Business Context and Reporting Period
This summary covers the Form 10-Q filed by Tengasco, Inc. for the quarterly period ended March 31, 2010. Tengasco is an independent oil and natural gas exploration and production company with primary operations in Kansas (oil) and Tennessee (natural gas and methane extraction). The company operates a 65-mile intrastate pipeline and a methane extraction project at the Carter Valley landfill.
Key Financial Metrics
| Metric | Q1 2010 | Q1 2009 |
|---|---|---|
| Total Revenues | $2,851,000 | $1,899,000 |
| Net Income (Loss) | $268,000 | $(402,000) |
| Net Income Per Share (Basic) | $0.00 | $(0.01) |
| Operating Cash Flow | $564,000 | $513,000 |
| Investing Cash Flow | $(496,000) | $(297,000) |
| Total Debt (Long-term + Current) | $10,154,000 | $10,181,000 |
| Cash and Cash Equivalents | $463,000 | $422,000 |
| Working Capital | $163,000 | $(129,000) |
Note: All figures in thousands except per share data. Working capital calculated as Current Assets minus Current Liabilities.
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased by approximately 50% to $2.85 million, driven primarily by a significant rise in realized oil prices (averaging $71.24/barrel in Q1 2010 vs. $35.74/barrel in Q1 2009). This price increase offset a 13 MBbl reduction in net oil sales volumes.
- Profitability Turnaround: The company reported a net income of $268,000, reversing a net loss of $402,000 in the prior year quarter. This was aided by a $162,000 unrealized gain on derivatives.
- Related Party Transactions: A material related party transaction occurred in Q1 2010. Tengasco recorded $1.708 million in "Accounts receivable - related party" and a corresponding "Accounts payable - other" liability. This relates to Tengasco contracting goods and services for Hoactzin Partners, L.P. (a related party), which Hoactzin paid directly to vendors.
- Capital Expenditures: Cash used in investing activities increased to $496,000 from $297,000, primarily due to drilling and polymer work performed on Kansas properties.
Guidance, Outlook, and Risks
- Debt Covenants: As of March 31, 2010, the company is in compliance with all covenants under its revolving credit facility with Sovereign Bank. The borrowing base is set at $10.9 million, with $9.9 million drawn. The next borrowing base review is scheduled for June 2010.
- Hedging Strategy: The company maintains a "costless collar" on approximately two-thirds of its daily oil production, with a floor of $60.00 and a cap of $81.50 per barrel (WTI NYMEX) through July 2011. This is intended to stabilize cash flows.
- Methane Project: The Manufactured Methane Corporation (MMC) subsidiary averaged 67% uptime in Q1 2010. A five-year fixed-price gas sales contract with Atmos Energy Marketing, LLC, is in place at over $6/MMBtu.
- Risks:
- Borrowing Base Reduction: A reduction in the borrowing base due to lower commodity prices or reserve estimates could force the company to pay down debt, limiting capital for operations.
- Commodity Price Volatility: Despite hedging, the company remains exposed to price fluctuations in unhedged production.
- Related Party Contingency: While currently unlikely, a contingent agreement exists where Hoactzin Partners could exchange a portion of its interest in the Methane Project for Tengasco preferred stock if certain payout thresholds are not met. Management deems this a remote contingency as of March 31, 2010.
Investor Verification Checklist
- Debt Compliance: Verify the outcome of the June 2010 borrowing base review with Sovereign Bank to ensure no forced debt repayment is required.
- Related Party Payables: Confirm the status of the $1.708 million related party payable/receivable and ensure Hoactzin continues to settle these vendor invoices directly.
- Production Volumes: Monitor the trend in net oil sales volumes, which declined in Q1 2010 despite higher prices, to assess the sustainability of revenue growth.
- Methane Project Uptime: Track the uptime and production efficiency of the Carter Valley landfill gas project, which averaged 67% in Q1 2010.
- Derivative Valuation: Review the fair value of the oil price collar, which currently represents a liability of $1.151 million on the balance sheet.