Riley Exploration Permian, Inc. quarterly report, Q3 FY2016

Business context and reporting period

Company identification mismatch: The request identifies Riley Exploration Permian, Inc., but the supplied filing is Tengasco, Inc.’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2016. This summary reflects the filing text provided, not Riley Exploration Permian.

Tengasco explored for and produced oil and natural gas, primarily in Kansas, and operated a methane treatment facility in Tennessee. Financial statement amounts below are in thousands of dollars except per-share data and where noted.

Financial results and position

• Nine-month oil and gas revenue was $2,965, down from $4,545; methane facility revenue was $491, up from $413. Management attributed lower oil revenue mainly to net oil sales declining to 82 MBbl from 101 MBbl and average realized price falling to $35.59/bbl from $44.65/bbl.
• Impairment expense was $632 in Q3 and $2,718 for the first nine months of 2016, compared with $7,189 in Q3 and in the first nine months of 2015. The impairments were non-cash ceiling-test charges associated with low commodity prices.
• Production costs and taxes were $2,570 for the first nine months, versus $3,223; DD&A was $904, versus $2,082; and general and administrative expense was $1,131, versus $1,557. The lower costs and impairment charges reduced reported losses, while lower revenue and the absence of the prior-year tax benefit offset some of the improvement.
• Operating cash flow was negative $939 for the first nine months, versus positive $349 in 2015. Investing cash use was $336, versus $536; financing provided $1,266, versus $225. Cash ended September at $31, compared with $40 at year-end 2015.
• At September 30, total assets were $8,638 and total liabilities were $5,105, compared with $11,993 and $4,533 at December 31, 2015. Stockholders’ equity fell to $3,533 from $7,460, principally reflecting the accumulated deficit and impairment-related asset reductions.
• Debt totaled approximately $2,289, including $2,172 of bank debt net of issuance costs and $117 of vehicle notes; $58 was current. The bank facility’s borrowing base was approximately $3.2 million, with about $2.2 million drawn. Its interest rate was 4.00% at quarter-end, and maturity was January 30, 2018.
• Reported current assets of $1,325 exceeded current liabilities of $631, but cash was only $31. The filing reported an asset retirement obligation of $2,243.

Material changes versus prior comparable periods

• Q3 revenue declined $183 year over year; nine-month revenue declined $1,502. Management linked the oil revenue decline to lower sales volumes and realized prices. Methane revenue increased, attributed to higher facility uptime and efficiency.
• Net loss improved by $4,055 in Q3 and $1,614 for the first nine months, chiefly because impairment expense was substantially lower. In Q3 2015, a $3,191 deferred tax benefit also reduced the reported loss; there was no tax benefit in 2016.
• Oil and gas properties, net, fell to $5,594 from $8,838 at year-end 2015. Debt rose from $1,011 to $2,289, while operating cash flow turned negative.
• The company’s 1-for-10 reverse stock split became effective for trading on March 24, 2016; comparative per-share data were adjusted accordingly.

Outlook, risks, contingencies, and unusual items

• Financing and covenant risk: The borrowing base had been reduced from $7.8 million to about $3.2 million. Tengasco had covenant defaults for prior periods and received waivers, including for the June 2016 debt-to-tangible-net-worth default and anticipated September default; management said the company was in compliance at September 30 as a result of waivers. The next borrowing-base review was scheduled for November 2016, and a lender reduction could require repayment.
• Proposed rights offering: A registration statement filed October 17, 2016 proposed allowing holders to buy two shares per existing share at $0.66 each, subject to final terms and regulatory effectiveness. If fully subscribed, gross proceeds would be about $8 million. Management expected to use net proceeds first to repay approximately $2.4 million of bank debt, with the balance for working capital and corporate purposes. The filing cautioned that failure to raise equity could materially affect operating funding and require other financing.
• Commodity and operating risk: Kansas oil prices received during the first nine months ranged from $24.50 to $43.02 per barrel. The company had no commodity or interest-rate derivatives. Management warned that prolonged low prices, reduced production or reserves, or a lower borrowing base could constrain operations, capital spending, and production replacement.
• Contingencies and related parties: Tengasco disclosed potential operational and other claims raised by related party Hoactzin Partners; discussions toward possible negotiated resolution were ongoing, and the filing did not quantify a clear exposure. The $386,000 BSEE civil penalty concerning a Hoactzin-operated property had been affirmed and paid in 2015. A $159,000 past-due Hoactzin receivable remained fully reserved.
• Cost reductions: Compensation reductions for employees and directors remained in place; accumulated reductions were approximately $205,000 at September 30 and had not been accrued as liabilities. Restoration and reimbursement depend on specified WTI price thresholds.
• Controls: Management reported disclosure controls adequate and effective at September 30. A material weakness relating to review of the quarterly ceiling-test calculation had been identified at December 31, 2015; management said it implemented a process in Q1 2016 to address the tax analysis component.
• The filing stated that the nine-month results were not necessarily indicative of full-year results. No specific earnings or production guidance was provided.

Important facts for investors to verify

1. Confirm the intended issuer: the supplied filing is for Tengasco, Inc., not Riley Exploration Permian, Inc.
2. Review the final rights-offering prospectus and terms, including subscription price, record date, actual proceeds, and use of funds.
3. Check the November 2016 borrowing-base redetermination, subsequent covenant compliance, and whether additional financing was obtained.
4. Assess oil sales volumes, realized prices, reserves, and further ceiling-test impairment exposure.
5. Review developments in the Hoactzin-related claims and any resulting financial or legal exposure.