Business Context and Reporting Period
Company: EnerJex Resources, Inc. (Note: Request metadata listed "Ageagle Aerial Systems Inc.", but the filing text confirms the registrant is EnerJex Resources, Inc.)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2011
Business Overview: EnerJex is an independent oil and gas company focused on acquiring, developing, and producing domestic onshore oil properties, primarily in Eastern Kansas and South Texas. The company utilizes the full-cost method of accounting for its oil and gas properties.
Key Financial Metrics
| Metric | Six Months Ended June 30, 2011 | Six Months Ended June 30, 2010 |
|---|---|---|
| Oil Revenues | $3,054,341 | $2,182,782 |
| Net Income (Loss) | $(1,925,196) | $(559,460) |
| Operating Cash Flow | $21,098 | $(239,204) |
| Investing Cash Flow | $(4,319,032) | $8,905 |
| Financing Cash Flow | $4,827,309 | $(89,272) |
| Cash and Equivalents (Ending) | $3,491,194 | $92,799 |
| Total Debt (Current + Long-term) | $6,144,427 | Not explicitly aggregated in text |
| Working Capital (Deficit) | $(3,327,977) | $(1,897,543) |
Production Metrics (Six Months Ended June 30, 2011):
- Net Oil Production: 33,024 Bbls
- Average Sales Price: $92.49 per Bbl
- Average Production Cost: $68.88 per Bbl
- Average Lifting Cost: $50.69 per Bbl
Material Changes vs. Prior Period
- Revenue Growth: Oil revenues increased by approximately 40% ($871,559) compared to the prior year period, driven by new wells from the 2011 drilling program and properties acquired in late 2010.
- Net Loss Expansion: Despite revenue growth, the net loss widened significantly from $(559,460) to $(1,925,196). This was primarily due to a $(1,271,766) loss on derivative instruments in 2011 (compared to a $(301,000) loss in 2010) and increased operating expenses.
- Expense Increases: Direct operating costs rose by $756,329, attributed to deferred maintenance on vintage leases and new acquisitions. Professional fees increased by $344,428 due to legal fees for acquisitions and capital raising.
- Derivative Volatility: The company reported a significant loss on derivatives for the six-month period, contrasting with a gain in the three-month period ended June 30, 2011 ($1,196,459 gain), highlighting the volatility of hedging positions.
- Liquidity Position: Cash on hand increased substantially to $3.49 million from $92,799 in the prior year, supported by $3.44 million in proceeds from the sale of common stock and $1.4 million from the sale of marketable securities.
Guidance, Outlook, and Risks
Management Commentary & Outlook:
- Drilling Activity: The company drilled and cased two wells in the El Toro project (South Texas) in July 2011, with a third planned for August. Production in the Rantoul project (Kansas) increased from ~30 to ~90 gross barrels per day (BOPD) following the completion of 27 new oil wells and 18 water injection wells.
- Capital Needs: Management is negotiating a new multi-year credit facility with Texas Capital Bank, anticipating a close in the third quarter of 2011. The current facility matures on October 3, 2011.
- Strategy: Focus remains on acquiring fragmented assets in Kansas and utilizing modern technology in South Texas to enhance recovery from mature reservoirs.
Risks and Contingencies:
- Debt Covenants: The company was not in compliance with three technical covenants of its Credit Facility as of December 31, 2010. While amendments were made, the company must maintain specific EBITDA to debt ratios and current asset ratios.
- Commodity Hedging: The company has significant derivative liabilities ($3.86 million fair value) to hedge oil prices. While this reduces exposure to price declines, it limits upside potential and resulted in significant non-cash losses in the first half of 2011.
- Liquidity: The company operates with a working capital deficit of approximately $3.3 million and relies on equity issuances and debt refinancing to fund operations and capital expenditures.
Investor Verification Checklist
- Debt Refinancing Status: Verify the successful closing of the new multi-year credit facility with Texas Capital Bank before the October 3, 2011 maturity of the current facility.
- Derivative Liability Exposure: Review the specific terms of the crude oil swaps (fair value of ~$3.86 million) and assess the impact of future oil price fluctuations on the income statement.
- Capital Expenditure Funding: Confirm the company's ability to fund the $2.57 million in additions to oil & gas properties and future drilling programs without further dilutive equity offerings.
- Production Realization: Monitor the actual production output from the new El Toro and Rantoul wells to ensure they meet the projected economic success and volume increases cited by management.
- Covenant Compliance: Track quarterly compliance with the EBITDA to senior funded debt ratio (currently required at 4.25:1.00) and current asset to current liability ratios.