# Riley Exploration Permian, Inc.: Form 10-Q for the period ended Mar 31, 2017

- Company: [Riley Exploration Permian, Inc.](/companies/repx.md) (CIK 1001614)
- Form: 10-Q
- Filed: 2017-05-12
- Accepted by EDGAR: May 12, 2017, 17:02 ET
- Period: 2017-03-31
- Accession: 0001140361-17-020141
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1001614/000114036117020141/form10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1001614/000114036117020141/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2017-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2017-01-01 to 2017-03-31 | $1.3m | us-gaap:Revenues |
| Operating income | 3 months, 2017-01-01 to 2017-03-31 | −$197.0k | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2017-01-01 to 2017-03-31 | $16.0k | us-gaap:InterestExpense |
| Net income | 3 months, 2017-01-01 to 2017-03-31 | −$213.0k | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2017-01-01 to 2017-03-31 | −$0.03 | us-gaap:EarningsPerShareBasicAndDiluted |
| Diluted shares (weighted) | 3 months, 2017-01-01 to 2017-03-31 | 8,452,132 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Cash and equivalents | at 2017-03-31 | $228.0k | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2017-03-31 | $1.6m | us-gaap:AssetsCurrent |
| Total assets | at 2017-03-31 | $8.3m | us-gaap:Assets |
| Current liabilities | at 2017-03-31 | $627.0k | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2017-03-31 | $2.7m | us-gaap:Liabilities |
| Long-term debt | at 2017-03-31 | $34.0k | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2017-03-31 | $53.0k | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2017-03-31 | $5.6m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 13,408 characters.

### Results of Operations and Financial Condition

During the first three months of 2017, 33.5 MBbl gross of oil were sold from the Company’s properties. Of the 33.5 MBbl sold, 26.0 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 three months of 2017 of 26.0 MBbl of oil compares to net sales of 27.8 MBbl of oil during the first three months of 2016. The Company’s net revenue from its oil and gas properties was $1.2 million during the first three months of 2017 compared to $782,000 during the first three months of 2016. This increase in net revenue was primarily due to a $484,000 increase related to an $18.65 per barrel increase in the average oil price from $27.67 per barrel during the first three months of 2016 to $46.32 per barrel during the first three months of 2017, partially offset by a $52,000 decrease related to the 1.8 MBbl decrease in sales volumes. The 1.8 MBbl decrease was primarily due to decreased sales volumes from the Albers A, Albers B, Liebenau, and Veverka A leases. MMC revenues during the first three months of 2017 and 2016 were $135,000 and $150,000, respectively.

### Comparison of the Quarters Ended March 31, 2017 and 2016

The Company reported a net loss of $213,000 or $0.03 per share of common stock during the first quarter of 2017 compared to a net loss of $1.4 million or $0.23 per share of common stock during the first quarter of 2016. The $1.2 million decrease in net loss was primarily due to a ceiling test impairment of $641,000 recorded in the first quarter of 2016 as a result of the low oil prices experienced during 2015 and 2016, a $412,000 increase in revenues, a $166,000 decrease in general and administrative costs, and a $100,000 decrease in DD&A, partially offset by a $132,000 increase in production cost and taxes.

The Company recognized $1.3 million in revenues during the first quarter of 2017 compared to $932,000 during the first quarter of 2016. The revenue increase from 2016 levels was primarily due to a $484,000 increase related to a $18.65 per barrel increase in the average oil price from an average price of $27.67 per barrel during first quarter of 2016 compared to an average price of $46.32 per barrel during the first quarter of 2017, partially offset by a $52,000 decrease related to a 1.8 MBbl decrease in sales volumes, primarily from the Albers A, Albers B, Liebenau, and Veverka A leases. In addition, there was a $15,000 decrease in methane facility revenues related to lower runtimes.

Production cost and taxes increased $132,000 from $839,000 during the first quarter of 2016 to $971,000 during the first quarter of 2017. This increase was primarily due to a $105,000 increase in methane facility costs, and a $70,000 change in the oil inventory quarterly adjustment, partially offset by a $20,000 decrease in Kansas property tax costs.

DD&A decreased $100,000 from $336,000 during the first quarter of 2016 to $236,000 during the first quarter of 2017. This decrease was primarily due to a $78,000 decrease related to a lower oil depletion rate as a result of impairments in 2016, and a $20,000 decrease related to a 1.8 MBbl decrease in oil sales volumes.

General and administrative costs decreased $166,000 from $500,000 during the first quarter of 2016 to $334,000 during the first quarter of 2017. This decrease was primarily due to an $112,000 decrease in corporate payroll costs as a result of personnel reductions during the first quarter 2016, an $18,000 reduction of stock transfer and proxy costs primarily as a result of the reverse stock split which occurred in the first quarter of 2016, and a $16,000 reduction in legal and accounting cost.

### Liquidity and Capital Resources

At March 31, 2017, the Company had a revolving credit facility with Prosperity Bank. This is the Company’s primary source to fund working capital and future capital spending. 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 March 31, 2017, the Company’s borrowing base was $1.25 million. 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. At March 31, 2017, these covenants included a current ratio, a funded debt to EBITDA ratio, and an interest coverage ratio. During the quarter ended March 31, 2017, the Company was in compliance with all covenants.

Effective March 16, 2017, the Company’s senior credit facility with Prosperity Bank after Prosperity Bank’s most recent review of the Company’s currently owned producing properties was amended and restated to among other things, decrease the Company’s borrowing base from $3.0 million to approximately $1.25 million, and extend the term of the facility to July 31, 2018. In addition, all the covenants were removed and replaced with the following: (a) Current Ratio \> 1:1; (b) Funded Debt to EBITDA Ratio \< 3.5x; and (c) Interest Coverage Ratio \> 3.0x. The borrowing base remains subject to the existing periodic redetermination provisions in the credit facility. The interest rate remained prime plus 0.50% per annum. This rate was 4.50% at the date of the amendment. The maximum line of credit of the Company under the Prosperity Bank credit facility remained $40 million and the Company had no outstanding borrowing under the facility as of March 31, 2017.

For the quarter ended December 31, 2016, the Company was in default on compliance with the minimum liquidity ratio. On March 16, 2017, the Company received a waiver from Prosperity Bank. Although the Company was in default of the minimum liquidity covenant for the quarter ended December 31, 2016, the Company was in compliance as a result of the waiver. In addition, the Company also received a waiver from Prosperity Bank for an anticipated default on the debt to equity covenant. Had the Company not received this waiver, it would have been in default on the debt to equity covenant for the quarter ended December 31, 2016. In February 2017, the Company paid off the credit facility using proceeds from the Company’s rights offering which closed on February 2, 2017. The Company was able to record the credit facility balance as of December 31, 2016 as a non-current liability since the Company had the ability and the intent to repay this debt using proceeds from the rights offering.

The total borrowing by the Company under the facility at March 31, 2017 and December 31, 2016 was $0 and $2.4 million, respectively. As disclosed in previous Company filings, on February 13, 2017, 4,498,698 common shares were issued to participants of the Company’s rights offering which closed on February 2, 2017. Of the 4,498,698 common shares issued, 3,293,407 were issued to the Company’s directors, management, and affiliates. The Company received approximately $2.7 million in proceed from this offering. The proceeds were used primarily to pay off the Company’s credit facility. The next borrowing base review will take place in July 2017.

During 2016, the Company incurred a net loss of approximately $4.2 million. In addition as of December 31, 2016, the Company was in default with various covenants included in its credit facility with Prosperity Bank. Each of these defaults was cured either through a waiver or an amendment to its credit facility. During 2017, the Company believes its revenues will be sufficient to fund operating and general and administrative expenses and to remain in compliance with its bank covenants. If revenues are not sufficient to fund these expenses or if the Company needs additional funds for capital spending, the Company could borrow funds against the credit facility as this facility currently has a $1.25 million borrowing base with no funds currently drawn. In addition, if required, the Company could also issue additional shares of stock and/or sell assets as needed to further fund operations.

Net cash used in operating activities decreased $1.0 million from $1.1 million used in operating activities during the first three months of 2016 to $88,000 used in operating activities during the first three months of 2017. Cash flow used in working capital was $155,000 during the first three months of 2017 compared to $683,000 used in working capital during the first three months of 2016. The $528,000 reduction in cash flow used in working capital was primarily due to a $634,000 payment of suspended Hoactzin drilling program payments that was paid in January 2016. The $1.0 million decrease in cash flow used in operating activities was primarily due to a $528,000 decrease in cash flow used in working capital, a $412,000 increase in revenues, and a $166,000 decrease in general and administrative costs, partially offset by a $132,000 increase in production cost and taxes. Net cash used in investing activities was $7,000 during the first three months of 2017 compared to $301,000 used in investing activities during the first three months of 2016. The $294,000 decrease in net cash used in investing activities was primarily a result of a $252,000 reduction in drilling, seismic, and leasehold cost during the first three months of 2017 compared to the first three months of 2016. Cash flow provided by financing activities during the first three months of 2017 was $247,000 compared to $1.4 million provided by financing activities during the first three months of 2016. During the first three months of 2017, the Company raised $2.7 million in proceeds as a result of a rights offering which closed on February 2, 2017. The direct costs associated with this rights offering was approximately $177,000, of which $140,000 was incurred during 2016. The net proceeds from this offering were used primarily to pay off the Company’s credit facility.

### Critical Accounting Policies

During the three months ended March 31, 2017, 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, 2016.

### Commitments and Contingencies

The Company as designated operator of the Hoactzin properties was administratively issued an “Incident of Non-Compliance” by BSEE during the quarter ended September 30, 2012 concerning one of Hoactzin’s operated properties. This action called 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. On July 14, 2015, the federal district court in the Eastern District of Louisiana affirmed the civil penalty without reduction. The Company did not further appeal. In the third quarter of 2015, the Company paid the civil penalty and statutory interest thereon from funds borrowed under its credit facility. In the fourth quarter of 2015, the Company received a return of the cash collateral previously provided to RLI Insurance Company. 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 above. The Company is discussing this analysis, as well as the civil penalty discussed above, 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

Commencing in the quarter ended March 31, 2015 and continuing through the quarter ended March 31, 2017, the Company implemented 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 is still employed by the Company or still a member of the Board of Directors. For the period January 1, 2015 through March 31, 2017, the reductions were approximately $286,000. The Company has not accrued any liabilities associated with these compensation reductions.

## Market risk

As filed, 4,684 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 naturally declining 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 March 31, 2017, the Company’s borrowing base was approximately $1.25 million of which zero had been drawn down by the Company. The Company’s next periodic borrowing base review will take place in July 2017.

### 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. The average monthly Kansas oil prices received during the first three months of 2017 ranged from a low of $44.13 per barrel to a high of $47.49 per barrel.

As of March 31, 2017, the Company has no open positions related to derivative agreements relating to commodities.

### Interest Rate Risk

At March 31, 2017, the Company had debt outstanding of approximately $87,000, none of which was owed on its credit facility with Prosperity Bank. As of March 31, 2017, 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 March 31, 2017 was 4.50%. The Company’s remaining debt of $87,000 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 zero assuming borrowed amounts under the credit facility remained at the same amount owed as of March 31, 2017. The Company did not have any open derivative contracts relating to interest rates at March 31, 2017 or December 31, 2016.

### 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, 1,862 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.

### Changes in Internal Controls

During the three months ended March 31, 2017, there have been no 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, 2016 filed on March 30, 2017 which is incorporated by this reference.

Filed May 12, 2017.
Source: SEC EDGAR, the filing index for accession 0001140361-17-020141. Last ingested by Listed: Nov 4, 2026, 18:14 ET. No prices; not investment advice.