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PED > SEC Filings for PED > Form 10-Q on 15-May-2014All Recent SEC Filings

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Form 10-Q for PEDEVCO CORP


15-May-2014

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of our financial condition and results of operations should be read in conjunction with the accompanying consolidated financial statements and the related footnotes thereto.

Forward-Looking Statements

Some of the statements contained in this report discuss future expectations, contain projections of results of operations or financial condition, or state other "forward-looking" information. The words "believe," "intend," "plan," "expect," "anticipate," "estimate," "project," "goal" and similar expressions identify such a statement was made, although not all forward-looking statements contain such identifying words. These statements are subject to known and unknown risks, uncertainties, and other factors that could cause the actual results to differ materially from those contemplated by the statements. The forward-looking information is based on various factors and is derived using numerous assumptions. Factors that might cause or contribute to such a discrepancy include, but are not limited to, the risks discussed in this and our other SEC filings. We do not promise to or take any responsibility to update forward-looking information to reflect actual results or changes in assumptions or other factors that could affect those statements except as required by law. Future events and actual results could differ materially from those expressed in, contemplated by, or underlying such forward-looking statements.

Forward-looking statements may include statements about our:

? business strategy;
? reserves;
? technology;
? cash flows and liquidity;
? financial strategy, budget, projections and operating results; ? oil and natural gas realized prices; ? timing and amount of future production of oil and natural gas; ? availability of oil field labor; ? the amount, nature and timing of capital expenditures, including future exploration and development costs; ? availability and terms of capital; ? drilling of wells;
? government regulation and taxation of the oil and natural gas industry;
? marketing of oil and natural gas; ? exploitation projects or property acquisitions; ? costs of exploiting and developing our properties and conducting other operations;
? general economic conditions;
? competition in the oil and natural gas industry; ? effectiveness of our risk management and hedging activities; ? environmental liabilities;
? counterparty credit risk;
? developments in oil-producing and natural gas-producing countries; ? future operating results;
? estimated future reserves and the present value of such reserves; and
? plans, objectives, expectations and intentions contained in this Report that are not historical.

Certain abbreviations and oil and gas industry terms used throughout this Report are described and defined in greater detail under "Glossary of Oil And Natural Gas Terms" on page 31 of our Annual Report on Form 10-K for the year ended December 31, 2013, as filed with the Securities and Exchange Commission on March 31, 2014.

Our Business

PEDEVCO Corp. (the "Company", "PEDEVCO", "we" and "us") is an energy company engaged primarily in the acquisition, exploration, development and production of oil and natural gas shale plays in the United States, and a secondary focus on conventional oil and natural gas plays. Our current operations are located primarily in the Wattenberg and Niobrara Shale plays in the Denver-Julesburg Basin (the "DJ Basin") in Weld and Morgan Counties, Colorado, and the Mississippian Lime play in Comanche, Harper, Barber and Kiowa Counties, Kansas. In March 2014, we expanded our DJ Basin position into the Wattenberg and Wattenberg Extension through the acquisition of additional oil and gas working interests from Continental Resources, Inc. ("Continental"), which includes approximately 14,000 net operated acres and interests in 40 wells located in Weld and Morgan Counties, Colorado, which we refer to as the "Wattenberg Asset." We also hold an interest in the North Sugar Valley Field in Matagorda County, Texas, though we consider this a non-core asset. We have entered into agreements to acquire an approximately 34% indirect interest (of which we are required to assign 50% of such interest, or 17%, to RJ Resources Corp. ("RJ Corp."), as discussed below) in a company holding an exploration agreement covering an approximate 380,000 acre oil and gas producing asset located in the Pre-Caspian Basin in Kazakhstan, which we plan to close upon receipt of required approvals from the Kazakhstan government, anticipated to be received no later than the third quarter of 2014, as described in greater detail below in "Recent Developments" - "Kazakhstan Acquisition".


We have approximately 16,379 net acres of oil and gas properties in the DJ Basin, including 13,995 net acres in our recently acquired Wattenberg Asset, and 2,384 net acres of oil and gas properties in our Niobrara Asset. Our wholly-owned subsidiary, Red Hawk Petroleum, LLC ("Red Hawk"), holds our Wattenberg Asset with interests in 40 wells, 11 of which are operated by Red Hawk, 14 are non-operated, and Red Hawk has an after-payout interest in 15, with a two week average production from the 11 operated wells since their acquisition on March 7, 2014 of approximately 434 gross barrels of oil equivalent per day (BOE/D), which does not include production from two of the wells which are currently undergoing repair. We estimate that once we bring these two wells back on production, the production from the 11 operated wells will be 504 gross BOE/D. We have not yet received enough information in regards to the 14 non-operated wells to estimate their current production. On April 2, 2014, Red Hawk also elected to participate to its full working interest percentage of 12.5% in each of three new long horizontal wells located in the Wattenberg area of the DJ Basin in Weld County, Colorado, that were drilled in January 2014 and completed by a third party operator in April 2014, with 24-hour peak production rates for these three wells, as estimated by us based on information received from the operator, of (i) 529.2 BOE/D (459 Bbl of oil and 421 Mcf/d of gas),
(ii) 556.2 BOE/D (458.7 Bbl of oil and 585 Mcf/d of gas), and (iii) 542.6 BOE/D (459.2 Bbl of oil and 500 Mcf/d of gas), respectively. In March 2014, we also elected to participate to our full working interest percentage of 0.45% in a fourth long horizontal well located in the Wattenberg area of the DJ Basin in Weld County, Colorado, that was spud by Bonanza Creek in May 2011 and is currently producing. With these additional interests in four new non-operated wells, Red Hawk currently has interests in 11 operated and 18 non-operated wells, with an after pay-out interest in an additional 15 wells, in its Wattenberg Asset.

We plan to drill, and to participate in the drilling of, approximately 16 total wells (equivalent to 6 net wells to us) during 2014, with 11 of those wells (equivalent to 4 net wells to us) being drilled in the Wattenberg Asset and 2 wells (equivalent to 0.4 net wells to us) in our Niobrara Asset in 2014, including both operated and non-operated wells. Both the Wattenberg and Niobrara Assets are located in the DJ Basin and substantially in Weld County, Colorado.

In preparation for our drilling program this year and in subsequent years, we recently filed spacing and pooling applications with the Colorado Oil and Gas Conservation Commission for sixteen of our newly acquired sections of acreage, we are currently performing title work, and we plan on filing applications for over 90 drilling permits over the next 30 days. These applications are expected to be finalized in June at which time we will be able to specifically identify well locations and our corresponding expected working interest in those wells.

Condor Energy Technology LLC ("Condor"), in which we own a 20% interest and manage with an affiliate of MIE Holdings Corporation (described in greater detail below under "Strategic Alliances" - "MIE Holdings"), operates our Niobrara Asset, including five wells in the Niobrara Asset with daily production in the month of March 2014 of approximately 258 BOE (67 BOE net). We believe our current Wattenberg Asset could contain approximately a gross total of 1,256 gross (175 net) drilling locations, and our Niobrara Asset could contain a gross total of 212 gross (81 net) drilling locations, for a combined total of 1,468 gross (256 net) possible drilling locations in the DJ Basin, based on 40 and 80 acre spacing.

We have approximately 7,006 gross (3,443 net acres) of oil and gas properties in the Mississippian Lime play, which we own an indirect 49% working interest in and operate (the "Mississippian Asset"). We believe the Mississippian Asset could contain a total of 42 gross (21 net) drilling locations, based on 160 acre spacing.

We have also announced the entry into Kazakhstan through an agreement whereby we plan to acquire an approximate 34% indirect interest in Aral Petroleum Capital Limited Partnership ("Aral"), a Kazakhstan entity which holds a 100% operated working interest in a production license covering the contract area issued by the Republic of Kazakhstan that expires in 2034 in western Kazakhstan (the "Contract Area"), from Asia Sixth Energy Resources Limited ("Asia Sixth"), which Contract Area covers 380,000 acres within the North Block located in the Pre-Caspian Basin. Under the agreement, we plan to acquire an interest in Aral through the acquisition of a 51% interest in Asia Sixth, by way of subscription of shares of Asia Sixth, which in turn currently holds a 60% controlling interest in Aral. Asia Sixth's interest in Aral is scheduled to increase to 66.5% following the completion of certain transactions to occur between Asia Sixth and Asia Sixth's partner in Aral that currently holds the remaining 40% interest in Aral (the "Aral Transactions"). Upon closing and completion of the Aral Transactions, Aral will be owned 66.5% by Asia Sixth. We have also entered into an agreement with our strategic partner, RJ Corp., pursuant to which we have agreed, at the option of RJ Corp., to either (a) provide for the issuance of the share certificate representing the shares of capital stock due from Asia Sixth representing 51% of the total issued and outstanding share capital of Asia Sixth which we have the right to purchase from Asia Sixth, to a Delaware limited liability company to be formed by us (such company, the "Nominee") and to convey to RJ Corp. fifty percent (50%) of the limited liability company interests issued by the Nominee or (b) provide for fifty percent (50%) of such Asia Sixth shares to be issued directly to RJ Corp. or its designee. Upon the closing and completion of these contemplated transactions, the Company, through its ownership in Asia Sixth, will own an approximate 17% beneficial interest in Aral.


The Company uses the equity method to account for both its 20% ownership in Condor, which owns and operates oil and gas properties in our Niobrara Asset, and (through December 30, 2013) its 50% ownership in White Hawk, which owns non-operated oil and gas properties in our Eagle Ford core asset. These equity investments are listed as a line item on our balance sheet but no revenue or production data is given in accordance with U.S. generally accepted accounting principles ("GAAP") reporting requirements.

We believe that the Wattenberg, Niobrara and Mississippian Shale plays represent among the most promising unconventional oil and natural gas plays in the U.S. We plan to continue to seek additional acreage proximate to our currently held core acreage. Our strategy is to be the operator, directly or through our subsidiaries and joint ventures, in the majority of our acreage so we can dictate the pace of development in order to execute our business plan. The majority of our capital expenditure budget for the period from January 2014 to December 2014 will be focused on the acquisition, development and expansion of these assets.

Strategic Alliances

RJ Corp.

On March 7, 2014, in connection with our acquisition of the Wattenberg Asset, we entered into a $50 million 3-year term debt facility with various investors including RJ Credit LLC, a subsidiary of a New York-based investment management group with more than $1.3 billion in assets under management specializing in resource investments. As part of the transaction, RJ Corp. (an affiliate of RJ Credit LLC) acquired (i) an equal 13,995 net acre position in the assets acquired from Continental, (ii) right to 50% of our pending interest in the Kazakhstan asset, and (iii) 50% of our ownership interest in (a) Pacific Energy Development MSL, LLC, which holds our Mississippian Asset, thereby making RJ Corp. a 50% working interest partner with us in the development of our Mississippian Asset, and (b) the Kazakhstan Asset which we are in the process of acquiring, allowing us to undertake a more aggressive drilling and development program in 2014 and beyond.

MIE Holdings

Through the relationships developed by our founder and Chief Executive Officer, Frank Ingriselli, we formed a strategic relationship with MIE Holdings Corporation (Hong Kong Stock Exchange code: 1555.HK), one of the largest independent upstream onshore oil companies in China, which we refer to as MIE Holdings, to assist us with our plans to develop unconventional shale properties and explore acquisition opportunities in Asia. According to information provided by MIE Holdings, MIE Holdings has drilled and currently operates over 2,000 oil wells in China and Kazakhstan and brings extensive drilling and completion experience and expertise, as well as a strong geological team. MIE Holdings has also been a significant investor in our operations, and as discussed below, our Niobrara Asset is held all or in part by Condor Energy Technology LLC, which we refer to as Condor, which is a Nevada limited liability company owned 20% by us and 80% by an affiliate of MIE Holdings.

Although our initial focus is on oil and natural gas opportunities in the United States, we plan to use our strategic relationship with MIE Holdings and our experience in operating U.S.-based shale oil and natural gas interests to acquire, explore, develop and produce oil and natural gas resources in Asia, with a particular focus on China and Kazakhstan. We intend to use one or more of our joint ventures with MIE Holdings to acquire additional shale properties in the United States, and in Asia, where MIE Holdings and other partners have extensive experience working in the energy sector.

MIE Holdings has been a valuable partner providing us necessary capital in the early stages of our development. It purchased 1,333,334 shares of our Series A preferred stock, which were automatically converted into 1,333,334 shares of our common stock in January 2013, and acquired an 80% interest in Condor for total consideration of $3 million, and as of March 31, 2014, has loaned us $6.17 million through a short-term note to fund operations and development of the Niobrara Asset and $432,433 toward the acquisition of the Mississippian asset, which $432,433 we repaid in March 2014.

STXRA

On October 4, 2012, we established a technical services subsidiary, Pacific Energy Technology Services, LLC, which is 70% owned by us and 30% owned by South Texas Reservoir Alliance, LLC, which we refer to as STXRA, through which we plan to provide acquisition, engineering, and oil drilling and completion technology services in joint cooperation with STXRA in the United States and Asia. While Pacific Energy Technology Services, LLC currently has no operations, only nominal assets and liabilities and limited capitalization, we anticipate actively developing this venture in 2014.


STXRA is a consulting firm specializing in the delivery of petroleum resource acquisition services and practical engineering solutions to clients engaged in the acquisition, exploration and development of petroleum resources. In April 2011, we entered into an agreement of joint cooperation with STXRA in an effort to identify suitable energy ventures for acquisition by us, with a focus on plays in shale oil and natural gas bearing regions in the United States. According to information provided by STXRA, the STXRA team has experience in their collective careers of drilling and completing horizontal wells, including over 100 horizontal wells with lengths exceeding 4,000 feet from 2010 to 2013, as well as experience in both slick water and hybrid multi-stage hydraulic fracturing technologies and in the operation of shale wells and fields. We believe that our relationship with STXRA, both directly and through our jointly-owned Pacific Energy Technology Services LLC services company, will supplement the core competencies of our management team and provide us with petroleum and reservoir engineering, petrophysical, and operational competencies that will help us to evaluate, acquire, develop and operate petroleum resources in the future.

Our Core Areas

The majority of our capital expenditure budget for the period from January to December 2014 will be focused on the acquisition and development of our core oil and natural gas properties located in the Wattenberg Asset, Niobrara Asset and Mississippian Asset. The following paragraphs summarize each of these core areas.

Wattenberg Asset

On March 7, 2014, through our wholly-owned subsidiary Red Hawk, we completed the acquisition of 13,995 net acres of oil and gas properties covering approximately 178 sections, and interests in 40 wells located in the DJ Basin, Colorado, from Continental for approximately $28.5 million in cash, and the assumption of approximately $845,000 of suspense accounts payable to royalty owners, mineral owners and other persons with an interest in production associated with the assets acquired, pertaining to oil and gas produced, which Continental had not paid as of closing. This acreage, which we refer to as the Wattenberg Asset, is located in the Wattenberg and Wattenberg Extension Areas of the DJ Basin in Weld and Morgan Counties, Colorado. Of these 40 wells acquired from Continental, 11 are operated by Red Hawk, 14 are non-operated, and we will have an after-payout interest in 15. All of Continental's leases and related rights, oil and gas and other wells, equipment, easements, contract rights, and production effective as of the December 1, 2013 effective date of the agreement were included in the purchase.

In order to finance the acquisition of the Wattenberg Asset, and provide us with sufficient capital to immediately commence a meaningful development program covering this new acreage, we entered into a 3-year term debt facility with RJ Corp. as described above under "RJ Corp.".

On April 2, 2014, Red Hawk also elected to participate to its full working interest percentage of 12.5% in each of three new long horizontal wells located in the Wattenberg area of the DJ Basin in Weld County, Colorado, that were drilled in January 2014 and completed by a third party operator in April 2014, with 24-hour peak production rates for these three wells, as estimated by us based on information received from the operator, of (i) 529.2 BOE/D (459 Bbl of oil and 421 thousand cubic feet per day (Mcf/d) of gas), (ii) 556.2 BOE/D (458.7 Bbl of oil and 585 Mcf/d of gas), and (iii) 542.6 BOE/D (459.2 Bbl of oil and 500 Mcf/d of gas), respectively. In March 2014, we also elected to participate to our full working interest percentage of 0.45% in a fourth long horizontal well located in the Wattenberg area of the DJ Basin in Weld County, Colorado, that was spud by Bonanza Creek in May 2011 and is currently producing. With these additional interests in four new non-operated wells, Red Hawk currently has interests in 11 operated and 18 non-operated wells, with an after pay-out interest in an additional 15 wells, in its Wattenberg Asset.

We plan to drill, and to participate in the drilling of, approximately 16 total wells (equivalent to 6 net wells to us) during 2014, with 11 of those wells (equivalent to 4 net wells to us) being drilled in the Wattenberg Asset and 2 wells (equivalent to 0.4 net wells to us) in our Niobrara Asset in 2014, including both operated and non-operated wells. Both the Wattenberg and Niobrara Assets are located in the DJ Basin and substantially in Weld County, Colorado. We plan to utilize the $15.5 million drilling facility agreed to be provided by RJ Credit LLC, draw downs under which are subject to certain prerequisites, requirements and conditions (described in greater detail below under "Recent Developments" - "Note Purchase Agreement and Sale of Secured Promissory Notes"), cash on hand, proceeds from future equity offerings, internally generated cash flow, and future debt financings to aggressively develop these assets.

In preparation for our drilling program this year and in subsequent years, we recently filed spacing and pooling applications with the Colorado Oil and Gas Conservation Commission for sixteen of our newly acquired sections of acreage, we are currently performing title work, and we plan on filing applications for over 90 drilling permits over the next 30 days. These applications are expected to be finalized in June at which time we will be able to specifically identify well locations and our corresponding expected working interest in those wells.


Niobrara Asset

As of March 31, 2014, we held 2,384 net acres in oil and natural gas properties covering approximately 9,067 gross acres that are located in Morgan and Weld Counties, Colorado that include the Niobrara formation, which we refer to as the Niobrara Asset. We hold 972 of our Niobrara leased acreage directly, and hold the remaining 1,412 acres through our ownership in Condor, which holds 7,058 acres in the leased acreage in the Niobrara Asset.

Condor is designated as the operator of the Niobrara Asset. The day-to-day operations of Condor are managed by our management, and Condor's Board of Managers is comprised of our President and Chief Executive Officer, Mr. Frank Ingriselli, and two designees of MIE Holdings. In addition, MIE Holdings has loaned us approximately $6.17 million to fund operations and development of the Niobrara Asset.

Based on approximately 250 square miles of 3D seismic data covering the Niobrara asset, we estimate that there are up to 212 potential gross drilling locations in the Niobrara Asset, with 2 gross well locations identified for our 2014 Niobrara development plan. We believe that the Niobrara Asset affords us the opportunity to participate in this emerging play at an early stage, with a position in the Denver-Julesburg Basin adjacent to significant drilling activity.

During 2012, Condor completed drilling the initial horizontal well on the Niobrara asset, the FFT2H, in April 2012, reaching a total combined vertical and horizontal depth of 11,307 feet. Halliburton performed a 20-stage frac of the well in mid-June 2012, with the well completed in July 2012 with an initial production rate of 437 BOE/D from the Niobrara formation. Condor completed drilling its second horizontal well on the Niobrara Asset, the Waves 1H, in November 2012, drilling to 11,114 feet measured depth (6,200 true vertical foot depth) in eight days. The 4,339 foot lateral section was completed in 18 stages by Halliburton in February 2013, and the well tested at an initial production rate of 528 Bbl of oil per day and 360 Mcf /d (588 BOE/D) from the Niobrara "B" Bench target zone. Condor also completed drilling its third horizontal well on the Niobrara Asset, the Logan 2H, in December 2012 to 12,911 feet measured depth (6,112 true vertical depth) in nine days. The 6,350 foot lateral section was completed in 25 stages by Halliburton in January 2013, and tested at an initial production rate of 522 Bbl of oil per day and 360 Mcf/d (585 BOE/D) from the Niobrara "B" Bench target zone.

During 2013, Condor completed drilling its fourth horizontal well on the Niobrara Asset, the State 16-7-60 1H well, in July 2013, reaching a total vertical depth of approximately 6,260 feet and total measured depth of approximately 10,630 feet. The well tested at an initial production rate of 480 Bbl of oil per day and 360 Mcf/d of gas (540 BOE/D), during a 4-hour test of the Niobrara "B" Bench target zone. Following removal of a down hole sand screen which was restricting flow, the well reached a peak production rate of 972 Bbl of oil per day and 800 Mcf/d of gas (1,105 BOE/D), during a 4-hour test from the Niobrara "B" Bench target zone. Condor also completed drilling its fifth horizontal well, the Wickstrom 18-2H well, located in Morgan County, Colorado, in August 2013 reaching a total vertical depth of approximately 6,125 feet and total measured depth of approximately 14,706 feet. The well tested an initial production rate of 414 Bbl of oil per day and 408 Mcf/d of gas (482 BOE/D), during a 4-hour test from the Niobrara "B" Bench target zone. The well was tested using a limited rate flowback technique to reduce frac sand entry into the well bore and test the concept of EUR increases through lower drawdown similar to the practice employed in the Eagle Ford Shale, resulting in an initial production rate at 80% of its anticipated full production potential.

Mississippian Asset

Effective March 15, 2013, we acquired an average 97% working interest in the Mississippian Lime covering approximately 7,006 gross (6,763 net) acres located in Comanche, Harper, Barber and Kiowa Counties, Kansas, which we refer to as the Mississippian Asset, and approximately 10.5 square miles of related 3-D seismic data. Also effective March 15, 2013, we acquired certain additional working interests in the same acreage located in Comanche, Harper, and Kiowa Counties, Kansas, bringing our average working interest to 98% in the Mississippian Asset covering an aggregate of approximately 7,006 gross (6,885 net) acres.

Effective March 7, 2014, pursuant to a Membership Interest Purchase Agreement (the "Membership Purchase Agreement") entered into by and between Pacific Energy Development Corp. ("PEDCO") and RJ Corp., PEDCO agreed to sell 50% of PEDCO MSL Merger Sub LLC, LLC, a Nevada limited liability company ("MSL Merger Sub"), which was wholly-owned by PEDCO immediately prior to the transactions contemplated by the Membership Purchase Agreement, to RJ Corp. The Membership Purchase Agreement contained customary representations, warranties, covenants and requirements for PEDCO to indemnify RJ Corp., subject to the terms and conditions of the Membership Purchase Agreement. Immediately subsequent to the closing of the transactions contemplated by the Membership Purchase Agreement, PEDCO's wholly-owned subsidiary, Pacific Energy Development MSL, LLC ("PEDCO MSL") and MSL Merger Sub, entered into an Agreement and Plan of Merger (the "Plan of Merger"), pursuant to which PEDCO MSL merged with and into MSL Merger Sub, with MSL Merger Sub being the surviving entity in the merger, and concurrently therewith effecting a name change to Pacific Energy Development MSL, LLC, which was effected pursuant to the filing of Articles of Merger with the Secretary of State of Nevada and effective March 10, 2014. The effective result of the Membership Purchase Agreement and Plan of Merger is that RJ Corp. now owns 50% of PEDCO MSL. As a result of the transactions effected by the Membership Purchase Agreement and Plan of Merger, RJ Corp. acquired effective ownership of 50% of the Mississippian Asset, with the Company now owning an indirect 49% working interest in the Mississippian Asset covering an aggregate of approximately 7,006 gross (3,443 net) acres.


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