operators for non-operated assets. The company said it had no material legal proceedings pending.
- Unusual reporting detail: The filing’s EPS disclosures are inconsistent: the statements of operations report 2017 EPS of $(6.22), while a later EPS note contains different 2017 figures and also shows 2018 net income of $59.607 million rather than $53.607 million. The filing text does not provide a clear reconciliation of these discrepancies.
Important facts investors should verify
- Reconcile the conflicting EPS and net-income amounts in the filing against the audited statements and XBRL data.
- Confirm the economics, production performance and capital requirements of the first horizontal Permian wells, and the schedule and funding for the remaining 2019 plan.
- Review the reserve report, especially the PUD assumptions, development schedule, and the transfer of D-J reserves to probable status.
- Assess liquidity after the reported debt conversions, including unrestricted cash, restricted cash, working-capital needs and the extent of any further committed funding. SK Energy support was not contractually committed.
- Evaluate dilution and governance effects of the conversions: the filing reports 45,288,828 shares outstanding and approximately 81.2% held by SK Energy as of March 27, 2019.
- Track remediation of ineffective disclosure and financial-reporting controls, and monitor customer concentration, commodity-price exposure and regulatory or water-disposal constraints.