PEDEVCO Corp. — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014. The filing was signed August 13, 2014. PEDEVCO is an oil and gas exploration and production company focused on U.S. shale assets, principally the DJ Basin in Colorado and the Mississippian Lime in Kansas.
Key financial metrics
| Metric | Q2 2014 / June 30, 2014 | Comparable period / prior year-end |
|---|---|---|
| Oil and gas revenue | $2.095 million for Q2; $3.102 million for six months | $156,000 for Q2 2013; $425,000 for six months 2013 |
| Net loss attributable to PEDEVCO common stockholders | $4.195 million for Q2; $17.365 million for six months | $2.433 million for Q2 2013; $3.914 million for six months 2013 |
| Loss per share, basic and diluted | $(0.16) for Q2; $(0.66) for six months | $(0.17) for Q2 2013; $(0.30) for six months 2013 |
| Cash and cash flows | $5.015 million cash; six-month operating cash use $3.741 million, investing cash use $16.059 million, financing cash inflow $18.201 million | $6.613 million cash at December 31, 2013; $1.773 million cash at June 30, 2013 |
| Liquidity | Current assets $9.587 million; current liabilities $15.015 million; negative working capital $5.428 million | Negative working capital $7.864 million at December 31, 2013 |
| Assets, liabilities and equity | Total assets $42.269 million; liabilities $34.088 million; shareholders’ equity $8.181 million | At December 31, 2013: assets $25.801 million; liabilities $14.914 million; equity $10.887 million |
Reported revenue reflects consolidated operations; Condor, in which PEDEVCO owns 20%, is accounted for using the equity method, so its revenue is not consolidated. The filing does not provide a clear consolidated gross-margin figure.
Material changes and drivers
- Revenue rose sharply year over year, mainly following the March 2014 acquisition of the Wattenberg Asset from Continental Resources. Lease operating costs, exploration expense, and depreciation, depletion and amortization also increased with the expanded asset base and activity.
- Six-month net loss increased substantially. Major items included a $5.408 million loss on sales of oil and gas properties, a $1.028 million loss on sale of the Mississippian equity interest, a $1.945 million loss on the Asia Sixth interest, and a $763,000 debt-extinguishment loss. The property disposals were primarily part of the financing and asset-sharing arrangements with Golden Globe.
- Six-month interest expense was $4.097 million, versus $607,000 in 2013. It included substantial amortization of debt discounts and financing costs; cash interest paid during the six months was $1.530 million.
- Investing cash use included $28.522 million paid for oil and gas properties, partly offset by proceeds from asset and investment sales. Financing included $19.357 million of note proceeds and $6.525 million of net stock-offering proceeds, partly offset by financing costs and debt repayments.
Debt, financing and liquidity outlook
- The March 2014 secured financing provided $34.5 million of initial notes, with up to a further $15.5 million available for qualifying drilling costs, subject to conditions. The notes bear 15% annual interest, mature March 6, 2017, are secured by substantially all company and subsidiary assets, and require monthly prepayments tied to received net revenues. The filing reports significant original issue discounts, transaction costs and asset-sale allocations; balance-sheet carrying values therefore are not the same as face principal.
- At June 30, the balance sheet reported $18.952 million of long-term secured notes and $1.266 million of current secured notes, net of discounts. It also reported $6.170 million of related-party notes, $1.203 million of convertible Bridge Notes and $244,000 of other Bridge Notes, each net of applicable discounts or premiums.
- Management expected cash on hand, operating cash flow and the remaining gross $15.5 million facility availability to fund operations for the next 12 months, but said additional debt or equity financing may be needed to cover capital spending shortfalls and debt obligations. Planned 2014 capital expenditures were up to $22 million, excluding capitalized interest and general and administrative expenses.
- Management anticipated drilling approximately 13 wells, equivalent to 4.5 net wells, in the Wattenberg and Niobrara assets during 2014. It planned three initial operated Wattenberg wells beginning in mid-August, with estimated gross cost of approximately $4.2 million per well, and expected initial results in late October. The company also planned three Mississippian wells in Q4.
Outlook, risks and unusual matters
- The Mississippian leasehold assignment required at least three horizontal wells by December 29, 2014 to preserve extension options. Failure to meet the drilling condition could put acreage at risk or require costly renegotiation; renewal on commercially reasonable terms was not assured.
- On August 1, 2014, after quarter-end, PEDEVCO terminated its planned Asia Sixth acquisition and restructured the transaction. It received a secured $5.0 million promissory note from Asia Sixth and expected to exchange it for a 5% interest in Caspian Energy, subject to approvals and closing conditions anticipated by July 2015. The filing says the revised structure would eliminate future capital-call and funding obligations if completed.
- PEDEVCO reported a material weakness in internal control over financial reporting: inadequate written accounting and SEC-reporting policies and ineffective period-end reporting controls. Management was developing policies and staffing and expected the initial control-development phase to take six months.
- One customer accounted for 41% of oil and gas revenue for the six months ended June 30, 2014. Approximately $4.265 million of cash was uninsured at period-end.
- Management cited exploration and development uncertainty, access to financing, commodity prices, drilling and operating costs, regulatory approvals, and the ability to convert discoveries into production as factors that could affect results. The filing reported no material pending legal proceeding and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Availability and conditions for drawing the remaining secured drilling facility, its fees, collateral provisions and required revenue-based repayments.
- Near-term repayment, subordination and conversion terms for the Bridge Notes and the $6.170 million MIEJ related-party note, including the effect of any further conversions or refinancing.
- Execution and economics of the planned Wattenberg and Mississippian drilling programs, including whether lease deadlines are met and whether well results support management’s development assumptions.
- Completion of the Caspian Energy restructuring, required Kazakhstan and shareholder approvals, and collectability or exchange value of the secured $5.0 million Asia Sixth note.
- Progress in remediating the reported material weakness, and the implications of customer concentration and uninsured cash balances.