PEDEVCO CORP. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; balance-sheet comparisons are with December 31, 2014. Amounts below are in U.S. dollars; financial statement figures are generally in millions unless stated otherwise.
Business context and reporting period
PEDEVCO is an oil and gas exploration, development and production company focused primarily on the Denver-Julesburg (D-J) Basin in Colorado. At quarter-end it reported approximately 26,394 net D-J Basin acres and interests in 53 gross (15.6 net) wells. In February, it acquired approximately 12,977 net acres and interests in 53 gross wells from Golden Globe Energy (GGE), increasing its reported D-J Basin position. It also divested its 20% interest in Condor and certain related properties to MIEJ.
Financial performance and liquidity
| Metric | Q1 2015 | Q1 2014 / prior balance date |
|---|---|---|
| Oil and gas revenue | $1.488 million | $1.007 million |
| Operating loss | $3.271 million | $11.379 million |
| Net loss | $4.182 million; $0.12 per share | $13.170 million; $0.50 per share |
| Operating cash flow | $(3.884) million | $(2.166) million |
| Investing cash flow | $0.300 million | $(14.444) million |
| Financing cash flow | $(0.773) million | $18.480 million |
| Cash | $2.318 million | $6.675 million at Dec. 31, 2014 |
| Total assets | $71.875 million | $41.740 million at Dec. 31, 2014 |
| Total liabilities | $44.852 million | $43.163 million at Dec. 31, 2014 |
| Working capital | $(7.2) million | $(10.7) million at Dec. 31, 2014 |
| Shareholders’ equity (deficit) | $27.023 million | $(1.423) million at Dec. 31, 2014 |
Lease operating costs were $0.361 million, down from $0.606 million. SG&A was $2.451 million, including $1.391 million of stock-based compensation. Impairment expense was $1.337 million versus $0.003 million, and depreciation, depletion, amortization and accretion was $1.045 million versus $0.115 million. The filing does not provide a clear consolidated gross-margin figure.
Debt included $23.603 million of secured promissory notes on the balance sheet, net of discounts, $8.353 million of subordinated notes assumed in the GGE acquisition, a $4.925 million MIEJ note, and $0.588 million of Bridge Notes, net of premium. The company reported approximately $13.5 million gross ($11.0 million net of fees) available to draw under its senior facility; it did not borrow under that facility in Q1. Cash interest paid was $2.634 million.
Material changes versus the prior comparable period
- Revenue rose 48%, principally due to the GGE-acquired assets and production from three Loomis wells. Management reported D-J Basin production of 48,976 BOE versus 13,005 BOE in Q1 2014; these figures include estimated attributable production from the acquired assets and former Condor interests.
- Net loss narrowed by $8.988 million. The comparison benefited from prior-year losses on property and investment dispositions and the 2015 MIEJ settlement gains, partly offset by higher interest expense, depletion and impairment.
- Interest expense increased to $3.143 million from $1.092 million, primarily reflecting financing costs associated with prior acquisitions. The MIEJ settlement generated a $2.192 million debt-extinguishment gain and a $0.566 million gain on the equity investment disposition.
- The GGE acquisition consideration included 3.375 million common shares, 66,625 Series A preferred shares valued at $28.402 million, assumed subordinated debt of approximately $8.353 million, and a Kazakhstan-related option. Oil and gas properties increased substantially; the acquisition was primarily noncash.
- The MIEJ settlement reduced aggregate liabilities owed to MIEJ and Condor from approximately $9.4 million to a new $4.925 million note, while PEDEVCO sold its Condor interest and certain properties.
Outlook, risks and unusual items
- Management expected substantial expenses and operating losses as it pursued development and acquisitions. Its standalone 2015 plan contemplated approximately 14 gross wells (3.5 net) and about $24 million of capital expenditures. If the proposed Dome transaction closed, management described a larger program of approximately $53.8 million for drilling and completions and $55.5 million including lease renewals. The filing gives differing net-well estimates for the proposed long-lateral program (3.5 in one passage and 4.2 in another).
- The proposed Dome US acquisition was described in a nonbinding Heads of Agreement: approximately 140 million PEDEVCO shares, subject to adjustment, in exchange for Dome US, and conditional on definitive agreements, approvals, due diligence and other conditions. Management cautioned there was no assurance it would close; the contemplated issuance would substantially dilute existing shareholders.
- After quarter-end, certain senior lenders agreed to defer May and June 2015 principal and interest payments for lease-related use. If not repaid by July 31, deferred amounts could be added to principal; warrants potentially covering approximately 380,000 shares were consideration.
- A 5.6 million-share offering at $0.50 per share was priced May 13, 2015, with approximately $2.35 million expected net proceeds and an over-allotment option for 840,000 shares. The filing states the offering had not closed as of the filing date and expected settlement around May 18.
- Commodity-price declines led management to revise its leasing plans and impair all unproved leasehold costs, resulting in the $1.337 million impairment. Approximately 10,925 net acres were due to expire during the rest of 2015, in addition to 321 net acres that expired during Q1.
- One customer accounted for 84% of Q1 oil and gas revenue, up from 55% a year earlier. The company also reported approximately $1.757 million of cash deposits above FDIC-insured limits.
- Series A preferred stock carries a $400-per-share liquidation preference and 10% annual dividend unless shareholder approval of conversion triggers specified reductions. The company also reported negative working capital and significant dependence on additional financing to fund its plans.
- Management said disclosure controls were effective and reported no material legal proceedings or material changes to previously disclosed risk factors, apart from the Dome-related dilution risk.
Key facts for investors to verify
- Whether the May offering closed as expected, its final net proceeds, and resulting share count and dilution.
- Whether the Dome acquisition advanced to definitive agreements or closed, including final consideration, financing and approval conditions.
- Near-term liquidity, actual availability and permitted uses of senior-facility borrowings, debt service requirements, and the status of deferred May–June payments.
- Lease-renewal progress for acreage expiring in 2015, and whether the planned drilling program and capital budget were revised.
- Production, revenue and customer concentration after the GGE acquisition, and the economics of the acquired assets at prevailing commodity prices.
- The final terms and potential economic impact of the Series A preferred stock, including redemption, dividends, conversion and potential additional preferred shares.
- The filing’s differing net-well estimates for the proposed Dome-dependent drilling program.