# Riley Exploration Permian, Inc.: Form 10-Q for the period ended Sep 30, 2013

- Company: [Riley Exploration Permian, Inc.](/companies/repx.md) (CIK 1001614)
- Form: 10-Q
- Filed: 2013-11-14
- Accepted by EDGAR: Nov 14, 2013, 09:15 ET
- Period: 2013-09-30
- Accession: 0001140361-13-042349
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1001614/000114036113042349/form10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1001614/000114036113042349/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2013-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Operating income | 3 months, 2013-07-01 to 2013-09-30 | $1.3m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2013-01-01 to 2013-09-30 | $4.4m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2013-07-01 to 2013-09-30 | $79.0k | us-gaap:InterestExpense |
| Interest expense | 9 months, 2013-01-01 to 2013-09-30 | $319.0k | us-gaap:InterestExpense |
| Income tax | 3 months, 2013-07-01 to 2013-09-30 | $713.0k | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2013-01-01 to 2013-09-30 | $1.9m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2013-07-01 to 2013-09-30 | $481.0k | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2013-01-01 to 2013-09-30 | $2.2m | us-gaap:NetIncomeLoss |
| Diluted shares (weighted) | 3 months, 2013-07-01 to 2013-09-30 | 60,854,655 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2013-01-01 to 2013-09-30 | 60,945,588 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2013-01-01 to 2013-09-30 | $6.6m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Cash and equivalents | at 2013-09-30 | $19.0k | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2013-09-30 | $2.9m | us-gaap:AssetsCurrent |
| Total assets | at 2013-09-30 | $38.9m | us-gaap:Assets |
| Current liabilities | at 2013-09-30 | $1.7m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2013-09-30 | $6.6m | us-gaap:Liabilities |
| Long-term debt | at 2013-09-30 | $3.1m | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2013-09-30 | $77.0k | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2013-09-30 | $32.3m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 14,489 characters.

### Results of Operations and Financial Condition

During the first nine months of 2013, the Company sold 162 MBbl of oil from its Kansas wells. Of the 162 MBbl, 126 MBbl were net to the Company after required payments to all of the royalty interests and drilling program participants. The Company’s net sales from its Kansas wells during the first nine months of 2013 of 126 MBbl of oil compares to net sales of 170 MBbl during the first nine months of 2012. This 44 MBbl decrease was due primarily to decreased sales volumes from the Albers, Coddington, DeYoung, Hilgers B, Liebenau, McElhaney A, Veverka A, Veverka B, and Zerger A leases primarily as a result of drilling and polymers performed during the first nine months of 2012 as well as polymers performed during late 2011. The Company’s net revenue from the Kansas properties was $11.5 million in the first nine months of 2013 compared to $15.1 million for the first nine months of 2012. This decrease in net revenue was due primarily to a $3.9 million decrease related to the 44 MBbl decrease in sales volumes partially offset by a $314,000 increase related to a $2.42 per barrel increase in the average Kansas oil price from $88.58 per barrel in 2012 to $91.00 per barrel in 2013. During the first nine months of 2013 and 2012, Swan Creek sales were $396,000 and $335,000, respectively and MMC revenues were $329,000 and $528,000, respectively.

### Comparison of the Quarters Ended September 30, 2013 and 2012

The Company recognized $4.0 million in revenues during the third quarter of 2013 and $5.8 million during the third quarter of 2012. The revenue decrease from 2012 levels was primarily due to a $2.2 million decrease related to a 26 MBbl decrease in Kansas oil sales volumes, partially offset by $0.5 million increase related to a $13.71 increase in the average oil price. Kansas oil prices during the third quarter of 2013 averaged $99.01 per barrel compared to an average price of $85.30 per barrel during the third quarter of 2012. The Company reported net income from continuing operations of $535,000 or $0.01 per share of common stock during the third quarter of 2013 compared to net income from continuing operations of $1,279,000 or $0.02 per share of common stock during the third quarter of 2012. Although revenues decreased $1.8 million, this decrease was partially offset by a $426,000 decrease in general and administrative cost, a $269,000 decrease in depreciation, depletion, and amortization, and a $186,000 decrease in operating cost, and a $112,000 decrease in interest expense.

General and administrative costs decreased $426,000 from $887,000 during the third quarter of 2012 to $461,000 during the third quarter of 2013. This decrease was primarily due to recording a $238,000 allowance for doubtful accounts associated with the related party receivable in the third quarter of 2012 and a $142,000 reduction in consulting, legal, and accounting costs from 2012 levels.

Depreciation, depletion, and amortization expense decreased $269,000 from $942,000 during the third quarter of 2012 to $673,000 during the third quarter of 2013. This decrease was primarily due to lower oil and gas sales volumes in the third quarter of 2013 compared to the oil and gas sales volumes during the third quarter of 2012, partially offset by higher depletion rates during the third quarter of 2013.

Production costs and taxes decreased $186,000 from $1.75 million during the third quarter of 2012 to $1.56 million during the third quarter of 2013. This decrease from 2012 levels was primarily due to a $41,000 decrease in personnel related costs included in production costs during 2012 but included as general and administrative expense during 2013, $39,000 related to reduced personnel cost as a result of the sale of the Swan Creek assets, and $36,000 related to timing of methane facility property tax payments.

Interest expense decreased $112,000 from $191,000 during the third quarter of 2012 to $79,000 during the third quarter of 2013. This decrease in interest expense was primarily due to an $8.1 million decrease in average bank borrowings from $12.9 million during the third quarter of 2012 to $4.8 million during the third quarter of 2013. This decrease in average bank borrowings related to a significant decrease in capital spending since the second quarter of 2012.

### Comparison of the Nine Months Ended September 30, 2013 and 2012

The Company recognized $12.2 million in revenues during the first nine months of 2013 compared to $16.0 million during the first nine months of 2012. The revenue decrease from 2012 levels was primarily due to a $3.9 million decrease related to a 44 MBbl decrease in Kansas oil sales volumes, a $198,000 decrease in methane plant sales due to increased downtime at the facility, partially offset by a $314,000 increase related to a $2.42 per barrel increase in average Kansas oil prices. Kansas oil prices during the first nine months of 2013 averaged $91.00 per barrel compared to an average price of $88.58 per barrel during the first nine months of 2012. The Company reported net income from continuing operations of $2.3 million or $0.04 per share of common stock during the first nine months of 2013 compared to net income from continuing operations of $3.4 million or $0.06 per share of common stock during the first nine months of 2012. Although revenues decreased $3.8 million, this decrease was partially offset by a $1.2 million decrease in operating cost, an $806,000 decrease in general and administrative cost, a $301,000 decrease in depreciation, depletion and amortization, a $266,000 decrease in interest expense, and a $140,000 decrease in loss on derivatives.

Production costs and taxes decreased $1.2 million from $5.3 million during the first nine months of 2012 to $4.1 million during the first nine months of 2013. This decrease from 2012 levels was primarily due to a $253,000 decrease in production taxes, a $168,000 decrease in Kansas property taxes related primarily to a successful appeal of 2012 property taxes, a $148,000 decrease in MMC expense primarily related to repairs performed in 2012, a $145,000 decrease related to changes in Kansas oil inventories, a $145,000 decrease in personnel related costs included in production costs during 2012 but included as general and administrative expense during 2013, and $96,000 of lower well repair cost incurred in 2013 compared to 2012 levels.

General and administrative costs decreased $806,000 from $2.2 million during the first nine months of 2012 to $1.4 million during the first nine months of 2013. This decrease was primarily due to a $337,000 decrease related to recording a $238,000 allowance for doubtful accounts associated with the related party receivable in 2012 and a $98,000 reversal of bad debt expense associated with the related party receivable during the second quarter of 2013, a $174,000 decrease in personnel relocation and office related costs during the first nine months of 2013 compared to the first nine months of 2012, and a $94,000 reduction in consulting expenses.

Depreciation, depletion, and amortization decreased $301,000 from $2.5 million during the first nine months of 2012 to $2.2 million during the first nine months of 2013. This decrease was primarily due to a $542,000 decrease related to lower oil and gas sales volumes during the first nine months of 2013 compared to the oil and gas sales volumes during the first nine months of 2012. This decrease was partially offset by a $274,000 increased related to higher depletion rates during the first nine months of 2013 as compared to the first nine months of 2012.

Interest expense decreased $266,000 from $585,000 during the first nine months of 2012 to $319,000 during the first nine months of 2013. This decrease in interest expense was primarily due to a $6.1 million decrease in average bank borrowings from $13.2 million during the first nine months of 2012 to $7.1 million during the first nine months of 2013. This decrease in average bank borrowings related to a significant decrease in capital spending since the second quarter of 2012.

During the first nine months of 2012, the Company recorded a $140,000 non-cash unrealized loss on derivatives related to the change in fair value of an oil derivative contract. No unrealized gains or losses were recorded during the first nine months of 2013 as the oil derivative contract expired on December 31, 2012.

### Liquidity and Capital Resources

At September 30, 2013, the Company had a revolving credit facility with F&M Bank & Trust Company (“F&M Bank”). Under the credit facility, loans and letters of credit are available to the Company on a revolving basis in an amount outstanding not to exceed the lesser of $40 million or the Company’s borrowing base in effect from time to time. As of September 30, 2013, the Company’s borrowing base was $20.5 million and the interest rate is the greater of prime plus 0.25% or 5.25% per annum. The Company’s interest rate at September 30, 2013 was 5.25%. The credit facility is secured by substantially all of the Company’s producing and non-producing oil and gas properties and the Company’s Methane Project assets. The credit facility includes certain covenants with which the Company is required to comply. These covenants include leverage, interest coverage, minimum liquidity, and general and administrative coverage ratios. The Company is in compliance with all of the credit facility covenants.

On October 24, 2013, the Company’s senior credit facility with F&M Bank after F&M Bank’s semiannual review of the Company’s currently owned producing properties was amended to decrease the Company’s borrowing base from $20.5 million to $17.5 million. This decrease in the Company’s borrow base was primarily related to a lower reserve base used at the mid-year borrowing base review as a result of production during the first six months of 2013 with no offsetting reserve additions from drilling or polymers. The borrowing base remains subject to the existing periodic redetermination provision in the credit facility. The interest rate was modified from the greater of prime plus 0.25% or 5.25% per annum, to prime plus 0.50%. The maximum line of credit of the Company under the F&M Bank credit facility remained $40 million.

The total borrowing by the Company under the credit facility at September 30, 2013 and December 31, 2012 was $3.0 million and $10.1 million, respectively. This $7.1 million reduction resulted from use of cash flow from operations to pay down the credit facility. The next borrowing base review will take place in March 2014.

Although the Company has not been required as of the date of this Report to make any payment of principal on the credit facility, the Company can make no assurance that in view of the conditions in the national and world economies, including the realistic possibility of low commodity prices being received for the Company’s oil and gas production for extended periods, that F&M Bank may in the future make a redetermination of the Company’s borrowing base to a point below the level of current borrowings. In such event, F&M Bank may require installment or other payments in such amount in order to reduce the principal of the Company’s outstanding borrowing to a level not in excess of the borrowing base as it may be redetermined. The Company can make no assurance that it can continue normal operations indefinitely or for any specific period of time in the event of extended periods of low commodity prices, or upon the occurrence of any significant downturn or losses in operations. In such event, the Company may be required to reduce costs of operations by various means, including not undertaking certain maintenance or reworking operations that may be necessary to keep some of the Company’s properties in production or to seek additional working capital by additional means such as issuance of equity including preferred stock or such other means as may be considered and authorized by the Company’s Board of Directors from time to time.

Net cash provided by operating activities decreased $833,000 from $7.4 million in the first nine months of 2012 to $6.6 million during the first nine months of 2013. Cash flow used in working capital was $556,000 during the first nine months of 2012 compared to $326,000 provided by working capital during the first nine months of 2013. The $882,000 change in cash flow used in working capital from 2012 to 2013 was primarily due to a $668,000 increase in materials and equipment inventory during the first nine months of 2012 compared to a $103,000 decrease in materials and equipment inventory during the first nine months of 2013. The $833,000 decrease in cash provided by operating activities was primarily due to a $3.8 million decrease in 2013 revenues, partially offset by a $1.2 million decrease in production costs and taxes, a $806,000 decrease in general and administrative expense, and the $882,000 change in cash flow used in working capital. Net cash provided by investing activities was $664,000 during the first nine months of 2013 compared to $7.16 million used in investing activities during the first nine months of 2012. This change was a result of a $6.9 million reduction in drilling, polymer, leasehold, and seismic costs from $7.7 million during the first nine months of 2012 to $836,000 during the first nine months of 2013. Also during 2013, the Company realized $1.4 million from the sale of its pipeline and Swan Creek assets. In addition, Methane Plant capital spending decreased $459,000 from 2012 levels as no spending occurred during the first nine months of 2013. These capital spending reductions were partially offset by the $1.0 million Section 1603 payment received by the Company in the second quarter of 2012. Cash flow used in financing activities during the first nine months of 2013 and 2012 was $7.25 million and $257,000, respectively. This increase was primarily related to using 2013 cash flows from operations to fund operations and pay down bank borrowings compared to using 2012 cash flows from operations to supplement funding of the Company’s capital spending programs during the first nine months of 2012.

### Critical Accounting Policies

During the quarter ended September 30, 2013, there were no changes to the critical accounting policies included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012.

## Market risk

As filed, 5,902 characters.

**The Company’s Borrowing Base under its Credit Facility may be reduced by the lender.**

The borrowing base under the Company’s revolving credit facility will be determined from time to time by the lender, consistent with its customary natural gas and crude oil lending practices. Reductions in estimates of the Company’s natural gas and crude oil reserves could result in a reduction in the Company’s borrowing base, which would reduce the amount of financial resources available under the Company’s revolving credit facility to meet its capital requirements. Such a reduction could be the result of lower commodity prices or production, inability to drill or unfavorable drilling results, changes in natural gas and crude oil reserve engineering, the lender’s inability to agree to an adequate borrowing base or adverse changes in the lenders’ practices regarding estimation of reserves. If cash flow from operations or the Company’s borrowing base decreases for any reason, the Company’s ability to undertake exploration and development activities could be adversely affected.

As a result, the Company’s ability to replace production may be limited. In addition, if the borrowing base is reduced, the Company may be required to pay down its borrowings under the revolving credit facility so that outstanding borrowings do not exceed the reduced borrowing base. This requirement could further reduce the cash available to the Company for capital spending and, if the Company did not have sufficient capital to reduce its borrowing level, could cause the Company to default under its revolving credit facility.

As of September 30, 2013, the Company’s borrowing base was set at $20.5 million of which $3.0 million had been drawn down by the Company. On October 24, 2013, the Company’s borrowing base was reduced to $17.5 million. The Company’s next periodic borrowing base review will occur in March 2014.

### Commodity Risk

The Company's major market risk exposure is in the pricing applicable to its oil and gas production. Realized pricing is primarily driven by the prevailing worldwide price for crude oil and spot prices applicable to natural gas production. Historically, prices received for oil and gas production have been volatile and unpredictable and price volatility is expected to continue. Although not as volatile as in previous years, monthly Kansas oil prices received during the first nine months of 2013 ranged from a low of $84.91 per barrel to a high of $99.78 per barrel. Gas prices realized during the same period ranged from a low of $2.46 per Mcf to a high of $4.29 per Mcf.

In order to help mitigate commodity price risk, the Company has entered into a long term fixed price contract for MMC gas sales. On August 27, 2009, the Company entered into a five-year fixed price gas sales contract with Atmos Energy Marketing, LLC, (“AEM”) in Houston, Texas, a nonregulated unit of Atmos Energy Corporation (NYSE: ATO) for the sale of the methane component of landfill gas produced by MMC at the Carter Valley Landfill. The agreement provides for the sale of up to 600 MMBtu per day. The contract is effective beginning with September 2009 gas production and ends July 31, 2014. The agreed contract price of over $6 per MMBtu was a premium to the then current five-year strip price for natural gas on the NYMEX futures market.

As of September 30, 2013, the Company has no open positions related to derivative agreements.

### Interest Rate Risk

At September 30, 2013, the Company had debt outstanding of $3.2 million including, as of that date, $3.0 million owed on its credit facility with F&M Bank. As of September 30, 2014, the interest rate on the credit facility was variable at a rate equal to the greater of prime plus 0.25% or 5.25% per annum. On October 24, 2013, the Company entered into an amendment of the credit facility with F&M Bank. This amendment modified the rate to prime plus 0.50%. The Company’s remaining debt of $157,000 has fixed interest rates ranging from 5.5% to 8.25%.

The annual impact on interest expense and the Company’s cash flows of a 10% increase in the interest rate on the credit facility would be approximately $16,000 assuming borrowed amounts under the credit facility remained at the same amount owed as of September 30, 2013. If the rate included in the October 24, 2013 amendment was used, the annual impact would be $11,000. The Company did not have any open derivative contracts relating to interest rates at September 30, 2013 or December 31, 2012.

### Forward-Looking Statements and Risk

Certain statements in this report, including statements of the future plans, objectives, and expected performance of the Company, are forward-looking statements that are dependent upon certain events, risks and uncertainties that may be outside the Company’s control, and which could cause actual results to differ materially from those anticipated. Some of these include, but are not limited to, the market prices of oil and gas, economic and competitive conditions, inflation rates, legislative and regulatory changes, financial market conditions, political and economic uncertainties of foreign governments, future business decisions, and other uncertainties, all of which are difficult to predict.

There are numerous uncertainties inherent in projecting future rates of production and the timing of development expenditures. The total amount or timing of actual future production may vary significantly from estimates. The drilling of exploratory wells can involve significant risks, including those related to timing, success rates and cost overruns. Lease and rig availability, complex geology and other factors can also affect these risks. Additionally, fluctuations in oil and gas prices, or a prolonged period of low prices, may substantially adversely affect the Company's financial position, results of operations, and cash flows.

## Controls and procedures

As filed, 2,444 characters.

### Evaluation of Disclosure Controls and Procedures

The Company’s Chief Executive Officer and Chief Financial Officer, and other members of management have evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)). Based on such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures, as of the end of the period covered by this Report, were adequate and effective to provide reasonable assurance that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. As a result of the resignation of Jeffrey R. Bailey as the Company’s Chief Executive Officer on June 28, 2013 and the appointment by the Board of Michael J. Rugen, the Company’s Chief Financial Officer to also serve as Chief Executive Officer on an interim basis, Mr. Rugen is acting in both capacities and has executed the accompanying certifications as to both offices. The effectiveness of a system of disclosure controls and procedures is subject to various inherent limitations, including cost limitations, judgments used in decision making, assumptions about the likelihood of future events, the soundness of internal controls, and fraud. Due to such inherent limitations, there can be no assurance that any system of disclosure controls and procedures will be successful in preventing all errors or fraud, or in making all material information known in a timely manner to the appropriate levels of management.

### Changes in Internal Controls

During the period covered by this Report, certain internal control procedures previously performed by the former Chief Executive Officer are now being performed by the Company’s General Counsel and Audit Committee. There have been no other changes to the Company’s system of internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s system of controls over financial reporting. As part of a continuing effort to improve the Company’s business processes, management is evaluating its internal controls and may update certain controls to accommodate any modifications to its business processes or accounting procedures.

## Risk factors

As filed, 168 characters.

Refer to Item 1A Risk Factors in the Company’s Report on Form 10-K for the year ended December 31, 2012 filed on March 29, 2013 which is incorporated by this reference.

Filed Nov 14, 2013.
Source: SEC EDGAR, the filing index for accession 0001140361-13-042349. Last ingested by Listed: Nov 4, 2026, 18:14 ET. No prices; not investment advice.