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| TEC > SEC Filings for TEC > Form 10-Q on 14-Aug-2009 | All Recent SEC Filings |
14-Aug-2009
Quarterly Report
• Our ability to service current and future indebtedness and comply with the covenants related to the debt facilities or our ability to receive forbearance therefrom;
• General economic and political conditions, including governmental energy policies, tax rates or policies, inflation rates and constrained credit markets;
• The market price of, and supply/demand balance for, oil and natural gas;
• Our success in completing development and exploration activities, when and if we are able to resume those activities;
• Expansion and other development trends of the oil and gas industry;
• Acquisitions and other business opportunities that may be presented to and pursued by us;
• Our ability to integrate our acquisitions into our company structure; and
• Changes in applicable laws and regulations.
These factors are not necessarily all of the important factors that could cause
actual results to differ materially from those expressed in any of our
forward-looking statements. Other factors, including unknown or unpredictable
ones, could also have material adverse effects on our future results.
The following discussion should be read in conjunction with Item 7. -
Management's Discussion and Analysis of Financial Condition and Results of
Operations - included in our Annual Report on Form 10-K for the fiscal year
ended December 31, 2008.
Overview and Strategy
We are an independent oil and gas exploration and production company focused on
the acquisition, exploration and development of North American properties. Our
current operations are concentrated in the prolific Midcontinent and Rocky
Mountain regions of the U.S. We have leasehold interests in the Central Kansas
Uplift, the eastern Denver-Julesburg Basin in Colorado, and the Big Horn Basin
in Wyoming.
Teton was formed in November 1996 and is incorporated in the State of Delaware.
Effective September 8, 2008, our common shares are publicly traded on the NASDAQ
Capital Market LLC under the symbol "TEC." Prior to September 8, 2008, our
common shares were publicly traded on the American Stock Exchange under the
symbol "TEC."
Our principal executive offices are located at 600 17th Street, Suite 1600
North, Denver, CO 80202, and our telephone number is (303) 565-4600. Our website
is www.teton-energy.com.
Current Economic Conditions and Credit Crisis
Our long-term plans have been, and will continue to be, to economically grow
reserves and production, primarily by:
(1) acquiring under-valued properties with reasonable risk-reward potential and
by participating in, or actively conducting, drilling operations in order to
further exploit our existing properties,
(2) seeking high-quality exploration and development projects with potential for
providing operated, long-term drilling inventories, and
(3) selectively pursuing strategic acquisitions that may expand or complement
our existing operations.
However, with the recent slowdown in the global economy, tightening of the
credit and equity markets and depressed oil and gas commodity prices, we have
evaluated our short-term objectives and the impact of these factors on our 2009
capital, operating and G&A budgets. In light of the current economic environment
and its impact on our industry, our focus for 2009 is largely centered on
production of our operated properties in the Central Kansas Uplift.
Additionally, we are focusing our efforts on the execution of our Feasibility
Plan (discussed below) in an attempt to solidify our position as a going
concern. Refer to the heading "Liquidity and Capital Resources" for further
discussion on the impacts of current economic factors on our short-term
strategic plans.
Following are summary comments of our performance in several key areas during
the three and six month periods ended June 30, 2009:
Net income (loss)
During the three and six month periods ended June 30, 2009, our net loss before
discontinued operations decreased from approximately $29.475 million (or $1.37
per share) for the three months ended June 30, 2008, to approximately
$10.724 million (or $0.45 per share) for the three months ended June 30, 2009
and from approximately $37.415 million (or $1.91 per share) for the six months
ended June 30, 2008 to approximately $15.088 million (or $0.63 per share) for
the six months ended June 30, 2009. The decrease in net loss before discontinued
operations of $18.751 million for the three month period and $22.327 million for
the six month period are due largely to a decrease in the unrealized loss on oil
and gas derivative contracts, a non-cash item required by SFAS No. 133, of
$15.204 million and $12.562 million, respectively; an increase in realized gain
on oil and gas derivative contracts of $4.662 million and $8.494 million,
respectively; a decrease in general and administrative expenses of
$2.898 million and $4.827 million, respectively (largely due to decrease in
non-cash compensation of $2.974 million and $4.595 million, respectively); and a
decrease in cash and non-cash interest expense of $4.05 million and
$6.96 million, respectively. See RESULTS OF OPERATIONS, below, for further
discussion.
Production
During the three and six month periods ended June 30, 2009, average company-wide
daily production decreased 28%, to 3,094 Mcfed and increased 21%, to 3,238
Mcfed, respectively, as compared to average daily production of 4,321 Mcfed and
2,677 Mcfed, respectively, during the same prior year periods. The fluctuations
in production by major operating area are discussed below.
Central Kansas Uplift. On April 2, 2008, we completed the purchase of reserves,
production and certain oil and gas properties in the Central Kansas Uplift, and
we began recognizing our share of production from the 53 producing wells at that
time (59 currently). Average daily production, net to us, from the area was
2,360 and 2,490 Mcfed for the three and six months ended June 30, 2009,
respectively, compared to 3,527 Mcfed for the three months ended June 30, 2008.
The second quarter 2008 was our first production from the Central Kansas Uplift
properties, so there were no production volumes included in the first quarter
2008 results. The decrease in production is due to a lack of drilling and the
normal decline curve.
At June 30, 2009, we had more than 90% of the current oil production hedged,
with contracts in place through December 31, 2009 on costless collars at a floor
price of $90.00 per barrel of oil and a ceiling price of $104.00. At $90.00 per
barrel of oil and today's drilling costs, a typical well in the Central Kansas
Uplift project would generate an approximate 88% internal rate of return.
Washco. As of June 30, 2009, there were 26 gross producing wells in our operated
Washco area of the DJ Basin which produced an average of 616 Mcfed and 689
Mcfed, net to us, during the three and six months ended June 30, 2009,
respectively, compared to 774 Mcfed and 904 Mcfed, net to us, respectively, for
the same prior year periods. The decrease in production is due to the normal
decline curve and the fact that we have not drilled any wells in the Washco area
since we acquired the property. We are currently seeking a partner to drill
additional wells in the Washco area in the future.
Piceance. For the three and six months ended June 30, 2009, production, net to
us, in the area, averaged 1,809 Mcfed and 2,451 Mcfed, as compared to 2,707
Mcfed and 2,801 Mcfed during the same prior year periods. Effective June 1,
2009, we divested our 12.5% non-operated working interest in the Piceance Basin
to an undisclosed third party for $7.0 million net of purchase price
adjustments. The sale was made as a part of our ongoing effort to sell the
non-operated assets, to be more heavily weighted towards our own operations to
be able to better control our pace of capital expenditures and to improve upon
our liquidity.
In accordance with generally accepted accounting principles, we recorded an
impairment expense on this property for the quarter ended March 31, 2009 of
$28.949 million. The current global economic conditions and credit crisis,
coupled with low commodity prices for natural gas in the Rockies, resulted in a
current market value of the assets that is lower than our book carrying value.
At June 1, 2009, the carrying value of the Piceance developed and undeveloped
properties exceeded the negotiated sales price of the assets, which resulted in
a loss on sale of discontinued operations of $1.47 million.
Noble AMI. Effective February 1, 2009, we sold our 25% non-operated working
interest position in the Teton-Noble AMI to Noble Energy Inc. ("Noble") in
exchange for the forgiveness of all outstanding and future amounts we owed to
Noble, related to the development of the project ($4 million after
post-effective date adjustments). Included in the sale is our 50% operated
working interest in the undeveloped Frenchman Creek acreage in eastern Colorado.
The sale closed on March 31, 2009, with an effective date of February 1, 2009.
As of the date of the sale, the carrying value of the Teton-Noble AMI developed
and undeveloped properties exceeded the sales price of the assets, which
resulted in a loss on the sale in discontinued operations of $799,000.
Williston. For the three and six months ended June 30, 2009, production, net to
us, in the area, averaged 137 Mcfed and 126 Mcfed, as compared to 16 Mcfed and
63 Mcfed during the same prior year periods. Prior to June 30, 2009, we held an
interest in 9 gross wells in the Williston Basin, including 7 producing Bakken
wells and 2 Red River wells (one producing and one well in process). On June 30,
2009, we sold our non-operated working interest in the Goliath project acreage
located in the Williston Basin to American Oil & Gas, Inc. for gross proceeds of
$900,000. The effective date of the sale is July 1, 2009. The sale was made in
furtherance of our ongoing effort to sell our non-operated assets and to improve
our liquidity.
In accordance with generally accepted accounting principles, we recorded an
impairment expense on this property for the quarter ended June 30, 2009 of
$7.529 million. The current global economic conditions and credit crisis,
coupled with low commodity prices, resulted in a current market value of the
assets that is lower than our carrying value.
Oil and Gas Sales
Oil and gas sales decreased from approximately $7.5 million for the three months
ended June 30, 2008 to approximately $2.3 million for the three months ended
June 30, 2009, and from approximately $8.7 million for the six months ended
June 30, 2008 to approximately $4.0 million for the six months ended June 30,
2009. The decrease in revenue is due to a decrease in production due to a lack
of drilling and a decrease in commodity prices due to general market conditions.
LIQUIDITY AND CAPITAL RESOURCES
Going Concern
Our consolidated financial statements have been prepared assuming that we will
continue as a going concern, which contemplates the realization of assets and
the liquidation of liabilities in the normal course of business. We have
incurred significant net losses in the quarter and six months ended June 30,
2009, attributable largely to loss on the sale of discontinued operations which
were all non-operated properties and the unrealized loss on oil and gas
derivative contracts, which are non-cash mark-to-market calculations. Also, the
sudden and rapid decline in oil and gas prices adversely affected our operating
results. We have managed our liquidity during this time through a series of cost
reduction initiatives and sales of assets. However, the global credit market
crisis and depressed commodity prices have had a dramatic effect on our
industry. In the second half of 2008 and the first half of 2009, the turmoil in
the overall credit markets, the volatility in the prices of oil and natural gas,
the recession in the United States and Western Europe and the slowdown of
economic growth in the rest of the world created a substantially more difficult
business environment. The ability to execute capital markets transactions or
sales of assets was extremely limited. Our liquidity position, as well as our
operating performance, was negatively affected by these economic and industry
conditions and by other financial and business factors, many of which are beyond
our control. We do not believe it is likely that these adverse economic
conditions, and their effect on the oil and gas industry, will improve
significantly during the remainder of 2009.
Historically, our primary sources of liquidity have been cash provided by debt
and equity offerings and borrowings under our bank credit facility. In the past,
these sources have been sufficient to meet our business needs. However, the
adverse developments in financial and credit markets during the fourth quarter
of 2008 have continued into 2009 and have made it extremely difficult to access
capital and credit markets, relative to the efforts that have historically been
required in order to raise capital. Although the credit markets tightened in the
latter half of 2008, we believed at December 31, 2008 that the amounts available
to us under our existing $150 million credit facility ($14 million borrowing
base at June 30, 2009 - see additional comments below related to the
redetermination of the bank borrowing base), together with the anticipated net
cash provided by operating activities during 2009 and proceeds from potential
sales of non-operated properties, would provide us with sufficient funds to
maintain our current facilities and complete our limited capital expenditure
program through 2009. As a result of significantly lower asset divestiture
prices, lower commodity prices and continued constrained capital markets, our
capital expenditure budget for 2009 has shifted, and instead we are focusing
primarily on optimizing production in our operated properties in the Central
Kansas Uplift (refer to discussion below under the heading "Cash Flows and
Capital Requirements"), integral lease expenditures and seismic costs.
We will require additional sources of capital in order for us to reinstate a
capital program to develop our leasehold position in the Central Kansas Uplift
and drill the internally generated prospects, or implement any other business
plan intended to maximize the value for our shareholders, as well as for our
creditors and other constituents. However, due to the uncertain state of the
current capital markets, we can provide no assurance that we will be able to
secure any such additional financing, or as to the terms of any such additional
financing. Securing additional financing is expected to be much more difficult
than it has been in the past, and, if secured, the terms likely will be more
onerous. We had previously publicly stated our plans to sell non-operated
properties as part of our strategic plan and also to improve our liquidity.
During the first half of 2009, we successfully divested our non-operated working
interests in the Piceance Basin and the Teton-Noble AMI in the DJ Basin, and
effective July 1, 2009, we divested our non-operated working interest in the
Williston Basin.
Current developments in the capital markets, combined with our lack of a
drilling program, have led to a decrease in our borrowing base. The significant
decline in commodity prices since the summer of 2008 resulted in a reduction of
our Senior Lenders' price decks, the commodity prices upon which the Senior
Lenders base their determinations of borrowing bases. Each individual bank
determines its own pricing deck based on its analysis of various factors,
including the general economy, current commodity prices and the specific bank's
expectations of future commodity prices. The reduced price decks coupled with
the fact that we have not drilled a well in the Central Kansas Uplift since
September 2008 (which prevents us from increasing our production, cash flows and
reserves) has resulted in a decline of the borrowing base. As of June 30, 2009,
we had outstanding borrowings of $22.5 million and a borrowing base of
$14 million. We have until August 25, 2009 to cure the excess above the
borrowing base. The next redetermination of our borrowing base will be effective
on August 1, 2009, and we expect the banks to communicate their results to us
mid to late August 2009. At this time, we do not have adequate funds available
to repay the borrowing base deficiency. As of the date of this report, we have
not received notification from our Senior Lenders regarding the August 1, 2009
redetermination.
During the first half of 2009, we implemented and substantially executed a
"Feasibility Plan" designed to improve our financial situation. This Feasibility
Plan was presented to the Senior Lenders for their consideration, and has
sustained us through the first half of fiscal year 2009. We reduced our
outstanding indebtedness with the Senior Lenders by 27% from March 31, 2009 to
June 30, 2009, divested all of our non-operated non-core assets, sold certain
crude oil hedges, reduced our general and administrative expenses by 56%
compared to the first half of fiscal year 2008, became substantially current on
our accounts payable and created an operating environment with positive monthly
recurring cash flow commencing in July 2009. The key elements of our Feasibility
Plan included:
• Asset sales - As noted above, the Teton-Noble AMI sale was closed on
March 31, 2009, with an effective date of February 1, 2009, in exchange for
the forgiveness of $4.0 million of payables to the buyer. Effective June 1,
2009, we divested our interest in the Piceance Basin to an undisclosed third
party for $7.0 million net of purchase price adjustments. Additionally,
effective July 1, 2009, we sold our interest in the Williston Basin for
$900,000. Of the total proceeds from these transactions, we applied
$6.925 million to pay down outstanding senior bank debt.
• Labor costs - We have reduced the number of our employees (both regular employees and contractors) by 58%. We have already experienced positive effects on expenses and cash flow. Salaries of all remaining employees were temporarily reduced by 10% during the second quarter of 2009, the 401(K) plan was eliminated and our contribution to employee benefit plan premiums was reduced to 50% from a range of 90% to 100%. The non-salary reductions were effective in early April 2009. The resultant annual reduction to G&A expenses is estimated at approximately $1.3 million. Additionally, we did not pay any bonuses in early 2009 for 2008 and have no intention of doing so in the foreseeable future.
• Delay in capital expenditures - We have evaluated our 2009 capital and drilling program through an analysis of each item on a discretionary and nondiscretionary basis, and have significantly reduced the 2009 program by eliminating or reducing those items we believe to be discretionary. We estimate capital expenditures will be less than $2.0 million in 2009, which is approximately $8.5 million less than our original projection. Additionally, we have renegotiated several supply and service contracts in the field and expect to realize savings on those items through the remainder of the year.
• Crude Oil Hedges - At the end of June 2009, we liquidated our hedge positions for January 2010 through September 2011 for an aggregate of $2.4 million, of which we applied $2.1 million to reduce our outstanding indebtedness with the Senior Lenders. We remain substantially hedged through the end of 2009. We do not view the liquidation of the 2009 hedges as a viable alternative since the successful execution of the Feasibility Plan and the day-to-day operations for the remainder of the year rely upon the hedge settlements to protect us against depressed oil prices.
We are continuing to act on our Feasibility Plan into the third quarter of
fiscal 2009, as we believe that the successful implementation of our Feasibility
Plan thus far has strengthened our financial position, enabling us to look
further into the future and evaluate our options in order to maximize creditor
and shareholder values. An integral component of our evolving strategy therefore
includes a focus on restructuring our balance sheet and raising new capital. We
are exploring various alternatives with our Senior Lenders and Debenture holders
as well as new sources of equity in order to improve our liquidity. In order to
facilitate our evaluation of strategic alternatives, the holders of our
Debentures consented to forbear with respect to interest payable July 1, 2009
until August 25, 2009. We are currently working with our Senior Lenders and
Debenture holders to enter into a forbearance agreement beyond August 25, 2009,
the due date of our borrowing base deficiency. Both sets of creditors concur
with our belief that we can maximize value for all of our constituencies by
seeking new equity, reinitiating a development capital program and organically
growing the Company through the drillbit. We are exploring all options available
to us, both financially and operationally, which includes, but is not limited
to, public and/or private placement of equity or debt, conversion of the
Debentures into shares of our common stock, merging with other companies, as
well as pre-packaged or pre-negotiated bankruptcy filings under the United
States Bankruptcy Code, or any combination of the above. We do not yet know
which of these actions, if any, we will choose to take, and, even if taken,
there can be no assurance that any such action(s) will be successful.
Our Amended Credit Facility contains two financial covenants with which we are
required to comply quarterly:
1. Ratio of total debt to EBITDAX (as defined in the Credit Facility agreement):
We will not, as of the last day of any fiscal quarter, permit our ratio of
total debt as of the end of such fiscal quarter to EBITDAX for the four
fiscal quarters ending on the last day of the fiscal quarter immediately
preceding the date of determination for which financial statements are
available to be greater than 3.5 to 1.0.
2. Current ratio: We will not, as of the last day of any fiscal quarter, permit our ratio of (i) consolidated current assets (including the unused amount of the total commitments under the Credit Facility, but excluding non-cash assets under SFAS No. 133) to (ii) consolidated current liabilities (excluding non-cash obligations, SFAS No. 133 liabilities and current maturities under or with respect to the Credit Facility, the convertible debt or any other senior subordinated debt, whether such amounts are reflected as a liability under GAAP or not) to be less than 1.0 to 1.0.
There exists an intercreditor agreement between the holders of our Debentures
and the banks in the Credit Facility whereby the same financial covenants apply
to the Debentures.
As of June 30, 2009, we were in compliance with all financial and non-financial
covenants of our debt agreements. However, the lower commodity prices being
experienced, coupled with a reduced capital spending budget during this time of
tight capital markets, will result in our EBITDAX measurement being lower in the
upcoming months. Lower EBITDAX may require us to lower our debt outstanding to
be able to maintain compliance with the total debt to EBITDAX ratio requirement.
As discussed above, we do not regard the liquidation of our 2009 hedges as a
viable interim strategy as we believe these hedges currently provide protection
against further lowering of the borrowing base. For every dollar that the price
of oil declines, our hedge value increases by one dollar, and for every dollar a
falling oil price decreases EBITDAX, the oil hedges will increase EBITDAX by one
dollar for the hedged volumes. We expect our oil hedges to cover over 90% of our
volumes of existing wells production in 2009, with new production from workovers
or completions of previously drilled wells being the only volumes sensitive to
actual pricing of crude oil.
Our operating cash flows also may fluctuate throughout the year due to weather,
changes in prices and volumes, as well as the timely collection of receivables.
The availability of oil field services and supplies such as concrete, pipe and
compression equipment are expected to have a significant influence on our
capital budget and net cash provided by operating activities. Our future growth
is further dependent upon the success and timing of our exploration and
production activities, new project development, efficient operation of our
facilities and our ability to obtain financing at acceptable terms. New
exploration and production activities and new project development are currently
not being pursued, and are not expected to be resumed until we have improved our
liquidity position.
As of June 30, 2009, we have more than 90% of our total oil production hedged
for the remainder of 2009 at a floor price of $90.00 and a ceiling price of
$104.00 per barrel. Our hedges are transacted with JPMorgan Chase Bank NA and
are currently in place through December 31, 2009. At July 23, 2009, the
liquidation value of our oil hedges was $1.4 million. Refer to the section
entitled "Contractual Obligations" below for further discussion.
Additionally, 100% of our operated production is purchased by credit worthy
third parties. However, we believe that in the absence of these third parties
sufficient resources exist to bring this production to market. During the three
months ended June 30, 2009, revenues from our operated properties accounted for
100% of total revenues from continuing operations and 59% of total production
including discontinued operations. During the six months ended June 30, 2009,
revenues from our operated properties accounted for 100% of total revenues from
continuing operations and 51% of total production including discontinued
operations.
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