Business Context and Reporting Period
Filing identity: The supplied filing is for EnerJex Resources, Inc., not Ageagle Aerial Systems Inc. It is an unaudited Form 10-Q for the three months ended March 31, 2014, filed May 13, 2014.
EnerJex acquires, develops, explores and produces onshore oil and natural gas properties, primarily in Kansas, Colorado, Nebraska and Texas. Capital spending was focused on Colorado and Kansas properties.
Financial Performance and Position
| Metric | Q1 2014 | Q1 2013 or period-end comparison |
|---|---|---|
| Total revenue | $3.855 million | $2.337 million |
| Operating income | $883,033 | $369,055 |
| Net income | $103,634 | $20,036 |
| Net loss attributable to common stockholders | $(295,813) | $(172,851) |
| Operating margin | Approximately 22.9% | Approximately 15.8% |
| Net margin | Approximately 2.7% | Approximately 0.9% |
| Cash from operating activities | $(65,848) | $(101,131) |
| Cash at period end | $1.437 million | $464,404 at March 31, 2013 |
| Long-term debt | $32.038 million | $31.547 million at December 31, 2013 |
| Working capital | $(179,847) | $(1.105 million) at December 31, 2013 |
- Oil revenue was $3.613 million, while natural gas revenue was $242,398. Oil production was 39,665 barrels and natural gas production was 57,141 Mcf.
- Average realized prices were $91.08 per barrel of oil and $4.24 per Mcf of natural gas.
- Direct operating costs increased to $1.532 million from $782,072, and depreciation, depletion and amortization increased to $763,758 from $444,537.
- Interest expense was $378,928 and derivative losses were $404,353, materially reducing operating profitability.
- Investing cash outflows were $327,512, including $1.235 million of additions to oil and gas properties, partly offset by $987,521 of proceeds from property sales.
- Financing activities provided $521,806, including $500,000 of borrowings.
- Current assets were $5.963 million versus current liabilities of $6.142 million. Marketable securities totaled $1.019 million.
Material Changes Versus the Prior Comparable Period
- Revenue increased approximately 65%, primarily from increased production associated with the September 2013 Black Raven acquisition, plus new natural gas production.
- Operating income increased approximately 139%, despite higher production costs and depreciation.
- Net income increased by $83,598, but preferred dividends resulted in a larger loss attributable to common stockholders.
- Oil production increased approximately 49%, from 26,537 barrels to 39,665 barrels. Oil pricing increased from $88.07 to $91.08 per barrel.
- Direct operating costs increased approximately 96%, although reported lifting costs per barrel of oil equivalent increased only about 5.7%, to $31.14.
- Interest expense increased approximately $260,683 because of higher borrowings following the Fifth Amendment to the credit facility. Derivative losses increased approximately $164,412.
- Cash increased $128,446 during the quarter. Working capital improved by approximately $925,000 but remained negative.
- Common shares outstanding increased to 115.258 million from 115.004 million at December 31, 2013, partly due to shares issued for employee and consultant compensation.
Outlook, Commentary, Risks and Unusual Items
- Management expected to fund near-term obligations through operating cash flow and additional borrowings under the senior secured credit facility. The filing states that management believed historical funding sources would provide adequate liquidity for 2014.
- The credit facility had a $38 million borrowing base, of which $32.0 million was borrowed at March 31, 2014. Management expected a second-quarter 2014 borrowing-base review and anticipated a possible increase based on production and existing production maturity. The facility expires October 3, 2015 and carried a 3.3% interest rate during the quarter.
- Management reported two reactivated Colorado oil wells, workovers on eight natural gas wells, 17 drilling permits filed in the Niobrara Project, and plans to solicit drilling, completion and pipeline bids.
- Unseasonably cold weather and harsh operating conditions slowed Colorado operations and increased certain operating expenses.
- Derivative contracts covering portions of crude oil production had an aggregate fair value liability of $1.421 million. Hedging reduces exposure to price volatility but limits the benefit of rising oil prices.
- Asset retirement obligations were $2.747 million. The company also had a $50,000 irrevocable letter of credit for the Texas Railroad Commission.
- On March 14, 2014, Black Raven settled disputes with Atlas Resources. Atlas agreed to pay $687,939, assign certain subsurface rights and pay $12,000 per month in overhead through November 2015; Black Raven agreed to purchase seven non-producing wells for $150,000.
- Effective May 1, 2014, the company exchanged working interests in portions of its Cherokee Project, increasing net acreage by approximately 5% with comparable production of less than five barrels per day on the transferred producing leases.
- Principal risks include oil and gas price volatility, reserve and production uncertainty, weather and operating conditions, ability to obtain development capital, debt and covenant risks, hedging losses, regulatory requirements and the need to maintain qualified personnel.
- The company disclosed no material impairments under its full-cost ceiling test for the quarter and no material off-balance-sheet arrangements.
- A legal action relating to a 2008 stock offering was partially settled for $500,000 paid in January 2014, with a counterclaim of $492,134 dismissed. Further recovery and appellate outcomes remain uncertain.
Facts an Investor Should Verify
- Confirm the issuer identity: the provided filing is EnerJex Resources, Inc., despite the request identifying Ageagle Aerial Systems Inc.
- Reconcile the company’s ability to fund capital spending and debt obligations given negative working capital, negative operating cash flow and $32.0 million of debt drawn against a $38 million borrowing base.
- Review the second-quarter 2014 borrowing-base redetermination and any resulting changes in borrowing capacity or covenant compliance.
- Evaluate the effect of commodity swaps, including the $1.421 million derivative liability and the risk that hedges limit upside from higher oil prices.
- Assess whether production growth from the Black Raven acquisition can offset higher operating costs, interest expense and depletion.
- Review subsequent filings for the Atlas settlement, Cherokee acreage exchange, Lonesome Dove property sale and any developments in the unresolved litigation.