Business context and reporting period
Important identity discrepancy: The supplied filing is Tengasco, Inc.’s Form 10-K for the fiscal year ended December 31, 2015; it does not identify Riley Exploration Permian, Inc. The summary below reflects the filing provided, not the company named in the request. Although the request says “2015 Q4,” this is an annual report; fourth-quarter figures are noted where provided.
Tengasco explored for and produced oil and natural gas, principally from Kansas properties, and operated a landfill-methane electricity facility in Tennessee. It had sold its Tennessee oil and gas and pipeline assets in 2013. Its common stock traded on NYSE MKT under TGC. Share and per-share data were adjusted for a 1-for-10 reverse split effective March 24, 2016.
Financial performance and position
| Metric | 2015 | 2014 |
|---|---|---|
| Revenue | $6.164 million | $13.788 million |
| Net loss | $24.721 million ($4.06 per share) | $788,000 ($0.13 per share) |
| Operating cash flow, continuing operations | $482,000 | $6.571 million |
| Capital spending / investing cash used, continuing operations | $541,000 | $3.994 million |
| Production costs and taxes | $4.224 million | $5.994 million |
| Impairment expense | $14.526 million | $2.796 million |
| Net interest expense | $80,000 | $88,000 |
Oil revenue fell as realized price declined to $42.66 per barrel from $86.05, while oil sales volume declined to 130.9 MBbl from 153.5 MBbl. Electricity revenue from the methane facility was $533,000, compared with $524,000; no methane gas was sold in either year. Gross Kansas oil production fell to 158 MBbl from 186 MBbl; net production was 129.1 MBbl. The company drilled one Kansas well, which was dry.
At year-end, cash was $40,000; current assets were $1.382 million and current liabilities $1.365 million. Total assets were $12.003 million, total liabilities $4.543 million, and stockholders’ equity $7.460 million. Total debt was $1.021 million, including $869,000 drawn on the Prosperity Bank facility. Asset retirement obligations were $2.222 million. The filing reports no dividends and no open commodity derivatives.
Proved reserves fell to 877 MBbl from 1,797 MBbl. The standardized measure of discounted future net cash flows declined to $8.287 million from $34.531 million. The reserve-price assumption fell to $43.98 per barrel from $88.34; proved undeveloped reserves declined from 359 MBbl to zero.
Material changes versus the prior year
- Revenue decreased 55%, primarily due to lower oil prices and volumes; operating cash flow fell to $482,000 from $6.571 million.
- The company recorded a $14.526 million non-cash oil-and-gas ceiling-test impairment, versus a $2.796 million impairment of methane facilities in 2014. It also recorded a $7.351 million deferred tax expense after fully valuing down its deferred tax assets.
- Oil and gas property carrying value declined to $8.838 million from $25.413 million. The reserve report attributed reserve reductions principally to lower prices, revisions, and the removal of undeveloped locations.
- Cost reductions included salary and director compensation cuts initiated in March 2015; reported general and administrative expense declined to $2.069 million from $2.707 million.
Outlook, risks, contingencies, and unusual items
- Liquidity and credit: The bank borrowing base was reduced from $7.8 million to approximately $3.2 million under a March 28, 2016 amendment, and the facility maturity was extended to January 30, 2018. The company had breached leverage and interest-coverage covenants at December 31, 2015; the amendment modified covenants and waived relevant defaults. The filing reports approximately $2.2 million outstanding under the facility as of March 28, 2016. The next borrowing-base review was scheduled for September 2016.
- Impairment outlook: Management estimated a further $1–2 million oil-property impairment for the quarter ending March 31, 2016, dependent principally on oil prices. The filing cautions that further low prices could reduce reserves, borrowing availability, and cash flows.
- Controls: Management concluded disclosure controls and internal control over financial reporting were ineffective because review controls over the quarterly ceiling-test calculation were inadequate. Management planned to strengthen analysis of tax effects in that calculation. The auditor did not attest to internal-control effectiveness.
- Contingencies and related parties: The company paid a $386,000 BSEE civil penalty and statutory interest in 2015 relating to operations on Hoactzin properties; the appeal was unsuccessful and the related cash collateral was returned. Hoactzin had provided an internal analysis describing potential operational and other claims against the company, which were under discussion. The company also remained operator of record for certain Hoactzin properties pending transfer of operations and bonds.
- Operating risks: Oil-price volatility, natural production decline, shut-in wells, dependence on two principal oil purchasers, environmental and regulatory costs, and access to credit could materially affect performance. Management stated that repairs to some shut-in wells were uneconomic at current prices. A voluntary lesser-prairie-chicken protection agreement could add about $40,000 per affected well.
- Governance and ownership: Interim CEO Michael J. Rugen also served as CFO. Chairman Peter E. Salas controlled approximately 34.5% of common stock and was connected to Hoactzin, a related party.
Most important facts for investors to verify
- Confirm the issuer: the supplied 10-K is for Tengasco, Inc., not Riley Exploration Permian, Inc.
- Review the March 2016 credit amendment, borrowing-base terms, covenant waivers, March debt balance, and subsequent September 2016 redetermination.
- Assess whether oil prices, production, and cash generation supported the stated impairment outlook and reserve estimates.
- Review the ceiling-test control weakness, remediation progress, and any subsequent impairment or financial-statement revisions.
- Determine the status and potential exposure of Hoactzin-related claims and the transfer of operator and bonding responsibilities.