# Riley Exploration Permian, Inc.: Form 10-Q for the period ended Jun 30, 2018

- Company: [Riley Exploration Permian, Inc.](/companies/repx.md) (CIK 1001614)
- Form: 10-Q
- Filed: 2018-08-14
- Accepted by EDGAR: Aug 14, 2018, 16:36 ET
- Period: 2018-06-30
- Accession: 0001140361-18-036367
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1001614/000114036118036367/form10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1001614/000114036118036367/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2018-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2018-04-01 to 2018-06-30 | $1.5m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 6 months, 2018-01-01 to 2018-06-30 | $2.8m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Operating income | 3 months, 2018-04-01 to 2018-06-30 | $97.0k | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2018-01-01 to 2018-06-30 | $216.0k | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2018-04-01 to 2018-06-30 | $1.0k | us-gaap:InterestExpense |
| Interest expense | 6 months, 2018-01-01 to 2018-06-30 | $3.0k | us-gaap:InterestExpense |
| Net income | 3 months, 2018-04-01 to 2018-06-30 | $109.0k | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2018-01-01 to 2018-06-30 | $1.4m | us-gaap:NetIncomeLoss |
| Diluted shares (weighted) | 3 months, 2018-04-01 to 2018-06-30 | 10,624,493 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2018-01-01 to 2018-06-30 | 10,624,468 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2018-01-01 to 2018-06-30 | $546.0k | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Cash and equivalents | at 2018-06-30 | $3.2m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2018-06-30 | $4.6m | us-gaap:AssetsCurrent |
| Total assets | at 2018-06-30 | $9.7m | us-gaap:Assets |
| Current liabilities | at 2018-06-30 | $751.0k | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2018-06-30 | $3.2m | us-gaap:Liabilities |
| Long-term debt | at 2018-06-30 | $108.0k | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2018-06-30 | $61.0k | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2018-06-30 | $6.5m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 13,694 characters.

### Results of Operations and Financial Condition

During the first six months of 2018, 61.6 MBbl gross of oil were sold from the Company’s properties. Of the 61.6 MBbl sold, 47.4 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 2018 of 47.4 MBbl of oil compares to net sales of 52.3 MBbl of oil during the first six months of 2017. The Company’s net revenue from its oil and gas properties was $2.8 million during the first six months of 2018 compared to $2.3 million during the first six months of 2017. This increase in net revenue was primarily due to a $714,000 increase related to an $15.06 per barrel increase in the average oil price from $44.55 per barrel during the first six months of 2017 to $59.61 per barrel during the first six months of 2018, partially offset by a $220,000 decrease related to the 4.9 MBbl decrease in sales volumes. The 4.9 MBbl decrease was primarily due to natural declines on the Albers, Coddington, Howard A, McElhany A, Riffe, and Veverka B, C, and D leases.

### Comparison of the Quarters Ended June 30, 2018 and 2017

The Company reported a net income from continuing operations of $99,000 or $0.01 per share of common stock during the second quarter of 2018 compared to a net loss from continuing operations of $230,000 or $0.02 per share of common stock during the second quarter of 2017. The $329,000 increase in net income was primarily due to a $337,000 increase in revenues, and a $30,000 decrease in DD&A, partially offset by a $30,000 increase in production cost and taxes, and a $14,000 increase in general and administrative expense.

The Company recognized $1.5 million in revenues during the second quarter of 2018 compared to $1.1 million during the second quarter of 2017. The $337,000 increase in net revenue was primarily due to a $452,000 increase related to a $19.04 per barrel increase in the average oil price from $42.82 per barrel during the second quarter of 2017 to $61.86 per barrel during the second quarter of 2018, partially offset by a $113,000 decrease related to the 2.6 MBbl decrease in sales volumes. The 2.6 MBbl decrease was primarily due to natural declines and timing of crude pickup by the refineries.

Production cost and taxes increased $30,000 from $880,000 during the second quarter of 2017 to $910,000 during the second quarter of 2018. This increase was primarily related to a $38,000 increase in well and equipment repair costs, and a $31,000 increase in franchise tax costs, partially offset by a $33,000 decrease due to a change in the quarterly oil inventory adjustment.

DD&A decreased $30,000 from $226,000 during the second quarter of 2017 to $196,000 during the second quarter of 2018. This decrease was primarily due to a $15,000 decrease related to a 2.6 MBbl decrease in oil sales volumes, and a $12,000 decrease related to a lower oil depletion rate.

General and administrative costs increased $14,000 from $258,000 during the second quarter of 2017 to $272,000 during the second quarter of 2018. This increase was primarily related to an increase in legal and accounting costs.

### Comparison of the Six Months Ended June 30, 2018 and 2017

The Company reported a net income from continuing operations of $232,000 or $0.02 per share of common stock during the first six months of 2018 compared to a net loss from continuing operations of $400,000 or $0.04 per share of common stock during the first six months of 2017. The $632,000 increase in net income was primarily due to a $496,000 increase in revenues, a $69,000 decrease in DD&A, a $47,000 decrease in production cost and taxes, a $19,000 increase on gain from asset sales, a $17,000 decrease in interest expense, partially offset by a $16,000 increase in general and administrative costs.

The Company recognized $2.8 million in revenues during the first six months of 2018 compared to $2.3 million during the first six months of 2017. The revenue increase from 2017 levels was primarily due to a $714,000 increase related to a $15.06 per barrel increase in the average oil price from an average price of $44.55 per barrel during the first six months of 2017 compared to an average price of $59.61 per barrel during the first six months of 2018, partially offset by a $220,000 decrease related to 4.9 MBbl decrease in sales volumes, primarily due to natural declines on the Albers, Coddington, Howard A, McElhany A, Riffe, and Veverka B, C, and D leases.

Production costs and taxes decreased $47,000 from $1.7 million during the first six months of 2017 to $1.6 million during the first six months of 2018. This decrease was primarily due to a $178,000 change in the oil inventory adjustment, partially offset by a $71,000 increase in well and equipment repair costs, and a $42,000 increase in franchise tax costs.

DD&A decreased $69,000 from $448,000 during the first six months of 2017 to $379,000 during the first six months of 2018. This decrease was primarily due to a $39,000 decrease related to a 4.9 MBbl decrease in oil sales volumes, and a $26,000 decrease related to a lower oil depletion rate.

General and administrative costs increased $16,000 from $592,000 during the first six months of 2017 to $608,000 during the first six months of 2018. This increase was primarily due to an increase in legal and accounting cost.

### Liquidity and Capital Resources

At June 30, 2018, the Company had a revolving credit facility with Prosperity Bank. This has historically been 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 $50 million or the Company’s borrowing base in effect from time to time. As of June 30, 2018, the Company’s borrowing base was $2 million. The credit facility is secured by substantially all of the Company’s producing and non-producing oil and gas properties. The credit facility includes certain covenants with which the Company is required to comply. At June 30, 2018, these covenants include the following: (a) Current Ratio \> 1:1; (b) Funded Debt to EBITDA \< 3.5x; and (c) Interest Coverage \> 3.0x. At June 30, 2018, the interest rate on this credit facility was 5.50%. The Company was in compliance with all covenants during the quarter ended June 30, 2018.

On March 21, 2018, 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 to increase the borrowing base to $2 million and the maturity date was extended to July 31, 2020. 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 5.00% at the date of the amendment. The maximum line of credit of the Company under the Prosperity Bank credit facility remained $50 million and the Company had no outstanding borrowing under the facility as of June 30, 2018. The next borrowing base review will take place in August 2018.

The Company incurred a net loss of approximately $574,000 in 2017. In January 2018, the Company sold its methane facility for $2.65 million. During 2018, the Company believes its revenues as well as the proceeds received from the sale of the methane facility will be sufficient to fund operating and general and administrative expenses and to remain in compliance with its bank covenants. If revenues and the proceeds from the sale of the methane facility 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 $2.0 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 provided by operating activities from continuing operations was $479,000 during the first six months of 2018 compared to $144,000 provided by operating activities from continuing operations during the first six months of 2017. Cash flow used in working capital was $185,000 during the first six months of 2018 compared to $32,000 provided by working capital during the first six months of 2017. The $217,000 increase in cash flow used in working capital was primarily due to changes in inventory and changes in accounts receivable, partially offset by changes in accounts payable and accrued liabilities. Net cash used in investing activities from continuing operations was $122,000 during the first six months of 2018 compared to $134,000 used in investing activities from continuing operations during the first six months of 2017. Cash flow used in financing activities from continuing operations during the first six months of 2018 was $24,000 compared to $169,000 provided by financing activities during the first six months of 2017. During the first six months of 2017, the Company raised approximately $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 $242,000, 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

Effective January 1, 2018, the Company adopted ASU 2014-09 *Revenue from Contracts with Customers.*

### Commitments and Contingencies

The Company as designated operator of the Hoactzin properties was administratively issued an “Incident of Non-Compliance” by the Bureau of Safety and Environmental Enforcement (“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.

In the normal course of business, the Company enters into commitments to spend capital on oil and gas properties. Since June 30, 2018, the Company has entered into a drilling commitment in the amount of approximately $280,000. The work associated with this commitment is anticipated to start in August 2018.

### Cost Reduction Measures

Commencing in the quarter ended March 31, 2015 and continuing through the quarter ended March 31, 2018, the Company implemented cost reduction measures including compensation reductions for each employee as well as members of the Board of Directors. These compensation reductions were to 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. In May 2018, oil prices as so calculated exceeded $70 and compensation reverted 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 June 30, 2018, the reductions were approximately $451,000. The Company has not accrued any liabilities associated with these compensation reductions.

### Legal Proceedings

The Company is not a party to any pending material legal proceeding. To the knowledge of management, no federal, state, or local governmental agency is presently contemplating any proceeding against the Company which would have a result materially adverse to the Company. To the knowledge of management, no director, executive officer or affiliate of the Company or owner of record or beneficially of more than 5% of the Company’s common stock is a party adverse to the Company or has a material interest adverse to the Company in any proceeding.

## Market risk

As filed, 4,676 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 June 30, 2018, the Company’s borrowing base was approximately $2 million of which zero had been drawn down by the Company. The Company’s next periodic borrowing base review will take place in August 2018.

### 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 six months of 2018 ranged from a low of $56.66 per barrel to a high of $64.04 per barrel.

As of June 30, 2018, the Company has no open positions related to derivative agreements relating to commodities.

### Interest Rate Risk

At June 30, 2018, the Company had debt outstanding of approximately $169,000, none of which was owed on its credit facility with Prosperity Bank. As of June 30, 2018, 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, 2018 was 5.50%. The Company’s remaining debt of $169,000 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 June 30, 2018. The Company did not have any open derivative contracts relating to interest rates at June 30, 2018 or December 31, 2017.

### 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, 1,859 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 six months ended June 30, 2018, 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, 2017 filed on March 28, 2018 which is incorporated by this reference.

Filed Aug 14, 2018.
Source: SEC EDGAR, the filing index for accession 0001140361-18-036367. Last ingested by Listed: Nov 4, 2026, 18:14 ET. No prices; not investment advice.