PEDEVCO Corp. Form 10-Q Summary
Business context and reporting period
Unaudited results for the quarter and nine months ended September 30, 2019. PEDEVCO develops and produces oil and gas, primarily in the Permian Basin of New Mexico and the Denver-Julesburg Basin of Colorado. At quarter-end, it reported approximately 39,000 net Permian acres and 11,400 net D-J Basin acres.
Key financial metrics
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Oil and gas revenue | $3.129 million | $1.259 million | $8.767 million | $2.801 million |
| Operating loss | $3.907 million | $2.236 million | $8.442 million | $4.098 million |
| Net income (loss) | $(3.906) million | $(2.733) million | $(9.361) million | $59.323 million |
| Basic loss per share | $(0.07) | $(0.19) | $(0.21) | $6.04 |
- Production for Q3 averaged 755 Boe/day, up 172% year over year; nine-month average was 655 Boe/day, up 212%. Oil prices fell: average crude realization was $49.80/Bbl in Q3 versus $62.16, and $52.42/Bbl for nine months versus $62.04.
- Operating expenses were $7.036 million in Q3 and $18.129 million for nine months. Nine-month lease operating costs were $4.756 million and depreciation, depletion, amortization and accretion was $8.985 million.
- At September 30, cash was $33.945 million; cash plus restricted cash was $37.242 million, including $3.297 million of restricted cash classified in other assets. Current assets were $36.127 million and current liabilities $10.322 million, a $25.805 million working-capital surplus.
- Operating cash flow was $6.494 million for nine months; investing cash use was $33.031 million and financing cash inflow was $58.000 million. Operating cash flow included a substantial increase in accounts payable.
- Notes payable were zero at September 30, compared with $38.294 million net at December 31, 2018. The company also reported $391,000 of operating lease liabilities and $2.713 million of asset retirement obligations. Shareholders' equity was $106.709 million.
Material changes versus prior comparable periods
- Q3 revenue rose 149%, primarily due to higher production volumes, partly offset by lower realized prices. Q3 net loss widened by $1.2 million, mainly because DD&A and accretion increased by $3.0 million.
- Nine-month revenue rose 213%, while the company moved from $59.323 million of prior-year net income to a $9.361 million loss. The 2018 result included a one-time $70.309 million gain on debt restructuring; excluding that gain, management said the loss improved by $1.6 million, reflecting lower interest expense and higher revenue, offset by higher operating costs.
- Debt was converted into equity in early 2019. The company also raised $43 million from common-stock sales during the nine-month period. Common shares outstanding rose from 15.8 million at December 31, 2018 to 70.7 million at September 30, 2019; SK Energy, controlled by the CEO, held 73.2% after the disclosed subscriptions.
- Capital investment and development expanded: nine Permian wells were drilled and four completed by quarter-end. Oil and gas properties, net, increased to $79.817 million from $60.462 million.
Outlook, management commentary, risks and unusual items
- The 2019 development plan called for approximately $50 million of capital, which management stated had been raised to date. Phase Two called for five horizontal San Andres wells and a saltwater-disposal well; the five horizontal wells had been drilled, with completion planned for Q4 2019 or Q1 2020, subject to permitting and disposal-well completion. The company anticipated about $1 million of D-J non-operated drilling participation through year-end.
- Management expected cash to cover foreseeable needs but identified operating cash flow, existing cash, possible SK Energy funding, credit facilities, asset sales and debt or equity financing as potential sources. SK Energy had no obligation to provide funding; management said the program could be extended into 2020 if financing conditions were unfavorable. No specific production or revenue guidance was provided.
- Commodity prices are volatile and outside the company's control. Other stated risks include drilling and completion execution, reserve and production uncertainty, access to capital and dilution, and environmental or regulatory changes. PEDEVCO specifically warned that Colorado Senate Bill 19-181 and related local rules could make D-J Basin operations more difficult or costly.
- A $920,000 gain was recorded on a Colorado lease-rights sale. The purchaser had not yet assigned the required replacement acreage; under the agreement, it may owe up to $200,000 if it fails to do so. The 2018 debt-restructuring gain materially affects year-over-year comparisons.
- The filing reported no material legal proceedings and no material changes to previously disclosed risk factors other than the updates described. Management concluded disclosure controls were effective as of September 30, 2019.
Important facts for investors to verify
- Whether the five Phase Two wells and saltwater-disposal well were completed on schedule, and the resulting production, costs and well-level economics.
- How sustainable operating cash flow is, given the contribution from increased accounts payable and the planned capital program.
- Access to future financing, particularly the degree of reliance on CEO-controlled SK Energy, and the potential for additional equity dilution.
- Resolution of the Colorado lease-sale replacement-acreage obligation and the $200,000 potential repayment.
- The acquisition description is inconsistent in the filing: one section describes the 22 acquired San Andres wells as vertical, while another calls them horizontal; confirm the asset details.
- Subsequent share issuance and ownership: the filing reports 70.7 million shares outstanding at September 30 and 70,961,328 at November 7, 2019.