PEDEVCO CORP. Introduction
The following is management's discussion and analysis of the significant factors
that affected the Company's financial position and results of operations during
the periods included in the accompanying unaudited consolidated financial
statements. You should read this in conjunction with the discussion under
"Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations" and the audited consolidated financial statements included in our
Annual Report on Form 10-K for the year ended
Certain abbreviations and oil and gas industry terms used throughout this
Quarterly Report are described and defined in greater detail under "Glossary of
Oil And Natural Gas Terms" on page 2 of our Annual Report on Form 10-K for the
year ended
Our fiscal year ends on
Certain capitalized terms used below but not otherwise defined, are defined in,
and shall be read along with the meanings given to such terms in, the notes to
the unaudited financial statements of the Company for the three and nine months
ended
Unless the context requires otherwise, references to the "Company," "we," "us,"
"our," "PEDEVCO" and "
In addition, unless the context otherwise requires and for the purposes of this Report only:
· "Boe" refers to barrels of oil equivalent, determined using the ratio of
one Bbl of crude oil, condensate or natural gas liquids, to six Mcf of
natural gas;
· "Bopd" refers to barrels of oil day;
· "Mcf" refers to a thousand cubic feet of natural gas;
· "NGL" refers to natural gas liquids;
· "Exchange Act" refers to the Securities Exchange Act of 1934, as amended;
· "SEC" or the "Commission" refers to the United States Securities and
Exchange Commission ;
· "SWD" means a saltwater disposal well; and
· "Securities Act" refers to the Securities Act of 1933, as amended.
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Available Information
The Company's Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q,
Current Reports on Form 8-K, and amendments to reports filed pursuant to
Sections 13(a) and 15(d) of the Exchange Act, are filed with the
Summary of The Information Contained in Management's Discussion and Analysis of Financial Condition and Results of Operations
Our Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is provided in addition to the accompanying consolidated financial statements and notes to assist readers in understanding our results of operations, financial condition, and cash flows. Our MD&A is organized as follows:
? General Overview. Discussion of our business and overall analysis of
financial and other highlights affecting us, to provide context for the
remainder of our MD&A.
? Strategy. Discussion of our strategy moving forward and how we plan to seek
to increase stockholder value.
? Results of Operations and Financial Condition. An analysis of our
financial results comparing the three and nine month periods ended
September 30, 2022 , and 2021, and a discussion of changes in our
consolidated balance sheets, cash flows and a discussion of our financial
condition.
? Critical Accounting Policies. Accounting estimates that we believe are
important to understanding the assumptions and judgments incorporated in
our reported financial results and forecasts.
General Overview
We are an oil and gas company focused on the development, acquisition and
production of oil and natural gas assets where the latest in modern drilling and
completion techniques and technologies have yet to be applied. In particular,
we focus on legacy proven properties where there is a long production history,
well defined geology and existing infrastructure that can be leveraged when
applying modern field management technologies. Our current properties are
located in the San Andres formation of the
Strategy
We believe that horizontal development and exploitation of conventional assets
in the
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Specifically, we seek to increase stockholder value through the following strategies:
? Grow production, cash flow and reserves by developing our operated
drilling inventory and participating opportunistically in non-operated
projects. We believe our extensive inventory of drilling locations in
the Permian Basin and the D-J Basin , combined with our operating
expertise, will enable us to continue to deliver accretive production,
cash flow and reserves growth. We believe the location, concentration
and scale of our core leasehold positions, coupled with our technical
understanding of the reservoirs will allow us to efficiently develop
our core areas and to allocate capital to maximize the value of our
resource base.
? Apply modern drilling and completion techniques and technologies. We
own and intend to acquire additional properties that have been
historically underdeveloped and underexploited. We believe our
attention to detail and application of the latest industry advances in
horizontal drilling, completions design, frac intensity and locally
optimal frac fluids will allow us to successfully develop our
properties.
? Optimization of well density and configuration. We own properties that
are legacy oil and gas fields characterized by widespread vertical and
horizontal development and geological well control. We utilize the
extensive petrophysical and production data of such legacy properties
to confirm optimal well spacing and configuration using modern
reservoir evaluation methodologies.
? Maintain a high degree of operational control or build strong
relationships with our operating partners in areas where we do not
operate. We believe that by retaining high operational control and by
building strong partnerships with operators in areas where we do not
operate, we can efficiently manage the timing and amount of our capital
expenditures and operating costs, and thus key in on the optimal
drilling and completions strategies, which we believe will generate
higher recoveries and greater rates of return per well.
? Leverage extensive deal flow, technical and operational experience to
evaluate and execute accretive acquisition opportunities. Our
management and technical teams have an extensive track record of
forming and building oil and gas businesses. We also have significant
expertise in successfully sourcing, evaluating and executing
acquisition opportunities. We believe our understanding of the geology,
geophysics and reservoir properties of potential acquisition targets
will allow us to identify and acquire highly prospective acreage in
order to grow our reserve base and maximize stockholder value.
? Preserve financial flexibility to pursue organic and external growth
opportunities. We intend to maintain a disciplined financial profile in
order to provide us flexibility across various commodity and market
cycles. We intend to utilize our strategic partners and funding which
we expect to be available through the sale of debt or equity, to
continuously fund development and operations.
We also are committed to developing and monitoring environmental, social and governance ("ESG") initiatives and the Board of Directors plans to evaluate the potential adoption of ESG initiatives from time to time, provided that no definitive ESG plans have been adopted to date.
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Our strategy is to be the operator and/or a significant working interest owner,
directly or through our subsidiaries and joint ventures, in the majority of our
We plan to continue to evaluate D-
We expect that we will have sufficient cash available to meet our needs over the
foreseeable future, including to fund the remainder of our 2022 development
program, discussed above, which cash we anticipate being available from (i)
projected cash flow from our operations, (ii) existing cash on hand, (iii)
equity infusions or loans (which may be convertible) made available from
How We Conduct Our Business and Evaluate Our Operations
Our use of capital for acquisitions and development allows us to direct our capital resources to what we believe to be the most attractive opportunities as market conditions evolve. We have historically acquired properties that we believe had significant appreciation potential. We intend to continue to acquire both operated and non-operated properties to the extent we believe they meet our return objectives.
We will use a variety of financial and operational metrics to assess the performance of our oil and natural gas operations, including:
· production volumes;
· realized prices on the sale of oil and natural gas, including the effects
of our commodity derivative contracts;
· oil and natural gas production and operating expenses;
· capital expenditures;
· general and administrative expenses;
· net cash provided by operating activities; and
· net income.
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Results of Operations and Financial Condition
Market Conditions and Commodity Prices
Our financial results depend on many factors, particularly the price of natural gas and crude oil and our ability to market our production on economically attractive terms. Commodity prices are affected by many factors outside of our control, including changes in market supply and demand, which are impacted by among other factors, weather conditions, inventory storage levels, basis differentials and other factors. As a result, we cannot accurately predict future commodity prices and, therefore, we cannot determine with any degree of certainty what effect increases or decreases in these prices will have on our production volumes or revenues. In addition to production volumes and commodity prices, finding and developing sufficient amounts of natural gas and crude oil reserves at economical costs are critical to our long-term success. We expect prices to remain volatile for the remainder of the year. For information about the impact of realized commodity prices on our natural gas and crude oil and condensate revenues, refer to "Results of Operations" below.
Results of Operations
The following discussion and analysis of the results of operations for the three
and nine-month periods ended
Three Months Ended
We reported net income for the three-month period ended
Net Revenues
The following table sets forth the operating results and production data for the
periods indicated:
Three Months Ended
September 30, Increase % Increase
2022 2021 (Decrease) (Decrease)
Sale Volumes:
Crude Oil (Bbls) 76,644 55,106 21,538 39%
Natural Gas (Mcf) 51,564 60,949 (9,385 ) (15%)
NGL (Bbls) 3,140 1,592 1,548 97%
Total (Boe) (1) 88,378 66,856 21,522 32%
Crude Oil (Bbls per day) 833 599 234 39%
Natural Gas (Mcf per day) 560 662 (102 ) (15%)
NGL (Bbls per day) 34 17 17 100%
Total (Boe per day) (1) 960 726 234 32%
Average Sale Price:
Crude Oil ($/Bbl) $ 91.04 $ 67.08 $ 23.96 36%
Natural Gas ($/Mcf) 7.72 5.24 2.48 47%
NGL ($/Bbl) 30.57 33.17 (2.60 ) (8%)
Net Operating Revenues (in
thousands):
Crude Oil $ 6,978 $ 3,697 $ 3,281 89%
Natural Gas 398 319 79 25%
NGL 96 53 43 81%
Total Revenues $ 7,472 $ 4,069 $ 3,403 84%
(1) Assumes 6 Mcf of natural gas equivalents to 1 barrel of oil.
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Total crude oil, natural gas and NGL revenues for the three-month period ended
Operating Expenses and Other Income
The following table summarizes our production costs and operating expenses for the periods indicated (in thousands):
Three Months Ended
September 30, Increase % Increase
2022 2021 (Decrease) (Decrease)
Direct Lease Operating 42%
Expenses $ 1,250 $ 879 $ 371
Workovers 886 151 735 487%
Other+ 782 393 389 99%
Total Lease Operating 105%
Expenses $ 2,918 $ 1,423 $ 1,495
Depreciation, Depletion,
Amortization and Accretion $ 2,313 $ 1,666 $ 647 39%
General and Administrative *%
(Cash) $ 748 $ 745 $ 3
Share-Based Compensation (20%)
(Non-Cash) 472 592 (120 )
Total General and (9%)
Administrative Expense $ 1,220 $ 1,337 $ (117 )
Interest Income $ 33 $ 4 $ 29 725%
Other Income $ 25 $ 28 $ (3 ) (11%)
+ Includes severance, ad valorem taxes and marketing costs.
* Less than 1%.
Lease Operating Expenses. The increase of
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Depreciation, Depletion, Amortization and Accretion. The
General and Administrative Expenses (excluding share-based compensation). There was a nominal increase in general and administrative expenses (excluding share-based compensation) as the Company continues to strive to contain costs and remain within budget from period to period.
Share-Based Compensation. Share-based compensation, which is included in general
and administrative expenses in the Statements of Operations, decreased by
Interest Income and Other Income (Expense). Includes interest earned from our
interest-bearing cash accounts, for which interest rates have increased in the
current period, compared to the prior period. Other income in the current period
is primarily related to a
Nine Months Ended
We reported net income for the nine-month period ended
Net Revenues
The following table sets forth the operating results and production data for the
periods indicated:
Nine Months Ended
September 30,
2022 2021 Increase % Increase
Sale Volumes:
Crude Oil (Bbls) 233,851 172,357 61,494 36%
Natural Gas (Mcf) 194,280 149,614 44,666 30%
NGL (Bbls) 17,455 3,328 14,127 424%
Total (Boe) (1) 283,686 200,621 83,065 41%
Crude Oil (Bbls per day) 857 631 226 36%
Natural Gas (Mcf per day) 712 548 164 30%
NGL (Bbls per day) 64 12 52 433%
Total (Boe per day) (1) 1,040 734 306 42%
Average Sale Price:
Crude Oil ($/Bbl) $ 94.49 $ 61.70 $ 32.79 53%
Natural Gas ($/Mcf) 6.65 4.04 2.61 65%
NGL ($/Bbl) 41.19 30.32 10.87 36%
Net Operating Revenues (in
thousands):
Crude Oil $ 22,098 $ 10,635 $ 11,463 108%
Natural Gas 1,292 604 688 114%
NGL 719 101 618 612%
Total Revenues $ 24,109 $ 11,340 $ 12,769 113%
(1) Assumes 6 Mcf of natural gas equivalents to 1 barrel of oil.
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Total crude oil, natural gas and NGL revenues for the nine-month period ended
Operating Expenses and Other Income (Expense)
The following table summarizes our production costs and operating expenses for the periods indicated (in thousands):
Nine Months Ended
September 30, Increase % Increase
2022 2021 (Decrease) (Decrease)
Direct Lease Operating Expenses $ 3,446 $ 2,700 $ 746 28%
Workovers 2,299 481 1,818 378%
Gain on ARO Settlement (6 ) - (6 ) 100%
Other* 2,337 983 1,354 138%
Total Lease Operating Expenses $ 8,076 $ 4,164 $ 3,912 94%
Depreciation, Depletion,
Amortization and Accretion $ 6,427 $ 4,829 $ 1,598 33%
General and Administrative (1%)
(Cash) $ 2,536 $ 2,567 $ (31 )
Share-Based Compensation (16%)
(Non-Cash) 1,572 1,867 (295 )
Total General and (7%)
Administrative Expense $ 4,108 $ 4,434 $ (326 )
Gain on Sale of Oil and Gas (100%)
Properties $ - $ 1,805 $ (1,805 )
Interest Expense $ - $ (1 ) $ 1 (100%)
Interest Income $ 40 $ 11 $ 29 264%
Other Income $ 90 $ 76 $ 14 18%
Gain on Forgiveness of New PPP (100%)
Loan $ - $ 374 $ (374 ) *Includes severance, ad valorem taxes and marketing costs.
Lease Operating Expenses. The increase of
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Depreciation, Depletion, Amortization and Accretion. The
General and Administrative Expenses (excluding share-based compensation). There was a nominal decrease in general and administrative expenses (excluding share-based compensation) as the Company continues to strive to contain costs and remain within budget from period to period.
Share-Based Compensation. Share-based compensation, which is included in general
and administrative expenses in the Statements of Operations, decreased by
Gain on Sale of
Interest Expense. The
Interest Income and Other Income. Includes interest earned from our
interest-bearing cash accounts, for which interest rates have increased in the
current period, compared to the prior period. Other income in the current
period is primarily related to an
Gain on Forgiveness of New PPP Loan. Includes principal and accrued interest from our New PPP Loan that was fully forgiven during the prior period.
Liquidity and Capital Resources
The primary sources of cash for the Company during the nine-month period ended
Impact of COVID-19
In
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Ukraine Conflict
In late
We plan to continue to closely monitor the global energy markets and oil and gas pricing, with the remainder of our 2022 development plan being subject to revision, if and as necessary, to react to market conditions in the best interest of its shareholders, while prioritizing its financial strength and liquidity.
Working Capital
At
Financing
The Company has an ongoing
The ATM Offering was made pursuant to the terms of that certain
We expect that we will have sufficient cash available to meet our needs over the
foreseeable future, including to fund the remainder of our 2022 development
program, discussed above, which cash we anticipate being available from (i)
projected cash flow from our operations, (ii) existing cash on hand, (iii)
equity infusions or loans (which may be convertible) made available from
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Cash Flows (in thousands)
Nine Months Ended September 30,
2022 2021
Cash flows provided by operating activities $ 12,994
(11,413 ) (309 )
Cash flows provided by financing activities 50 8,237
Net increase in cash and restricted cash $ 1,631
Cash flows provided by operating activities. Net cash provided by operating
activities increased by
Cash flows used in investing activities. Net cash used in investing activities
increased by
Cash flows provided by financing activities. In the prior period, the Company
closed an underwritten public offering of 5,968,500 shares of common stock at a
public offering price of
Non-GAAP Financial Measures
We have included EBITDA and Adjusted EBITDA in this Report as supplements to
GAAP measures of performance to provide investors with an additional financial
analytical framework which management uses, in addition to historical operating
results, as the basis for financial, operational and planning decisions and
present measurements that third parties have indicated are useful in assessing
the Company and its results of operations. "EBITDA" represents net income before
interest, taxes, depreciation and amortization. "Adjusted EBITDA" represents
EBITDA, less share-based compensation, gain on sale of oil and gas properties,
gain on forgiveness of PPP loan, and accounts payable settlements. Adjusted
EBITDA excludes certain items that we believe affect the comparability of
operating results and can exclude items that are generally non-recurring in
nature or whose timing and/or amount cannot be reasonably estimated. EBITDA and
Adjusted EBITDA are presented because we believe they provide additional useful
information to investors due to the various noncash items during the period.
EBITDA and Adjusted EBITDA are also frequently used by analysts, investors and
other interested parties to evaluate companies in our industry. EBITDA and
Adjusted EBITDA have limitations as analytical tools, and you should not
consider them in isolation, or as a substitute for analysis of our operating
results as reported under GAAP. Some of these limitations are: EBITDA and
Adjusted EBITDA do not reflect cash expenditures, future requirements for
capital expenditures, or contractual commitments; EBITDA and Adjusted EBITDA do
not reflect changes in, or cash requirements for, working capital needs; and
EBITDA and Adjusted EBITDA do not reflect the significant interest expense, or
the cash requirements necessary to service interest or principal payments, on
debt or cash income tax payments. For example, although depreciation and
amortization are noncash charges, the assets being depreciated and amortized
will often have to be replaced in the future, and EBITDA and Adjusted EBITDA do
not reflect any cash requirements for such replacements. Additionally, other
companies in our industry may calculate EBITDA and Adjusted EBITDA differently
than
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Three Months Ended Nine Months Ended
September 30, September 30,
2022 2021 2022 2021
Net income (loss) $ 1,079 $ (325 ) $ 5,628 $ 178
Add (deduct)
Depreciation, depletion,
amortization and accretion 2,313 1,666 6,427 4,829
Interest expense - - - 1
EBITDA 3,392 1,341 12,055 5,008
Add (deduct)
Share-based compensation 472 592 1,572 1,867
Gain on sale of oil and gas
properties - - - (1,805 )
Gain on forgiveness of PPP loan - - - (374 )
Accounts payable settlements - - - (32 )
Adjusted EBITDA $ 3,864 $ 1,933 $ 13,627 $ 4,664
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations
is based on our financial statements, which have been prepared in accordance
with accounting principles generally accepted in
Exploratory wells in areas not requiring major capital expenditures are evaluated for economic viability within one year of completion of drilling. The related well costs are expensed as dry holes if it is determined that such economic viability is not attained. Otherwise, the related well costs are reclassified to oil and gas properties and subject to impairment review. For exploratory wells that are found to have economically viable reserves in areas where major capital expenditure will be required before production can commence, the related well costs remain capitalized only if additional drilling is under way or firmly planned. Otherwise, the related well costs are expensed as dry holes.
Exploration and evaluation expenditures incurred subsequent to the acquisition of an exploration asset in a business combination are accounted for in accordance with the policy outlined above.
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Depreciation, depletion and amortization of capitalized oil and gas properties is calculated on a field-by-field basis using the unit of production method. Lease acquisition costs are amortized over the total estimated proved developed and undeveloped reserves and all other capitalized costs are amortized over proved developed reserves. Costs specific to developmental wells for which drilling is in progress or uncompleted are capitalized as wells in progress and not subject to amortization until completion and production commences, at which time amortization on the basis of production will begin.
Revenue Recognition. The Company's revenue is comprised entirely of revenue from exploration and production activities. The Company's oil is sold primarily to marketers, gatherers, and refiners. Natural gas is sold primarily to interstate and intrastate natural-gas pipelines, direct end-users, industrial users, local distribution companies, and natural-gas marketers. NGLs are sold primarily to direct end-users, refiners, and marketers. Payment is generally received from the customer in the month following delivery.
Contracts with customers have varying terms, including month-to-month contracts, and contracts with a finite term. The Company recognizes sales revenues for oil, natural gas, and NGLs based on the amount of each product sold to a customer when control transfers to the customer. Generally, control transfers at the time of delivery to the customer at a pipeline interconnect, the tailgate of a processing facility, or as a tanker lifting is completed. Revenue is measured based on the contract price, which may be index-based or fixed, and may include adjustments for market differentials and downstream costs incurred by the customer, including gathering, transportation, and fuel costs.
Revenues are recognized for the sale of the Company's net share of production volumes. Sales on behalf of other working interest owners and royalty interest owners are not recognized as revenues.
Stock-Based Compensation. Pursuant to the provisions of
Recently Adopted and Recently Issued Accounting Pronouncements. None.
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