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| PRC > SEC Filings for PRC > Form 10-K on 31-Mar-2009 | All Recent SEC Filings |
31-Mar-2009
Annual Report
The following discussion should be read in conjunction with our financial statements included elsewhere in this Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors including those set forth in our "Risk Factors" described herein.
General
We are an independent oil and natural gas company engaged in the acquisition, drilling and production of oil and natural gas properties in the United States. We pursue interests in oil and gas properties in partnership with oil and gas companies that have exploration, development and production expertise. Our business strategy is designed to create maximum shareholder value by leveraging the knowledge, expertise and experience of our management team along with that of our operating partners. Our oil and gas properties are located principally in Texas, Louisiana, North Dakota, New Mexico and Kentucky.
Since the commencement of our oil and gas operations in 2005, we have been successful in creating and expanding a balanced portfolio consisting of producing properties and prospects that are geologically and geographically diverse, including producing properties, secondary enhanced oil recovery projects, and exploration prospects. This diversity provides projects with varied payout periods, helping the company remain competitive in volatile markets. We target low to medium risk projects that have the potential for multiple producing horizons, and offer repeatable success allowing for meaningful production and reserve growth.
As of December 31, 2007, our net total proved reserves were approximately 2,716,602 boe (net of production) of which approximately 2,369,600 boe were crude oil reserves and 347,002 boe were natural gas reserves. As of December 31, 2008, our estimated net total proved reserves had grown to approximately 3,118,079 boe (net of production) of which approximately 2,409,253 boe were crude oil reserves and 708,826 boe were natural gas reserves. The increase in net total proved reserves is the result of successful exploratory drilling efforts in our Cinco Terry Project in Crockett County, Texas, Surprise Prospect in Nacogdoches County, Texas and in our East Chalkley Prospect in Cameron Parish, Louisiana. From these prospects, we added approximately 931,997 boe of proved reserves net of production, which offsets a reduction of 530,520 boe of proved reserves net of production in North Dakota.
Results of Operations
It is our belief that the exploration and production industry's most significant value creation occurs through the drilling of successful exploratory wells and the enhancement of oil recovery in mature fields given appropriate economic conditions. We acquire producing properties based on our view of the pricing cycles of oil and natural gas and available exploration and development opportunities of proved, probable and possible reserves. We also participate as a non-operator and evaluate each prospect based on its geological and geophysical merits and, in large part, on an operator's track record and resources. We intend to operate certain prospects and projects in the near future in order to gain both economic and operational advantages.
For the Year Ended December 31, 2008 Compared to December 31, 2007
Revenues for the year ended December 31, 2008 totaled $15,883,441 compared to revenues of $7,020,533 for the year ended December 31, 2007. Revenue for the year ended December 31, 2008 consisted $14,486,478 of oil and gas sales,$1,196,963 of revenue from the gain on our sale of Hall Houston Exploration II, and $200,000 of revenue representing a liquidated damage penalty for failure to commence drilling by a specified date assessed against our operating partner in the Palo Duro acreage. Revenue for the prior year period consisted of $6,920,533 of oil and gas sales and $100,000 of liquidated damages related to the Palo Duro acreage. Approximately 75% of the increase in revenue from oil and gas sales was to increased production and 25% was due to increase in prices.
Lease operating expenses for the year ended December 31, 2008 totaled $5,378,989, compared to lease operating expenses of $3,510,521 for the prior year period. Approximately 30% of the increase in lease operating expenses was due to the increase in the number of producing wells in our Cinco Terry Field in Crockett County, Texas, and the remainder of the increase was due to the increase in the secondary recovery efforts in North Dakota.
Exploration costs increased to $7,348,778 for the year ended December 31, 2008 from $1,767,898 during the prior year period. Exploration costs represent our drilling costs associated with dry holes. Exploration costs for 2008 include two deep wells drilled in North Dakota in our Newport Prospect as well as four shallow wells also drilled in North Dakota. We also wrote off our South San Arroyo prospect in New Mexico and our White Water prospect in Colorado.
Our expenses for impairment of oil and gas properties increased to $1,973,015 for the year ended December 31, 2008 from $95,272 during the prior year period. Impairment expenses represent the write-down of previously capitalized expenses for productive wells. We take an impairment charge for a productive well when there is an indication that we may not receive production payments equal to the net capitalized costs. Almost all of the impairment was related to our North Dakota properties.
Our expenses for depreciation, depletion, and accretion for the year ended December 31, 2008 totaled $7,682,293, compared to $1,781,263 for the prior year period. Approximately 50% of this increase was due to increased depletion rates because of increased capitalized costs and approximately 50% was due to increased production in the Williston Basin and the Cinco Terry Fields.
General and administrative expenses for the year ended December 31, 2008 totaled $3,964,664 compared to general and administrative expenses of $2,751,647 for the prior year period. General and administrative expenses for the years ended December 31, 2008 and December 31, 2007 included expenses of $1,589,675 and $1,117,836, respectively, for outstanding common stock options granted under our Stock Incentive Plan and common shares issued to executive officers. Without giving effect to expenses for common shares and stock options, our general and administrative expenses for the years ended December 31, 2008 and December 31, 2007 were $2,374,989 and $1,633,811, respectively. The increase in general and administrative expenses (other than expenses for options and common shares) between reporting periods was due to increased number of employees, additional office space, professional fees and travel.
We incurred a net loss from operations of $10,464,300 for the 2008 fiscal year, compared to a net loss from operations of $2,886,068 during the prior year. The net loss from operations increased during 2008 due to increased expenses associated with lease operating expenses, exploration, impairment, and depreciation, depletion and accretion and general and administrative expenses partially offset by an increase in revenue.
During the year ended December 31, 2008, interest expense increased by $2,028,835 to $2,771,858, over the prior year period. The increase in interest expense was due to the fact that we capitalized less interest in 2008 due to less activity in the Williston Basin.
During the year ended December 31, 2008, we realized a gain on derivative contracts of $7,311,255 compared to a loss on derivative contracts of $2,458,165 during the prior year. Beginning in March 2007, we have entered into commodity derivative financial instruments for purposes of hedging our exposure to market fluctuations of oil prices. These fluctuations are driven by the change in the market prices of hedged oil and gas volumes.
We incurred a net loss to common stockholders of $7,620,740 during fiscal 2008, compared to a net loss to common stockholders of $6,050,357 for the prior year period. The increase in net loss to common stockholders was primarily the result of an increase in our exploration, impairment and depreciation expenses offset by increased revenues and gains on derivative contracts.
We generated positive cash flow from operations of $3,437,329 in fiscal 2008, compared to a positive cash flow from operations of $853,615 for fiscal 2007 due to increased revenue.
Plan of Operations
Our plan of operations for the next twelve months is to continue further exploration and development of oil and natural gas prospects that we currently own; concentrating on those with the lowest development and lifting costs. Consistent with that is our gradual structuring and staffing of our company toward becoming an operator of select properties in Texas and Louisiana. By becoming an operator, we will have more control over drilling and developmental decisions and will broaden the spectrum of exploration prospects we can consider for participation. As an operator we should reduce overall finding costs and in the future we may start to generate exploration prospects.
The continued development of our properties and prospects and the pursuit of fresh opportunities require that we maintain access to adequate levels of capital. We will strive for an optimal balance between our property portfolio and our capital structuring that will allow for growth and to the maximum benefit of our shareholders. The decisions around the balancing of capital needs and property holdings will be a challenge to us as well as all companies in the entire energy industry during this time of lowered commodity prices and an increasing complex global economic picture. As a function of balancing properties and capital, we may decide to monetize certain properties to reduce debt or to allow us to acquire interest in new prospects or producing properties that may be better suited to the current economic and energy industry environment.
The business of oil and natural gas acquisition, exploration and development is capital intensive and the level of operations attainable by an oil and gas company is directly linked to and limited by the amount of available capital. Therefore, a principal part of our plan of operations is to raise the additional capital required to finance the exploration and development of our current oil and natural gas prospects and the acquisition of additional properties. As explained under "Financial Condition and Liquidity" below, based on our present working capital, available borrowings under the credit facility and current rate of cash flow from operations, we believe we have available to us sufficient working capital to fund our operations and expected commitments for exploration and development through, at least, December 31, 2009. However, in the event we receive calls for capital greater than, or generate cash flow from operations less than, we expect, we may require additional working capital to fund our operations and expected commitments for exploration and development prior to December 31, 2009. We will seek additional working capital through the sale of our securities and we will endeavor to obtain additional capital through bank lines of credit and project financing. However, as described further below, under the terms of our guarantee of $65 million in credit facilities, we are prohibited from incurring any additional debt from third parties. Our ability to obtain additional working capital through new bank lines of credit and project financing may be subject to the repayment of outstanding sums drawn from the $65 million credit facilities.
We intend to use the services of independent consultants and contractors to perform various professional services, including reservoir engineering, land, legal, environmental, investor relations and tax services. We believe that by limiting our management and employee costs, we may be able to better control total costs and retain flexibility in terms of project management.
Financial Condition and Liquidity
As of the date of this report, we estimate our capital budget for fiscal 2009 to be approximately $7.1 million, including:
· Up to $3.1 million to be deployed for drilling in Cinco Terry.
· Up to $1.8 million towards operations in the Surprise Prospect.
· Up to $1.7 million to be used in connection with our interest in the East Chalkley Prospect and Leblanc Prospect. Approximately $500,000 to be used in connection with other prospect areas.
As of December 31, 2008, we had total assets of $61,664,868 and working capital of $6,682,370. In addition, we have available to us a $65 million in credit facilities, of which $21.5 million is outstanding as of December 31, 2008, for purposes of financing our commitments towards the drilling and development of our oil and gas properties. Based on our present working capital, available borrowings under the credit facility and current rate of cash flow from operations, we believe we have available to us sufficient working capital to fund our operations and expected commitments for exploration and development through, at least, December 31, 2009. However, in the event we receive calls for capital greater than, or generate cash flow from operations less than, we expect, we may require additional working capital to fund our operations and expected commitments for exploration and development prior to December 31, 2009.
We will seek to obtain additional working capital through the sale of our securities and, subject to the successful deployment of our cash on hand, we will endeavor to obtain additional capital through bank lines of credit and project financing. However, other than our existing $65 million credit facilities, we have no agreements or understandings with any third parties at this time for our receipt of additional working capital and we have no history of generating significant cash from oil and gas operations. Further, as described further below, under the terms of our guarantee of the $65 million credit facilities, we are prohibited from incurring any additional debt from third parties. Our ability to obtain additional working capital through bank lines of credit and project financing may be subject to the repayment of the $65 million credit facilities. Consequently, there can be no assurance we will be able to obtain continued access to capital as and when needed or, if so, that the terms of any available financing will be subject to commercially reasonable terms. If we are unable to access additional capital in significant amounts as needed, we may not be able to develop our current prospects and properties, may have to forfeit our interest in certain prospects and may not otherwise be able to develop our business. In such an event, our stock price will be materially adversely affected.
CIT Credit Facility
On September 9, 2008 and amended effective as of March 25, 2009, we entered into a $50 million Credit Agreement (the "Credit Agreement") with certain lenders named in the agreement and CIT Capital USA Inc., as administrative agent for the lenders, and a $15 million Second Lien Term Loan Agreement (the "Second Lien Term Loan Agreement") with certain lenders named in the agreement and CIT Capital USA Inc., as administrative agent for the lenders. All term loans available under the Second Lien Term Loan facility were advanced to us on September 9, 2008 and were used to retire our previously existing credit facility arranged by Petrobridge Investment Management, LLC.
The Credit Agreement provides for a $50 million first lien revolving credit facility, with an initial borrowing base availability of $17 million. The first lien facility may be used for loans and, subject to a $500,000 sublimit, letters of credit. Borrowings under the Credit Agreement may be used to provide working capital for exploration and production purposes, to refinance existing debt, and for general corporate purposes. The maturity date of the Credit Agreement is September 9, 2011.
Borrowings under the Credit Agreement bear interest, at our option, at either a fluctuating base rate or a rate equal to LIBOR plus, in each case, a margin determined based on our utilization of the borrowing base. The Credit Agreement also requires us to satisfy certain financial covenants, including maintaining (A) a ratio of EBITDAX to Interest Expense (as each term is defined in the Credit Agreement) of not less than 2.5:1.0; (B) a ratio of Net Debt (as such term is defined in the Credit Agreement) to EBITDAX of not more than (y) 4.5:1.0 for the fiscal quarters ending December 31, 2008, March 31, 2009, June 30, 2009 and September 30, 2009, and (z) 3.5:1.0 for each fiscal quarter ending thereafter; and (C) a ratio of consolidated current assets to consolidated current liabilities of not less than 1.0:1.0. We are also required to enter into certain swap agreements pursuant to the terms of the Credit Agreement.
The Second Lien Term Loan Agreement provides for a $15 million second lien term loan facility. As noted above, all term loans available under the second lien term loan facility were advanced to us on September 9, 2008 and were also used to retire our previously existing credit facility arranged by Petrobridge Investment Management, LLC. The maturity date of the Second Lien Term Loan Agreement is September 9, 2012. Under certain circumstances, we are permitted to repay the term loans prior to the maturity date; however, any payments made on or prior to September 9, 2009 are subject to a prepayment penalty equal to 2% of the amount prepaid, and any payments made after September 9, 2009 but on or before September 9, 2010 are subject to a prepayment penalty equal to 1% of the amount prepaid.
Borrowings under the Second Lien Term Loan Agreement bear interest, at our option, at either a fluctuating base rate plus 6.50% per annum or a rate equal to LIBOR plus 7.50% per annum. The Second Lien Term Loan Agreement also requires us to satisfy certain financial covenants, including maintaining (1) a ratio of Total Reserve Value to Debt (as each term is defined in the Second Lien Term Loan Agreement) of not less than 1.75:1.0; and (2) a ratio of Net Debt to EBITDAX (as each term is defined in the Second Lien Term Loan Agreement) of not more than (a) 4.5:1.0 for the fiscal quarters ending December 31, 2008, March 31, 2009, June 30, 2009 and September 30, 2009, and (b) 4.0:1.0 for each fiscal quarter ending thereafter.
If an event of default occurs and is continuing under either the Credit Agreement or the Second Lien Term Loan Agreement, the lenders may increase the interest rate then in effect by an additional 2% per annum. The Credit Agreement and the Second Lien Term Loan Agreement contain covenants that, among others things, restrict our ability to, with certain exceptions: (i) incur indebtedness; (ii) grant liens; (iii) acquire other companies or assets; (iv) dispose of all or substantially all of our assets or enter into mergers, consolidations or similar transactions; (v) make restricted payments; (vi) enter into transactions with affiliates; and (vii) make capital expenditures.
PRC Williston LLC, our wholly-owned subsidiary, has guaranteed the performance of all of our obligations under the Credit Agreement, the Second Lien Term Loan Agreement and related agreements pursuant to a Guaranty and Collateral Agreement and a Second Lien Guaranty and Collateral Agreement each dated as of September 9, 2008. Subject to certain permitted liens, our obligations have been secured by the grant of a first priority lien on no less than 80% of the value of our and PRC Williston's existing and to-be-acquired oil and gas properties and the grant of a first priority security interest in related personal property of ours and PRC Williston. We also granted a first priority security interest in our ownership interest in PRC Williston, subject only to certain permitted liens.
The Credit Agreement was amended effective as of March 25, 2009 because we were unable to comply with the interest and debt coverage covenants under the terms of the original Credit Agreement and Second Lien Term Loan Agreement for the fiscal quarter ended December 31, 2008. Pursuant to the amendments, the administrative agent and the lenders have agreed to waive these defaults. In connection with the semi-annual review of our borrowing base, lower commodity prices have resulted in our borrowing base for the Credit Agreement being reduced from $17M to $12M. The terms of the Credit Agreement and Second Lien Term Loan Agreement as amended are as follows.
Under the amended Credit Agreement, we must have (A) a ratio of EBITDAX to Interest Expense (as each term is defined in the Credit Agreement) of not less than 2.0:1.0 for the first and second fiscal quarters of 2009, 2.25:1.0 for the third and fourth fiscal quarters of 2009, and 2.5:1.0 for each fiscal quarter thereafter; (B) a ratio of Net Debt (as such term is defined in the Credit Agreement) to EBITDAX of not more than 6.5:1.0 for the fiscal quarters of 2009, 6.0:1.0 for the fiscal quarters of 2010, and 5.0:1 for each fiscal quarter thereafter; and (C) a ratio of First Lien debt to EBITDAX of not more than 2.75:1.0 for each fiscal quarter. Borrowings under the Credit Agreement bear interest, at our option, at either a fluctuating base rate or a rate equal to LIBOR (with a LIBOR floor of 2.50%) plus, in each case, a margin determined based on our utilization of the borrowing base. The amendment includes an increase in the margin of 50 basis points.
Under the amended Second Lien Term Loan Agreement, we must have a ratio of Net Debt to EBITDAX (as each term is defined in the Second Lien Term Loan Agreement) of not more than 6.5:1.0 for the fiscal quarters of 2009 and 2010 and 5.5:1 for the fiscal quarters of 2011 each fiscal quarter ending thereafter. Borrowings under the Second Lien Term Loan Agreement bear interest, at our option, at either a fluctuating base rate plus 6.50% per annum or a rate equal to LIBOR (with a LIBOR floor of 2.50%) plus 7.50% per annum.
As of March 30, 2009, we have drawn $21.5 million, of which $15.0 million was drawn on the Second Lien Term Loan Agreement and $6.5 million was drawn on the Credit Agreement. We are permitted to use the remaining available funds under the Credit Agreement to finance our capital program and fund general corporate purposes.
Series A Preferred Stock Redemption
On September 26, 2008, we redeemed 2,563,712 shares of our outstanding Series A Preferred Stock at an aggregate redemption price of $7,946,735. The shares were held by investment funds managed by Touradji Capital Management. Pursuant to the terms of the Series A Preferred Stock, we were required to redeem all Series A Preferred Stock no later than October 2, 2008. After giving effect to the redemption, there are no shares of Series A Preferred Stock outstanding.
Sale of Hall-Houston Exploration II, L.P. Partnership Interest
On September 26, 2008, we sold our 5.33% limited partner interest in Hall-Houston Exploration II, L. P. pursuant to a Partnership Interest Purchase Agreement dated September 26, 2008, as amended on September 29, 2008. The interest was purchased by a non-affiliated partnership for a cash consideration of $8.0 million and the purchaser's assumption of the first $1,353,000 of capital calls on the limited partnership interest sold subsequent to September 26, 2008. We have agreed to reimburse the purchaser for up to $754,255 of capital calls on the limited partnership interest sold in excess of the first $1,353,000 of capital calls subsequent to September 26, 2008. We realized a net gain on the sale of the asset of $1.20 million for the quarter ending September 30, 2008, subject to future upward adjustment to the extent that some or all of the $754,255 is not called. The proceeds of the sale of the limited partnership were used to redeem the Company's outstanding shares of Series A Preferred Stock.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet financing arrangements.
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