SEC Form 10-Q Summary: EnerJex Resources, Inc.
Filing-period note: The supplied filing is for EnerJex Resources, Inc., not Ageagle Aerial Systems Inc. It covers the quarter and nine months ended September 30, 2014, and was filed November 14, 2014.
Business Context and Reporting Period
EnerJex is an onshore oil and natural gas acquisition, development, exploration and production company operating primarily in Kansas, Colorado, Nebraska and Texas. The company’s strategy focused on developing Colorado and Kansas properties, including drilling, recompletions, waterflood projects and infrastructure upgrades. The filing includes the operations of Black Raven Energy, acquired in September 2013, for the full comparable 2014 periods.
The financial statements are unaudited and prepared under U.S. GAAP for interim reporting. Management stated that interim results are not necessarily indicative of full-year results.
Key Financial Metrics
| Metric | Three Months Ended September 30, 2014 | Three Months Ended September 30, 2013 | Nine Months Ended September 30, 2014 | Nine Months Ended September 30, 2013 |
|---|---|---|---|---|
| Total revenue | $3.81 million | $2.69 million | $11.62 million | $7.23 million |
| Income from operations | $0.22 million | $0.67 million | $1.87 million | $1.44 million |
| Net income (loss) | $1.79 million | $(0.62) million | $0.88 million | $0.12 million |
| Net income (loss) attributable to common stockholders | $1.27 million | $(0.82) million | $(0.49) million | $(0.45) million |
| Basic and diluted earnings per common share | $0.17 | $(0.18) | $(0.07) | $(0.10) |
- Oil revenue was $10.79 million for the nine months, compared with $7.23 million in the prior-year period. Natural gas revenue was $0.83 million, compared with none reported in the prior-year period.
- Nine-month oil production increased to 118,023 barrels from 76,327 barrels. Natural gas production was 251,127 Mcf, compared with none reported in the prior-year period.
- Nine-month direct operating costs increased 103% to $4.96 million, primarily because of acquired production, while direct operating cost per Boe declined slightly to $31.05 from $31.11.
- Nine-month depreciation, depletion and amortization increased to $2.50 million from $1.35 million, while depletion expense per Boe declined 12%.
- Nine-month operating margin was approximately 16.1%, versus approximately 19.9% in the prior-year period. Net income was significantly affected by derivative valuation gains and losses.
Cash Flow, Liquidity, Debt and Capital Structure
- Cash provided by operating activities was $2.42 million for the nine months ended September 30, 2014, compared with $1.80 million in the prior-year period.
- Investing activities used $4.41 million, including $5.16 million of additions to oil and gas properties, partly offset by $0.99 million of proceeds from property sales.
- Financing activities provided $1.25 million. The company received $13.35 million from preferred-stock issuance and $3.50 million from borrowings, but paid $14.03 million of long-term debt and $1.38 million of preferred dividends.
- Cash declined to $0.56 million at September 30, 2014 from $1.08 million at December 31, 2013. Working capital remained negative at $(0.27) million, although it improved from $(1.10) million.
- Total long-term debt was $21.02 million at September 30, 2014, compared with $31.55 million at year-end 2013. The senior secured facility had a $40 million borrowing base, $21 million outstanding, a stated interest rate of 3.3% and a maturity date of October 3, 2018.
- The company issued 639,157 shares of 10% Series A Cumulative Perpetual Preferred Stock at $23.75 per share for gross proceeds of approximately $15.2 million. Preferred dividends are based on a $25 liquidation preference and are cumulative at 10% annually.
- Total assets were $70.98 million and total liabilities were $28.35 million at September 30, 2014. Stockholders’ equity was $42.63 million.
Material Changes Versus the Prior Comparable Period
- Revenue increased 61% for the nine months, driven primarily by higher oil production from the Black Raven assets and the addition of natural gas revenue.
- Operating income increased 30% for the nine months, but the quarterly operating result declined because production and general expenses grew faster than quarterly revenue.
- Net income increased to $0.88 million from $0.12 million for the nine months. The improvement reflected higher operating income and a $20,012 derivative gain versus a $992,556 derivative loss in the prior-year period.
- Interest expense increased to $1.01 million from $0.39 million because of increased borrowings and related financing costs.
- Common-stockholders’ results remained negative for the nine-month period because of approximately $1.38 million of preferred dividends.
- The company completed a 1-for-15 reverse common-stock split, exchanged existing preferred stock for common stock and new preferred stock, began trading on the NYSE MKT, and increased its credit-facility borrowing base from $38 million to $40 million while extending maturity by three years.
Guidance, Outlook, Risks and Unusual Items
- Management expected to fund near-term cash obligations through operating cash flow and additional borrowings under the Texas Capital Bank facility. It stated that historical funding sources were expected to provide adequate liquidity for 2014, but no formal revenue, earnings or production guidance was provided.
- Development activity included a Kansas Mississippian drilling program, Adena Field waterflood and infrastructure work, and a planned 17-well Niobrara program in Colorado targeted for permitting and pipeline-tap completion by the first quarter of 2015.
- On September 30, 2014, the company acquired an 85% operated working interest in 640 acres in Weld County, Colorado. On October 14, 2014, it acquired a 100% working interest in an additional 3,400 mineral acres in Weld County for approximately $0.30 million.
- Derivative instruments produced a material quarterly gain of $1.83 million and had aggregate fair value of approximately $(0.24) million at September 30, 2014. Hedging reduces price exposure but limits the benefit of higher oil prices.
- Asset retirement obligations were $2.84 million. The company had a $50,000 irrevocable letter of credit in favor of the Texas Railroad Commission and future non-cancellable lease payments totaling approximately $0.65 million through 2019.
- Management identified risks involving oil and gas price volatility, reserve estimates, borrowing-base reductions, access to development capital, secured-debt covenants, interest rates, regulatory approvals, weather, operating costs and the ability to execute development plans.
- The company reported no material pending legal proceedings, but an appeal remained outstanding in litigation related to a 2008 stock offering. A prior settlement provided $0.50 million to the company and eliminated a $0.49 million counterclaim; the outcome of the appeal and any additional recovery were uncertain.
- No impairment resulted from the full-cost ceiling test for the quarter. Management concluded that disclosure controls and procedures were effective and reported no material changes to internal control over financial reporting.
Important Facts for Investors to Verify
- Confirm the issuer identity: the supplied filing is for EnerJex Resources, Inc., although the request identifies Ageagle Aerial Systems Inc.
- Assess liquidity after the decline in cash to $0.56 million and the continued negative working capital position.
- Review the borrowing-base terms, covenants, collateral and results of the planned early-2015 borrowing-base redetermination.
- Separate recurring operating performance from derivative valuation gains, which materially affected reported earnings.
- Evaluate the sustainability of production growth and the economics of the Colorado and Kansas drilling, waterflood and infrastructure programs.
- Review the cumulative 10% preferred-dividend obligation and its effect on returns attributable to common stockholders.
- Verify reserve estimates, full-cost accounting assumptions, asset-retirement obligations and potential impairment exposure if commodity prices decline.