Business Context and Reporting Period
The provided filing is a Form 10-Q for the quarter ended September 30, 2011, filed November 21, 2011. The filing identifies the registrant as EnerJex Resources, Inc., not Ageagle Aerial Systems Inc.; this company-identity discrepancy should be verified. EnerJex acquired, developed, explored and produced domestic onshore oil properties, primarily in Eastern Kansas and South Texas.
The financial statements are unaudited and cover the three and nine months ended September 30, 2011, with comparisons to the corresponding 2010 periods.
Financial Results and Key Metrics
| Metric | Q3 2011 | Q3 2010 | Nine Months 2011 | Nine Months 2010 |
|---|---|---|---|---|
| Oil revenue | $1.674 million | $0.897 million | $4.728 million | $3.097 million |
| Operating income (loss) | $0.029 million | $(0.068) million | $(0.426) million | $0.279 million |
| Net income (loss) | $3.119 million | $(0.954) million | $1.194 million | $(1.362) million |
| Operating margin | Approximately 1.7% | Approximately (7.6%) | Approximately (9.0%) | Approximately 9.0% |
| Net margin | Approximately 186.3% | Approximately (106.3%) | Approximately 25.3% | Approximately (44.0%) |
- Q3 net income included a $3.188 million gain on derivative instruments. For the nine-month period, the derivative gain was $1.917 million. These non-operating, largely mark-to-market items were the principal driver of reported profitability.
- Nine-month expenses were $5.154 million in the financial statements, including $2.462 million of direct operating costs, $0.976 million of depreciation, depletion and amortization, $0.746 million of professional fees, $0.434 million of salaries and $0.537 million of administrative expense.
- Net oil production increased to 19,724 barrels in Q3 2011 from 14,442 barrels in Q3 2010, and to 52,748 barrels for the nine months from 41,776 barrels.
- Average oil sales price increased to $84.87 per barrel in Q3 and $89.64 for the nine months, compared with $62.13 and $74.14, respectively, in the prior-year periods.
- Average production cost increased to $58.97 per barrel in Q3 and $65.18 for the nine months, compared with $48.31 and $44.08 in the prior-year periods. Average lifting costs were $39.95 per barrel in Q3 and $46.67 for the nine months.
Cash Flow, Liquidity and Capital Structure
- Nine-month operating cash flow was negative $0.884 million, compared with negative $0.204 million in 2010.
- Investing cash flow was negative $5.678 million, including $3.904 million of additions to oil and gas properties, $0.274 million of fixed-asset purchases and a $1.500 million treasury-stock purchase.
- Financing cash flow was positive $4.822 million, consisting primarily of $3.436 million from common-stock sales and $1.400 million from sales of marketable securities.
- Cash declined from $2.962 million at December 31, 2010 to $1.222 million at September 30, 2011. Current assets were $3.975 million and current liabilities were $1.342 million, producing reported working capital of approximately $2.475 million.
- Total liabilities were $9.217 million at September 30, 2011, including $6.132 million of long-term debt, $1.083 million of asset-retirement obligations and $0.660 million of derivative liabilities.
- On October 3, 2011, the company entered into a four-year senior secured revolving credit facility with a maximum commitment of $50 million. The borrowing base was $7.2 million, of which $6.131 million was funded, leaving approximately $1.07 million of availability. The facility matures October 3, 2015 and is secured by company assets.
- The facility carries interest based on applicable base-rate or floating-rate formulas, with margins ranging from 0.00% to 0.75% for base-rate loans and 2.25% to 3.00% for floating-rate loans, plus a 0.500% unused-borrowing-base commitment fee.
Material Changes Versus the Prior Comparable Period
- Nine-month oil revenue increased $1.631 million, or approximately 52.7%, driven by higher production from the 2011 drilling program, acquired producing assets and higher oil prices.
- Nine-month production expenses increased approximately $1.596 million, or 86.7%. Direct operating costs increased by $1.020 million, partly reflecting deferred maintenance on older leases and costs associated with acquired properties; management estimated deferred maintenance at approximately $0.5 million.
- Professional fees increased by approximately $0.494 million, primarily due to acquisition and capital-raising activity. Management also identified approximately $65,000 of non-recurring administrative expenses during the nine months.
- Interest expense declined to $0.334 million from $0.794 million, reflecting lower borrowings and the conversion of subordinated debentures into common equity.
- Net income improved by $2.557 million for the nine months, but the improvement was substantially attributable to the derivative gain rather than operating profitability.
- Common shares outstanding increased to 69,436,529 at September 30, 2011 from 67,469,555 at December 31, 2010. The company also reported 900,000 outstanding stock options and 2,838,330 warrants.
Guidance, Outlook, Commentary and Risks
- Three wells were drilled and cased in the El Toro project in South Texas. Management expected stimulation and initial production before year-end 2011; the company owned a 40% working interest. Oil-field service delays related to activity in the Eagle Ford Shale were noted.
- The company exercised an option on November 9, 2011 to acquire a 90% working interest in 720 acres of the Nickletown Leasehold and had potential rights to an additional 1,280 acres upon satisfying drilling milestones.
- Management stated that cash on hand and the new credit facility were expected to meet obligations for the next 12 months, while also identifying additional equity, debt financing and working-interest participants as important sources of capital.
- The credit facility requires a minimum current-assets-to-current-liabilities ratio of 1.00 to 1.00 and limits senior funded debt to EBITDA to 4.75:1.00 for the September 30 and December 31, 2011 quarters, declining to 4.50:1.00 thereafter. It also requires specified oil-production hedging levels.
- Commodity swaps covered portions of expected crude-oil production. Their aggregate fair value was a $501,733 derivative liability at September 30, 2011. Hedging reduces exposure to falling prices but limits upside participation and creates counterparty, valuation and collateral risks.
- Key risks include volatile oil prices, reserve-estimate changes, borrowing-base redeterminations, access to development capital, possible debt or covenant defaults, operating and weather disruptions, regulatory requirements, service-provider availability, asset-retirement costs and the company’s ability to execute its development plans.
- The company reported no material pending legal proceedings, no defaults upon senior securities and no material off-balance-sheet arrangements.
Facts an Investor Should Verify
- Confirm that the filing belongs to EnerJex Resources, Inc. rather than Ageagle Aerial Systems Inc.
- Reconcile the financial-statement total expenses of $5.154 million with the MD&A presentation of $5.159 million for the nine months ended September 30, 2011.
- Assess the sustainability of reported net income excluding the $1.917 million nine-month derivative gain.
- Verify the October 3, 2011 credit-facility terms, the $7.2 million borrowing base, funded debt and covenant compliance.
- Review oil-reserve estimates, the effect of hedges on the borrowing base and the potential impact of oil-price changes on the full-cost ceiling test.
- Confirm the timing, production results and capital requirements for the El Toro wells and the terms and drilling obligations related to the Nickletown Leasehold.
- Evaluate liquidity in light of negative operating cash flow, remaining credit availability of approximately $1.07 million and the company’s stated need for additional financing.