Filing summary
Issuer mismatch: The supplied filing is Tengasco, Inc.’s Form 10-Q for the quarter ended March 31, 2017, not a filing for Riley Exploration Permian, Inc.
Business context and reporting period
Tengasco reported unaudited first-quarter 2017 results. Its business included oil and gas exploration and production, primarily in Kansas, and a manufactured-methane facility in Tennessee. The company reported no methane gas sales in the quarter.
Financial results
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Total revenue | $1.344 million | $932,000 |
| Operating loss | $197,000 | $1.384 million |
| Net loss | $213,000 | $1.404 million |
| Loss per share | $0.03 | $0.23 |
| Cash used in operating activities | $88,000 | $1.071 million |
| Cash used in investing activities | $7,000 | $301,000 |
Revenue rose about 44%, largely as the average realized oil price increased to $46.32 per barrel from $27.67. Net oil sales volume fell to 26.0 thousand barrels from 27.8 thousand. Oil and gas revenue was $1.209 million; methane-facility revenue was $135,000.
Production costs and taxes increased to $971,000 from $839,000. General and administrative expense declined to $334,000 from $500,000, and depreciation, depletion and amortization declined to $236,000 from $336,000. No impairment was recorded in Q1 2017, compared with a $641,000 oil-property impairment in Q1 2016. The filing does not present a separate gross-margin figure.
Balance sheet, debt and liquidity
- At March 31, 2017, cash was $228,000, current assets $1.616 million and current liabilities $627,000. Total assets were $8.323 million.
- Total liabilities were $2.732 million, including an asset retirement obligation of $2.071 million. Debt was $87,000, primarily vehicle installment notes; the Prosperity Bank facility had no amount drawn.
- The bank facility’s borrowing base was reduced from $3.0 million to approximately $1.25 million, and its maturity was extended to July 31, 2018. Its rate was prime plus 0.50% (4.50% at amendment). The lender’s next borrowing-base review was scheduled for July 2017.
- The company raised approximately $2.7 million gross in a rights offering, issuing 4,498,698 shares; 3,293,407 went to directors, management and affiliates. Proceeds were used primarily to repay the $2.4 million bank-facility balance outstanding at year-end. Shares outstanding increased to 10,601,685 at quarter-end from 6,097,723 at December 31, 2016.
- Cash from financing activities was $247,000, reflecting the offering proceeds and repayments of borrowings. The company reported a $152,000 increase in cash during the quarter.
Changes, outlook and risks
The net loss narrowed by $1.191 million year over year, mainly reflecting higher oil revenue, lower G&A and DD&A, and the absence of the prior-year impairment, partly offset by higher production costs and taxes. Management said it expected 2017 revenue to cover operating and G&A expenses and support compliance with bank covenants. If funding needs exceed available cash, the company said it could draw on the $1.25 million borrowing base, issue additional shares or sell assets. This is management’s expectation, not a quantified earnings or production forecast.
The company had been in covenant default for the quarter ended December 31, 2016; the bank waived the minimum-liquidity default and an anticipated debt-to-equity default. Tengasco reported compliance with covenants for Q1 2017. It also disclosed that the borrowing base could be reduced at lender review, limiting funds for capital spending. Oil-price volatility, production declines, drilling outcomes, costs and reserve estimates were identified as material risks. The company had no commodity or interest-rate derivative positions.
A Texas lawsuit seeks approximately $188,000 plus interest and legal fees for offshore services allegedly unpaid by Prime8 and Tengasco. Tengasco said it did not sign the relevant agreement and reported that Hoactzin agreed to indemnify and defend it; the case was set for trial in October 2017, subject to possible postponement. The filing also describes possible operational claims by Hoactzin under a prior management agreement, which the parties were discussing. Separately, a previously affirmed $386,000 BSEE civil penalty was paid in 2015.
The company reported a full valuation allowance against deferred tax assets and did not expect to pay federal or state income taxes for 2017, citing $26.4 million of net operating loss carryforwards at year-end 2016. A rights agreement adopted in March 2017 was intended to help preserve use of those tax losses by discouraging ownership changes.
Investor verification points
- Confirm the issuer: this document is Tengasco’s filing, not Riley Exploration Permian’s.
- Check the July 2017 borrowing-base redetermination and subsequent covenant compliance; available borrowing capacity was limited to approximately $1.25 million.
- Review oil-price and production trends, given the company’s dependence on oil revenue and declining net sales volumes.
- Track the Hoactzin-related litigation and claims, including the scope and collectability of the indemnity; the filing does not quantify potential ultimate exposure clearly.
- Assess dilution and related-party participation in the rights offering, as well as the implications of the rights agreement for share ownership and tax attributes.