Business context and reporting period
Riley Exploration Permian, Inc. filed this Form 10-Q for the quarter ended March 31, 2021, its fiscal second quarter, and the six months then ended. The company is an independent oil and gas producer focused primarily on the San Andres Formation in the Permian Basin. The filing reports three- and six-month comparisons with 2020; the merger with Tengasco closed February 26, 2021, and the statements use reverse-merger accounting, with REP LLC treated as the accounting acquirer.
Key financial results and liquidity
Amounts below are in millions of dollars, except per-share data and where noted.
| Metric | Three months ended March 31 | Six months ended March 31 |
|---|---|---|
| Total revenue | 2021: $37.3; 2020: $25.4 | 2021: $60.3; 2020: $55.0 |
| Income from operations | 2021: $7.0; 2020: $7.2 | 2021: $13.7; 2020: $19.8 |
| Net income (loss), including discontinued operations | 2021: $(51.9); 2020: $75.1 | 2021: $(59.8); 2020: $68.2 |
| Net loss attributable to common shareholders/unitholders | 2021: $(52.5); 2020: $74.2 | 2021: $(61.3); 2020: $66.5 |
| Basic net income (loss) per share/unit | 2021: $(3.61); 2020: $5.95 | 2021: $(4.52); 2020: $5.34 |
Quarterly operating margin was approximately 18.9%, compared with 28.5% a year earlier. Quarterly oil and gas sales rose 51% to $36.7 million; total revenue also includes related-party contract-services revenue. Average daily production increased 11% to 8,293 Boe/d. The average realized commodity price was $49.12/Boe before derivative settlements and $45.64/Boe including settlements for the quarter, per the operating table.
For the six months, cash provided by operating activities from continuing operations was $38.1 million, versus $36.3 million in 2020. Continuing-operations investing cash use was $16.8 million, including $17.1 million of oil and gas property additions; financing cash use was $13.2 million. Cash ended the period at $10.1 million, compared with $1.7 million at September 30, 2020. The company reported a $29.6 million working-capital deficit.
At March 31, 2021, revolving-credit borrowings were $97.5 million against a $135 million borrowing base, leaving $37.5 million available. The facility matures September 28, 2023; the company reported covenant compliance. Total assets were $357.2 million and total liabilities were $175.9 million. The former $61.2 million Series A preferred-unit balance converted to common units in connection with the merger; no preferred shares were outstanding at quarter-end.
Material changes versus the prior comparable period
- Quarterly production and revenue increased, supported by higher commodity prices and greater natural gas and NGL sales volumes. The company attributed the latter to expanded third-party gathering and processing capacity, not a change in its gas-oil ratio.
- Operating income declined modestly for the quarter and more substantially for the six-month period. Higher exploration costs, merger expenses, and compensation costs contributed to expense growth.
- Derivative results swung sharply: the company recorded a $24.9 million quarterly derivative loss and a $38.8 million six-month loss, compared with gains of $69.2 million and $51.2 million, respectively, in the 2020 periods. The six-month loss included a $41.4 million unrealized loss, primarily reflecting rising commodity prices.
- The company recorded $14.2 million of quarterly income-tax expense and $13.7 million for the six months, largely reflecting the change to corporate tax status following the merger.
- Cash capital spending fell 49% year over year for the six-month period. The company drilled 11 gross (8.9 net) wells and completed 8 gross (5.5 net) wells.
Outlook, commentary, risks, and unusual items
- Management expected fiscal 2021 capital spending of approximately $54–$56 million, intended to be funded entirely from operating cash flow. The company stated that forecast operating cash flow and revolver availability were expected to fund working-capital needs through May 2022.
- Management cited commodity-price volatility, regional price differentials, production and reserve uncertainty, third-party gathering and processing access, borrowing-base reductions, covenant compliance, and severe weather as key risks. Winter Storm Uri caused an estimated 18 net MBoe production reduction over five days.
- The company entered an agreement to sell the Kansas Reporting Unit acquired in the merger. The sale closed April 2, 2021 for $3.5 million plus approximately $0.2 million in net closing adjustments. The unit was classified as held for sale and discontinued operations at March 31; the company recorded an $18.5 million goodwill impairment, included in discontinued-operations loss.
- Quarterly and six-month reported losses include substantial noncash and transaction-related effects, including derivative remeasurement, the Kansas goodwill impairment, merger costs, and merger-related stock compensation. These items make reported net results less indicative of operating cash generation.
- Disclosure controls and procedures were reported ineffective at March 31, 2021 because of material weaknesses in financial reporting. The cited issues involved stock-based compensation, dividend timing, derivative settlements, and preparation and review of the cash-flow statement. Remediation had not been fully implemented and tested.
- Stakeholder entities accounted for 87% of revenue for the six months, creating significant customer concentration. The company also disclosed that 79% of undeveloped acreage was scheduled to expire in fiscal 2021 and estimated about $1 million to extend or renew material leases, excluding drilling to hold acreage.
Important facts for investors to verify
- Confirm the control-remediation plan, its implementation and testing, and whether any future filings identify restatements or additional weaknesses.
- Reconcile the filing’s realized-price discussion: the operating table reports $45.64/Boe including derivative settlements for the quarter and $42.68/Boe for the six months, while the highlights section describes $42.68/Boe as a second-quarter figure.
- Review current hedge positions, settlement exposure, counterparty risk, and how derivative fair-value changes may affect earnings and liquidity.
- Assess liquidity against the capital budget, dividends, working-capital deficit, debt covenants, and possible borrowing-base changes; the stated May 2022 liquidity forecast depends on management assumptions.
- Verify the completed Kansas divestiture’s final proceeds and adjustments, and monitor lease renewals, production trends, and reliance on major customers and third-party midstream providers.