PEDEVCO Corp. (PEDEVCO) — FY 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013; filed March 31, 2014. This is an annual report, not a standalone fourth-quarter report. The company was an early-stage oil and gas explorer and producer; its reported 2013 results chiefly reflect its Niobrara, Kansas Mississippian and legacy Texas operations. Major Wattenberg and Kazakhstan developments described below occurred after year-end.
Financial and operating results
| Metric | FY 2013 | FY 2012 |
|---|---|---|
| Oil and gas revenue | $743,656 | $503,153 |
| Lease operating costs | $648,462 | $281,103 |
| Selling, general and administrative expense | $7.149 million | $3.730 million |
| Operating loss | $16.780 million | $11.072 million |
| Net loss | $18.145 million | $12.013 million |
| Basic and diluted loss per share | $1.07 | $1.94 |
| Net cash used in operating activities | $2.263 million | $2.804 million |
| Net cash used in investing activities | $20.198 million | $3.742 million |
| Net cash provided by financing activities | $26.596 million | $8.848 million |
- Revenue increased approximately 48%, but remained small relative to operating costs. The filing does not provide a single headline gross-margin figure; lease operating costs were close to 87% of reported revenue.
- SG&A rose approximately $3.419 million, principally from stock compensation, professional services and legal fees. Stock-based compensation expense was $3.198 million.
- Impairment of oil and gas properties was $3.303 million versus $180,000 in 2012. The company also recorded a $5.778 million loss from equity-method investments, primarily reflecting a major impairment at Condor and other investment-related items. The 2012 comparison included a $6.820 million goodwill impairment.
- Oil sold totaled approximately 7,597 barrels in 2013: 5,970 from Niobrara and 1,627 from North Sugar Valley. Niobrara gas sales were 5,927 Mcf. Average reported oil sales prices were $90.40 per barrel for Niobrara and $103.45 for North Sugar Valley; the latter’s reported average production cost was $199.99 per barrel.
- Cash was $6.613 million at year-end, versus $2.478 million a year earlier. Total current assets were $6.974 million and current liabilities $14.838 million, resulting in negative working capital of approximately $7.8 million. Total assets were $25.801 million, total liabilities $14.914 million, and stockholders’ equity $10.887 million.
- Year-end current notes payable, net of discounts, totaled about $9.760 million, including related-party notes. The company also reported $6.170 million principal owed to MIEJ, with $585,777 accrued interest. The separate $26.473 million Condor borrowing was at the investee level, not presented as PEDEVCO’s consolidated debt.
- Proved reserves attributable to direct and equity-method interests were reported at 523,285 BOE at December 31, 2013, versus 964,956 BOE at year-end 2012. Combined PV-10 was $1.624 million versus $7.189 million. The filing attributes the reserve decline mainly to revised SEC-guideline interpretation for booking Niobrara PUDs and weaker production assumptions following weather-related flooding, freezing and mechanical problems.
Material changes and subsequent developments
- In December 2013, PEDEVCO raised approximately $6.282 million net from a public offering of 3.25 million shares. It also completed a $22 million private placement agreement in August, but the lead investor paid only $10 million of its $20 million commitment. The unpaid $10 million was rescinded and the note cancelled on March 7, 2014; the year-end balance sheet included a $10 million stock subscription receivable.
- In March 2014, the company acquired the Wattenberg asset from Continental for a final cash purchase price of approximately $28.522 million, assumed about $845,000 of suspense payables, and transferred 50% of the acquired interests to RJ Resources. The acquired position included approximately 27,990 net acres at closing and interests in 40 wells.
- To finance the acquisition and development, PEDEVCO entered into a $50 million secured financing arrangement in March 2014: $34.5 million in initial notes and up to $15.5 million of additional, conditional drilling funding. Initial funding produced approximately $27.473 million net after discounts, fees and expenses. Notes mature March 6, 2017, carry 15% annual interest, and require monthly payment of 25% of received net revenues toward principal, subject to the agreement. They are secured by substantially all company and subsidiary assets and guaranteed by subsidiaries.
- RJ Resources also acquired 50% of the Mississippian asset and rights to 50% of PEDEVCO’s planned Kazakhstan investment. The company’s Mississippian working interest consequently fell from approximately 98% to 49%.
- In February 2014, PEDEVCO sold its remaining Eagle Ford interests for net cash proceeds of approximately $2.718 million. It had already exited the Eagle Ford through the related transactions effective November 1, 2013.
Outlook, risks and unusual items
- Management planned up to $22 million of 2014 capital expenditures, subject to financing, and approximately 16 gross (6 net) wells: 11 gross Wattenberg, two gross Niobrara and three gross Mississippian. Management stated that cash on hand, projected operating cash flow and available drilling-facility funding were expected to fund operations for the next 12 months, while also noting financing and execution uncertainty.
- The proposed Kazakhstan acquisition remained conditional on government approvals and other closing conditions. PEDEVCO had paid a $10 million deposit, refundable if the deal fails other than following its material uncured breach; 50% of any returned deposit is payable to RJ Resources. Additional consideration could be $15 million or $20 million depending on measured production, or zero below the specified threshold. Aral’s reported production was voluntarily halted pending a gas-flaring permit or gas offtake agreement.
- Key risks include recurring losses, low production and limited operating history; reliance on further capital; high-cost, secured debt and restrictive covenants; volatile commodity prices; drilling, reserve and impairment uncertainty; lease expirations (including the need to drill three long horizontal Mississippian wells by December 29, 2014 to preserve those leases); environmental, water and hydraulic-fracturing regulation; and political, regulatory and funding risks in Kazakhstan.
- Management concluded internal control over financial reporting and disclosure controls were ineffective at December 31, 2013, citing insufficient written accounting and reporting procedures and ineffective period-end controls. Management described remediation efforts, including additional accounting resources and written procedures. The independent auditor gave an unqualified opinion on the financial statements but did not attest to internal-control effectiveness.
- The 2013 loss and reserve values include substantial impairment charges. The filing also reports no material pending legal proceeding and no income-tax provision; deferred tax assets were fully offset by a valuation allowance.
Important facts for investors to verify
- Reconcile the $10 million year-end stock subscription receivable with its March 2014 rescission, and confirm the resulting accounting treatment and share count.
- Review the full financing documents: effective debt proceeds after fees, 15% interest burden, revenue sweep, borrowing conditions, collateral, covenants, and restrictions on repayment of subordinated bridge notes.
- Check current production, repair status and net ownership for the Wattenberg and Niobrara wells; compare realized production and costs with management’s drilling and cash-flow assumptions.
- Assess the basis for the material proved-reserve and PV-10 reductions, including the reserve engineer’s PUD methodology, production revisions, and development-cost assumptions.
- Confirm the status of Kazakhstan approvals, gas-flaring/offtake authorization, sustained production, deposit refund rights and any required final closing payment and financing.
- Track lease preservation and required drilling deadlines, especially the Mississippian commitment, and monitor remediation of the disclosed material weaknesses in financial controls.