Business Context and Reporting Period
The source filing is EnerJex Resources, Inc.’s Form 10-K for the fiscal year ended December 31, 2013, not Ageagle Aerial Systems Inc. and not a quarterly filing. EnerJex was an independent onshore oil and gas company operating primarily in Kansas, Colorado, Nebraska and Texas.
The filing was signed March 28, 2014. It reports the September 2013 acquisition of Black Raven Energy, with Black Raven’s operating results included only for the fourth quarter of 2013.
Financial and Operating Metrics
| Metric | 2013 | 2012 | Change or comment |
|---|---|---|---|
| Oil and gas revenue | $10.94 million | $8.50 million | Increased approximately 29% |
| Production | 120,634 BOE | 96,842 BOE | Increased approximately 25% |
| Average realized price | $90.71 per BOE | $87.74 per BOE | Increased $2.97 per BOE |
| Operating income | $1.69 million | $0.87 million | Operating margin approximately 15.4% versus 10.2% |
| Net income | $1.29 million | $0.74 million | Increased approximately 74% |
| Income attributable to common stockholders | $0.25 million | $(0.26) million | Improved after preferred dividends |
| Basic and diluted earnings per share | $0.00 | $0.00 | Rounded presentation |
| Cash flow from operations | $3.11 million | $2.28 million | Increased approximately 36% |
| Capital additions to oil and gas properties | $7.67 million | $10.25 million | Declined approximately 25% |
| Cash and cash equivalents | $1.31 million | $0.77 million | Includes $228,840 of restricted cash in 2013 |
| Working capital | $(1.10) million | $(1.02) million | Deficit increased modestly |
| Long-term debt | $31.55 million | $8.50 million | Increased materially following development and the Black Raven transaction |
| Total liabilities | $41.08 million | $15.44 million | Increased substantially |
Direct operating costs were $4.10 million, or $33.95 per BOE, compared with $3.10 million, or $32.03 per BOE, in 2012. Total expenses were $9.25 million, compared with $7.63 million in 2012. Interest expense was $772,471, and derivative losses were $740,456. Other income was $1.12 million.
The company’s net proved reserves increased to 5.8 million BOE from 2.9 million BOE. Approximately 77% of 2013 reserves were oil, with 49% classified as proved developed producing, 17% as proved developed non-producing and 34% as proved undeveloped. PV10 increased to $102.4 million from $60.8 million; the GAAP standardized measure of discounted future net cash flows was $81.4 million.
Material Changes Versus the Prior Comparable Period
- Production and revenue rose primarily from successful drilling in the Cherokee and Mississippian projects and the addition of Colorado production from Black Raven.
- The company drilled 93 development wells in 2013, all reported as successful, compared with 227 development wells, including one dry well, in 2012. It also drilled 45 water injection wells and recompleted four oil wells after the Black Raven acquisition.
- EnerJex completed the Black Raven merger on September 27, 2013, issuing 41,327,516 common shares and paying $207,067 in cash. Former Black Raven stockholders received approximately 38% of EnerJex’s outstanding voting stock.
- The senior secured credit facility was amended in September 2013. The borrowing base increased to $38 million, the principal commitment increased to $100 million, Black Raven became a borrower, additional collateral was pledged, and the stated current interest rate was reduced to 3.30%.
- Common shares outstanding increased from approximately 73.6 million at December 31, 2012 to 115.0 million at December 31, 2013, largely because of the Black Raven merger.
- Salary expense more than doubled to $1.43 million, while professional fees declined to $1.07 million and administrative expenses remained approximately flat.
- Cash flow from operations increased, but it was insufficient to fund the company’s $7.67 million of oil and gas property additions without debt and other financing sources.
Guidance, Outlook, Risks and Unusual Items
Management stated that historical sources of liquidity, including operating cash flow and borrowings under the credit facility, were expected to provide adequate liquidity for 2014. The company expected a second-quarter 2014 borrowing-base review and anticipated that increased production and maturation of existing production could support an increase.
Management planned to continue developing Kansas and Colorado properties, expand waterflood operations, reactivate and recomplete wells in the Adena Field, and evaluate horizontal drilling opportunities in the El Toro project. The company also committed up to $320,445 of capital expenditures, in addition to a $79,555 cash payment, for three Golden Project wells before June 30, 2014.
The company had crude oil hedges covering portions of 2014 and 2015 production. Hedging reduced exposure to lower prices but limited the benefit of higher prices and generated approximately $740,000 of realized and unrealized losses in 2013. The total fair value of derivative liabilities was $1.35 million at year-end.
Key risks include commodity-price volatility, borrowing-base reductions, substantial secured debt, dependence on additional capital, drilling and waterflood execution risk, cost inflation, environmental and regulatory liabilities, limited geographic diversification, dependence on a small number of purchasers, and the possibility that proved undeveloped reserves will not be developed economically.
The company settled portions of litigation concerning its 2008 stock offering for $500,000, paid in January 2014, and dismissal of a $492,134 counterclaim. The company retained the ability to appeal certain rulings, but the filing states that recovery of additional damages is uncertain.
Series A preferred stockholders received $1.04 million of dividends in 2013 and had priority dividend and liquidation rights. The filing states that approximately $3.08 million of additional distributions remained before conversion of the preferred stock, although certain disclosures describe the remaining amount differently; the precise preferred-stock obligation should be verified in the filed financial statements.
Management reported effective disclosure controls and internal control over financial reporting. The independent auditor issued an unqualified opinion on the 2013 consolidated financial statements but did not express an opinion on internal control effectiveness because the company was not required to have such an audit.
Investor Verification Checklist
- Verify the issuer identity: the supplied text is for EnerJex Resources, Inc., whereas the request identifies Ageagle Aerial Systems Inc.
- Confirm the reported period is the fiscal year ended December 31, 2013 rather than “2013 Q4.”
- Reconcile reported cash, restricted cash and ending cash equivalents, particularly the difference between $1.08 million of cash on the balance sheet and $1.31 million of cash and cash equivalents in the cash-flow statement.
- Review the Black Raven merger accounting, share issuance, ownership dilution and the limited fourth-quarter contribution to reported results.
- Assess debt covenant compliance, borrowing-base availability, collateral requirements and refinancing risk under the facility maturing October 3, 2015.
- Evaluate the sustainability of production growth and the capital required to develop the 34% of proved reserves classified as undeveloped.
- Review preferred-stock dividend, conversion and liquidation rights and their effect on cash available to common stockholders.
- Analyze the fair value, maturity, pricing and production coverage of the crude oil hedges.
- Review subsequent events, including the March 2014 Atlas settlement, additional asset acquisitions and related cash commitments.