Business Context and Reporting Period
Riley Exploration Permian, Inc. filed this unaudited Form 10-Q for the fiscal quarter and nine months ended June 30, 2021. The company is an independent oil and gas producer focused primarily on conventional assets in the Permian Basin. On February 26, 2021, it completed its merger with Tengasco; the transaction was accounted for as a reverse merger, with Riley Exploration Permian, LLC treated as the accounting acquirer. The acquired Kansas operations were classified as discontinued operations and sold on April 2, 2021.
Financial and Operating Results
Amounts below are in millions except per-share data, production and prices.
| Metric | Three months ended June 30, 2021 | Comparable 2020 period | Nine months ended June 30, 2021 | Comparable 2020 period |
|---|---|---|---|---|
| Total revenue | $42.1 | $6.0 | $102.4 | $61.0 |
| Income (loss) from operations | $19.3 | ($12.2) | $33.0 | $7.6 |
| Net income (loss) | ($21.5) | ($28.0) | ($81.3) | $40.2 |
| Net cash from continuing operations | Not separately stated | Not separately stated | $58.8 | $49.5 |
| Net cash used in continuing investing activities | Not separately stated | Not separately stated | ($39.4) | ($46.2) |
- Quarterly net loss attributable to common shareholders was $21.5 million, or $1.20 per diluted share. The nine-month loss was $82.8 million, or $5.57 per diluted share.
- The nine-month net loss includes a $19.6 million loss from discontinued operations, including an $18.5 million goodwill impairment associated with the Kansas assets. Continuing-operations results also include $74.2 million of derivative losses for the nine months, mostly unrealized.
- Quarterly production was 9,100 Boe/d, up 35% from 6,757 Boe/d. Average realized commodity price before derivative settlements was $50.18/Boe, including $64.55/Bbl for oil; after derivative settlements, the average was $40.86/Boe.
- Cash capital spending before acquisitions was $40.1 million for the nine months. Cash and equivalents were $6.9 million at June 30. The company reported a $43.3 million working-capital deficit, primarily reflecting current derivative liabilities and accrued liabilities.
- Revolving-credit borrowings were $97.5 million at June 30, against a $135 million borrowing base, leaving $37.5 million available. The weighted-average borrowing rate was 3.10%; the company reported compliance with credit covenants.
Material Changes Versus the Prior Comparable Period
- Revenue growth reflected recovery in realized commodity prices from the exceptionally weak 2020 comparison, as well as higher production. Quarterly oil volumes rose 26%; nine-month oil volumes rose 9%.
- Operating income improved in the quarter and nine-month period, but derivative losses, income tax expense, and the discontinued-operations loss drove reported net losses in 2021. The nine-month 2020 comparison included a $37.0 million derivative gain and $40.2 million net income.
- The February merger converted the business from an LLC flow-through tax structure to a taxable C corporation. The company recognized a $13.6 million deferred tax provision on the change in tax status; total nine-month income tax expense was $17.0 million.
- The company issued equity in the merger and converted $61.2 million of preferred units into common units. After quarter-end, it issued 1,666,667 shares at $30 per share, generating approximately $46.7 million in net proceeds.
Outlook, Risks, and Other Notable Items
- Management expected fiscal 2021 capital expenditures of approximately $60 million to $66 million, to be funded by operating cash flow and stock-offering proceeds. The company intended to use a significant portion of the offering proceeds for drilling and infrastructure for its EOR project, with remaining funds for general corporate purposes. Initial EOR operations began in May 2021; outcomes and benefits remain uncertain.
- After June 30, the company used $35.5 million of offering proceeds to reduce revolving-credit borrowings to $62 million. It also declared and paid a $0.28-per-share dividend after quarter-end. The dividend is discretionary and competes with investment and debt-reduction needs for cash.
- Commodity prices and differentials, production performance, midstream access, severe weather, COVID-19 impacts, permitting and regulatory changes, and the ability to maintain borrowing-base capacity are material risks. Derivatives reduce some price exposure but may constrain gains; their fair-value changes are recorded in earnings rather than hedge accounting.
- Management concluded disclosure controls were not effective at June 30 because of unremediated material weaknesses involving share-based compensation, dividend timing, derivative settlements, and cash-flow-statement preparation and review. Management was developing remediation measures; a future misstatement or restatement risk remains until controls are implemented and tested.
- A predecessor-related BSEE decommissioning matter remained under monitoring. Management assessed loss as remote; the BSEE had extended the deadline for remaining work to August 31, 2021. No material liability was recorded.
Important Facts for Investors to Verify
- Whether the material weaknesses have been fully remediated and controls are operating effectively.
- How much of the derivative loss is non-cash, the future settlement profile, and the company’s production volumes covered by hedges.
- Actual EOR project capital requirements, operating performance, and production or cash-flow contribution versus management expectations.
- Progress against the $60 million to $66 million fiscal-year capital budget and the funding mix after the equity offering and debt paydown.
- Production growth, realized prices, operating costs, and liquidity under changes in commodity prices and borrowing-base availability.
- Final resolution of the BSEE decommissioning matter and any other material legal or environmental contingencies.