PEDEVCO CORP. — Q1 2016 Form 10-Q
Business context and reporting period
Unaudited results cover the three months ended March 31, 2016, compared with Q1 2015. PEDEVCO is an oil and gas exploration and production company focused principally on its Denver-Julesburg Basin properties in Colorado. At quarter-end, it reported approximately 11,861 net acres and interests in 61 gross wells (17.4 net).
Financial and operating performance
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Oil and gas revenue | $0.582 million | $1.488 million |
| Operating loss | $2.492 million | $3.271 million |
| Net loss | $6.578 million | $4.182 million |
| Net loss per share, basic and diluted | $0.14 | $0.12 |
| Cash used in operating activities | $0.406 million | $3.884 million |
| Production | 25,841 BOE | 48,976 BOE |
Revenue fell about 61%, while production declined about 47%. Management attributed the revenue decrease to lower oil prices, natural production decline, periodic well shut-ins, and unusually high Loomis-well production in the 2015 comparison period. Operating expenses were $3.074 million versus $5.509 million; lower SG&A and no repeat of the prior-year impairment helped reduce the operating loss. Net loss worsened mainly because Q1 2015 included a $2.192 million gain on debt extinguishment and Q1 2016 had $0.943 million more interest expense.
At March 31, cash was $0.732 million; current assets were $2.309 million and current liabilities $11.766 million, giving a reported working-capital deficit of approximately $9.5 million. Total assets were $63.362 million, total liabilities $54.401 million, and shareholders’ equity $8.961 million. Oil and gas properties, net, were $60.964 million. Reported debt carrying amounts included $23.277 million of secured notes, $5.033 million of related-party secured notes, $9.192 million of related-party subordinated notes, $4.925 million of other notes, and $0.588 million of Bridge Notes; the secured-note balances reflect substantial debt discounts. Interest expense was $4.086 million. No income tax provision was recorded.
Material changes, outlook, and risks
- During Q1, the company reacquired interests in eight wells from Dome Energy under a March 29 settlement. The reported property additions included $3.582 million of well costs; the settlement also included $0.712 million of oil and gas receivables and assumed corresponding payables. A $0.250 million Dome receivable was collected after quarter-end.
- Management’s 2016 plan targeted approximately $35.6 million of capital spending to drill, participate in, or acquire approximately 8.5 net wells. It said an additional $11–12 million would be needed to complete the plan; if funding were unavailable, drilling could be extended into 2017. The filing provides no production or earnings guidance.
- After quarter-end, on May 12, the company completed a debt restructuring. It obtained an initial $6.422 million Tranche A funding and could request up to a further $18.578 million, subject to lender discretion and conditions. Tranche A capacity is capped at $25.960 million. The restructured Tranche B notes had stated aggregate principal of $39.065 million after capitalized interest. Interest is 15%; specified Tranche B interest is deferred through 2017 and added to principal. Maturities are in 2019.
- The restructuring replaced mandatory revenue-based prepayments with a monthly net-revenue sweep toward debt repayment, after specified operating costs, interest, and general and administrative expenses. The G&A cap is $150,000 per month absent lender approval. Management said the sweep limits cash available for development and other uses. Additional Tranche A advances are not committed and remain at lender discretion.
- Management reported that the working-capital deficit fell to approximately $0.855 million immediately after the May restructuring and related settlements. It cautioned that funding may not be available when needed or on favorable terms and that further equity financing could dilute shareholders.
- Also after quarter-end, Liberty’s approximately $2.620 million payable was settled for $750,000 cash and 2.450 million shares; the company expects to recognize a $1.282 million gain in Q2. The settlement resolved the disclosed lawsuit. The GOM merger remained under discussion, with its closing deadline removed; completion and financing benefits were uncertain.
- Additional risks include declining production and commodity prices, lease expirations, dependence on customers (one customer represented 74% of Q1 2016 oil and gas revenue), and debt-service and financing constraints. Management stated disclosure controls were effective at March 31, 2016.
Most important facts for investors to verify
- Whether lenders approve and fund further Tranche A advances, and whether PEDEVCO can secure the additional capital needed for its 2016 drilling plan.
- The practical effect of the revenue sweep and $150,000 monthly G&A cap on operating liquidity and development spending.
- Updated production, realized prices, and customer concentration, given the substantial year-over-year production and revenue declines.
- The debt balances, deferred interest, maturity terms, and any covenant or default status following the May restructuring.
- The effects of the Liberty settlement share issuance and other subsequent equity awards or issuances on dilution and outstanding share count.
- Whether the GOM transaction proceeds and what financing or operational terms would result.