Business context and reporting period
The supplied filing is Tengasco, Inc.’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2011; it does not identify Riley Exploration Permian, Inc. as the registrant. Tengasco explores for and produces oil and natural gas, primarily in Kansas and Tennessee, and operates a 65-mile gas pipeline and a landfill-methane project in Tennessee.
Financial performance and position
Amounts below are in millions of dollars except per-share data and percentages.
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $4.36 | $3.29 | $12.80 | $9.43 |
| Operating income | $1.65 | $0.52 | $4.42 | $1.51 |
| Net income | $1.19 | $0.19 | $2.52 | $1.19 |
| Diluted EPS | $0.02 | $0.00 | $0.04 | $0.02 |
| Operating margin | 37.8% | 15.9% | 34.5% | 16.0% |
- Revenue growth was driven by higher Kansas oil prices and volumes. Average Kansas oil prices were $82.49/barrel in Q3 versus $68.64 a year earlier, and $88.22/barrel for nine months versus $70.22. Nine-month net oil sales rose to 139 MBbl from 123 MBbl.
- For nine months, operating cash flow was $6.38 million, versus $2.92 million. Investing used $7.69 million, including $5.89 million for oil and gas properties and $0.54 million for the methane project; financing provided $1.25 million. Cash declined $0.07 million to $0.07 million.
- At September 30, current assets were $3.61 million and current liabilities $2.62 million (working capital about $0.99 million; current ratio about 1.38). Total assets were $42.94 million, liabilities $15.06 million, and stockholders’ equity $27.88 million.
- Total debt was approximately $11.1 million, including $10.9 million drawn on the revolving facility. The $20 million borrowing base was reaffirmed in July; facility maturity is January 2013. The company reported compliance with all covenants.
Changes, outlook, risks and unusual items
- Compared with the prior periods, stronger oil prices and increased sales volumes substantially raised revenue and operating income. Nine-month production costs and taxes increased to $4.72 million from $4.40 million; G&A was broadly stable at $1.74 million.
- Derivative results were volatile: the nine-month statement reports a $0.11 million net derivative gain versus $0.79 million in 2010. Management separately describes $0.98 million of unrealized gains, $0.86 million of realized losses, and a $0.37 million cost to purchase the new hedge. These components should not be treated as equivalent to cash earnings.
- The prior oil-price collar expired in August 2011. A Cargill contract provides a $65/barrel floor on 10,000 barrels monthly through December 2012, with no cap, for a stated total cost of $0.374 million. About half of current oil production is covered.
- The methane plant operated only 26% of available hours in Q3, principally because oxygen and water problems in the landfill gas collection system caused shutdowns; maintenance also contributed. Republic had begun repairs and drilled four new collection wells. Tengasco expected further improvements from those actions and planned plant modifications, but gave no assurance of improved output or economics. No methane-project net profits had been generated for Hoactzin through September 30.
- Management anticipated Hoactzin’s remaining $0.03 million investment balance would be recovered by year-end 2011, ending its contingent preferred-stock exchange option. This is a projection dependent on oil prices, volumes, and expenses. Hoactzin is controlled by the chairman; related-party balances included $0.46 million receivable and $0.46 million payable at quarter-end.
- Key risks include volatile commodity prices, borrowing-base reductions that could require debt repayment, drilling and reserve-estimation uncertainty, and methane-project operating interruptions. The next borrowing-base review was scheduled for January 2012. No formal earnings guidance is provided. The company reported no legal proceedings and said disclosure controls were effective, with no material control changes during the period.
Important facts for investors to verify
- Confirm the intended issuer: the provided 10-Q is for Tengasco, Inc., not Riley Exploration Permian, Inc.
- Review the January 2012 borrowing-base outcome, facility covenants, and liquidity given only $0.07 million of reported cash.
- Assess whether the methane collection repairs and plant modifications improved operating hours, sales, and cash profitability.
- Reconcile derivative fair-value gains and realized hedge settlements to reported earnings and cash flows; confirm hedge volumes and costs.
- Track Hoactzin-related balances and the expected repayment of its remaining investment, including the contingent preferred-stock provisions.