PEDEVCO Corp. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Unaudited consolidated results; amounts below are in U.S. dollars, with financial statement amounts generally shown in millions unless otherwise stated. PEDEVCO is an oil and gas producer with assets in New Mexico’s Permian Basin and Colorado’s Denver-Julesberg Basin.
Financial performance and position
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Oil and gas revenue | $2.417 million, down 23% from $3.129 million | $5.905 million, down 33% from $8.767 million |
| Operating loss | $2.893 million, versus $3.907 million loss | $10.601 million, versus $8.442 million loss |
| Net loss | $2.293 million; $0.03 per share, versus $3.906 million; $0.07 per share | $9.291 million; $0.13 per share, versus $9.361 million; $0.21 per share |
| Net cash from operating activities | Not separately provided for the quarter | Used $0.024 million, versus provided $6.494 million |
| Capital spending on oil and gas assets | Not separately provided for the quarter | $5.798 million |
- Q3 production averaged 795 Boe/day, up 5% year over year; nine-month production averaged 789 Boe/day, up 20%. For the nine-month period, higher volumes did not offset lower realized prices: crude oil averaged $31.08/Bbl, down 41%, and natural gas averaged $1.48/Mcf, down 41%.
- Operating expenses were $5.310 million in Q3, down from $7.036 million. For the nine months, they were $16.506 million, down from $18.129 million. Nine-month SG&A rose 11% to $4.826 million, largely because share-based compensation increased to $2.073 million from $1.023 million; cash SG&A declined.
- Other income was $0.597 million in Q3 and $1.275 million for the nine months. It included settlements of accounts payable and working-interest credits; these items helped reduce reported net losses. The 2019 nine-month comparison also included a $0.920 million gain on property sales and $0.824 million of interest expense.
- At September 30, cash was $8.382 million, plus $3.297 million of restricted cash included in other assets. Current assets were $9.545 million and current liabilities $2.044 million, yielding working capital of $7.5 million, down from $11.9 million at year-end 2019.
- Total liabilities were $4.427 million. The company had a $370,000 PPP loan outstanding at September 30, presented as $227,000 current and $144,000 long-term (rounding). Interest was 1%; forgiveness had been applied for but was not confirmed by the filing date. PEDEVCO reported no significant conventional debt in the current period.
- Total assets were $102.711 million and shareholders’ equity $98.284 million. Common shares outstanding at September 30 were 72.463 million.
Changes versus prior comparable periods
- Q3 revenue declined by $0.712 million, primarily from lower oil prices, while production was slightly higher. The net loss narrowed by $1.613 million, reflecting lower operating expenses and favorable other income, partly offset by lower revenue.
- Nine-month revenue declined by $2.862 million, mainly from a $3.6 million unfavorable price variance, partly offset by a $0.7 million favorable volume variance. Net loss improved only slightly, by $0.070 million, while operating loss increased by $2.159 million; other income, including lower interest expense and settlements, offset much of the operating deterioration.
- Nine-month operating cash flow fell from $6.494 million provided in 2019 to $0.024 million used in 2020. Investing cash outflow decreased to $14.379 million from $33.031 million, primarily because drilling and completion spending was reduced or deferred. Financing provided $0.370 million in 2020, compared with $58.000 million in 2019 from equity and related-party financing.
- Cash and restricted cash declined by $14.033 million during the first nine months, to $11.679 million. Accounts payable fell to $0.546 million from $12.099 million, while accrued expenses fell to $0.324 million from $1.972 million.
Outlook, risks, and notable items
- COVID-19 and the oil-price collapse led PEDEVCO to shut in all operated producing wells in mid-April 2020. It resumed full production beginning in early June after a partial price recovery. Management said prices and demand remained below pre-pandemic levels and continued to pressure results and cash flows.
- The company completed several deferred 2019 carryover projects, including a saltwater-disposal well and hookups for three horizontal Permian wells. It deferred remaining minor work and planned 2020 development projects into 2021, pending a more favorable price environment, and said it planned no major additional capital expenditures for the remainder of 2020. Management described 2020 capital spending as reduced from an original $14.5 million budget to approximately $7 million, with the filing stating that amount had been deployed to date.
- Management expected cash to meet needs over the foreseeable future, relying on operating cash flow and cash on hand, and potentially financing from SK Energy, credit facilities, or other sources. SK Energy, controlled by the CEO, was under no obligation to provide funding. Management warned that materially weaker oil prices could prompt further shut-ins and require additional capital, which might not be available on favorable terms.
- Cost reductions included a 20% salary reduction for salaried employees and officers beginning April 1, discretionary-spending cuts, vendor-payable negotiations, and reduced lease operating costs. The salary reduction was to remain in place until oil markets recovered to levels management considered acceptable.
- On October 13, 2020, PEDEVCO launched an offer to exchange each SandRidge Permian Trust unit for 0.4 PEDEVCO share, with a proposed second-step merger if specified conditions were met. The offer was scheduled to expire November 30, 2020, unless extended. The Trust’s sponsor later disclosed a sale of assets that released royalty interests representing a substantial portion of the Trust’s value and production; PEDEVCO said it was evaluating the offer in light of the sale. The filing estimated transaction costs of $566,000 and potential issuance of up to 21 million shares, which would substantially dilute existing shareholders if completed.
- Other risks include volatile oil and gas prices, transportation and market-access constraints, possible asset impairments in a prolonged low-price environment, and regulatory restrictions in Colorado, including a new 2,000-foot setback rule effective January 1, 2021. Lease expirations include 170 net D-J Basin acres during the remainder of 2020 and 4,940 net Permian acres thereafter; the company said it planned to preserve acreage through drilling or extensions.
- There were no material legal proceedings reported. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether the PPP loan was forgiven, and whether the company can sustain liquidity given near-zero operating cash flow and falling cash balances.
- Oil and gas prices, realized-price differentials, production levels, and the potential for renewed shut-ins or property impairments.
- Execution, timing, and cost of deferred development work, including the 2021 projects and acreage-retention plans.
- The status and final terms of the SandRidge Trust offer after the sponsor’s asset sale, including required approvals, potential dilution, and transaction costs.
- Availability of any external financing, particularly since SK Energy has no funding obligation, and whether any financing would be on acceptable terms.