# Riley Exploration Permian, Inc.: Form 10-Q for the period ended Jun 30, 2016

- Company: [Riley Exploration Permian, Inc.](/companies/repx.md) (CIK 1001614)
- Form: 10-Q
- Filed: 2016-08-12
- Accepted by EDGAR: Aug 12, 2016, 08:41 ET
- Period: 2016-06-30
- Accession: 0001140361-16-076013
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1001614/000114036116076013/form10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1001614/000114036116076013/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2016-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2016-04-01 to 2016-06-30 | $1.3m | us-gaap:Revenues |
| Revenue | 6 months, 2016-01-01 to 2016-06-30 | $2.2m | us-gaap:Revenues |
| Operating income | 3 months, 2016-04-01 to 2016-06-30 | −$1.6m | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2016-01-01 to 2016-06-30 | −$3.0m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2016-04-01 to 2016-06-30 | $26.0k | us-gaap:InterestExpense |
| Interest expense | 6 months, 2016-01-01 to 2016-06-30 | $46.0k | us-gaap:InterestExpense |
| Income tax | 6 months, 2016-01-01 to 2016-06-30 | $0 | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2016-04-01 to 2016-06-30 | −$1.6m | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2016-01-01 to 2016-06-30 | −$3.0m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2016-04-01 to 2016-06-30 | −$0.27 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2016-01-01 to 2016-06-30 | −$0.50 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2016-04-01 to 2016-06-30 | −$0.27 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2016-01-01 to 2016-06-30 | −$0.50 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2016-04-01 to 2016-06-30 | 6,088,555 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2016-01-01 to 2016-06-30 | 6,086,435 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2016-01-01 to 2016-06-30 | −$1.1m | us-gaap:NetCashProvidedByUsedInOperatingActivitiesContinuingOperations |
| Capital expenditure | 6 months, 2016-01-01 to 2016-06-30 | $35.0k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2016-06-30 | $66.0k | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2016-06-30 | $1.5m | us-gaap:AssetsCurrent |
| Total assets | at 2016-06-30 | $9.7m | us-gaap:Assets |
| Current liabilities | at 2016-06-30 | $661.0k | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2016-06-30 | $5.3m | us-gaap:Liabilities |
| Long-term debt | at 2016-06-30 | $2.4m | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2016-06-30 | $61.0k | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2016-06-30 | $4.4m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 16,264 characters.

### Results of Operations and Financial Condition

During the first six months of 2016, 70.5 MBbl gross of oil were sold from the Company’s properties. Of the 70.5 MBbl, 55.5 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 properties during the first six months of 2016 of 55.5 MBbl of oil compares to net sales of 69.6 MBbl of oil during the first six months of 2015. The Company’s net revenue from its oil and gas properties was $1.9 million during the first six months of 2016 compared to $3.3 million during the first six months of 2015. This decrease in net revenue was primarily due to a $716,000 decrease related to a $12.90 per barrel decrease in the average oil price from $46.64 per barrel during the first six months of 2015 to $33.75 per barrel during the first six months of 2016, and a $658,000 decrease related to the 14.1 MBbl decrease in sales volumes. The 14.1 MBbl decrease was primarily due to decreased sales volumes from the Albers, Coddington, Croffoot, Hilgers B, Howard A, Liebenau, McElhaney A, Rogers, and Veverka B leases. Methane facility revenues during the first six months of 2016 and 2015 were $320,000 and $263,000, respectively. The increase in methane facility revenues was a result of increased runtime during 2016 compared to 2015.

### Comparison of the Quarters Ended June 30, 2016 and 2015

The Company reported a net loss of $1.6 million or $0.27 per share of common stock during the second quarter of 2016 compared to a net loss of $76,000 or $0.01 per share of common stock during the second quarter of 2015. The $1.55 million increase in net loss was primarily due to a ceiling test impairment of $1.4 million recorded in the second quarter of 2016 as a result of the low oil prices experienced during 2015 and 2016, and a $617,000 decrease in revenues, partially offset by a $390,000 decrease in DD&A, a $133,000 decrease in general and administrative cost, and a $50,000 decrease in production cost and taxes.

The Company recognized $1.3 million in revenues during the second quarter of 2016 compared to $1.9 million during the second quarter of 2015. The revenue decrease from 2015 levels was primarily due to a $313,000 decrease related to a $11.33 per barrel decrease in the average oil price from an average price of $51.19 per barrel during second quarter of 2015 compared to an average price of $39.86 per barrel during the second quarter of 2016, and a $326,000 decrease related to a 6.4 MBbl decrease in sales volumes, primarily from the Albers, Croffoot, DeYoung, Howard A, Liebenau, McElhaney A, Rogers, Stahl, JR Thyfault, Veverka B and C leases. In addition, there was a $24,000 increase in methane facility revenues related to higher runtimes and increased efficiency.

DD&A decreased $390,000 from $702,000 during the second quarter of 2015 to $312,000 during the second quarter of 2016. This decrease was primarily due to a $262,000 decrease related to a lower oil depletion rate as a result of impairments in 2015 and 2016, and a $121,000 decrease related to a 6.4 MBbl decrease in oil sales volumes.

General and administrative costs decreased $133,000 from $418,000 during the second quarter of 2015 to $285,000 during the second quarter of 2016. This decrease was primarily due to personnel reductions which took place during the first quarter of 2016.

Production cost and taxes decreased $50,000 from $892,000 during the second quarter of 2015 to $842,000 during the second quarter of 2016. This decrease was primarily due to a $27,000 decrease in methane facility cost, and a $22,000 decrease in Kansas property taxes.

### Comparison of the Six Months Ended June 30, 2016 and 2015

The Company reported a net loss of $3.0 million or $0.50 per share of common stock during the first six months of 2016 compared to a net loss of $591,000 or $0.10 per share of common stock during the first six months of 2015. The $2.44 million increase in net loss was primarily due to a ceiling test impairment of $2.1 million recorded in the first six months of 2016 as a result of the low oil prices experienced during 2015 and 2016, a $1.3 million decrease in revenues, and a $380,000 tax benefit recorded during the first six months of 2015, partially offset by a $786,000 decrease in DD&A, a $413,000 decrease in production cost and taxes, and a $186,000 decrease in general and administrative cost.

The Company recognized $2.2 million in revenues during the first six months of 2016 compared to $3.5 million during the first six months of 2015. The revenue decrease from 2015 levels was primarily due to a $716,000 decrease related to a $12.90 per barrel decrease in the average oil price from an average price of $46.64 per barrel during first six months of 2015 compared to an average price of $33.75 per barrel during the first six months of 2016, and a $658,000 decrease related to a 14.1 MBbl decrease in sales volumes, primarily from the Albers, Coddington, Croffoot, Hilgers B, Howard A, Liebenau, McElhaney A, Rogers, and Veverka B leases. In addition, there was a $57,000 increase in methane facility revenues from $263,000 during the first six months of 2015 to $320,000 during the first six months of 2016. The increase in methane facility revenues was a result of increased runtime during 2016 compared to 2015.

DD&A decreased $786,000 from $1.4 million during the first six months of 2015 to $648,000 during the first six months of 2016. This decrease was primarily due to a $505,000 decrease related to a lower oil depletion rate as a result of impairments in 2015 and 2016, and a $272,000 decrease related to a 14.1 MBbl decrease in oil sales volumes.

Production cost and taxes decreased $413,000 from $2.1 million during the first six months of 2015 to $1.7 million during the first six months of 2016. This decrease was primarily due to a $153,000 change in oil inventory quarterly adjustment, an $83,000 decrease in methane facility cost, a $77,000 decrease in utility cost, and a $56,000 decrease in chemical cost.

General and administrative costs decreased $186,000 from $972,000 during the first six months of 2015 to $786,000 during the first six months of 2016. This decrease was primarily due to $134,000 decrease in salaries and wages as a result of personnel reductions which took place during the first quarter of 2016, and a $41,000 reduction in legal and accounting costs.

### Liquidity and Capital Resources

At June 30, 2016, the Company had a revolving credit facility with Prosperity 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 June 30, 2016, the Company’s borrowing base was approximately $3.2 million, the interest rate of prime plus 0.50% per annum, and the maturity date was January 30, 2018. The Company’s interest rate at June 30, 2016 was 4.00%. The borrowing base is subject to an existing periodic redetermination provision in the credit facility. The credit facility is secured by substantially all of the Company’s producing and non-producing oil and gas properties and the Company’s Manufactured Methane facilities. The credit facility includes certain covenants with which the Company is required to comply. For the quarter ended December 31, 2015, the Company was in default on compliance with the Leverage Ratio covenant. On March 28, 2016, the credit facility was amended to delete the Leverage Ratio covenant, add a Debt to Tangible Net Worth covenant, waived the default on the Interest Coverage ratio for the quarter ended December 31, 2015, waived the anticipated default for the quarter ended March 31, 2016, and waived compliance with the Interest Coverage ratio for all applicable periods through the maturity date. Although the Company was in default of the Leverage and Interest Coverage ratios for the quarter ended December 31, 2015, the Company was in compliance at March 28, 2016 as a result of the amendment and waivers. For the quarter ended June 30, 2016, the Company was in default on compliance with the Debt to Tangible Net Worth covenant. On August 10, 2016, the Company received a waiver of the covenant default for the quarter ended June 30, 2016 as well as a waiver for the anticipated default for the quarter ended September 30, 2016. Based on additional means of raising capital currently being considered by the Company, it is anticipated that the Company will be in compliance with this covenant for the quarter ended December 31, 2016. Although the Company was in default of the Debt to Tangible Net Worth covenant for the quarter ended June 30, 2016, the Company was in compliance as of August 10, 2016 as a result of the waiver. The next borrowing base review will take place in August 2016.

The total borrowing by the Company under the Prosperity Bank facility at June 30, 2016 and December 31, 2015 was approximately $2.3 million and $869,000, respectively.

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 Prosperity Bank may not in the future make a redetermination of the Company’s borrowing base to a point below the level of current borrowings. In such event, Prosperity 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 $1.5 million from $436,000 provided by operating activities during the first six months of 2015 to $1.1 million used in operating activities during the first six months of 2016. Cash flow used in working capital was $852,000 during the first six months of 2016 compared to $82,000 used in working capital during the first six months of 2015. The $770,000 reduction in cash flow provided by working capital was primarily due to a $544,000 decrease related to a decrease in accounts payable during the first six months of 2016 as compared to an $88,000 decrease in accounts payable during the first six months of 2015. The $1.5 million decrease in cash flow provided by operating activities was primarily due to a $770,000 decrease in cash flow provided by working capital, and a $1.3 million decrease in revenues, partially offset by a $413,000 decrease in production cost and taxes, and an $186,000 decrease in general and administrative cost. Net cash used in investing activities was $327,000 during the first six months of 2016 compared to $444,000 used in investing activities during the first six months of 2015. The $117,000 decrease in net cash used in investing activities was primarily a result of an $184,000 reduction in drilling, seismic, and leasehold cost during the first six months of 2016 as compared to the first six months of 2015. Cash flow provided by financing activities during the first six months of 2016 was $1.4 million as compared to $28,000 during the first six months of 2015. This change was primarily due additional credit facility borrowings as a result of lower oil prices and production during the first six months of 2016 as compared to the first six months of 2015.

### Critical Accounting Policies

During the three months and six months ended June 30, 2016, 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, 2015.

### Commitments and Contingencies

The Company as designated operator was administratively issued an “Incident of Non-Compliance” by BSEE during the quarter ended September 30, 2012 concerning one of Hoactzin’s properties. This action calls for payment of a civil penalty of $386,000 for failure to provide, upon request, documentation to the BSEE evidencing that certain safety inspections and tests had been conducted in 2011. In the 4th quarter of 2012, the Company filed an administrative appeal with the Interior Board of Land Appeals (“IBLA”) of this action in order to attempt to significantly reduce the civil penalty. This appeal required a fully collateralized appeal bond to postpone the payment obligation until the appeal was determined. The Company posted and collateralized this bond with RLI Insurance Company. If the bond was not posted, the appeal would have been administratively denied and the order to the Company as operator to pay the $386,000 penalty would have become final. On June 23, 2014, the IBLA affirmed the civil penalty without reduction. On September 22, 2014, the Company sought judicial review of the June 23, 2014 agency action in the federal district court in the Eastern District of Louisiana at New Orleans. On July 14, 2015, the court affirmed the determination by the IBLA without reduction. The Company determined that further appeal of the determination was not likely to reduce the penalty and the Company did not further appeal. In the third quarter of 2015, the Company paid the civil penalty affirmed on appeal and statutory interest thereon from funds borrowed under its credit facility. The Company has not advanced any funds to pay any obligations of Hoactzin and no borrowing capability of the Company has been used in connection with its obligations under the Management Agreement, except for those funds used to pay the civil penalty and interest thereon.

During the second quarter of 2015, the Company received from Hoactzin a copy of an internal analysis prepared by Hoactzin setting out certain issues that Hoactzin may consider to form the basis of operational and other claims against the Company primarily under the Management Agreement. This analysis raised issues other than the “Incident of Non-Compliance” discussed previously. The Company is discussing this analysis, as well as the civil penalty discussed previously, with Hoactzin in an effort to determine whether there is possibility of a reasonable resolution of some or all of these matters on a negotiated basis.

### Cost Reduction Measures

During the quarter ended March 31, 2015, the Company initiated cost reduction measures including compensation reductions for each employee as well as members of the Board of Directors. These compensation reductions will remain in place until such time, if any, that the market price of crude oil, calculated as a thirty day trailing average of WTI postings as published by the U.S. Energy Information Administration meets or exceeds $70 per barrel when compensation shall revert to the levels in place before the reductions became effective. At such time, if any, that the market price of crude oil, calculated as a thirty day trailing average of WTI postings as published by the U.S. Energy Information Administration meets or exceeds $85 per barrel, all previous reductions made will be reimbursed, a portion which may be paid in stock, to each employee and members of the Board of Directors if he is still employed by the Company or still a member of the Board of Directors. As of June 30, 2016, the reductions were approximately $162,000. The Company has not accrued any liabilities associated with these compensation reductions.

## Market risk

As filed, 4,992 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 June 30, 2016, the Company’s borrowing base was approximately $3.2 million of which $2.3 million had been drawn down by the Company. The Company’s next periodic borrowing base review will take place in August 2016.

### Commodity Risk

The Company's major market risk exposure is in the pricing applicable to its oil production. Realized pricing is primarily driven by the prevailing worldwide price for crude oil. Historically, prices received for oil and gas production have been volatile and unpredictable and price volatility is expected to continue. Monthly Kansas oil prices received during the first six months of 2016 ranged from a low of $24.50 per barrel to a high of $43.02 per barrel. As a result of the low prices experienced during 2015 and 2016, the Company recorded an impairment of its oil and gas properties during the quarter ended March 31, 2016 and the quarter ended June 30, 2016. The Company anticipates it may need to record an additional impairment during the quarter ended September 30, 2016.

As of June 30, 2016, the Company has no open positions related to derivative agreements relating to commodities.

### Interest Rate Risk

At June 30, 2016, the Company had debt outstanding of $2.45 million including, as of that date, $2.3 million owed on its credit facility with Prosperity Bank. As of June 30, 2016, the interest rate on the credit facility was variable at a rate equal to prime plus 0.50% per annum. The Company’s credit facility interest rate at June 30, 2016 was 4.00%. The Company’s remaining debt of $133,000 has fixed interest rates ranging from 4.16% to 4.60%.

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 $9,000 assuming borrowed amounts under the credit facility remained at the same amount owed as of June 30, 2016. The Company did not have any open derivative contracts relating to interest rates at June 30, 2016 or December 31, 2015.

### 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, 2,974 characters.

### Evaluation of Disclosure Controls and Procedures

The Company’s Chief Executive Officer and Chief Financial Officer has 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 has 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. 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.

During the quarter ended December 31, 2015, the Company’s management determined that the Company’s controls over review of the quarterly ceiling test calculation were not adequate to ensure this calculation was performed correctly. Based on this material weakness, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures, as of December 31, 2015 were not 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. During the quarter ended March 31, 2016, the Company’s management addressed this material weakness by implementing a process to more fully analyze the impact of the Company’s tax position on its quarterly ceiling test calculation.

### Changes in Internal Controls

During the quarter ended March 31, 2016, the Company implemented a process to more fully analyze the impact of the Company’s tax position on its quarterly ceiling test calculation. Other than this process, 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, 2015 filed on March 31, 2016 which is incorporated by this reference.

Filed Aug 12, 2016.
Source: SEC EDGAR, the filing index for accession 0001140361-16-076013. Last ingested by Listed: Nov 4, 2026, 18:14 ET. No prices; not investment advice.