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| PRC > SEC Filings for PRC > Form 10-Q on 11-May-2009 | All Recent SEC Filings |
11-May-2009
Quarterly Report
Industry terms used in this report are defined in the Glossary of Oil and Natural Gas Terms located at the end of this Item
In this report we make, and from time to time we otherwise make, written and oral statements regarding our business and prospects, such as projections of future performance, statements of management's plans and objectives, forecasts of market trends, and other matters that are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Statements containing the words or phrases "will likely result," "are expected to," "will continue," "is anticipated," "estimates," "projects," "believes," "expects," "anticipates," "intends," "target," "goal," "plans," "objective," "should" or similar expressions identify forward-looking statements, which may appear in documents, reports, filings with the Securities and Exchange Commission, news releases, written or oral presentations made by our officers or other representatives to analysts, stockholders, investors, news organizations and others, and discussions with management and other of our representatives. For such statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.
Our future results, including results related to forward-looking statements, involve a number of risks and uncertainties. No assurance can be given that the results reflected in any forward-looking statements will be achieved. Any forward-looking statement speaks only as of the date on which such statement is made. Our forward-looking statements are based upon assumptions that are sometimes based upon estimates, data, communications and other information from operators, government agencies and other sources that may be subject to revision. Except as required by law, we do not undertake any obligation to update or keep current either (i) any forward-looking statement to reflect events or circumstances arising after the date of such statement, or (ii) the important factors that could cause our future results to differ materially from historical results or trends, results anticipated or planned by us, or which are reflected from time to time in any forward-looking statement.
There are several important factors that could cause our future results to differ materially from historical results or trends, results anticipated or planned by us, or results that are reflected from time to time in any forward-looking statement. Some of these important factors, but not necessarily all important factors, are included in our filings with the SEC, including the risk factors set forth of our annual report on Form 10-K for our 2008 fiscal year filed with the SEC on March 31, 2009.
General
Petro Resources Corporation is an independent oil and gas company engaged in the acquisition, drilling and production of oil and natural gas properties and prospects within the United States. 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.
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 us to 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. Our acquisition and exploration pursuits of oil and natural gas properties are principally located in Texas, Louisiana, North Dakota, New Mexico and Kentucky. We currently own interests in approximately 286,282 gross (50,611 net) leasehold acres, of which 261,147 gross (43,281 net) acres are classified as undeveloped acreage.
In July 2005, we acquired our initial interest in drilling prospects and commenced drilling activities in November 2005. In December 2005, we commenced production operations from our first oil and gas prospects and received our first revenues from oil and gas production in February 2006. In the first quarter of 2007, we acquired oil and gas producing assets in the Williston Basin area of North Dakota. In the third quarter of 2007, we increased our oil and gas producing assets with the addition of acreage in the Permian Basin located in West Texas. Subsequently, in 2008, we participated in new prospects located in southwest Louisiana as well as east Texas. As of March 30, 2009, we held interests in approximately 238 producing wells in Texas, Louisiana and North Dakota. Our current drilling inventory includes prospects located in Texas, Louisiana, New Mexico, North Dakota and Kentucky.
We recognize the value of hedging oil and gas production through both derivative and physical contracts to help stabilize cash flow. During the second and third quarters of 2008, we entered into three separate hedging agreements. In June 2008, we purchased put options for crude oil at a price of $110 per bbl for 100 bbls per day of production during 2009. The cost of these crude oil put options was $363,175. We also entered into swap agreements in September covering 207,400 barrels of crude oil at a price of $105 per bbl for the period of October 2008 to December 2011. We incurred no cost in entering these swap agreements. In addition to crude oil hedges, we also hedged natural gas production in October 2008, whereby we purchased natural gas put options at a strike price of $7.75 per mcf for 658 mcf per day (240,000 total mcf) of production during 2009. The cost of these natural gas put options was $200,400.
As of December 31, 2008, our total proved reserves were 3,118 mboe net of production, a gain of 401 mboe from year end 2007 of 2,716 mboe net of production. This gain in proved reserves was the result of gains of 932 mboe from prospect areas in Texas and Louisiana offset by a reduction in North Dakota proved reserves of 531 mboe. The decrease of reserves in North Dakota was precipitated by a lower year end price causing a decrease to the estimated life of the reserves. The total 2008 year end proved reserves is comprised of 2,409 mbbls of crude oil and NGLs and 709 mboe of natural gas.
Our executive offices are located at 777 Post Oak Blvd., Suite 910, Houston, Texas 77056, and our telephone number is (832) 369-6986. Our web site is www.petroresourcescorp.com. Additional information which may be obtained through our web site does not constitute part of this quarterly report on Form 10-Q. A copy of this quarterly report on Form 10-Q is located at the SEC's Public Reference Room at 100 F Street, NE, Washington, DC 20549. Information on the operation of the SEC's Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330. The SEC also maintains an internet site that contains reports, proxy and information statements and other information regarding our filings at www.sec.gov.
Results of Operations
For the three months ended March 31, 2009 compared to the three months ended March 31, 2008
The Company's net production for the quarter ended March 31, 2009 included 33,369 barrels of oil, 121,874 mcf of natural gas, and 12,100 barrels of natural gas liquids for a barrel-equivalent total of 65,781 boe compared to 30,179 barrels of oil, 42,275 mcf of natural gas, and 4,035 barrels of natural gas liquids for a barrel-equivalent total of 41,260 boe for the quarter ended March 31, 2008.
For the quarter ended March 31, 2009, the average daily production was approximately 730 boe per day compared to average daily production of 461 boe per day for the quarter ended March 31, 2008.
The Company realized prices for the quarter ended March 31, 2009 were $33.84 per barrel of oil, $3.24 per mcf of natural gas, and $24.25 per barrel of natural gas liquids compared to $85.93 per barrel of oil, $5.59 per mcf of natural gas, and $48.06 per barrel of natural gas liquids for the comparable prior year period.
Revenue for the quarter ended March 31, 2009 consisted $1,817,036 of oil and gas sales compared to oil and gas sales of $3,058,001 for the quarter ended March 31, 2008. The decrease in revenue from oil and gas sales was due primarily to significantly lower commodity prices.
Lease operating expenses for the quarter ended March 31, 2009 totaled $1,244,562 compared to lease operating expenses of $1,222,398 for the prior year comparable period. While lease operating expenses have not come off as quickly as the drop in commodity prices in the initial months of 2009, the industry has begun to see a retreat in these costs reflecting the current market conditions.
Exploration costs for the quarter ended March 31, 2009 were $94,475 compared to $572,510 for the quarter ended March 31, 2008. Exploration costs represent our drilling costs associated with dry holes and the carrying costs of properties. The decrease in exploration costs represents our successful drilling efforts in the Cinco Terry Prospect in Crockett County, Texas as well as the Surprise Prospect in Nacogdoches County, Texas.
We incurred no expenses related to the impairment of oil and gas properties in the quarters ended March 31, 2009 or 2008. 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. No wells needed to be written down in either quarter.
Our expenses for depreciation, depletion, and accretion for the quarter ended March 31, 2009 totaled $1,307,527 compared to $525,172 for the same period in the prior year. This was due to our increased production as a result of the Cinco Terry Field drilling program, the Surprise prospect wells coming online as well as increased depletion rates.
General and administrative expenses for the quarter ended March 31, 2009 totaled $746,613 compared to general and administrative expenses of $1,293,443 for the prior year period. General and administrative expenses for the quarters ended March 31, 2009 and March 31, 2008 included expenses of $192,775 and $594,365, respectively, for outstanding common stock shares and common stock options granted under our Stock Incentive Plan. Without giving effect to expenses for common shares and stock options, our general and administrative expenses for the quarters ended March 31, 2009 and March 31, 2008 were $553,838 and $699,078, respectively. The decrease in general and administrative expenses (other than expenses for options and common shares) between reporting periods was due to the decrease in legal and professional services and a decrease in employee costs because at this time, no bonuses have been paid this year.
We incurred a net loss from operations of $1,476,141 for the quarter ended March 31, 2009 compared to a loss from operations of $455,522 during the same period in the prior year. The increase in net loss occurred due to the decline in commodity prices leading to reduced revenue in addition to slowly retreating lease operating expenses.
During the quarter ended March 31, 2009, interest expense totaled $570,677, compared to $514,961 for the quarter ended March 31, 2008. The increase in interest expense was principally due to decreased capitalization of interest.
Beginning in March 2007, we entered into commodity derivative financial instruments for purposes of hedging our exposure to market fluctuations of oil prices. During the quarter ended March 31, 2009, we incurred a gain on derivative contracts of $556,315 compared to a loss of $685,594 for the comparable period in 2008. Our gain on derivative contracts include both $1,054,732 in gains on the actual settlement of certain derivative financial instruments during quarter ended March 31, 2009 and the unrealized loss of $498,417 based on the changes in the fair value of derivative instruments covering positions beyond March 31, 2009.
We incurred a net loss attributable to common shareholders of $1,371,283 ($.04 per share) during the quarter ended March 31, 2009, compared to a net loss of $1,634,205 ($.04 per share) to common shareholders for the same period in 2008. The decrease in net loss was primarily the result of an gain on derivative contracts.
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 existing 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 $65.0 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, audit 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 $7.3 million, including:
· Up to $3.4 million to be deployed for drilling in Cinco Terry.
· Up to $1.2 million towards operations in the Surprise Prospect.
· Up to $1.5 million to be used in connection with our interest in the East Chalkley Prospect and Leblanc Prospect.
· Up to $495,000 to maintain secondary recovery efforts in North
Dakota.
· Approximately $700,000 to be used in connection with other
prospect areas.
As of March 31, 2009, we had total assets of $59,800,799 and working capital of $3,450,745. In addition, we have $65.0 million in credit facilities, of which $21.5 million is outstanding as of March 31, 2009 and $5.5 million is available for additional borrowing 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 may 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 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 existing 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 our 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 may be materially adversely affected.
CIT Credit Facility
On September 9, 2008 and amended on March 19, 2009, we entered into a $50.0 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 $15.0 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 $50.0 million first lien revolving credit facility, with an initial borrowing base availability of $17.0 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 on March 19, 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 $17.0 million to $12.0 million. The terms of the Credit Agreement and Second Lien Term Loan Agreement as amended are as follows.
Under the Credit Agreement, the Company 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; (C) a ratio of consolidated current assets to consolidated current liabilities of not less than 1.0:1.0 for each fiscal quarter; and (D) 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 Second Lien Term Loan Agreement, the Company must have (A) 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 (B) 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 31, 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. Subject to the above-described conditions, we are permitted to use the remaining available funds under the Credit Agreement to finance our capital program and fund general corporate purposes. As of March 31, 2009, $5.5 million is available for additional borrowing under the credit facilities.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet financing arrangements.
Glossary of Oil and Natural Gas Terms
The following is a description of the meanings of some of the oil and natural gas industry terms used in this report.
bbl. Stock tank barrel, or 42 U.S. gallons liquid volume, used in this report in reference to crude oil or other liquid hydrocarbons.
bcf. Billion cubic feet of natural gas.
boe. Barrels of crude oil equivalent, determined using the ratio of six mcf of natural gas to one bbl of crude oil, condensate or natural gas liquids.
boe/d. boe per day.
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