Business Context and Reporting Period
Company: Tengasco, Inc. (Note: Request metadata listed "Riley Exploration Permian, Inc.", but the filing text identifies the registrant as Tengasco, Inc.)
Filing Type: Form 10-K
Period Ended: December 31, 2010
Business Overview: Tengasco is an independent oil and natural gas exploration and production company. Its primary oil operations are in Kansas, and its primary gas operations are in the Swan Creek Field in Tennessee. The company also operates a 65-mile intrastate pipeline and a methane extraction facility (Manufactured Methane Corporation) that processes landfill gas.
Key Financial Metrics
| Metric | 2010 | 2009 | 2008 |
|---|---|---|---|
| Revenues | $13.2 million | $9.7 million | $15.6 million |
| Net Income (Loss) | $(1.7) million | $(2.0) million | $0.2 million |
| Net Income (Loss) Per Share | $(0.03) | $(0.03) | $0.00 |
| Operating Cash Flow | $4.0 million | $1.7 million | $7.1 million |
| Long-Term Debt | $9.6 million | $10.1 million | $10.1 million |
| Total Assets | $39.7 million | $41.2 million | $42.4 million |
| Stockholders' Equity | $25.2 million | $26.8 million | $28.6 million |
Production Highlights:
- Kansas Oil: 224 MBbls produced in 2010 (vs. 217 MBbls in 2009). Average sales price: $72.14/Bbl.
- Tennessee Gas: Average sales price: $4.90/Mcf. Production volumes declined due to natural field decline.
- Methane Project: Production was significantly curtailed in the second half of 2010 due to oxygen spikes in the raw gas supply from the landfill, causing safety shutdowns.
Material Changes vs. Prior Period
- Revenue Increase: Revenues increased 36% from 2009 to 2010, driven primarily by higher oil prices in Kansas ($72.14 vs. $54.48) and increased production volumes.
- Net Loss Reduction: The net loss narrowed to $1.7 million from $2.0 million in 2009. However, this was heavily impacted by a non-cash impairment charge.
- Asset Impairment: The company recorded a $5.0 million non-cash writedown of its pipeline facilities in 2010. This resulted from an assessment that cash flows were insufficient to recover the asset's net book value, following expressions of interest from potential buyers at significantly lower valuations.
- Derivative Gains: The company recorded a $0.5 million gain on derivatives in 2010, compared to a $1.3 million loss in 2009.
- Reserve Growth: Total proved reserves increased to 2,500 MBOE in 2010 from 2,293 MBOE in 2009, largely due to higher oil prices and successful drilling in Kansas.
Guidance, Outlook, Risks, and Unusual Items
Management Commentary & Outlook:
- Capital Spending: The company plans to be more active in 2011 due to increased oil prices, though spending remains dependent on commodity prices and cash flow.
- Hoactzin Program: The "Ten Well Program" with Hoactzin Partners is expected to reach its payout point by December 31, 2013. Management believes it is highly unlikely that Hoactzin will exercise its option to exchange its interest for preferred stock, as the payout point is being approached rapidly.
- Methane Project: Production remains intermittent due to ongoing repairs by the landfill operator (Republic Services) to fix oxygen intrusion issues. No assurances can be made regarding the timeline for full production resumption.
- Commodity Price Volatility: Operations are highly sensitive to oil and gas prices. A decline could reduce the borrowing base and limit capital expenditures.
- Debt Covenants: The company had a waiver for covenant non-compliance in late 2009. As of December 31, 2010, it was in compliance, but future non-compliance could restrict operations.
- Related Party Transactions: Significant relationships exist with Hoactzin Partners (controlled by the Chairman of the Board), including the Ten Well Program and a management agreement. A receivable of $0.99 million from Hoactzin for vendor payables was recorded.
- Customer Concentration: The top three purchasers accounted for 80%, 16.6%, and 2.3% of total revenues in 2010.
- Pipeline Writedown: The $5.0 million impairment charge was a significant non-cash item reducing net income.
- Deferred Tax Benefit: A $1.1 million deferred tax benefit was recognized in 2010 related to net operating loss carryforwards and the pipeline impairment.
Investor Verification Checklist
- Debt Covenants: Verify current compliance with leverage and interest coverage ratios under the F&M Bank credit facility, especially given the history of waivers.
- Methane Project Viability: Confirm the status of Republic Services' repairs to the landfill gas collection system and the timeline for resuming full production capacity (400 MMBtu/day).
- Pipeline Asset Value: Assess the likelihood of selling the pipeline asset versus holding it, given the recent $5 million writedown and low expressions of interest.
- Hoactzin Payout: Monitor the progress toward the $5.2 million payout point for the Ten Well Program to ensure no preferred stock issuance is triggered.
- Reserve Estimates: Review the LaRoche Petroleum Consultants report to understand the sensitivity of reserve values to oil price fluctuations.