10-K/A: PEDEVCO Restates 2024 Financials, Boosts Production

PEDEVCO Corp. has restated its 2024 financial statements due to accounting errors, while reporting significant increases in oil and gas production and proved reserves.

Summary

• PEDEVCO Corp. filed an Amendment No. 2 to its Annual Report on Form 10-K for the fiscal year ended December 31, 2024, to restate previously issued financial statements.
• The restatement corrects an error in accounting for prior period net operating losses (NOLs) in the tax provision calculation for 2024, which overstated the tax benefit and deferred income tax account by approximately $5.5 million.
• An earlier restatement (March 25, 2025) addressed an overstatement of depletion expense for fiscal years ended December 31, 2023 and 2022.
• Net income for the year ended December 31, 2024, was $12.3 million, or $0.14 per share, a significant increase from $1.7 million, or $0.02 per share, in 2023.
• Total revenues increased by 28% to $39.6 million in 2024, up from $30.8 million in 2023, driven by higher production volumes.
• Oil production rose 29% to 492,396 barrels (1,345 Bopd), natural gas production increased 27% to 608,382 Mcf (1,662 Mcf per day), and NGL production grew 34% to 78,003 barrels (213 Bbls per day) in 2024.
• Proved reserves increased by 1.1 MMBoe to 18.1 MMBoe as of December 31, 2024, primarily due to additions in the D-J Basin Asset.
• The estimated discounted future net cash flow (PV-10) for proved reserves decreased by 23% to $178.9 million in 2024 from $231.7 million in 2023, mainly due to lower commodity pricing assumptions.
• The company incurred $22.1 million in capital expenditures in 2024, primarily for non-operated drilling and completion in the D-J Basin and operated wells in the Permian Basin.
• Working capital surplus increased to $6.3 million in 2024 from $5.7 million in 2023.
• PEDEVCO's New Mexico operating subsidiary, RAZO, is in full compliance with a Stipulated Final Order to plug and abandon 299 inactive legacy wells, having reimbursed $248,000 in 2024.

Sentiment

Score: 4

Explanation: While the company shows strong production growth and strategic partnerships, the material restatements, identified internal control weaknesses, and the Tilloo Note default introduce significant financial and operational uncertainty. The decrease in PV-10 also reflects a less favorable reserve valuation. These negative factors outweigh the positive operational performance for overall sentiment.

Positives

• Net income significantly increased to $12.3 million in 2024 from $1.7 million in 2023, partly due to a $7.3 million income tax benefit.
• Total revenues grew by 28% to $39.6 million in 2024, driven by increased production volumes.
• Oil, natural gas, and NGL production volumes all saw substantial increases in 2024 (29%, 27%, and 34% respectively).
• Proved reserves increased by 1.1 MMBoe to 18.1 MMBoe in 2024, indicating successful reserve additions and development.
• The company entered into a new $250 million reserve-based lending facility with Citibank, N.A., with an initial borrowing base of $20 million, providing significant liquidity, and has not drawn down any funds to date.
• Strategic joint development agreements in the D-J Basin are expected to drive future growth, with 70-75% of 2025 capital expenditures allocated to this area.
• The company successfully divested non-core Permian Basin assets in 2023, eliminating approximately $3.2 million in plugging and abandonment liabilities.
• Management has a strong track record and extensive experience in the oil and gas industry, with key personnel changes aimed at strengthening leadership.

Negatives

• The company's financial statements for 2024, 2023, and 2022 required restatement due to material accounting errors, which may affect investor confidence.
• Material weaknesses in internal control over financial reporting were identified as of December 31, 2024, related to DD&A calculations and tax provision preparation.
• The PV-10 of proved reserves decreased by 23% ($52.8 million) in 2024 compared to 2023, primarily due to lower commodity pricing assumptions.
• Cash provided by operating activities decreased by $10.7 million in 2024 compared to 2023, despite increased net income.
• Tilloo Exploration & Production, LLC defaulted on a $1.1 million secured promissory note due January 8, 2025, from the Milnesand Sale, requiring the company to pursue remedies.
• Natural gas average sales price decreased by 33% to $2.00/Mcf in 2024.
• Lease operating expenses and depreciation, depletion, amortization, and accretion (DD&A) increased significantly in 2024, by 27% and 69% respectively.

Risks

• Future oil, natural gas, and NGL prices are volatile and can adversely affect business, financial condition, and results of operations.
• The company has a limited operating history and may incur net losses in the future, facing substantial business risks in initial development stages.
• Additional capital may be needed for future acquisitions and operations beyond 2025, and funding may not be available on favorable terms, if at all.
• Inability to generate sufficient cash flow could impact debt service and other obligations.
• Operations are concentrated in the Permian Basin and D-J Basin, making the company vulnerable to regional events, regulatory changes, and infrastructure bottlenecks.
• Drilling for and producing oil and natural gas are highly speculative and involve a high degree of risk, including accidents, equipment failures, and non-commercial yields.
• Operational hazards and unforeseen interruptions may not be adequately insured, leading to significant financial exposure.
• Unless oil and natural gas reserves are replaced, reserves and production will decline, adversely affecting the business.
• Failure to identify or successfully complete future acquisitions, or to realize projected revenues from them, could reduce earnings and hamper growth.
• Acquired properties may come with unknown liabilities or risks that are not correctly assessed.
• Title deficiencies in properties could result in losses or costs.
• Identified drilling locations are susceptible to uncertainties that could alter their occurrence or timing.
• Difficulty in obtaining additional seismic and geological data at a reasonable cost could adversely affect future operations.
• Unavailability or high cost of drilling rigs, completion equipment, services, supplies, and personnel could delay or adversely affect exploration and development plans.
• Limited control over activities on non-operated properties could adversely affect targeted returns.
• The marketability of production depends on third-party gathering, transportation, and storage facilities, and their unavailability could harm revenue.
• Increases in the differential between benchmark prices and wellhead prices could adversely affect financial results.
• Financial difficulties of purchasers, third-party operators, or co-owners could decrease cash flow.
• The calculated present value of future net revenues from proved reserves may not reflect actual market value.
• Intense competition in the oil and natural gas industry makes it difficult to acquire properties, market products, and secure personnel.
• Competitors may use superior technology and data resources that the company cannot afford or obtain.
• Uncertainties with enhanced recovery methods may prevent acceptable returns on investments.
• Competition for hydraulic fracturing services and water disposal could impede development.
• Downturns and volatility in global economies and commodity/credit markets could materially adversely affect the business.
• Improvements or new discoveries in alternative energy technologies could reduce demand for oil and gas.
• Future litigation or governmental proceedings could result in material adverse consequences.
• A substantial percentage of properties are undeveloped, increasing development risk.
• Negative public perception regarding the industry or the company could lead to increased regulatory scrutiny and operational delays.
• The physical effects of climate change could disrupt production and incur significant costs.
• Changes in the legal and regulatory environment, including forced pooling, setback rules, and salt water disposal permitting, could have a material adverse effect.
• Proposed changes to U.S. tax laws could adversely affect the business.
• SEC rules could limit the ability to book additional proved undeveloped reserves (PUDs).
• Regulations could adversely affect the ability to hedge risks.
• The company is subject to the Continued Listing Criteria of the NYSE American, and failure to satisfy these could result in delisting.
• Requirements of being a public company strain resources and distract management.
• The company does not insure against all potential losses, leading to significant financial exposure.
• Increasing attention to environmental, social, and governance (ESG) matters may impact the business.
• Changes in accounting standards could adversely impact financial position or results.

Future Outlook

The company estimates net capital expenditures for 2025 to range between $27 million and $33 million, with 70-75% allocated to D-J Basin development under new joint development agreements. Funding is expected from projected cash flow, existing cash, the RBL facility, potential funding from Dr. Simon G. Kukes (though not obligated), public/private debt/equity financings (including an $8.0 million ATM offering), and other credit facilities. The company plans to continue evaluating D-J Basin well proposals and has flexibility to reallocate capital between its Permian and D-J Basin assets. All proved undeveloped reserves are scheduled to be developed within five years of initial booking, with an aggregate expenditure of $170-$200 million through December 31, 2028.

Management Comments

• We believe that horizontal development and exploitation of conventional assets in the Permian Basin and development of the Wattenberg and Wattenberg Extension in the D-J Basin, represent among the most economic oil and natural gas plays in the U.S.
• We plan to optimize our existing assets and opportunistically seek additional acreage proximate to our currently held core acreage, as well as other attractive onshore U.S. oil and gas assets that fit our acquisition criteria, that Company management believes can be developed using our technical and operating expertise and be accretive to stockholder value.
• We expect that we will have sufficient cash available to meet our needs over the next 12 months after the filing of this report and in the foreseeable future, including to fund our 2025 development program.

Industry Context

The company operates in a highly competitive oil and natural gas industry, facing volatility in commodity prices (e.g., WTI crude oil fluctuating from below $20/barrel in 2020 to over $120/barrel in 2022, then to $70s recently). The D-J Basin's Wattenberg Extension has seen significant growth since 2018 due to enhanced completion designs and interest from major operators. The industry is also subject to increasing environmental regulations, particularly regarding methane emissions and hydraulic fracturing, which could increase operating costs and delay projects. Geopolitical events (e.g., Russia-Ukraine conflict, Israel war) continue to impact global energy supply and demand. The company's strategy of focusing on legacy proven properties with modern drilling techniques aligns with industry trends seeking to optimize existing resource bases.

Comparison to Industry Standards

• The company's D-J Basin Asset is located in an area of considerable activity by major and independent operators such as Chevron Corporation (which acquired Noble Energy and PDC Energy), Civitas Resources, Inc., Bison Oil & Gas IV, Verdad Resources LLC, Fundare Resources Company, LLC, and Occidental Petroleum. This suggests the company is operating in a geologically prospective region with established industry interest.
• The company's focus on applying modern drilling and completion techniques to historically underdeveloped conventional assets is a common strategy among E&P companies seeking to unlock additional value from mature fields.
• The company's estimated 2025 capital allocation of 70-75% to D-J Basin development, including joint development agreements with a large private equity-backed operator, indicates participation in significant industry-standard projects and leveraging external expertise and capital.
• The decrease in PV-10 for proved reserves, primarily due to lower commodity pricing assumptions, reflects a broader industry trend where reserve valuations are sensitive to prevailing market prices, as mandated by SEC guidelines for reserve reporting.

Management Changes

Corporate Governance

Legal Proceedings

• Tilloo Exploration & Production, LLC has alleged intentional misrepresentations by company principals in connection with the Milnesand Sale and defaulted on a $1.1 million secured promissory note due January 8, 2025. The company believes the claims are baseless and intends to pursue all available remedies, including potential foreclosure.

Related Party Transactions

• Dr. Simon G. Kukes, the Executive Chairman, beneficially owns 65.4% of the company's common stock, giving him majority voting control.
• Dr. Kukes previously provided $51.7 million in loans (2018-2019) which were converted into 29.5 million shares of common stock, and purchased an additional 15.0 million shares for $28.0 million in private transactions in 2019.
• Dr. Kukes has verbally advised intent to provide additional funding as needed, but is under no obligation to do so, and such funding may not be on favorable terms.

Stakeholder Impact

• Shareholders face potential dilution from future equity offerings and the influence of the majority shareholder, Dr. Simon G. Kukes, whose interests may not always align with other shareholders.
• Employees benefit from competitive pay, benefits, and training programs, with stock awards used to conserve cash and align incentives.
• Customers are primarily a small number of purchasers, but the company believes alternative buyers are available, mitigating concentration risk.
• Creditors (e.g., Citibank, N.A. for the RBL facility) have security interests over substantially all company assets, increasing their protection but potentially limiting the company's financial flexibility.

Next Steps

• Implement new controls and procedures to address identified material weaknesses in internal control over financial reporting, particularly for DD&A calculations and tax provision preparation.
• Pursue all available avenues and remedies, including potential foreclosure, to resolve the Tilloo Note default.
• Continue to evaluate D-J Basin well proposals from third-party operators and participate in economic and prospective projects.
• Allocate 70-75% of the estimated $27 million to $33 million in 2025 capital expenditures to D-J Basin development.
• Fund the 2025 development program through projected cash flow, existing cash, the RBL facility, and potentially other financing sources.
• Monitor and adjust capital forecasts and allocations based on liquidity, drilling results, acquisition opportunities, partner non-consents, and commodity prices.
• Develop proved undeveloped reserves, with an aggregate expenditure of $170-$200 million planned through December 31, 2028, ensuring all PUDs are developed within five years of booking.

Key Dates

Recommendation

The company demonstrates strong operational performance with significant increases in production and proved reserves, driven by strategic development in key basins and new joint ventures. However, the material restatements of prior financial statements and the identified material weaknesses in internal controls raise serious concerns about financial reporting reliability and governance. The decrease in PV-10 and the default on the Tilloo Note add further uncertainty. While the growth trajectory is positive, these significant risks warrant a cautious 'hold' recommendation until the internal control issues are fully remediated and the financial implications of the restatements and the Tilloo dispute are clearer. Investors should monitor the effectiveness of remediation efforts and the resolution of the Tilloo matter.

Keywords

Oil and Gas, SEC Filing, 10-K/A, Restatement, Financial Reporting, Energy Sector, Permian Basin, D-J Basin, Proved Reserves, Production Growth, Capital Expenditures, Internal Controls, Corporate Governance, Risk Management, PEDEVCO Corp., NYSE American