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| TGC > SEC Filings for TGC > Form 10-Q on 10-Nov-2008 | All Recent SEC Filings |
10-Nov-2008
Quarterly Report
Results of Operations and Financial Condition
Kansas
During the first nine months of 2008, the Company sold 165,782 gross barrels of oil from its Kansas Properties that currently comprise 170 producing oil wells. Of the 165,782 gross barrels, 109,494 barrels were net to the Company after required payments to all of the Drilling Program participants and royalty interests. The Company's sales for the first nine months of 2008 of 109,494 net barrels of oil compares to 96,747 barrels sold to the Company's interest in the first nine months of 2007. The Company's net revenues from the Kansas properties were $12,115,669 in the first nine months of 2008 compared to $5,831,906 in 2007. This increase was due to an increase in prices for oil to an average of $106.53 in 2008 from an average of $60.28 in 2007 and a 12,747 net barrel increase in sales in 2008. This 12% increase in production is due to a 10% increase on properties owned before the addition of the Riffe field, generated from drilling and polymer work-overs. The three months of production from the newly acquired Riffe Field contributed 2% to the 9 month total.
During the first nine months of 2008, the Company produced gas from 23 wells in the Swan Creek field, which it primarily sold in Kingsport, Tennessee to Eastman Chemical Company. Natural gas production from the Swan Creek field for the first nine months of 2008 was an average of 234 Mcf per day during that period as compared to 207 Mcf per day in the first nine months of 2007. For the first nine months of 2008, the Company produced 4,247 barrels of oil from the Swan Creek field as compared to 5,729 in the first nine months of 2007.
Comparison of the Quarters Ended September 30, 2008 and 2007.
The Company recognized $5,067,106 in revenues during the third quarter of 2008 compared to $2,375,229 in the third quarter of 2007. The increase in revenues was due to an increase in oil prices in 2008 and a 9,377 net barrel increase in oil sales. Oil prices in the third quarter of 2008 averaged $110.85 per barrel as compared to $69.15 per barrel in the third quarter of 2007. Although the Company's gross revenues increased substantially, the Company's net income attributable to common shareholders of $1,562,967 or $0.03 per share of common stock during the third quarter of 2008 was relatively the same as the net income in the third quarter of 2007 to common shareholders of $1,580,662 or $0.03 per share of common stock. This was due to a tax expense of $805,000 for the third quarter of 2008.The Company's operating income was $2,367,967 in 2008 compared to operating income in 2007 of $480,662. The Company recorded a operating loss carry forwards of $1,100,000 in the third quarter of 2007 and recorded non-cash income tax expense of $805,000 for the third quarter net income of 2008.
Depreciation, depletion, and amortization expense for the third quarter of 2008 was $552,165 compared to $479,487 in the third quarter of 2007. The depletion has remained consistent even though revenues have increased proportionally to increase in oil prices. The Company increased depletion in 2008 to account for the Black Diamond purchase.
During the third quarter of 2008, general and administrative costs increased to $418,985 from $291,680 in the third quarter of 2007 due to continued administrative growth.
Interest expense increased from $94,014 in 2007 to $214,548 in 2008, due to additional borrowing and an increase in asset retirement obligation due to the Black Diamond purchase.
Comparison of the Nine Months Ended September 30, 2008 and 2007.
The Company recognized $13,006,414 in revenues during the first nine months of 2008 compared to $6,368,068 in the first nine months of 2007. The increase in revenues was due to an increase in oil prices in 2008 and a 12,747 net barrel increase in oil sales. Oil prices in the first nine months of 2008 averaged $106.53 per barrel as compared to $60.28 per barrel in the first nine months of 2007. The Company realized a net income attributable to common shareholders of $8,796,685 or $0.15 per share of common stock during the first nine months of 2008, compared to a net income in the first nine months of 2007 to common shareholders of $1,702,253 or $0.03 per share of common stock. Approximately $3.4 million (38%) of this income was attributable to the net effects of recognizing the Company's deferred tax assets in 2008. The Company's operating income was $5,414,685 in 2008 compared to operating income in 2007 of $602,253. The Company recorded the remaining net operating loss carry forwards of $5,227,000 in the first quarter of 2008 and recorded non-cash income tax expense of $1,845,000 for the first nine months net income. The Company recorded $1,100,000 in operating loss carry forwards in 2007.
Production costs and taxes in the first nine months of 2008 increased to $4,216,050 from $2,902,595 in the first nine months of 2007. The difference is due to increased workovers to increase production, increased taxes, and overall cost increases of supplies in the industry. These cost have increased due to the rise in fuel costs and commodity price increases.
Depreciation, depletion, and amortization expense for the first nine months of 2008 was $1,491,111 compared to $1,422,845 in the first nine months of 2007. The depletion has remained consistent even though revenues have increased proportionally to price.
Interest expense increased from $245,606 in 2007 to $394,652 due to additional borrowing and an increase in asset retirement obligation from the Black Diamond purchase.
Liquidity and Capital Resources
On December 17, 2007, Citibank assigned the Company's revolving credit facility with Citibank to Sovereign Bank of Dallas, Texas ("Sovereign") as requested by the Company.
Under the facility as assigned to Sovereign, loans and letters of credit will be available to the Company on a revolving basis in an amount outstanding not to exceed the lesser of $20 million or the Company's borrowing base in effect from time to time. The Company's initial borrowing base with Sovereign was set at $7.0 million, an increase from its borrowing base of $3.3 million with Citibank prior to the assignment. The Company's initial borrowing on December 17, 2007 under its new facility with Sovereign was approximately $4.2 million which will bear interest at a floating rate equal to prime as published in the Wall Street Journal plus 0.25% resulting in a current interest rate of approximately 7.5%. Interest only is payable during the term of the loan and the principal balance of the loan is due December 31, 2010. The Sovereign facility is secured by substantially all of the Company's producing and non-producing oil and gas properties and pipeline and the Company's Methane Project assets.
The Company used a portion of the $4.2 million borrowed from Sovereign to pay off the funds it previously borrowed from Citibank. The remaining $900,000 borrowed from Sovereign was used to pay bank fees and attorney fees relating to the assignment in the amount of approximately $75,000 and the balance of approximately $825,000 was used to pay a portion of the purchase price for equipment to be utilized in the Methane Project currently under construction in Church Hill, Tennessee by MMC, the Company's wholly-owned subsidiary. The Company borrowed an additional $500,000 in the second quarter of 2008 to accelerate drilling activities on its Kansas Properties.
Effective as of July 1, 2008, the Company purchased from Black Diamond Oil, Inc. an expected 80 barrels per day of oil producing properties and related leases and equipment in Rooks County, Kansas for $5.35 million. The Company has acquired producing oil wells and saltwater disposal wells, equipment, and the underlying working interests in leases comprising what is known as the Riffe field that had been owned by Black Diamond for many years. The purchase price was paid primarily from borrowings under its credit facility with Sovereign Bank and from company cash on hand. Following the purchase, the Company has borrowed a total of $9.9 million under its credit facility with Soverign Bank.
The Company prepares its Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States of America, which requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the year. Actual results could differ from those estimates. The Company considers the following policies to be the most critical in understanding the judgments that are involved in preparing the Company's financial statements and the uncertainties that could impact the Company's results of operations, financial condition and cash flows.
Revenue Recognition
The Company uses the sales method of accounting for natural gas and oil revenues. Under this method, revenues are recognized based on actual volumes of oil and gas sold to purchasers. Natural gas meters are placed at the customers' locations and usage is billed monthly.
The Company follows the full cost method of accounting for oil and gas property acquisition, exploration and development activities. Under this method, all productive and non-productive costs incurred in connection with the acquisition of, exploration for and development of oil and gas reserves for each cost center are capitalized. Capitalized costs include lease acquisitions, geological and geophysical work, day rate rentals and the costs of drilling, completing and equipping oil and gas wells. Costs, however, associated with production and general corporate activities are expensed in the period incurred. Interest costs related to unproved properties and properties under development are also capitalized to oil and gas properties. Gains or losses are recognized only upon sales or dispositions of significant amounts of oil and gas reserves representing an entire cost center.
Proceeds from all other sales or dispositions are treated as reductions to capitalized costs. The capitalized oil and gas property, less accumulated depreciation, depletion and amortization and related deferred income taxes, if any, are generally limited to an amount (the ceiling limitation) equal to the sum of: (a) the present value of estimated future net revenues computed by applying current prices in effect as of the balance sheet date (with consideration of price changes only to the extent provided by contractual arrangements) to estimated future production of proved oil and gas reserves, less estimated future expenditures (based on current costs) to be incurred in developing and producing the reserves using a discount factor of 10% and assuming continuation of existing economic conditions; and (b) the cost of investments in unevaluated properties are excluded from the costs being amortized. No ceiling write-downs were recorded in 2008 or 2007.
and Amortization of Oil and Gas Properties
The capitalized costs of oil and gas properties, plus estimated future development costs relating to proved reserves and estimated costs of plugging and abandonment, net of estimated salvage value, are amortized on the unit-of-production method based on total proved reserves. The costs of unproved properties are excluded from amortization until the properties are evaluated, subject to an annual assessment of whether impairment has occurred.
The Company's proved oil and gas reserves as of December 31, 2007 were determined by LaRoche Petroleum Consultants, Ltd. Projecting the effects of commodity prices on production and timing of development expenditures includes many factors beyond the Company's control.
The future estimates of net cash flows from the Company's proved reserves and their present value are based upon various assumptions about future production levels, prices, and costs that may prove to be incorrect over time. Any significant variance from assumptions could result in the actual future net cash flows being materially different from the estimates.
The Company is required to record the effects of contractual or other legal obligations on well abandonments for capping and plugging wells. Management periodically reviews the estimate of the timing of the wells' closure as well as the estimated closing costs, discounted at the credit adjusted risk free rate of 6%. Quarterly, management accretes the 6% discount into the liability and makes other adjustments to the liability for well retirements incurred during the period.
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