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| QRCP > SEC Filings for QRCP > Form 10-Q on 5-Nov-2009 | All Recent SEC Filings |
5-Nov-2009
Quarterly Report
Since we control the general partner interests in Quest Energy and Quest
Midstream, we reflect our ownership interest in these partnerships on a
consolidated basis, which means that our financial results are combined with
Quest Energy's and Quest Midstream's financial results and the results of our
subsidiaries. The interest owned by non-controlling partners' share of income is
reflected as noncontrolling interests in our results of operations. Since the
initial public offering of Quest Energy in November 2007, QRCP's potential
sources of revenue and cash flows consists almost exclusively of distributions
on its partnership units in Quest Energy and Quest Midstream, because QRCP's
Appalachian assets largely consist of undeveloped acreage. Our consolidated
results of operations are derived from the results Quest Energy's and Quest
Midstream's operations as well the results of Quest Eastern's operations related
to the Appalachian Basin and our general and administrative expenses and our
interest income (expense). Accordingly, the discussion of our financial position
and results of operations in this Management's Discussion and Analysis of
Financial Condition and Results of Operations primarily reflects the operating
activities and results of operations of Quest Energy and Quest Midstream.
Operating Highlights
The Company's significant operational highlights by area include:
• Reduced oil and gas production costs in the current quarter by $0.13 per
Mcfe from the prior year quarter.
• Sustained natural gas production levels similar to the prior year despite minimal current period capital expenditures on acquisition and development.
Financial Highlights
The Company's significant financial highlights include:
• Reduced total debt by $44.6 million from December 31, 2008.
• Increased cash and cash equivalents by $20.2 million from December 31, 2008.
• Repriced derivatives during the second quarter of 2009 and received $26 million.
• Obtained a new $8 million revolving credit facility during the third quarter of 2009 to finance the Company's drilling program in the Appalachian Basin, general and administrative expenses, working capital and other corporate expenses.
Recent Developments
Global Financial Crisis and Impact on Capital Markets and Commodity Prices
Currently, there is unprecedented uncertainty in the financial markets. This
uncertainty presents additional potential risks to us and our subsidiaries and
affiliates. These risks include the availability and costs associated with our
borrowing capabilities and raising additional debt and equity capital.
Additionally, the current global economic outlook coupled with exceptional
unconventional resource development success in the U.S. has resulted in a
significant decline in natural gas prices across the United States. Gas price
declines impact us in two different ways. First, the basis differential from
NYMEX pricing to sales point pricing for our Cherokee Basin gas production has
narrowed significantly. Our Cherokee Basin basis differential averaged $0.49 per
Mmbtu in the third quarter of 2009 and was $0.23 per Mmbtu in October 2009 which
is down from an average of $1.79 per Mmbtu in the third quarter of 2008 and
$3.38 per Mmbtu in October 2008. The second impact has been the absolute value
erosion of natural gas. Our operations and financial condition are significantly
impacted by absolute natural gas prices. On September 30, 2009, the spot market
price for natural gas at Henry Hub was $3.30 per Mmbtu, a 53.7% decrease from
September 30, 2008.
For oil, worldwide demand has decreased by over 5% from 2007 levels creating
an oversupply environment similar to natural gas. The recent recovery of oil
prices into the $70 per barrel range has had a small positive impact on revenues
during the second half of 2009. Our management believes that managing price
volatility will continue to be a challenge. The spot market price for oil at
Cushing, Oklahoma at September 30, 2009 was $70.46 per barrel, a 30.0% decrease
from the price at September 30, 2008. It is impossible to predict the duration
or outcome of these price declines or the long-term impact on drilling and
operating costs and the
impacts, whether favorable or unfavorable, to our results of operations,
liquidity and capital resources. Due to our relatively low level of oil
production relative to gas and our existing commodity hedge positions, the
volatility of oil prices had less of an effect on our operations.
Suspension of Distributions and Asset Sale
Quest Midstream has not paid any distributions on any of its units since the
second quarter of 2008, and Quest Energy suspended its distributions on its
subordinated units starting with the third quarter of 2008 and on all units
starting with the fourth quarter of 2008. Distributions on all of Quest Energy's
and Quest Midstream's units continue to be suspended, and we are unable to
estimate when such distributions may, if ever, be resumed. Since these
distributions would have been substantially all of QRCP's cash flows for 2009,
the loss of these distributions was material to QRCP's financial position. QRCP
received cash distributions from Quest Energy and Quest Midstream of
$12.9 million for the nine months ended September 30, 2008 and did not receive
any cash distributions from Quest Energy and Quest Midstream for the nine months
ended September 30, 2009.
On February 13, 2009, we divested of approximately 23,000 net undeveloped
acres and one well in Lycoming County, Pennsylvania to a private party for
approximately $8.7 million.
Settlement Agreements
As discussed in our 2008 Form 10-K/A, we filed lawsuits, related to certain
unauthorized transfers, repayments and re-transfers of funds (the "Transfers")
to entities controlled by Jerry D. Cash, our former chief executive officer,
seeking, among other things, to recover the funds that were transferred. On
May 19, 2009, we entered into settlement agreements with Mr. Cash, the
controlled-entity and the other owners to settle this litigation. Under the
terms of the settlement, and based on a settlement allocation agreed to by the
board of directors of QRCP and QELP, QRCP received (1) approximately
$2.4 million in cash and (2) 60% of the controlled-entity's interest in a gas
well located in Louisiana and a landfill gas development project located in
Texas and QELP received Mr. Cash's interest in STP Newco, Inc ("STP") which
consisted of 100% of the common stock of the company.
While QRCP estimates the value of these assets to be less than the amount of
the unauthorized transfers and cost of the internal investigation, Mr. Cash
represented that they comprised substantially all of Mr. Cash's net worth and
the majority of the value of the controlled-entity. We did not take Mr. Cash's
stock in QRCP, which he represented had been pledged to secure personal loans
with a principal balance far in excess of the current market value of the stock.
STP owns interests in certain oil producing properties in Oklahoma, and other
assets and liabilities. STP's accounting and operation records provided to QELP,
at the date of the settlement, were in poor condition and we are in the process
of reconstructing the financial records in order to determine the estimated fair
value of the assets acquired and liabilities assumed in connection with the
settlement. Based on documents we received prior to the settlement, the
estimated fair value of the net assets to be assumed was expected to provide
QELP reimbursement for all of the costs of the internal investigation and the
costs of the litigation against Mr. Cash that have been paid by QELP; however,
the financial information we received prior to closing contained errors related
to Mr. Cash's ownership interests in the properties as well as amounts due
vendors and royalty owners. Based on work performed to date we believe that the
actual estimated fair value of net assets of STP that QELP received is less than
previously expected. We expect to complete our analysis of STP's financial
information and our final valuation of the oil producing properties obtained
from STP by December 31, 2009. We also are in the process of determining what
further actions can be taken with regards to this matter and intend to pursue
all remedies available under the law.
Based on the information available at this time, we have estimated the fair
value of the assets and liabilities obtained in connection with the settlement.
As additional information becomes available other assets and/or liabilities may
be identified and recorded.
The estimated fair value of the assets and liabilities received is as follows
(in thousands):
QRCP QELP Total
Cash, net of legal expenses $ 2,429 $ - $ 2,429
Oil and gas properties 896 1,076 1,972
Other assets 50 - 50
Current liabilities - (326 ) (326 )
Long-term debt - (719 ) (719 )
Net assets received $ 3,375 $ 31 $ 3,406
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Recombination
On July 2, 2009, QRCP, Quest Midstream, Quest Energy and other parties
thereto entered into an Agreement and Plan of Merger (the "Merger Agreement")
pursuant to which, following a series of mergers and an entity conversion, QRCP,
Quest Energy and the successor to Quest Midstream will become wholly-owned
subsidiaries of PostRock Energy Corporation ("PostRock") a new, publicly-traded
corporation (the "Recombination"). On October 2, 2009, the Merger Agreement was
amended to, among other things, reflect certain technical changes as the result
of an internal restructuring. On October 6, 2009, PostRock filed with the SEC a
registration statement on Form S-4, which included a joint proxy
statement/prospectus, relating to the Recombination.
While we are working toward the completion of the Recombination before the
end of 2009, it remains subject to the satisfaction of a number of conditions,
including, among others, the arrangement of one or more satisfactory credit
facilities for PostRock and its subsidiaries, the approval of the transaction by
our stockholders and the unitholders of QELP and QMLP, and consents from each
entity's existing lenders. There can be no assurance that these conditions will
be met or that the Recombination will occur.
Upon completion of the Recombination, the equity of PostRock would be owned
approximately 44% by current QMLP common unitholders, approximately 33% by
current QELP common unitholders (other than QRCP), and approximately 23% by
current QRCP stockholders.
Additionally, in connection with the Merger Agreement, on July 2, 2009, we
entered into a Support Agreement with Quest Energy, Quest Midstream and certain
Quest Midstream unitholders (the "Support Agreement"), which was amended on
October 2, 2009 to, among other things, add an additional Quest Midstream common
unitholder as a party. Pursuant to the Support Agreement, as amended, we have,
subject to certain conditions, agreed to vote the common and subordinated units
of Quest Energy and Quest Midstream that we own in favor of the Recombination
and the holders of approximately 73% of the common units of Quest Midstream
have, subject to certain conditions, agreed to vote their common units in favor
of the Recombination.
Results of Operations
The following discussion of financial condition and results of operations
should be read in conjunction with the condensed consolidated financial
statements and the related notes, which are included elsewhere in this report.
Operating segment data for the periods indicated are as follows (in
thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
2009 2008 2009 2008
Revenues:
Oil and gas sales $ 18,329 $ 49,531 $ 56,711 $ 136,989
Natural gas pipelines 16,635 16,095 52,260 47,482
Elimination of inter-segment revenue (11,002 ) (8,583 ) (31,238 ) (25,921 )
Natural gas pipelines, net of
inter-segment revenue 5,633 7,512 21,022 21,561
Total segment revenues $ 23,962 $ 57,043 $ 77,733 $ 158,550
Operating profit (loss):
Oil and gas production $ (11,342 ) $ 18,005 $ (128,246 ) $ 42,237
Natural gas pipelines 4,254 2,985 17,840 10,768
Total segment operating profit (loss) (7,088 ) 20,990 (110,406 ) 53,005
General and administrative expenses (11,337 ) (4,638 ) (29,705 ) (16,579 )
Recovery of misappropriated funds, net
of liabilities assumed 9 - 3,406 -
Total operating income (loss) $ (18,416 ) $ 16,352 $ (136,705 ) $ 36,426
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Three Months Ended September 30, 2009 Compared to the Three Months Ended
September 30, 2008
Oil and Gas Production Segment
Oil and gas production segment data for the periods indicated are as follows
(in thousands, except unit and per unit data):
Three Months Ended
September 30, Increase/
2009 2008 (Decrease)
Oil and gas sales $ 18,329 $ 49,531 $ (31,202 ) (63.0 )%
Oil and gas production costs $ 8,739 $ 9,963 $ (1,224 ) (12.3 )%
Transportation expense (intercompany) $ 11,002 $ 8,583 $ 2,419 28.2 %
Depreciation, depletion and amortization $ 9,930 $ 12,980 $ (3,050 ) (23.5 )%
Production Data:
Natural gas production (Mmcf) 5,389 5,694 (305 ) (5.4 )%
Oil production (Mbbl) 20 19 1 5.3 %
Total production (Mmcfe) 5,512 5,808 (296 ) (5.1 )%
Average daily production (Mmcfe/d) 59.9 63.1 (3.2 ) (5.1 )%
Three Months Ended
September 30, Increase/
2009 2008 (Decrease)
Average Sales Price per Unit:
Natural gas (Mcf) $ 3.15 $ 8.31 $ (5.16 ) (62.1 )%
Oil (Bbl) $ 64.08 $ 116.89 $ (52.81 ) (45.2 )%
Natural gas equivalent (Mcfe) $ 3.33 $ 8.53 $ (5.20 ) (61.0 )%
Average Unit Costs per Mcfe:
Production costs $ 1.59 $ 1.72 $ (0.13 ) (7.6 )%
Transportation expense (intercompany) $ 2.00 $ 1.48 $ 0.52 35.1 %
Depreciation, depletion and amortization $ 1.80 $ 2.23 $ (0.43 ) (19.3 )%
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Oil and Gas Sales. Oil and gas sales decreased $31.2 million, or 63.0%, to
$18.3 million during the three months ended September 30, 2009. This decrease
was primarily due to a decrease in average realized prices which resulted in
decreased revenues of $30.2 million. Lower production volumes decreased revenue
by an additional $1.0 million. Our average realized prices on an equivalent
basis (Mcfe) decreased to $3.33 per Mcfe for the three months ended
September 30, 2009, from $8.53 per Mcfe for the three months ended September 30,
2008.
Oil and Gas Operating Expenses. Oil and gas operating expenses consist of oil
and gas production costs, which include lease operating expenses, severance
taxes and ad valorem taxes, and transportation expense. Oil and gas operating
expenses increased $1.2 million, or 6.4%, to $19.7 million for the three months
ended September 30, 2009, from $18.5 million for the three months ended
September 30, 2008.
Oil and gas production costs decreased $1.2 million, or 12.3%, to
$8.7 million during the three months ended September 30, 2009, from
$10.0 million during the three months ended September 30, 2008. This decrease
was primarily due to cost-cutting measures that began in the third quarter of
2008 continuing into the current year. Field headcount was reduced by
approximately half while overtime hours were simultaneously reduced for the
three months ended September 30, 2009 compared to the three months ended
September 30, 2008. Well service improvement measures resulted in fewer wells
going offline, reduced loss of production due to offline wells, and fewer well
repairs in the current quarter compared to the prior year quarter. Production
costs including gross production taxes and ad valorem taxes were $1.59 per Mcfe
for the three months ended September 30, 2009 as compared to $1.72 per Mcfe for
the three months ended September 30, 2008. The decrease in per unit cost was due
to the cost-cutting and well service improvement measures discussed above.
Transportation expense increased $2.4 million, or 28.2%, to $11.0 million
during the three months ended September 30, 2009, from $8.6 million during the
three months ended September 30, 2008. The increase was primarily due to an
increase in the contracted transportation fee. Transportation expense was $2.00
per Mcfe for the three months ended September 30, 2009 as compared to $1.48 per
Mcfe for the three months ended September 30, 2008.
Depreciation, Depletion and Amortization. We are subject to variances in our
depletion rates from period to period due to changes in our oil and gas reserve
quantities, production levels, product prices and changes in the depletable cost
basis of our oil and gas properties. Our depreciation, depletion and
amortization decreased approximately $3.1 million, or 23.5%, during the three
months ended September 30, 2009 to $9.9 million from $13.0 million during the
three months ended September 30, 2008. On a per unit basis, we had an decrease
of $0.43 per Mcfe to $1.80 per Mcfe during the three months ended September 30,
2009 from $2.23 per Mcfe during the three months ended September 30, 2008. This
decrease was primarily due to the impairment of our oil and gas properties in
the fourth quarter of 2008 and the first quarter of 2009, which decreased our
rate per unit, as well as the resulting decrease in the depletable pool.
Natural Gas Pipelines Segment
Natural gas pipelines segment data for the periods indicated are as follows (in
thousands, except unit and per unit data):
Three Months Ended
September 30,
2009 2008 Increase/ (Decrease)
Natural Gas Pipeline Revenue:
Gas pipeline revenue - Third Party $ 5,633 $ 7,512 $ (1,879 ) (25.0 )%
Gas pipeline revenue - Intercompany 11,002 8,583 2,419 28.2 %
Total natural gas pipeline revenue $ 16,635 $ 16,095 $ 540 3.4 %
Pipeline operating expense $ 8,243 $ 7,737 $ 506 6.5 %
Depreciation and amortization expense $ 4,138 $ 5,373 $ (1,235 ) (23.0 )%
Throughput Data (Mmcf):
Throughput - Third Party 1,761 1,509 252 16.7 %
Throughput - Intercompany 6,062 6,578 (516 ) (7.8 )%
Total throughput (Mmcf) 7,823 8,087 (264 ) (3.3 )%
Average Pipeline Operating Costs per Mcf:
Pipeline operating expense $ 1.05 $ 0.96 $ 0.09 9.4 %
Depreciation and amortization $ 0.53 $ 0.66 $ (0.13 ) (19.7 )%
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Pipeline Revenue. Total natural gas pipeline revenue increased $0.5 million
to $16.6 million for the three months ended September 30, 2009 from
$16.1 million for the three months ended September 30, 2008.
Third party natural gas pipeline revenue decreased $1.9 million, or 25.0%, to
$5.6 million during the three months ended September 30, 2009, from $7.5 million
during the three months ended September 30, 2008.
Intercompany natural gas pipeline revenue increased $2.4 million, or 28.2%,
to $11.0 million during the three months ended September 30, 2009, from
$8.6 million during the three months ended September 30, 2008. The increase was
primarily due to a higher contracted rate in 2009.
Pipeline Operating Expense. Pipeline operating expense increased
$0.5 million, or 6.5%, to $8.2 million during the three months ended
September 30, 2009, from $7.7 million during the three months ended
September 30, 2008. Pipeline operating costs per unit increased $0.09 per Mcf
during the three months ended September 30, 2009, from $0.96 per Mcf to $1.05
per Mcf. The increase in per unit cost was the result of lower volumes over
which to spread fixed costs.
Depreciation and Amortization. Depreciation and amortization expense
decreased $1.2 million, or 23.0%, to $4.1 million during the three months ended
September 30, 2009, from $5.4 million during the three months ended
September 30, 2008. Depreciation and amortization per unit decreased $0.13, or
19.7%, to $0.53 per Mcf for the three months ended September 30, 2009 from $0.66
per Mcf for the three months ended September 30, 2008.
Unallocated Items
The following is a discussion of items not allocated to either of our segments.
General and Administrative Expenses. General and administrative expenses
increased $6.7 million, or 144.4%, to $11.3 million during the three months
ended September 30, 2009, from $4.6 million during the three months ended
September 30, 2008. The increase is primarily due to increased accounting and
audit fees related to our reaudits and restatements as well as legal, investment
. . .
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