SEC Filing Summary
Filing identity: The supplied filing is EnerJex Resources, Inc.’s Form 10-K for the fiscal year ended December 31, 2011, not Ageagle Aerial Systems Inc. or a quarterly filing. The prior comparable period is the nine-month transition period ended December 31, 2010, so year-over-year comparisons are not directly comparable.
Business Context and Reporting Period
EnerJex is an independent domestic onshore oil acquisition, development, exploration and production company focused on Eastern Kansas and South Texas. At December 31, 2011, it had 511 gross active oil and water-injection wells, approximately 5,154 net acres in Kansas and 4,240 net acres in South Texas.
The company produced 71,729 net barrels in 2011 and reported approximately 2.71 million net proved reserves and 1.31 million net probable reserves. Proved reserves were approximately 24% developed and 76% undeveloped.
Financial and Operating Metrics
| Metric | FY 2011 | 9-month transition period FY 2010 |
|---|---|---|
| Oil revenues | $6.285 million | $2.929 million |
| Net oil production | 71,729 barrels | 40,345 barrels |
| Average realized oil price | $87.63 per barrel | $72.60 per barrel |
| Direct operating costs | $3.440 million | $1.548 million |
| Depreciation, depletion and amortization | $1.129 million | $0.382 million |
| Loss from operations | $(1.201) million | $(0.333) million |
| Net loss | $(2.017) million | $(0.878) million |
| Basic and diluted loss per share | $(0.03) | $(0.16) |
| Cash flow from operating activities | $(0.761) million | $(0.193) million |
| Cash and cash equivalents | $2.770 million | $2.962 million |
| Working capital | $1.912 million | $(1.898) million |
| Total debt | $3.833 million | Approximately $6.153 million current and long-term debt based on the balance sheet presentation |
Production revenues less direct operating costs and depletion, depreciation and amortization were approximately $1.716 million, representing an approximate 27% production-activity margin before general and administrative, interest and derivative costs. The company’s operating margin was approximately negative 19%, and net margin was approximately negative 32%.
Total assets were $31.415 million and total liabilities were $9.949 million at December 31, 2011. The company had a $50 million senior secured revolving credit facility, of which $3.816 million was drawn at year-end. Debt was secured by substantially all assets, and the company reported compliance with its credit covenants.
Investing activities used $2.740 million, including $6.289 million of additions to oil properties partially offset by $3.825 million of oil-property sale proceeds. Financing activities provided $3.310 million, including stock-sale proceeds, proceeds from the sale of a noncontrolling interest and new borrowings, offset by debt repayments, treasury-stock purchases and preferred dividends.
Material Changes Versus the Prior Comparable Period
- Oil revenue increased by $3.356 million, or approximately 115%, driven by higher production volume and a $15.03 per-barrel increase in realized pricing.
- Net production increased approximately 78%, although the comparison is against only nine months of 2010.
- Direct operating costs rose approximately 122%, and total production expenses increased approximately 139%, reflecting acquired properties, deferred maintenance and expanded operations.
- The company incurred approximately $330,000 of nonrecurring deferred maintenance costs and approximately $86,000 of wind-down operating costs related to sold non-core assets.
- Professional fees increased to $1.453 million, including transaction-related, legal and investment-banking costs.
- The net loss increased to $2.017 million from $0.878 million despite revenue growth, primarily because of higher operating, depletion, professional, salary, administrative, interest and derivative costs.
- Working capital improved by approximately $3.810 million to a positive $1.912 million, largely because current debt was refinanced or reclassified under the new credit facility.
- Proved reserves increased to 2.714 million barrels from 2.320 million barrels, while proved PV10 increased to $53.2 million from $31.2 million. The GAAP standardized measure of discounted future net cash flows was $43.6 million.
Guidance, Outlook, Commentary, Risks and Unusual Items
Management stated that historical funding sources—operating revenues, debt financing and equity issuance—were expected to provide adequate liquidity for operations and the 2012 capital program. No specific revenue, production, earnings or capital-spending guidance was provided.
Management intended to focus near-term capital and operating resources on Eastern Kansas because of rising service and equipment costs and delays in South Texas associated with the rapidly developing Eagle Ford Shale play. Management expected per-barrel Kansas lease operating costs to decline in 2012 following the sale of non-core assets.
The company entered into the Rantoul Partners joint venture, initially retaining an 88.25% interest after contributing assets and receiving $2.35 million from investors. Additional 2012 contributions could reduce the company’s ownership interest to approximately 75% if all planned contributions occur.
The company’s board authorized hedging of up to 80% of net production. Derivative liabilities totaled approximately $2.727 million at year-end, and the company recorded a $409,000 derivative loss in 2011. Hedging may reduce downside price exposure but also limits benefits from higher oil prices and creates counterparty, volume and liquidity risks.
- Future liquidity depends on oil prices, production, operating cash flow, borrowing-base availability and access to additional capital.
- Approximately 78% of proved reserves were proved undeveloped or developed non-producing, creating development, funding and execution risk.
- Oil prices, reserve estimates, production costs and borrowing capacity are highly sensitive to commodity prices and operating conditions.
- The company is concentrated in Eastern Kansas and South Texas and depends on a limited number of oil purchasers and third-party infrastructure.
- Drilling, waterflooding, permitting, environmental compliance, title, weather, equipment availability and contractor risks could adversely affect results.
- Debt covenants restrict additional borrowing, asset sales, liens, affiliate transactions and dividends. The company reported no common-stock dividends and does not expect to pay them in the foreseeable future.
- Series A preferred stockholders have preferential dividend and liquidation rights, voting rights and conversion rights into 4.779 million common shares.
- Accounts payable included $492,134 payable to former attorneys that was in dispute.
- In January 2012, the company filed litigation alleging approximately $50 million of economic loss and seeking unspecified damages and repayment of more than $484,000 in legal fees. The outcome was uncertain.
- The filing states there were no material environmental claims or material pending legal proceedings known at year-end, apart from the subsequently filed litigation.
Most Important Facts for Investors to Verify
- Confirm the issuer and period: the source is EnerJex Resources, Inc., FY 2011, rather than Ageagle Aerial Systems Inc. or “2011 Q4.”
- Reconcile the full-year 2011 results with the nine-month 2010 transition period before interpreting growth rates.
- Review the audited cash-flow statement because operating cash flow was negative despite higher oil revenue and reported production-activity earnings.
- Verify the borrowing-base terms, covenant requirements, collateral package and consequences of future reserve or oil-price declines.
- Assess the quality and development schedule of the largely undeveloped proved reserve base and the assumptions underlying PV10.
- Review derivative contracts, fair values, fixed prices, expiration dates and potential cash requirements if production differs from hedged volumes.
- Evaluate the effect of the Rantoul Partners funding commitments and potential dilution of EnerJex’s ownership interest.
- Review the preferred stock’s mandatory dividend mechanics, conversion terms and priority over common shareholders.
- Investigate the disputed legal fees and the January 2012 litigation, including potential liabilities and recoveries.