Business Context and Reporting Period
The filing is a Form 10-Q for the quarter ended March 31, 2012. Although the request metadata identifies Ageagle Aerial Systems Inc., the filing identifies the registrant as EnerJex Resources, Inc. The company acquires, develops and produces domestic onshore oil properties, primarily in Eastern Kansas and South Texas.
The financial statements are unaudited and consolidate wholly owned subsidiaries and the majority-controlled Rantoul Partners. The company uses full-cost accounting for oil and gas properties and was classified as a smaller reporting company.
Financial Results and Key Metrics
| Metric | Q1 2012 | Q1 2011 |
|---|---|---|
| Oil revenue | $1.903 million | $1.369 million |
| Income (loss) from operations | $160,459 | $(276,443) |
| Net income (loss) | $(1.082) million | $(2.847) million |
| Net loss attributable to EnerJex | $(1.136) million | $(2.847) million |
| Loss per share, basic and diluted | $(0.02) | $(0.04) |
| Operating cash flow | $(1.347) million | $184,151 |
| Capital additions to oil and gas properties | $1.776 million | $966,548 |
- Net production increased to 19,485 barrels from 14,780 barrels, while the average sales price increased to $97.66 per barrel from $92.64.
- Direct operating costs declined to $609,079 from $847,564. Depreciation, depletion and amortization increased to $422,603 from $271,965.
- Operating margin was approximately 8.4%, compared with a negative operating margin of approximately 20.2% in the prior-year quarter. Net margin remained negative at approximately 56.8%, compared with approximately 208.0% in Q1 2011.
- The company recorded a $1.187 million loss on derivative instruments, compared with a $2.468 million loss in Q1 2011. Management attributed the 2012 loss to higher oil prices.
- Cash declined to $667,979 at March 31, 2012 from $2.770 million at December 31, 2011. Current assets were $3.665 million and current liabilities were $2.670 million, producing working capital of $995,026.
- Total assets were $31.131 million, including $27.183 million of oil properties and other assets. Total liabilities were $10.770 million and total equity was $20.361 million.
- Debt consisted primarily of approximately $4.9 million drawn under the senior secured credit facility, plus a $13,999 equipment loan. The balance sheet reported current and long-term debt totaling approximately $4.930 million.
- Derivative liabilities totaled approximately $3.491 million, consisting of $1.301 million current and $2.191 million non-current liabilities.
- Asset retirement obligations increased to $986,901 from $908,790 at year-end 2011.
Material Changes Versus the Prior Comparable Period
- Revenue increased $533,725, or approximately 39%, due to higher production and oil prices.
- Production expenses decreased $87,847 in aggregate despite higher depreciation and depletion, primarily because direct operating costs declined.
- General expenses increased $184,670, including higher professional fees and a non-recurring $85,000 payment related to settlement of an oil lease issue.
- Interest expense decreased to $67,660 from $114,213, which management attributed to reduced borrowing under the credit facility.
- Net loss improved by $1.765 million, primarily because of higher revenue, lower direct operating costs and a smaller derivative loss.
- Operating cash flow deteriorated from positive $184,151 to negative $1.347 million, driven in part by a $1.288 million reduction in accounts payable and continued working-capital needs.
- Investing cash outflows declined to $1.776 million from $2.714 million, although oil and gas property additions increased from $966,548 to $1.776 million because the prior-year period included treasury stock and fixed-asset purchases.
Guidance, Outlook, Risks and Unusual Items
- Management stated that historical sources of liquidity, including the credit facility, operating cash flow and equity financing, were expected to provide adequate liquidity for the 2012 operating and capital program. The filing does not provide formal revenue, production or earnings guidance.
- The credit facility had a $6.2 million borrowing base, of which approximately $4.9 million was drawn at March 31, 2012. Texas Capital Bank was re-determining the borrowing base after completion of the year-end 2011 reserve report, creating potential liquidity and borrowing-capacity risk.
- Rantoul Partners received $1.0 million contributions on April 1 and May 1, 2012. These contributions reduced EnerJex’s ownership interest to 78.25%; the filing also states that an additional $650,000 contribution could reduce ownership to 75.00%.
- The company drilled and completed 12 wells in the Mississippian Project and drilled 23 oil wells and 35 water-injection wells in the Rantoul Project, reporting a 100% success rate for the described drilling programs. Completion status varied among the Rantoul wells.
- Commodity price volatility affects revenue, derivative valuations, reserve estimates, property values and the borrowing base. Existing swaps reduce exposure to falling oil prices but limit the benefit of rising prices and generated a substantial fair-value liability.
- Other risks include reserve-estimation uncertainty, potential defaults under secured debt, additional development financing needs, regulatory and environmental requirements, weather, operating costs and interest-rate changes.
- The company filed litigation alleging approximately $50 million of economic loss against former legal advisers. The defendants filed a $492,134 counterclaim, which management states is already reflected in accounts payable. The outcome is uncertain.
- Management reported effective disclosure controls and procedures and no material changes to internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Confirm the registrant identity: the supplied metadata names Ageagle Aerial Systems Inc., while the filing itself is for EnerJex Resources, Inc.
- Verify the pending borrowing-base redetermination and whether the approximately $4.9 million drawn debt remains within lender requirements.
- Assess cash-burn risk, given $667,979 of quarter-end cash, negative operating cash flow and planned capital spending.
- Review the valuation, maturity profile and cash-flow effects of the approximately $3.491 million commodity-derivative liability.
- Evaluate the effect of Rantoul Partners’ capital contributions and reduced ownership percentage on future production, assets, earnings and cash distributions.
- Monitor the legal action and $492,134 counterclaim, as well as any potential liability beyond the amount recorded in accounts payable.
- Reconcile the filing’s stated production success rates with completed wells, reserve reports and future production results.