EnerJex Resources, Inc. 2012 Form 10-K Summary
Filing and period: The supplied filing is EnerJex Resources, Inc.’s Form 10-K for the fiscal year ended December 31, 2012, filed April 10, 2013. The request metadata identifies Ageagle Aerial Systems Inc. and “2012 Q4,” which does not match the filing text.
Business Context
EnerJex was an independent onshore oil acquisition, development and production company focused on Eastern Kansas and South Texas. The company used full-cost accounting and concentrated its 2012 capital program on Kansas properties. It held 2.9 million net barrels of proved reserves, including approximately 53% proved developed producing and 47% proved undeveloped reserves.
- Net production: 96,842 barrels, compared with 71,729 in 2011.
- Active wells: 862 gross and 680.8 net at year-end.
- 2012 drilling: 227 development wells, of which 226 were successful and one was dry.
- Proved reserve PV10: approximately $60.8 million, compared with $53.2 million in 2011.
Financial and Operating Metrics
| Metric | 2012 | 2011 | Change |
|---|---|---|---|
| Oil revenues | $8.50 million | $6.52 million | Increase of approximately 30% |
| Average realized price | $87.74 per barrel | $87.63 per barrel | Nearly unchanged |
| Direct operating costs | $3.10 million | $3.67 million | Decrease of approximately 16% |
| Production expenses, including DD&A | $4.64 million | $4.80 million | Decrease of approximately 3% |
| Income from operations | $866,642 | $(1.20) million | Improved to operating profit |
| Net income | $741,120 | $(2.02) million | Improved to net profit |
| Net income attributable to EnerJex | $345,992 | $(2.04) million | Improved materially |
| Net loss attributable to common stockholders | $(262,467) | $(2.09) million | Loss narrowed |
| Cash flow from operations | $2.28 million | $(761,493) | Improved materially |
| Capital additions to oil properties | $10.25 million | $6.29 million | Increase of approximately 63% |
| Cash and cash equivalents | $767,494 | $2.77 million | Decrease of approximately $2.00 million |
Operating margin was approximately 10.2% in 2012, versus a negative operating margin in 2011. Direct lifting costs declined to $32.03 per barrel from $47.96, reflecting greater scale in the Cherokee Project and the sale of non-core properties. Depreciation, depletion and amortization increased to $1.63 million from $1.13 million as production grew.
The company reported basic and diluted earnings per share of approximately $0.00 in 2012, compared with a loss of $0.03 in 2011. Preferred dividends of $608,459 reduced the amount attributable to common stockholders.
Liquidity, Debt and Capital Structure
- Current assets were $3.38 million and current liabilities were $4.56 million, producing a working-capital deficit of approximately $1.17 million based on the balance sheet. The MD&A separately reports a $999,091 deficit, indicating an inconsistency in the supplied filing text.
- Cash declined to $767,494 after $10.58 million of investing outflows, primarily oil-property development, partially offset by $6.29 million of financing inflows.
- Senior secured debt was $8.50 million at year-end, secured by substantially all assets. The borrowing base was $12.15 million, and the facility carried a 3.75% interest rate and matured October 3, 2015.
- A $825,000 note payable arose from the repurchase of 2 million shares and was scheduled to be fully paid during 2013.
- The company reported compliance with credit-facility covenants at December 31, 2012, but borrowing-base reductions could require debt repayment or additional collateral.
- Series A preferred stockholders had priority dividend and liquidation rights. Approximately $4.29 million of preferred distributions remained before conversion conditions were satisfied, according to the filing.
Material Changes and Unusual Items
- Production increased approximately 35%, while realized oil prices were essentially flat.
- The company drilled substantially more development wells and increased oil-property investment, particularly in Eastern Kansas.
- Rantoul Partners was dissolved effective December 31, 2012. EnerJex received a 75% working interest in the partnership leases, which became subject to a joint operating agreement.
- The company entered into additional oil hedges. Outstanding hedges extended through December 2015, with volumes and fixed prices varying by period. Derivative contracts had a total fair value liability of approximately $1.80 million at year-end.
- Derivative results improved to a reported gain of $55,708 in the statement of operations, although the notes also disclose derivative contract losses of $871,331; the differing presentations should be reconciled.
- The board authorized repurchases of up to $2.0 million of common stock. The company repurchased 2 million shares for $323,035 in cash plus an $825,000 note.
- No oil-property impairment was recorded for 2012 or 2011.
Outlook, Risks and Contingencies
Management expected 2013 liquidity to be supported by operating cash flow, debt availability and the company’s existing financing arrangements. Near-term capital was directed toward Eastern Kansas because of higher service and equipment costs in South Texas. Management planned to evaluate horizontal drilling at the El Toro Project and anticipated production increases from new waterflood projects, including within six to nine months in the Mississippian Project.
- Key risks include volatile oil prices, reserve-estimate uncertainty, drilling and service-cost inflation, limited access to capital, borrowing-base reductions and secured-debt default.
- Approximately 47% of proved reserves were undeveloped and may require substantial future capital to develop.
- The company operated in only two geographic regions and depended on a small number of oil purchasers and third-party infrastructure.
- South Texas lease expirations, particularly at the Lonesome Dove Project, presented a material near-term risk.
- Environmental, plugging, abandonment, regulatory and title liabilities could increase costs. Asset-retirement obligations were $1.34 million at year-end.
- EnerJex filed litigation seeking approximately $50 million of alleged damages and reimbursement of more than $484,000 in legal fees related to a 2008 stock offering. The outcome was uncertain.
- The company had approximately $23.5 million of net operating loss carryforwards, subject to limitations, with a full valuation allowance against deferred tax assets.
- Management concluded internal control over financial reporting was effective; the independent auditor stated it was not engaged to audit or provide an opinion on internal controls.
Investor Verification Points
- Confirm the correct issuer: the supplied filing is for EnerJex Resources, Inc., not Ageagle Aerial Systems Inc.
- Reconcile conflicting 2011 oil-revenue figures and the conflicting 2012 working-capital deficit figures in the filing.
- Reconcile the statement-of-operations derivative gain with the notes’ disclosed derivative losses.
- Review the $8.50 million secured debt, borrowing-base availability, covenant requirements and 2013 note-payable maturities.
- Assess the funding required to develop the 1.38 million net barrels of proved undeveloped reserves.
- Review the terms and economic effect of Series A preferred dividends, liquidation preference and potential conversion dilution.
- Monitor the legal claim against former attorneys, South Texas lease expirations, environmental obligations and the company’s ability to maintain oil production and liquidity.