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| PLLL > SEC Filings for PLLL > Form 10-Q on 3-Nov-2008 | All Recent SEC Filings |
3-Nov-2008
Quarterly Report
Acquire Long-Lived Properties with Enhancement Opportunities. Our acquisition
strategy is focused on leveraging our geographical expertise in our core areas
of operation and seeking assets located in and around these areas. We
selectively evaluate acquisition opportunities and expect that they will
continue to play a role in increasing our reserve base and future drilling
inventory. When identifying target assets, we focus primarily on reserve quality
and assets in new development plays with upside potential. Through this
approach, we have traditionally targeted smaller asset acquisitions which allow
us to absorb, enhance and exploit properties without taking on significant
integration risk.
Conduct Exploratory Activities. Although we do not emphasize exploratory
drilling, we will selectively undertake exploratory projects that have known
geological and reservoir characteristics that are in close proximity to existing
wells so data from the existing wells can be correlated with seismic data on or
near the prospect being evaluated, and that could have a potentially meaningful
impact on our reserves.
The extent to which we are able to implement and follow through with our
business strategy is influenced by:
• the prices we receive for the oil and natural gas we produce;
• the results of reprocessing and reinterpreting our 3-D seismic data;
• the results of our drilling activities;
• the costs of obtaining high quality field services;
• our ability to find and consummate acquisition opportunities; and
• our ability to negotiate and enter into "work to earn" arrangements, joint ventures or other similar arrangements on terms acceptable to us.
Significant changes in the prices we receive for the oil and natural gas we
produce, or the occurrence of unanticipated events beyond our control, may cause
us to defer or deviate from our business strategy, including the amounts we have
budgeted for our activities.
Operating Performance
Our operating performance is influenced by several factors, the most
significant of which are the prices we receive for our oil and natural gas and
the quantities of oil and natural gas that we are able to produce. The world
price for oil has overall influence on the prices that we receive for our oil
production. The prices received for different grades of oil are based upon the
world price for oil, which is then adjusted based upon the particular grade.
Typically, light oil is sold at a premium, while heavy grades of crude are
discounted. Natural gas prices we receive are influenced by:
• seasonal demand;
• weather;
• hurricane conditions in the Gulf of Mexico;
• availability of pipeline transportation to end users;
• proximity of our wells to major transportation pipeline infrastructures; and
• to a lesser extent, world oil prices.
Additional factors influencing our overall operating performance include:
• production expenses;
• overhead requirements;
• costs of capital; and
• effects of derivative contracts.
Our oil and natural gas exploration, development and acquisition activities
require substantial and continuing capital expenditures. Historically, the
sources of financing to fund our capital expenditures have included:
• cash flow from operations;
• sales of our equity and debt securities;
• bank borrowings; and
• industry joint ventures.
For the three months ended September 30, 2008 (the "Current Quarter"), the
sale price we received for our crude oil production averaged $115.19 per barrel,
compared with $69.45 per barrel for the three months ended September 30, 2007
(the "Comparable Quarter"). The average sales price we received for natural gas
for the Current Quarter was $8.54 per Mcf, compared with $5.81 per Mcf for the
Comparable Quarter. For information regarding prices received, refer to the
selected operating data table under "-Results of Operations" on page 25.
For the nine months ended September 30, 2008 (the "Current Period"), the sale
price we received for our crude oil production averaged $109.52 per barrel,
compared with $59.98 per barrel for the nine months ended September 30, 2007
(the "Comparable Period"). The average sales price we received for natural gas
for the Current Period was $8.78 per Mcf, compared with $6.14 per Mcf for the
Comparable Period. For information regarding prices received, refer to the
selected operating data table under "-Results of Operations" on page 25.
Our oil and natural gas producing activities are accounted for using the full
cost method of accounting. Under this accounting method, we capitalize all costs
incurred in connection with the acquisition of oil and natural gas properties
and the exploration for and development of oil and natural gas reserves. These
costs include lease acquisition costs, geological and geophysical expenditures,
costs of drilling productive and non-productive wells, and overhead expenses
directly related to land and property acquisition and exploration and
development activities. Proceeds from the disposition of oil and natural gas
properties are accounted for as a reduction in capitalized costs, with no gain
or loss recognized unless a disposition involves a material change in the
relationship between capitalized costs and reserves, in which case the gain or
loss is recognized.
Depletion of the capitalized costs of oil and natural gas properties,
including estimated future development costs, is provided using the equivalent
unit-of-production method based upon estimates of proved oil and natural gas
reserves and production, which are converted to a common unit of measure based
upon their relative energy content. Unproved oil and natural gas properties are
not amortized, but are individually assessed for impairment. The cost of any
impaired property is transferred to the balance of oil and natural gas
properties being depleted.
Results of Operations
Our business activities are characterized by frequent, and sometimes
significant, changes in our:
• reserve base;
• sources of production;
• product mix (gas versus oil volumes); and
• the prices we receive for our oil and natural gas production.
Year-to-year or other periodic comparisons of the results of our operations can be difficult and may not fully and accurately describe our condition. The following table shows selected operating data for each of the three and nine months ended September 30, 2008 and September 30, 2007.
Three Months Ended Nine Months Ended
9/30/2008 9/30/2007 9/30/2008 9/30/2007
(in thousands, except per unit data)
Production Volumes:
Oil (Bbls) 274 254 758 797
Natural gas (Mcf) 2,886 2,043 8,338 5,243
BOE(1) 755 595 2,148 1,671
BOE per day 8.2 6.5 7.8 6.1
Sales Prices:
Oil (per Bbl) $ 115.19 $ 69.45 $ 109.52 $ 59.98
Natural gas (per Mcf) $ 8.54 $ 5.81 $ 8.78 $ 6.14
BOE price $ 74.45 $ 49.62 $ 72.73 $ 47.86
Operating Revenues:
Oil $ 31,552 $ 17,619 $ 83,043 $ 47,786
Natural gas 24,649 11,868 73,174 32,171
$ 56,201 $ 29,487 $ 156,217 $ 79,957
Operating Expenses:
Lease operating expense $ 7,539 $ 6,445 $ 21,772 $ 16,420
Production taxes 2,836 1,448 8,121 3,696
Production tax refund - - - (1,209 )
General and administrative 3,125 2,492 8,958 7,737
Depreciation, depletion and amortization 11,551 7,821 31,386 21,680
$ 25,051 $ 18,206 $ 70,237 $ 48,324
Operating income $ 31,150 $ 11,281 $ 85,980 $ 31,633
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(1) A BOE means one barrel of oil equivalent using the ratio of six Mcf of gas to one barrel of oil.
RESULTS OF OPERATIONS
For the Three Months Ended September 30, 2008 and 2007:
Our oil and natural gas revenues and production product mix are displayed in
the following table for the Current and Comparable Quarters.
Oil and Gas Revenues
Revenues Production
2008 2007 2008 2007
Oil (Bbls) 56 % 60 % 36 % 43 %
Natural gas (Mcf) 44 % 40 % 64 % 57 %
Total 100 % 100 % 100 % 100 %
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The following table shows our production volumes, product sales prices and operating revenues for the indicated periods.
Three Months Ended September 30, Increase % Increase
2008 2007 (Decrease) (Decrease)
(in thousands except per unit data)
Production Volumes
Oil (Bbls) 274 254 20 8 %
Natural gas (Mcf) 2,886 2,043 843 41 %
BOE (1) 755 595 160 27 %
BOE/Day 8.2 6.5 1.7 26 %
Sales Price
Oil (per Bbl) $ 115.19 $ 69.45 $ 45.74 66 %
Natural gas (per Mcf) $ 8.54 $ 5.81 $ 2.73 47 %
BOE price $ 74.45 $ 49.62 $ 24.83 50 %
Operating Revenues
Oil $ 31,552 $ 17,619 $ 13,933 79 %
Natural gas 24,649 11,868 12,781 108 %
Total $ 56,201 $ 29,487 $ 26,714 91 %
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(1) A BOE means one barrel of oil equivalent using the ratio of six Mcf of gas to one barrel of oil.
Oil revenues
Average wellhead realized crude oil prices increased $45.74 per Bbl, or 66%,
to $115.19 per Bbl in the Current Quarter, over the Comparable Quarter. This
price increase resulted in increased revenues by approximately $12.5 million for
the Current Quarter, as compared to the Comparable Quarter. Oil production
increased by approximately 20,000 Bbls due primarily to new wells and the
additional interest acquired in the Diamond M area, where volumes increased
approximately 37,000 Bbls in the Current Quarter. This increase was partially
offset with natural declines in the Andrews and Fullerton areas. The increase in
production resulted in increased revenues of approximately $1.4 million in the
Current Quarter over the Comparable Quarter.
Natural gas revenues
Average realized wellhead natural gas prices increased $2.73 per Mcf, or 47%,
to $8.54 per Mcf in the Current Quarter, over the Comparable Quarter. This price
increase accounted for an increase in revenue of approximately $7.9 million.
Natural gas production increased by approximately 843,000 Mcf primarily due to
new wells in the New Mexico Wolfcamp, Barnett Shale and the additional interest
acquired in the Diamond M Deep areas in the Current Quarter. In June 2008, we
acquired additional interests in the Diamond M Deep which also added to our
natural gas revenues. The increase in production was offset with natural
declines in the south Texas, Andrews and other Permian areas. The overall
increase in natural gas volumes increased revenue approximately $4.9 million for
the Current Quarter.
Cost and Expenses
Three months ended September 30, Increase % Increase
2008 2007 (Decrease) (Decrease)
($ in thousands)
Lease operating expense $ 7,539 $ 6,445 $ 1,094 17 %
Production taxes 2,836 1,448 1,388 96 %
General and administrative 3,125 2,492 633 25 %
Depreciation, depletion and amortization 11,551 7,821 3,730 48 %
Total $ 25,051 $ 18,206 $ 6,845 38 %
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Lease operating expense
Lease operating expense increased approximately $1.1 million or 17%, to
$7.5 million during the Current Quarter compared to $6.4 million for the
Comparable Quarter. The increase in expense was due to higher electricity,
water injection and well repair costs associated with the increased production
in the New Mexico Wolfcamp and Barnett Shale areas and the additional Diamond M
interests acquired in June 2008. Overall costs and volumes increased from the
additional interest acquired in the Diamond M area and from the new wells
drilled in the New Mexico Wolfcamp and Barnett Shale areas. Lifting costs
(excluding production taxes) per BOE decreased to $9.99 for the Current Quarter
compared to $10.84 per BOE in the Comparable Quarter due to increased
production. Ad valorem taxes increased in the Current Quarter by approximately
$231,000 over the Comparable Quarter due to an overall increase in our producing
property values.
Production taxes
Production taxes increased $1.4 million for the Current Quarter, as compared
to the Comparable Quarter. Production taxes were 5.0% of revenue for the Current
Quarter compared to 4.9% of revenue for the Comparable Quarter. The increase is
related to higher natural gas production and higher tax rates in the New Mexico
area. Production taxes in future periods will be a function of product mix,
production volumes, product prices and tax rates.
General and administrative
General and administrative expenses increased 25%, or $633,000, for the
Current Quarter, over the Comparable Quarter. This increase was primarily due to
increased stock based compensation expense of approximately $466,000 and an
increase in staffing and salary cost of approximately $188,000 over the
Comparable Quarter. This increase over the Comparable Quarter was partially
offset by lower franchise taxes, and fees associated with consulting and related
services in the Current Quarter. On a BOE basis, general and administrative
costs were $4.14 per BOE in the Current Quarter, as compared to $4.19 per BOE in
the Comparable Quarter.
Depreciation, depletion and amortization
Depreciation depletion and amortization expense increased 48%, or
$3.7 million, in the Current Quarter, over the Comparable Quarter. Total
depreciation, depletion and amortization per BOE was $15.30 for the Current
Quarter and $13.14 for the Comparable Quarter. This increase is primarily
attributable to an overall increase in actual and anticipated drilling costs.
Increased cost levels affect both the depletable amounts of capitalized costs in
2008 and the depletion attributable to amounts of estimated future
development costs on proved undeveloped properties. Our drilling over the past year and our future drilling plans are focused on our natural gas resource projects which have higher associated per BOE drilling and development costs due to the nature of the wellbores. These factors, when combined with the increase in the absolute level of our capital expenditures during this time period, have led to a significant increase in our depletion rate per BOE.
Other income (expense)
Three months ended September 30, Increase % Increase
2008 2007 (Decrease) (Decrease)
($ in thousands)
Gain (loss) on derivatives not
classified as hedges $ 65,661 $ (4,556 ) $ 70,217 (1,541 )%
Interest and other income 20 55 (35 ) (64 )%
Interest expense, net (6,139 ) (5,429 ) (710 ) 13 %
Cost of debt retirement (102 ) (760 ) 658 (87 )%
Other expense (11 ) (76 ) 65 (86 )%
Equity in loss of pipelines and
gathering system ventures (2 ) (69 ) 67 (97 )%
Total $ 59,427 $ (10,835 ) $ 70,262 (648 )%
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Gain (loss) on derivatives not classified as hedges
We recorded a gain of $65.7 million in the Current Quarter for derivatives
not classified as hedges, as compared to a loss of $(4.6) million for the
Comparable Quarter. The greatest impact of the change in fair market valuation
was within our crude oil contracts due to the significant decrease in oil prices
throughout the Current Quarter. We settled in cash a net payment of
$13.5 million in derivative contracts during the Current Quarter. See Note 6 to
Consolidated Financial Statements.
Interest expense
Interest expense increased approximately $710,000. The Current Quarter
resulted in a higher interest expense of approximately $664,000 primarily due to
higher average outstanding debt balances over the Comparable Quarter.
Capitalized interest for the Current Quarter was approximately $23,000 and
$47,000 for the Comparable Quarter. Our weighted average interest rate decreased
to 7.63% for the Current Quarter, from 9.27% for the Comparable Quarter.
In the Comparable Quarter we wrote off the unamortized bank fees of
$(760,000) associated with the Second Lien Term Loan that was retired in
July 2007.
Equity in loss of pipelines and gathering system ventures
For the Current Quarter, our equity investments recorded a loss of $(2,000),
compared to a loss of $(69,000) for the Comparable Quarter. This increase in
earnings of approximately $67,000 was primarily due to the equity investments in
the Hagerman Gas Gathering System Joint Venture being operated at a loss in the
Comparable Quarter.
In June 2008, we acquired all of the assets of the Hagerman Gas Gathering
System Joint Venture. The results of operations of the Hagerman Gas Gathering
System are now included in our operating income and not as an equity gain / loss
item in our Consolidated Statement of Operations. See Note 10 to Consolidated
Financial Statements.
Income taxes, deferred
Income tax expense was approximately $31.9 million in the Current Quarter, as
compared to
approximately $153,000 in the Comparable Quarter. Income tax expense for 2008
will be dependent on our earnings and is expected to be approximately 35% of
income before income taxes.
Basic and diluted net income
We had basic and diluted net income per share of $1.41 and $0.01 for the
Current Quarter and the Comparable Quarter, respectively. Basic weighted average
common shares outstanding increased from 38.0 million shares in the Comparable
Quarter to 41.6 million shares in the Current Quarter. Diluted weighted average
common shares outstanding increased from 38.8 million shares in the Comparable
Quarter to 41.7 million shares in the Current Quarter. The increase in common
shares was primarily due to our public offering of 3.0 million shares of common
stock in December 2007, the exercise of employee and nonemployee stock options
in 2007 and 2008 and the exercise of warrants during 2008.
RESULTS OF OPERATIONS
For the Nine Months Ended September 30, 2008 and 2007:
Percentages of our revenues and production, by product mix, are shown in the
following table for the Current Period and Comparable Period.
Oil and Gas Revenues
Revenues Production
2008 2007 2008 2007
Oil (Bbls) 53 % 60 % 35 % 48 %
Natural gas (Mcf) 47 % 40 % 65 % 52 %
Total 100 % 100 % 100 % 100 %
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The following table shows our production volumes, product sale prices and operating revenues for the following periods.
Nine Months Ended September 30, Increase % Increase
2008 2007 (Decrease) (Decrease)
(in thousands except per unit data)
Production Volumes
Oil (Bbls) 758 797 (39 ) (5 )%
Natural gas (Mcf) 8,338 5,243 3,095 59 %
BOE (1) 2,148 1,671 477 29 %
BOE/Day 7.8 6.1 1.7 28 %
Sales Price
Oil (per Bbl) $ 109.52 $ 59.98 $ 49.54 83 %
Natural gas (per Mcf) $ 8.78 $ 6.14 $ 2.64 43 %
BOE price $ 72.73 $ 47.86 $ 24.87 52 %
Operating Revenues
Oil $ 83,043 $ 47,786 $ 35,257 74 %
Natural gas 73,174 32,171 41,003 127 %
Total $ 156,217 $ 79,957 $ 76,260 95 %
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(1) A BOE means one barrel of oil equivalent using the ratio of six Mcf of gas to one . . .
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