Filing summary: Tengasco, Inc. Form 10-K
Entity and period: The supplied filing is Tengasco, Inc.’s annual report for the fiscal year ended December 31, 2011, not a filing identified in its text as Riley Exploration Permian, Inc. The company’s common stock traded as TGC on NYSE Amex.
Business context and reporting period
Tengasco explored for and produced oil and natural gas, with most operations and financial results centered on Kansas oil properties. Its other activities included gas production in Tennessee’s Swan Creek field, operation of a 65-mile Tennessee pipeline, and landfill-methane processing through its subsidiary Manufactured Methane Corporation (MMC).
Financial performance and position
| Metric | FY 2011 | FY 2010 |
|---|---|---|
| Revenue | $17.085 million | $13.216 million |
| Net income (loss) | $4.680 million | ($1.745 million) |
| Basic earnings (loss) per share | $0.08 | ($0.03) |
| Cash from operating activities | $8.491 million | $4.044 million |
| Cash used in investing activities | $10.374 million | $3.758 million |
| Cash and cash equivalents at year-end | $68,000 | $141,000 |
| Working capital | $839,000 surplus | $10,000 surplus |
| Total debt at year-end | $11.797 million | $9.693 million |
Production costs and taxes were $6.204 million; depreciation, depletion and amortization were $2.703 million; general and administrative expense was $2.324 million; and interest expense was $642,000. The filing does not provide a clearly labeled consolidated operating-margin measure.
Oil and gas properties, net, were $20.206 million; pipeline facilities, net, were $6.865 million; and methane project assets, net, were $5.102 million. Total assets were $45.999 million and stockholders’ equity was $30.097 million. The F&M Bank facility had $11.531 million outstanding against a $20 million borrowing base at year-end. The company reported covenant compliance for 2011.
Kansas accounted for 96% of 2011 revenue ($16.4 million of $17.1 million) and 96% of total oil and gas production. Kansas oil production was 240.8 thousand gross barrels, up from 224.2 thousand in 2010; the average Kansas oil sales price rose to $88.15 per barrel from $72.14. Year-end proved reserves were 2.591 million BOE, versus 2.500 million BOE in 2010. The standardized measure of discounted future net cash flows was $51.909 million, compared with $48.344 million.
For the fourth quarter of 2011, revenue was $4.281 million, net income was $2.163 million, and earnings per share were $0.04.
Material changes versus the prior comparable period
- Revenue increased $3.869 million year over year. Management attributed approximately $2.8 million of the increase to higher Kansas oil prices and approximately $1.2 million to higher sales volumes, partly offset by lower methane-project revenue.
- Net income improved from a $1.745 million loss to $4.680 million income. The 2010 loss included a $4.957 million pipeline impairment charge; no pipeline impairment was recorded in 2011.
- Operating cash flow more than doubled, while investing outflows increased primarily due to higher drilling and polymer-treatment activity and methane-facility investment.
- The company drilled 25 Kansas wells: 16 producers and nine dry holes. It also treated 15 wells with polymer, which management said contributed approximately 32 thousand barrels of production.
- The company recorded a $407,000 net derivative loss in 2011, including $860,000 in settlement payments and an unrealized gain of approximately $453,000.
Outlook, risks, contingencies and unusual items
- Management planned a more active Kansas drilling program in 2012, but said lower oil prices could reduce capital spending. A paid hedge provided a $65-per-barrel floor on 10,000 barrels per month through December 2012, without a price cap.
- On March 14, 2012, after year-end, the bank raised the borrowing base from $20 million to $23 million and extended facility maturity to January 27, 2014. Borrowings were $14.5 million on March 14, 2012. The borrowing base remained subject to periodic redetermination.
- The company had only $68,000 of year-end cash and substantial variable-rate secured debt. Lower commodity prices, reduced reserves or a borrowing-base cut could constrain spending or require repayment. Management believed operating cash flow and facility availability would fund operations, but gave no assurance in a prolonged downturn.
- The methane plant averaged 81 MMBtu per day of production in 2011; oxygen spikes in landfill gas caused downtime, and the plant had no output during November and December while generator modifications were made. Electricity sales began January 25, 2012 under a ten-year fixed-price contract. Management reported improved operating time after modifications, but the filing does not establish the project’s future profitability.
- The pipeline’s net book value was $6.865 million after a $4.957 million impairment in 2010. Management reported no impairment indicators at year-end 2011.
- Related-party matters warrant attention: Chairman Peter E. Salas controlled Hoactzin, which participated in the ten-well program and held an interest in the methane project. Hoactzin-related vendor payables and matching receivables were each reported at approximately $265,000 at year-end; the company expected Hoactzin to pay the vendor obligations. The company also provided approximately $10.7 million of offshore plugging-and-abandonment bonds for properties it operated for Hoactzin; Hoactzin provided $6.6 million of cash collateral, and a Salas-controlled affiliate was jointly liable under the indemnity agreement.
- The ten-well program payout point was expected by December 31, 2013 based on oil revenues; no methane-project net profits had been paid to Hoactzin through year-end 2011. The company said the contingent preferred-stock exchange option would no longer be exercisable after Hoactzin’s program proceeds reached the purchase-price threshold.
- Key risks include volatile oil and gas prices, reserve-estimation and impairment uncertainty, customer concentration (the top three purchasers accounted for 99.3% of 2011 oil and gas revenue), environmental and regulatory liabilities, and reliance on third-party drilling equipment and key personnel. No material pending legal proceedings were reported.
- The company removed a $1.741 million deferred-tax valuation allowance in 2011, contributing to the reported tax result. The filing gives inconsistent expiration ranges for federal net operating loss carryforwards: one note says 2013–2024 and another says 2021–2029.
- Management concluded internal control over financial reporting was effective as of December 31, 2011; the auditor did not provide an attestation on internal control. The company changed auditors in September 2011 and reported no disagreements related to the change.
Most important facts for investors to verify
- Confirm the issuer identity: the supplied text is for Tengasco, Inc. (TGC), not Riley Exploration Permian, Inc.
- Review the complete audited statements and notes for the tax valuation-allowance release, NOL balances and conflicting expiration dates.
- Check the current borrowing-base availability, covenant status, maturity terms and sensitivity to oil-price or reserve revisions.
- Assess whether the methane generator and plant improvements sustained production and cash generation after the January 2012 startup.
- Examine related-party arrangements, vendor balances, bond exposure and collateral sufficiency, including the Hoactzin relationship.
- Validate reserve assumptions and the company’s ability to replace production through successful drilling and development.