Filing Scope and Business Context
The provided filing is an unaudited Form 10-Q for EnerJex Resources, Inc., not Ageagle Aerial Systems Inc. It covers the quarter and nine months ended September 30, 2012, with comparative periods ended September 30, 2011. EnerJex acquires, develops and produces domestic onshore oil properties, primarily in Eastern Kansas and South Texas.
Key Financial Metrics
| Metric | Three Months Ended September 30, 2012 | Three Months Ended September 30, 2011 | Nine Months Ended September 30, 2012 | Nine Months Ended September 30, 2011 |
|---|---|---|---|---|
| Oil revenues | $2.253 million | $1.674 million | $6.205 million | $4.728 million |
| Income (loss) from operations | $0.356 million | $0.029 million | $0.761 million | $(0.426) million |
| Net income (loss) | $(1.296) million | $3.119 million | $0.684 million | $1.194 million |
| Net income (loss) per share | $(0.02) | $0.04 | $0.01 | $0.02 |
| Operating margin | 15.8% | 1.7% | 12.3% | (9.0)% |
Net oil production increased to 26,038 barrels in the quarter and 68,986 barrels for the nine-month period, compared with 19,724 and 52,748 barrels, respectively, in the prior-year periods. Average oil sales prices were $86.52 per barrel in the quarter and $89.94 per barrel year to date. Average production costs declined to $48.69 and $50.05 per barrel, respectively, from $58.97 and $65.18.
Cash flow from operations was $0.837 million for the first nine months of 2012, compared with an operating cash outflow of $0.884 million in the prior-year period. Investing cash flow was $(6.465) million, primarily reflecting $6.414 million of additions to oil properties. Financing cash flow was $3.264 million, including $1.850 million of borrowings and $2.000 million from selling a noncontrolling interest in a subsidiary.
Cash declined to $0.406 million at September 30, 2012, from $2.770 million at December 31, 2011. Current assets were $3.013 million and current liabilities were $2.728 million, producing working capital of $0.285 million versus $1.912 million at year-end 2011. Long-term debt was $5.666 million, compared with $3.826 million at December 31, 2011. Total liabilities were $10.756 million, including $1.824 million of derivative liabilities and a $1.303 million asset retirement obligation.
Material Changes Versus Prior Comparable Period
- Quarterly revenue rose $0.579 million, or approximately 35%, and nine-month revenue rose $1.477 million, or approximately 31%, driven primarily by higher production.
- Quarterly operating income improved by $0.327 million, while nine-month operations moved from a $0.426 million loss to $0.761 million of income.
- Quarterly net results deteriorated by $4.415 million because of a $1.529 million derivative loss versus a $3.188 million derivative gain in the prior-year quarter. The company stated that a significant portion of the 2012 loss was a noncash write-down.
- Nine-month net income declined $0.510 million despite the operating improvement, primarily because derivative gains were substantially lower than in 2011.
- Direct operating costs declined $0.300 million for the nine-month period, while depreciation, depletion and amortization increased $0.314 million and professional fees increased $0.292 million.
- Oil properties increased to $31.262 million from $25.761 million at December 31, 2011, reflecting continued development spending.
Outlook, Debt, Risks and Unusual Items
Management expected to fund near-term obligations and the 2012–2013 capital program through operating cash flow and borrowings under its Texas Capital Bank credit facility. The disclosed borrowing base was $12.150 million after a November 5, 2012 amendment, although approximately $5.7 million was outstanding at September 30, 2012. Management expected a further borrowing-base review in the first quarter of 2013 and anticipated that increased production could support an increase.
The company planned to focus near-term capital spending on Kansas projects because oil-field services in South Texas were constrained by activity in the Eagle Ford Shale. During the third quarter it drilled and completed 28 oil wells and 10 water-injection wells on Cherokee Project expansion leases. El Toro production was approximately 55 gross barrels per day, while new Cherokee expansion wells reached 30 gross barrels per day in October 2012 before secondary waterflood effects.
Commodity swaps covering portions of production had a total fair value liability of $1.824 million at September 30, 2012. These contracts reduce exposure to oil-price declines but limit the benefit of higher prices and can create material earnings volatility. The company also identified risks relating to oil-price volatility, reserve estimates, borrowing-base availability, debt covenant compliance, access to development capital, weather, regulation, service availability and asset retirement costs.
Subsequent events included a proposed $2.0 million common-stock repurchase authorization, an option agreement requiring a potential $151,000 fee and quarterly purchases of at least 500,000 shares during 2013, and a November 2012 credit amendment that included a limited waiver related to a prior interest-coverage-ratio issue. The company disclosed litigation seeking approximately $50 million in alleged damages against former legal advisers; defendants filed a $492,134 counterclaim, already reflected in accounts payable. No material pending proceedings were otherwise identified.
Investor Verification Items
- Verify the issuer identity: the supplied filing is for EnerJex Resources, Inc., not Ageagle Aerial Systems Inc.
- Reconcile the substantial difference between operating profitability and net profitability caused by derivative fair-value changes.
- Assess liquidity given only $0.406 million of cash, $0.285 million of working capital and planned capital spending.
- Review the credit agreement, borrowing-base calculations, financial covenants and the November 2012 waiver.
- Evaluate the economics, reserve support and execution risk of the Kansas drilling and waterflood program.
- Review derivative contract volumes, settlement terms and potential future mark-to-market losses.
- Assess exposure to the disclosed litigation, asset retirement obligations and future capital requirements.