Riley Exploration Permian, Inc. — FY2021 Form 10-K
Reporting period: Fiscal year ended September 30, 2021. This is an annual report, not a standalone fourth-quarter report. Riley Permian focuses on oil, natural gas and NGL development in the Permian Basin, primarily the San Andres formation. The February 2021 Tengasco merger was accounted for as a reverse merger, with REP LLC as the accounting predecessor; the Kansas assets acquired in the merger were subsequently sold.
Financial and operating performance
| Metric | FY2021 | FY2020 |
|---|---|---|
| Total revenue | $151.0 million | $76.9 million |
| Oil and gas sales, net | $148.6 million | $73.1 million |
| Income from operations | $59.9 million | $7.3 million |
| Net income (loss) from continuing operations | $(46.9) million | $35.1 million |
| Net income (loss), including discontinued operations | $(65.7) million | $35.1 million |
| Cash provided by operating activities from continuing operations | $86.1 million | $62.6 million |
| Cash used in investing activities from continuing operations | $(59.6) million | $(51.5) million |
- Average production increased 22% to 8,640 Boe/d; the company brought 20 gross (14 net) wells online. Oil was approximately 74% of production.
- Oil and gas sales increased 103%, reflecting higher prices and production. Combined realized price before derivative settlements rose to $47.12/Boe from $28.22/Boe. Lease operating expense declined to $6.97/Boe from $7.81/Boe.
- Derivative loss was $89.2 million, including $72.9 million of unrealized loss and $16.3 million of realized loss. This more than offset operating income and was a principal reason for the continuing-operations loss.
- Capital spending before acquisitions was reported at $60.1 million. The company declared approximately $18.1 million of dividends for the year; cash-flow disclosures report $18.3 million of common dividends paid.
- At year-end, cash was $17.1 million, revolving debt was $60.0 million, and borrowing capacity was $75.0 million against a $135.0 million borrowing base. The borrowing base increased to $175.0 million in October 2021. Working capital was negative $46.9 million, largely reflecting current derivative liabilities.
- Proved reserves rose to 72.2 million Boe from 56.8 million Boe. Approximately 42% were proved undeveloped, with estimated future development costs of $207.1 million. The standardized measure of discounted future net cash flows was $552.9 million, up from $302.3 million; this is a prescribed reserve valuation measure, not fair market value.
Material changes and unusual items
- The merger changed the company from a pass-through LLC structure to a taxable corporation. A $13.6 million deferred-tax provision was established upon the tax-status change; FY2021 income-tax expense was $13.0 million.
- The July 2021 equity offering of 1.67 million shares generated approximately $46.7 million net proceeds; $35.5 million was used to repay revolving debt.
- The company sold the acquired Kansas reporting unit in April 2021 for an adjusted $3.3 million. Discontinued operations included an $18.5 million goodwill impairment and a net loss of $18.8 million.
- Comparability is affected by the reverse merger, the conversion to a taxable corporation, the divestiture, and merger-related costs. FY2021 results include the post-merger corporate period; consult the pro forma disclosures and notes when comparing periods.
- The company reported that previously identified material weaknesses in financial reporting controls were remediated by September 30, 2021. Management concluded internal control over financial reporting was effective; the external auditor did not provide an ICFR attestation.
Outlook, risks and contingencies
- No quantified production, earnings or capital-spending guidance is provided in the supplied filing text. Management’s stated strategy is to develop its drilling inventory, generally fund capital expenditures from operating cash flow, pursue selective acquisitions and distribute excess returns through dividends subject to board discretion and credit-agreement limits.
- The company began planning, permitting and drilling for a water-and-CO₂ enhanced oil recovery project in Yoakum County. It later contracted for CO₂ supply and pipeline connection. Project results, timing, economics and CO₂ availability remain uncertain; management also described investigating carbon capture, utilization and sequestration opportunities.
- Commodity-price volatility, regional price differentials, reserve-estimation uncertainty, concentration in the Permian, dependence on third-party gathering and processing, and a purchaser representing 87% of FY2021 purchased revenue are notable risks. The filing states hedges provide partial protection but can limit gains and create mark-to-market volatility.
- The company recorded an estimated 18,000 Boe production reduction during Winter Storm Uri. COVID-19 had not caused significant operational disruption as of the filing, but its demand and price effects remained uncertain.
- A five-year gathering-system commitment begins in January 2022; failure to meet annual well or volume targets may trigger financial penalties. EOR supply commitments total approximately $1.2 million due by January 2022 and $3.3 million by April 2022.
- A bankruptcy trustee lawsuit filed November 30, 2021 seeks approximately $14 million, plus unspecified punitive damages and fees, relating to historical Kansas working-interest transfers. The case was at an early stage, losses could not be estimated, and no reserve was recorded. Management stated it did not believe pending matters would materially affect the company, but the lawsuit’s outcome is unresolved.
Important facts for investors to verify
- Review the full derivative schedule, hedge volumes and prices, and how subsequent commodity-price movements could affect earnings, cash flow and collateral requirements.
- Check current debt, borrowing-base availability, covenant compliance and dividend restrictions, including changes made after year-end.
- Assess the economics, funding plan and execution milestones for the EOR project and the expected development pace and financing of PUDs.
- Monitor the Hoactzin litigation, its potential exposure and any future change to the company’s loss estimate or reserves.
- Evaluate customer concentration, gas-processing commitments and the availability and cost of transportation, processing and CO₂ supply.
- Consider reserve assumptions and sensitivity to prices and costs; the company notes that reserve estimates and standardized-measure values are uncertain and are not fair market values.