PEDEVCO Corp. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Amounts are in millions of dollars unless otherwise stated. PEDEVCO develops and produces oil and natural gas in the Permian Basin and Denver-Julesburg (D-J) Basin.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Oil and gas revenue | $9.547 | $3.740 | $16.637 | $7.271 |
| Operating income (loss) | $3.221 | $(0.647) | $4.477 | $0.075 |
| Net income (loss) | $3.210 | $(0.225) | $4.549 | $0.503 |
| Diluted earnings per share | $0.04 | $(0.00) | $0.05 | $0.01 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $7.131 | $2.473 |
- Q2 revenue rose 155%; oil and gas sales volumes increased 51% to 1,085 Boe/day. Management attributed growth to higher realized prices and production from two new Permian wells and D-J non-operated wells.
- For the first half, revenue rose 129% and volumes increased 44% to 1,065 Boe/day. Average realized prices also increased: Q2 oil was $109.82/Bbl, natural gas $7.01/Mcf and NGLs $43.78/Bbl.
- Q2 operating expenses were $6.326 million, including $2.802 million of lease operating costs and $2.228 million of depreciation, depletion, amortization and accretion. Higher workovers, production-related costs, taxes and inflation contributed to the increase.
- Operating margin was approximately 34% in Q2 and 27% for the first half, calculated as operating income divided by revenue.
- First-half adjusted EBITDA, a non-GAAP measure, was $9.763 million versus $2.731 million. The company cautions that this measure is not a substitute for GAAP results.
Financial position and liquidity
- At June 30, cash was $23.064 million; cash and restricted cash totaled $26.361 million, including $3.297 million of restricted cash. Working capital was $24.214 million, compared with $22.857 million at December 31, 2021.
- Total assets were $102.651 million and total liabilities $5.469 million. The filing states the company maintained no debt; reported liabilities primarily include asset retirement obligations and operating lease liabilities.
- First-half operating cash flow of $7.131 million was below $10.047 million of investing cash outflow, largely reflecting drilling and completion spending. Cash and restricted cash decreased $2.866 million during the period.
- The company spent $10.047 million on drilling and completion costs in cash during the first half. It also reported $1.604 million of accrued oil and gas development costs as a noncash investing item.
Changes, outlook and risks
- Net income improved year over year, supported by higher prices and production. The prior-year comparisons included a $0.374 million PPP loan forgiveness gain and, for the first half, a $1.805 million gain on an oil and gas property sale.
- Management estimated 2022 net capital expenditures of $30 million to $35 million, including $28 million to $33 million for drilling and completion. Through June 30, it reported approximately $7.9 million of drilling and completion expenses and $0.5 million of other estimated capital expenditures. The plan is subject to market conditions, permitting, contractor availability, capital availability and reallocation decisions.
- Management expected available resources to fund foreseeable needs, citing operating cash flow and cash on hand, among other potential sources. Possible equity or loans from SK Energy, controlled by the CEO, are not committed; the company also cited financing, credit facilities, asset sales and farm-outs as potential sources. Up to $3.5 million remained available under its ATM agreement.
- Inflation and supply constraints increased estimated per-well development costs by approximately 25%–30% in the Permian and 10%–20% in the D-J Basin. Management warned that further cost increases, delays or lower commodity prices could adversely affect margins, cash flow and development plans. Commodity prices were expected to remain volatile.
- Material post-quarter contingency: On August 2, 2022, New Mexico’s EMNRD alleged noncompliance with agreed compliance orders, declared them void, demanded $850,500 in civil penalties by August 31, and required approximately 333 legacy wells to be brought online or plugged immediately. Additional penalties and interest at 8.75% could accrue. PEDEVCO disputed the allegations and was seeking a resolution. If unresolved, the company said it could face the demanded penalties, additional actions and plugging costs estimated at a minimum of about $45,000 per well—approximately $15.0 million for 333 wells at that stated minimum—potentially affecting its financial position and drilling plans.
- The company reported no material legal proceedings as of the filing and no material change in internal control over financial reporting. It identified the EMNRD matter as a significant risk.
Important facts for investors to verify
- Current status and final financial impact of the EMNRD dispute, penalties, well obligations and any plugging schedule.
- Whether projected cash flow and other financing sources can cover the 2022 capital program and potential regulatory costs; SK Energy support is not obligatory.
- Actual development spending, per-well costs, production results and the effect of inflation or commodity-price changes on the stated capital plan.
- Cash conversion and working-capital movements, including the increase in oil and gas receivables during the first half.
- Share dilution: common shares outstanding increased to 85,550,267 at June 30, 2022; additional ATM sales remained available.