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PED > SEC Filings for PED > Form 10-Q on 13-Aug-2014All Recent SEC Filings

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Form 10-Q for PEDEVCO CORP


13-Aug-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, as amended.

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 now includes approximately 14,000 net operated acres and interests in 42 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 also entered into agreements to acquire a 5% interest in a Canadian publicly-traded company which is in the process of acquiring a 100% working interest in production and exploration licenses 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 and satisfaction of other customary closing conditions, which are planned to be satisfied on or before July 2015.


We have approximately 16,350 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 42 wells, 11 of which are operated by Red Hawk, 16 are non-operated, and Red Hawk has an after-payout interest in 15. 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. 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.

On June 17, 2014, we received approval from the Oil and Gas Conservation Commission of the State of Colorado (COGCC) for the drilling of up to 79 new horizontal wells comprising 7 spacing units covering a total of approximately 6,700 gross acres in our recently acquired Wattenberg Asset located in Weld County, Colorado. With these approvals now in hand, we plan to commence drilling operations in mid-August 2014 on our initial 3 horizontal wells to be drilled and completed in our recently acquired Wattenberg Asset. We have identified all key service providers, and have cash on hand and an established drilling credit line necessary to drill and complete these wells as scheduled. We plan to drill these wells from a single pad at an estimated gross cost of approximately $4.2 million per well with an approximately 45% net working interest in each, with each well planned to receive an 18 stage enhanced frac treatment with lateral lengths between 4,000 and 4,500 feet, and with completion and initial results expected to be available in late-October 2014.

We plan to drill, and to participate in the drilling of, approximately 13 total wells (equivalent to 4.5 net wells to us) in our Wattenberg and Niobrara Assets during 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.

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 average daily production June 30, 2014 of approximately 215 BOE/D (50 BOE/D 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 plan to drill 3 wells (equivalent to 1.5 net wells to us) in our Mississippian Asset during the fourth quarter of 2014.

The Company uses the equity method to account for its 20% ownership in Condor, which owns and operates oil and gas properties in our Niobrara Asset. Accordingly, all assets and liabilities of Condor are reflected as equity investment in our consolidated balance sheets and all revenues, operating expenses and other income and expenses are reflected as earnings/loss on equity investments in our consolidated statements of operations in accordance with U.S. generally accepted accounting principles ("GAAP") reporting requirements.

We have listed below the total production volumes and total revenue net to PEDEVCO for the three and six months ended June30, 2014 and 2013 attributable to PEDEVCO's directly held Niobrara Asset and Red Hawk's Wattenberg Asset, along with the calculated production volumes and revenue numbers for PEDEVCO's Niobrara Asset held indirectly through Condor that would be net to PEDEVCO's interest if reported on a consolidated basis. Red Hawk is consolidated at 100% into PEDEVCO's results in accordance with U.S. "GAAP" but has been shown separately below due to the acquisition in 2014 and the effect on prior year comparisons.


Three months ending June 30, 2014 (Net       Niobrara        Niobrara Held                     Combined Net to
to PEDEVCO)                               Directly Held        in Condor        Red Hawk     PEDEVCO's interest

Oil volume (BBL)                                      758              1,795        27,310                29,863
Gas volume (MCF)                                    1,013              3,580         9,537                14,130
Volume equivalent (BOE) (1)                           927              2,392        28,900                32,218
Revenue (000's)                             $          76      $         188     $   1,991         $       2,255

Three months ending June 30, 2013 (Net       Niobrara        Niobrara Held                     Combined Net to
to PEDEVCO)                               Directly Held        in Condor        Red Hawk     PEDEVCO's interest

Oil volume (BBL)                                    1,715              1,896             -                 3,611
Gas volume (MCF)                                    1,766              1,765             -                 3,531
Volume equivalent (BOE) (1)                         2,009              2,190             -                 4,199
Revenue (000's)                             $         156      $         172     $       -         $         328




Six months ending June 30, 2014 (Net to      Niobrara        Niobrara Held                     Combined Net to
PEDEVCO)                                  Directly Held        in Condor        Red Hawk     PEDEVCO's interest

Oil volume (BBL)                                    1,665              4,088        35,385                41,138
Gas volume (MCF)                                    2,084              8,029        14,481                24,594
Volume equivalent (BOE) (1)                         2,012              5,426        37,799                45,237
Revenue (000's)                             $         160      $         409     $   2,740         $       3,309

Six months ending June 30, 2013 (Net to      Niobrara        Niobrara Held                     Combined Net to
PEDEVCO)                                  Directly Held        in Condor        Red Hawk     PEDEVCO's interest

Oil volume (BBL)                                    3,862              4,182             -                 8,044
Gas volume (MCF)                                    3,087              2,773             -                 5,860
Volume equivalent (BOE) (1)                         4,377              4,644             -                 9,021
Revenue (000's)                             $         367      $         394     $       -         $         761

(1) 6 Mcf of natural gas is equivalent to 1 barrel of oil.


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

Golden Globe

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, Golden Globe Energy Corp. ("Golden Globe") (an affiliate of RJ Credit LLC) acquired (i) an equal 13,995 net acre position in the assets acquired from Continental, and (ii) 50% of our ownership interest in Pacific Energy Development MSL, LLC, which holds our Mississippian Asset, thereby making Golden Globe an equal working interest partner with us in the development of our Wattenberg and Mississippian Assets, allowing us to undertake a more aggressive drilling and development program in 2014 and beyond. Golden Global also acquired 50% of our then ownership rights under the SSA, described below under "Kazakhstan Acquisition Restructuring".

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.

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 are still held by MIE Holdings, and acquired an 80% interest in Condor for total consideration of $3 million, and as of June 30, 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, of which we repaid $432,433 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. 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 38 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. 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.

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.

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 Golden Globe as described above under "Golden Globe".

We plan to drill, and to participate in the drilling of, approximately 16 total wells (equivalent to 6 net wells to us) in our Wattenberg and Niobrara Assets during 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, drawdowns under which are subject to certain prerequisites, requirements and conditions (described in greater detail below under "Historical Liquidity and Capital Resources" - "Secured Debt Funding"), cash on hand, proceeds from future equity offerings, internally generated cash flow, and future debt financings to aggressively develop these assets.

Niobrara Asset

As of June 30, 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.

Condor has drilled and completed five horizontal wells on the Niobrara Asset, including the FFT2H, Waves 1H and Logan 2H wells in 2012, with initial production rates of 437 BOE/D, 588 BOE/D, and 585 BOE/D, respectively, and the State 16-7-60 1H and Wickstrom 18-2H wells in 2013, with initial production rates of 1,013 BOE/D and 479 BOE/D, respectively, all from the Niobrara "B" Bench target zone.


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 Golden Globe, 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 Golden Globe. The Membership Purchase Agreement contained customary representations, warranties, covenants and requirements for PEDCO to indemnify Golden Globe, 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 Golden Globe now owns 50% of PEDCO MSL. As a result of the transactions effected by the Membership Purchase Agreement and Plan of Merger, Golden Globe 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.

The Mississippian acquisition is structured as a primary term assignment to us by Berexco of the leasehold interests which expires on December 29, 2014. If we drill at least three (3) horizontal wells on these leasehold interests during this primary term, then we have the option, in our sole discretion, to extend the primary term with respect to some or all of the leases subject to the assignment for an additional one (1) year period upon payment to Berexco of an additional $200 per net acre covered by the leases upon which the option is exercised. If we complete a commercially producing well during the primary or extended terms, then Berexco shall assign such leases to us for as long as the wells produce in paying quantities, with each horizontal well of at least 4,000 feet in length holding 320 acres covered by the leases, each short horizontal well with a length of between less than 4,000 feet and at least 2,000 feet in length holding 160 acres, and each vertical well holding 10 acres. Berexco shall retain an overriding royalty interest equal to the positive difference, if any, obtained by subtracting existing leasehold burdens from 22.5% before payout and 25% after payout (reduced to the extent Berexco assigns less than a 100% working interest to us). For purposes of the Mississippian agreement, "payout" is defined as such time, on a well by well basis, when a well has sold the following specified barrels of oil equivalent ("BOE"), (utilizing a conversion factor for gas sales of 8 Mcf per 1 barrel of oil): for a vertical well, ten thousand (10,000) BOE; for a short horizontal well: twenty-five thousand (25,000) BOE; and for a horizontal well: fifty thousand (50,000) BOE.

We serve as the operator of the Mississippian Asset, which includes both undeveloped and held-by-production (HBP) positions. We anticipate drilling the first three wells on the Mississippian Asset by the end of 2014. The Mississippian oil play is one of the latest oil plays that have recently captured attention in the industry, and we believe that there is an opportunity to acquire additional interests in this emerging play on attractive terms.

Wattenberg Asset and Niobrara Asset Reserves Estimates

The following table sets forth as of July 1, 2014, the estimated net proved oil and natural gas reserves and the estimated present value (discounted at an annual rate of ten percent (10%)) of estimated future net revenues before future income taxes (PV-10) of our reserves with respect solely to the Niobrara "A", "B" and "C" Benches of our Wattenberg Asset and our Niobrara Asset, each prepared in accordance with assumptions described by the SEC. The information presented below does not reflect any reserves that may be attributable to the Codell, Greenhorn, J-Sands or other prospective formations available for development in both our Wattenberg Asset and our Niobrara Asset, formations that are actively being pursued by companies in our area and which we will be eagerly watching their operations and results, nor does it reflect any reserves that we may have in our North Sugar Valley Asset or any other of our assets. Lastly, these numbers only reflect a development plan that contemplates developing approximately 50% of our available Wattenberg Asset acreage.

The PV-10 value is a widely used measure of value of oil and natural gas assets and represents a pre-tax present value of estimated cash flows discounted at ten percent (10%). PV-10 is considered a non-GAAP financial measure as defined by the SEC. We believe that our PV-10 presentation is relevant and useful to our investors because it presents the discounted future net cash flows attributable to our proved reserves before taking into account the related future income taxes, as such taxes may differ among various companies because of differences . . .

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