PEDEVCO CORP. — Q2 2016 Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2016. Financial statements are unaudited. PEDEVCO is an oil and gas exploration and production company focused primarily on the Denver-Julesburg Basin in Colorado.
Financial performance and position
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Oil and gas revenue | $1.203 million | $1.787 million | $1.785 million | $3.275 million |
| Net loss | $3.434 million | $5.444 million | $10.012 million | $9.626 million |
| Net loss per share, basic and diluted | $0.07 | $0.13 | $0.21 | $0.25 |
| Cash used in operating activities | Not separately reported for the quarter | $6.637 million | $6.320 million |
Q2 revenue fell about 33% year over year; first-half revenue fell about 46%. Management attributed the decline to lower oil prices, natural production declines, shut-in wells, and the prior-year production contribution from Loomis wells. First-half production was 62,274 BOE versus 96,522 BOE. Lease operating expense fell to $678,000 for the first half from $939,000, while SG&A declined to $2.721 million from $4.283 million, mainly due to lower stock compensation and cost reductions. The filing does not provide a clear gross margin figure.
Q2 operating income was $158,000, but included a $1.282 million gain on settling payables. First-half interest expense was $7.678 million, contributing to the net loss. The company recorded no oil and gas impairment in the first half of 2016, compared with $1.337 million in the first half of 2015.
At June 30, cash was $658,000, current assets $1.680 million, current liabilities $3.160 million, and working capital was negative $1.480 million. Total assets were $62.401 million, total liabilities $55.037 million, and shareholders’ equity $7.364 million. Balance-sheet notes payable, net of discounts where shown, totaled approximately $52.5 million; contractual principal and accrued interest differ from these carrying amounts. First-half cash flows were $6.637 million used in operations, $64,000 used in investing, and $6.221 million provided by financing; cash declined by $480,000.
Material changes and unusual items
- In May 2016, PEDEVCO restructured senior debt in a troubled debt restructuring. Senior notes carry 15% annual interest; Tranche B interest through 2017 is deferred and added to principal. The reported Tranche B principal was $39.737 million at June 30.
- The restructuring included an initial $6.422 million Tranche A advance and a facility allowing up to $18.578 million in additional advances, subject to lender discretion and conditions. Tranche A borrowing is part of a facility with a stated maximum of $25.960 million.
- Monthly net revenues, after specified operating costs, interest and permitted general and administrative costs, are swept to repay Tranche A and then Tranche B. The G&A limit is $150,000 per month absent lender approval. No principal was paid through the sweep during the first half.
- The related-party RJC Junior Note was amended: interest was capitalized, future interest is deferred, and maturity extended to July 2019. Its June 30 balance was $9.571 million. The $4.925 million MIEJ subordinated note is due March 2017, subject to potential extension provisions.
- To settle Liberty Oilfield Services’ claim, the company paid $750,000 and issued 2.45 million shares valued at $588,000 against approximately $2.62 million of accrued payables, recognizing a $1.282 million gain. The dispute was reported settled in full.
- Common shares outstanding increased to 49.768 million at June 30 from 45.236 million at December 31, 2015. The company also issued 5.963 million lender warrants at a $0.25 exercise price, exercisable cashlessly, and reported 13.766 million total warrants outstanding.
Outlook, risks and contingencies
Management planned approximately $35.6 million of development and acquisition spending over the next 12 months, including about 8.5 net wells; approximately $6.4 million had been deployed. Management said an additional $11–12 million from other sources would be needed to complete the plan and that the drilling program could be extended into 2017 if funding is unavailable. The remaining debt-facility advances are discretionary, and the revenue sweep limits cash available for development and other uses.
The company said it was pursuing a GOM Holdings merger and hoped to close as early as the end of Q3 2016, subject to closing conditions. It expected the transaction to provide additional resources and facilitate debt refinancing; neither outcome was assured. A cost-reduction plan implemented in April was intended to bring G&A within the lender’s monthly cap. CEO Frank Ingriselli retired from that role effective April 30; Michael Peterson became CEO and Gregory Overholtzer became CFO.
Other risks include continuing operating losses, low cash and negative working capital, high-cost debt, dependence on discretionary financing, possible equity dilution, declining production and commodity prices, and customer concentration: one customer accounted for 58% of first-half 2016 oil and gas revenue. Some lease acreage is subject to expiration. Management reported disclosure controls were effective and no material change in internal control during the quarter. The filing states there were no material legal proceedings after the Liberty settlement.
Important facts for investors to verify
- Availability and conditions for remaining Tranche A and RJC funding, and the company’s ability to finance the stated $11–12 million funding gap.
- Debt balances, deferred interest accumulation, compliance with covenants and the effect of the monthly revenue sweep on operating liquidity.
- Timing and closing conditions for the proposed GOM merger and whether it delivers the expected refinancing or liquidity.
- Production trends, realized commodity prices, reserve assumptions and lease expirations; also reconcile the MD&A production table’s first-half 2015 revenue figure of $3.305 million with the financial statements’ $3.275 million.
- Potential dilution from warrants, options and the 66,625 Series A preferred shares, which are convertible at 1,000 common shares per preferred share, subject to stated restrictions.