PEDEVCO Corp. (PED) Earnings Call Transcript & Summary

I would now like to turn the call over to Laurent Weil of Elevate IR. Please go ahead.

Thank you, operator, and good afternoon, everyone. Welcome to PEDEVCO's third quarter 2026 earnings call. With me today are R.T. Dukes, Interim President and Chief Executive Officer and Chief Operating Officer, and Bobby Long, Chief Financial Officer. Before we begin, I'd like to remind everyone that today's discussion includes forward-looking statements within the meaning of the federal securities laws subject to risks and uncertainties that could cause actual results to differ materially from expectations. For more information, please refer to our third quarter 2026 Form 10-Q and other SEC filings. The company undertakes no obligation to update or revise any forward-looking statement. During today's call, we will discuss certain non-GAAP financial measures including adjusted EBITDA; reconciliations to the most directly comparable GAAP measures are available in our earnings release and 10-Q filing. These non-GAAP measures should not be considered in isolation or as substitutes for GAAP results. I would also like to note that all per share and share count figures referenced today reflect the company's 1-for-20 reverse stock split effective March 13, 2026, applied retroactively to all periods presented. As of September 30, 2026, the company had approximately 13.3 million shares of common stock outstanding. Here is today's agenda. R.T. will begin with a strategic and operational update, and then Bobby will walk through our financial performance. After our prepared remarks, the management team will open the call for questions. With that, I will turn it over to R.T.

Thank you, Laurent, and good afternoon, everyone. Before we get into the quarter, I want to spend a few minutes on where PEDEVCO is headed. Since taking on the interim CEO role in September, I've continued to oversee operations while the board conducts its search for a permanent CEO. I know these assets and the people behind them, and I'm encouraged by what we can build from here. We have a deep inventory across the Rockies, and our focus is on putting that inventory to work to drive strong production growth in 2027 and beyond. This quarter we completed a well in the DJ Basin in Wyoming, we drilled an operated well in the Powder River Basin, and expanded our Mowry position in an area we're particularly excited about. Those are tangible steps towards executing on the opportunities we see ahead. Before I get into that, let me put the quarter in perspective. We delivered a solid top-line result generating $35.5 million in revenue, which is slightly ahead of our expectations. We did report a net loss this quarter, but the result was significantly affected by the non-cash movement in our derivative positions. Adjusted EBITDA was lower sequentially as production and realized oil prices declined from the second quarter. Operationally, we had a little more downtime than we budgeted related to our completion activity and including well work we deliberately brought forward into Q3 from Q4, which we expect to accelerate the increased production benefits going forward. I'll explain the fourth quarter implications shortly, but that work is part of a broader effort to improve performance across our existing wells and prepare for future development. Over the past year, we've made substantial progress. We will put more of our existing inventory to work to grow going forward. We have operating control across substantial portions of our acreage, which lets us make choices about where and when we deploy capital. We also have opportunities to participate alongside other operators where the economics are attractive. We'll evaluate those opportunities against our own projects and will remain steadfast in our focus on value creation for our shareholders. We are working towards plans to cement our place as a high-growth company in the coming year, and we'll release more details once the CEO search is complete and plans are finalized in early 2027. We're working through the sequencing now, including the decisions needed to prepare for next year's activity. That planning will guide where we invest and how we turn our Rocky Mountain inventory into production growth. Alongside our development plans, we're pursuing acquisitions that can strengthen our Rockies position and support future growth. We'll continue evaluating opportunities that fit our Rockies position and compete well for capital. The Mowry lease purchase is a good example of the kind of opportunity that interests us, adding acreage in an area we know and want to develop. We'll remain selective about what we pursue and what we pay. Our existing inventory is attractive, so acquisitions have to compete with our development portfolio in a reasonable timeframe. Let me now walk through the three basins and work we're doing starting with production. Third quarter production was 538,231 BOE, or 5,850 BOE per day, down 14% on an average daily basis from the second quarter. Temporary shut-ins associated with drilling and completion activity in the DJ and Powder River Basin affected volumes. We also moved several rod conversions originally planned for the fourth quarter into the third quarter. We also sold non-core assets. While reducing our production by approximately 150 BOE per day, it decreased our well count significantly and freed up our staff's efforts dedicated to mature assets. Temporary shut-ins and accelerated conversions curtailed almost 200 barrels of oil equivalent per day during the quarter. The affected shut-in wells have since returned to production. With those wells back online, we expect sequentially stronger production in the fourth quarter. In the DJ Basin, we hold approximately 85,898 net acres and interest in 74 gross or 66.9 net operated wells and 110 gross or 12.5 net non-operated wells. During the quarter, we completed the previously drilled Hastings well. That completion required offset shut-ins, so there was a near-term production impact associated with completing that well. We're in the first couple of months of flowback, evaluating results from the well and the offset parent well response for future investment decisions in the area. We also accelerated several rod conversions in the DJ. This work changes how we lift production from existing wells with the objective of lowering recurring operating costs and workover requirements. Taking wells offline to make that change affects the current quarter, but we evaluate the investment based on what it can do over the remaining life of the well. Separately, we sold one non-core non-producing location and associated acreage in Weld County in July for $2.5 million. In the Powder River Basin, we hold approximately 183,829 net acres and interest in 39 gross or 28.2 net wells, including 8 gross and 0.3 net non-operated wells. We drilled a new operated well in the quarter. That well is scheduled to be completed near year-end and is expected to start flowing back in early 2027. In the Powder River, we also acquired approximately 5,678 net acres through a BLM lease sale for approximately $5.9 million. That nearly doubled our Mowry position in this specific prospect area to approximately 12,000 net acres. It is one of the highest growth areas we anticipate in our portfolio. Expanding there gives us more operated spacing units where we can control more inventory, and it reflects our willingness to invest in the inventory that we believe can drive our business forward. On the non-operated side, recently three completed PRB wells began contributing production in early November, and additional wells were spud before the end of Q3. That participation adds another source of development and activity alongside our operator program. In total, our second-half program that spills over into early 2027 covers approximately 15 gross wells, with those completions extending into next year as well. We also completed the assignment of some non-operated acreage under a previously disclosed settlement and sold some mature operated assets that don't align with our high-growth priorities going forward. Those two transactions account for most of the reduction in our Powder River acreage and well count since the second quarter. In the Permian Basin, we hold approximately 14,505 net acres and interest in 38 gross, 34.5 net wells, all of which we operate. Now a word on the optimization program. We're approximately halfway through the program and expect to complete the remaining work in 2027. The team has continued to deliver at a high level, completing the 2026 program ahead of schedule. Along with lift conversions, the work includes compression optimizations and other well cleanouts. These projects are intended to lower the cost of operating the existing production base and, where appropriate, capture additional production at a relatively low incremental cost. We continue to target more than $10 million of annualized LOE savings once the program is complete. There is more work ahead, and the benefits will build as the work is completed. We also performed more workovers in the third quarter than earlier in the year. When possible, we try to schedule that activity during the summer when field conditions are the best, and we remain within our internal workover and maintenance budget. That seasonal activity is part of keeping the existing wells productive as we prepare the next group of development opportunities. Looking ahead, our immediate focus is on the production recovery in the fourth quarter, continued non-operated activity, and finalizing our near-term development plans. We're encouraged by the inventory and the growth opportunity it provides. Bobby will cover the updated capital guidance and how we're funding that activity.

Thank you, R.T., and good afternoon, everyone. The third quarter reflected the development and optimization activity R.T. described alongside lower production and realized oil prices than in the second quarter. We reduced revolver borrowings while investing in development and additional leasehold. I'll walk through each of these areas beginning with revenue and operating costs. Starting with our third quarter results, revenue was $35.5 million, up 411% from $7 million in the prior-year period, and down approximately 23% from the second quarter. The year-over-year increase reflects the contribution from the expanded asset base and a higher average realized oil price. Of the $28.6 million increase, $26.7 million was attributable to higher sales volumes and $1.9 million to higher realized pricing. Our average realized oil price before derivatives was $83.81 per barrel compared to $63.76 a year ago and $94.07 in the second quarter. Total operating expenses were approximately $31.4 million, resulting in operating income of $8.9 million, including a $4.7 million net gain on the sale of oil and gas properties. Within operating expenses, LOE was $14.3 million and G&A was $9.7 million. LOE declined from $16.9 million in the second quarter to $14.3 million on an absolute basis. The year-over-year increase in G&A primarily reflects $2.1 million of severance costs associated with the leadership transition and additional payroll expense associated with the larger company. G&A was up year-over-year, driven by higher production and the expanded asset base. We also recorded $2.4 million of impairment expense related to the undeveloped DJ leases that we allowed to expire and do not plan to drill. We recorded $1.7 million of interest expense, consisting of $1.5 million of interest on credit facility borrowings and $0.2 million of amortization of deferred financing costs, compared to $0.1 million of interest expense in the prior-year period. Below the operating line, the most significant item was $16.6 million of net loss on derivative contracts. As in prior quarters, I want to separate the realized and unrealized components. We recorded $4.6 million of realized settlement losses, reflecting settlements on our derivative positions. We also recorded a $12 million non-cash unrealized mark-to-market loss, primarily reflecting the increase in commodity prices from June 30 to September 30 on our open positions. The $12 million unrealized loss is an accounting entry, not a cash outflow. Realized settlement losses remain included in adjusted EBITDA. The unrealized loss is excluded. The purpose of our hedge program is to reduce cash flow volatility, protect the capital plan, and maintain financial flexibility. Our hedge book includes swaps, costless collars, and three-way collars, so our price exposure varies across contracts. Some participating collars restore a portion of the upside above $80 oil on the covered volumes. However, that does not apply to the entire hedge book. Subsequent to quarter end, we added fixed-price crude oil swaps covering approximately 400,000 barrels of production in 2027 and 2028 at weighted-average prices of $77.45 per barrel for the 2027 volumes and $70.95 per barrel for the 2028 volumes. The September 30 schedule in our release excludes those subsequent additions. GAAP net loss was $9.2 million, or $0.70 per share, compared to a net loss of $0.3 million in the third quarter of 2025, as higher operating income, including the net gain on property sales, was offset by derivative losses and higher interest expense. Adjusted EBITDA was $14.7 million compared to $4.3 million in the prior-year period, and $18.7 million in the second quarter. Beginning this quarter, adjusted EBITDA also excludes severance costs, which totaled $2.1 million. There were no severance costs in the comparative periods presented. The full reconciliation from net loss to adjusted EBITDA is included in our earnings press release. Turning to the balance sheet and capital allocation, at September 30 we had cash on hand of $4.7 million and restricted cash of $1.1 million. During the quarter, we reduced borrowings under our senior secured revolving credit facility to $80 million from $85 million at June 30, reflecting a $5 million paydown. We also had $45 million of funding availability under the credit facility at quarter end. In October, our borrowing base and elected commitments were reaffirmed at $125 million. For the first nine months, net cash provided by operating activities was $35.4 million. Cash paid for drilling and completion costs was $30.3 million, and cash paid for leasehold acquisition was $6.1 million. Those cash payments differ from capital expenditures incurred because of the timing of payments and accruals. We received $8.3 million of proceeds from property sales during the first nine months. The final $1 million payment under the Phoenix settlement was received on October 1. Capital expenditures incurred were $23.3 million in the third quarter and $32.5 million year-to-date. The total comprises approximately $17.6 million of development capital, $8.8 million of maintenance capital, primarily optimization, and $6.9 million of acquisition costs. We are updating full-year net capital expenditure guidance to a range of $37 million to $42 million, reflecting the Mowry lease acquisition and development activity. Fourth quarter spending is expected to relate primarily to our operated and non-operated Powder River Basin wells. We are reiterating our full-year 2026 adjusted EBITDA guidance of $60 million to $70 million. In early September, adjusted EBITDA was $51.5 million. We also continue to expect full-year production within our guidance range of 6,500 to 7,000 BOE per day. Thank you all for your attention. I will now turn it back to the operator for questions.

[Operator Instructions] Our first question comes from Dave Storms with StoneGate.

Good evening, and appreciate you taking my question. I wanted to start with the production growth that you're expecting in 2027. Maybe how quickly could you accelerate this growth if you wanted to? Is the constraint capital availability, permitting, timing, you know, any constraints there? And I guess if you could tie that in to any early outlooks for CapEx spend in 2027. Is $10 million a quarter a good benchmark, or should it be a little lower after accounting for the Mowry lease? Thank you.

Hey Dave, R.T., good to catch up with you. Real quick, I think in general, we're going to release a lot more details once the CEO search is complete. So you'll learn more kind of at the end of the quarter, in Q4 reporting. I think a way to think about our business going forward is we're real happy with the inventory we have. We like the growth trajectory that we can see fairly easily through just executing, you know, just normal blocking and tackling. Let's go drill and complete some wells. And so you're going to see us reinvest our cash flow back into the business at a pretty aggressive rate. So probably not a bad starting point for this year in 2026, but I think we'll want to put more on the ground going forward.

Understood. I appreciate that. If I could ask just one follow-up and more of a clarification question, you mentioned that some of the shut-ins and rod pull-forward impacted you about 150 to 200 barrels a day, but now you're expecting sequential increases Q3 to Q4. Just to make sure I'm clear on the logistics here, does getting those wells back online outpace the natural declines that we tend to see quarter-over-quarter, leading to that sequential improvement in BOE, or is there more there that we should be thinking about?

Yes, and Bobby might have the exact numbers in front of him, but the way I think about it is our guidance would kind of indicate flat Q3 to Q4, but obviously growth in the exit rate as those wells are back online for the full quarter and then we're bringing a handful of wells online. A few of those are already online with a couple more coming online before the end of the year. And really timing, you know, you get around the holidays and winter starts, you know, early winter, late fall. Timing starts to get pushed, you know, sometimes you get delays. But ultimately, you'll see growth through the exit rate for sure, relatively flat quarter-on-quarter, you know, based on our guidance read-through.

That's perfect. I appreciate the clarity and wish you luck in the next quarter.

As a reminder, to ask a question, please press star 11 on your telephone. The next question will come from Nicholas Pope with Roth Capital.

Can you hear me?