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LEI > SEC Filings for LEI > Form 10-Q on 14-Nov-2011All Recent SEC Filings

Show all filings for LUCAS ENERGY, INC.

Form 10-Q for LUCAS ENERGY, INC.


14-Nov-2011

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following discussion and analysis should be read in conjunction with the unaudited financial statements and notes thereto included elsewhere in this report, and should be read in conjunction with management's discussion and analysis contained in Lucas's Annual Report on Form 10-K for the fiscal year ended March 31, 2011 (the 2011 Annual Report) and related discussion of our business and properties contained therein. The terms "Company," "Lucas Energy," "Lucas," "we," "us" and "our" refer to Lucas Energy, Inc. and its subsidiary.

Overview

Lucas Energy, Inc., a Nevada corporation, is an independent oil and gas company based in Houston, Texas. Lucas Energy, Inc. together with its subsidiary, acquires oil and gas properties and develops, produces and markets crude oil and natural gas from various known geological formations, including the Austin Chalk, Eagle Ford and Buda Formations, primarily in Gonzales, Wilson, Karnes and Atascosa Counties south of the City of San Antonio in South Texas and McKinley County in New Mexico. Our goal is to become a recognized player in the development and production of crude oil and natural gas in established oil fields.

The Company's strategy is twofold:

We focus on building and developing a portfolio of oil and gas assets by acquiring what we believe are undervalued, underdeveloped and underperforming properties and for which we believe we can increase production economically and profitably. We do not operate in land not known to be a productive field; that is, we do not drill wildcat wells.

To efficiently pave the way towards growth, we monetize and divest non-core oil and gas assets and enter into joint ventures, farm-outs and drilling arrangements with select and reputable oil and gas companies to exploit the productive geological formations in our properties.

Our fiscal year ends on the last day of March of the calendar year. We refer to the twelve-month period ended March 31, 2012 as our 2012 fiscal year and the three months ended September 30, 2011 as our second quarter of fiscal year 2012.

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Operations. During the first six months of our fiscal year 2012, we continued our efforts on improving production from our existing Austin Chalk wells to capitalize on their undeveloped potential. Our efforts resulted in a 9% growth in our gross crude oil production for the first six months of this fiscal year as compared to the first six months of our prior fiscal year.

To expedite the production growth of the Company, we prepared for our 2012 Austin Chalk horizontal well drilling program early in the first quarter of the 2012 fiscal year; and in late June, commenced the program by drilling a new horizontal well, the Rainey Unit No.1H, in Gonzales County. A portion of the well is on the same lease as the two Hagen Eagle Ford No. 1H and No. 2H wells operated by Hilcorp Energy Company ("Hilcorp"). The Rainey Unit No.1H well was successfully completed in early September and is currently producing 80-100 gross barrels of oil per day (BOPD) from the Austin Chalk formation. Seidler Oil and Gas is a joint venture partner with Lucas in this well, and Lucas owns an approximate 30% working interest in the well. In October 2011, the Company completed the re-drilling of the lateral on the Milton Hines No.1 well, and it is currently producing 80-100 gross BOPD. Lucas owns a 100% working interest in this well. We are presently drilling the Kuntschik #1 lateral extension and anticipate the extension to add more than 100 gross BOPD for the 2012 third fiscal quarter's totals when completed. The Company plans to drill at least three new Austin Chalk horizontal wells and five more new Austin Chalk laterals from old well bores during the remainder of its 2012 fiscal year. In addition, the Hilcorp operated Eagle Ford program is anticipated to add another two to three wells during the same period.

Lucas also plans to increase its production by acquiring additional property interests in the Austin Chalk. On October 13, 2011, the Company entered into a purchase and sale agreement with Nordic Oil USA I, LP (Nordic 1), whereby effective July 1, 2011, the Company purchased all of Nordic 1's right, title and interest in certain oil, gas and mineral leases located in Gonzales, Karnes and Wilson Counties, Texas. The property interests acquired represent all of Nordic 1's interests in the LEI 2009 II and III Capital Programs. Pursuant to the agreement, the closing of the Nordic 1 Transaction is deferred until the transaction is ratified by Nordic 1's shareholders. In early November 2011, Lucas was informed by Nordic 1 that its shareholders had ratified the transaction and the transaction will officially close upon receipt of the proper confirmation documentation from Nordic 1. Pursuant to the transaction, Lucas agreed to pay $22 million to Nordic 1 in the form of a senior secured promissory note, the payment of which will be secured by a deed of trust, security agreement, financing statement and assignment of production on the properties acquired. The note will be due a year from the official closing date and will bear interest at 6% per annum. The Company also entered into a purchase agreement with an individual pursuant to which the Company agreed to purchase the individual's property interests in the property to be acquired from Nordic 1 in consideration for 2,000 shares of to be designated Series A Convertible Preferred Stock of the Company. The Series A Convertible Preferred Stock will have no voting rights, no liquidation rights and no redemption rights, but will have conversion rights. The conversion rights will provide the holder thereof the right to convert each Series A Convertible Preferred Stock share into 1,000 shares of the Company's common stock, from time to time at the option of the holder, provided that no conversion will be allowed at any time that the number of shares to be issued to the holder thereof, together with any other shares of common stock beneficially owned by the holder, would exceed 4.99% of the Company's then outstanding common stock.

Lucas expects the performance of the Company's existing wells, its current capital expenditure program and the newly acquired property interests to give rise to an average daily production rate of approximately 300 gross BOPD for the last six months of the 2012 fiscal year and the daily production rate at the end of the 2012 fiscal year to be approximately 500 gross BOPD, subject to operational risks, economic uncertainties and other factors that may cause the actual results to be materially different.

Eagle Ford Acreage. The Company has been meeting with potential buyers and investment banking groups to discuss various possible future plans concerning its approximately 4,700 net Eagle Ford acres. The Company is considering different alternatives and strategies for the property, including but not limited to converting the position to cash and focusing on the development of the Austin Chalk reserves.

Financial Strengths. The only material debt that the Company has is the $22 million senior secured promissory note in connection with the Nordic 1 acquisition described above. The note is secured by the properties acquired.

In an effort to secure the funding for the capital expenditure program for the current fiscal year and to avoid the unpredictable nature of the financial market, the Company incentivized the institutional investors who purchased securities in the Company's December 2010 unit offering to exercise the Series C Warrants they purchased as part of

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the offering by entering into an amendment to the original Series C Warrant Agreement on July 18, 2011 (the "Amendment Agreement"). The expiration date for the Series C Warrants was August 3, 2011. Without changing the expiration date, the Amendment Agreement required the investors to exercise immediately 25% of the Series C Warrants they held and the Company to lower the exercise price of the Series C Warrants to $2.48 per share from the original exercise price of $2.62 per share. Pursuant to the Series C Warrant Agreement, as amended, the investors were required to exercise all of their remaining Series C Warrants if the closing bid price of the Company's stock was higher than the amended exercise price on August 3, 2011. Since the closing bid price on that date for the Company's stock was $2.51, all remaining Series C Warrants were exercised and a total of 2,510,506 shares of the Company's common stock were issued. Net proceeds to the Company from the exercises of the Series C Warrants were approximately $5.8 million after deducting commission to the placement agent. The Company used the net proceeds for general corporate purposes, including the funding of capital expenditures.

To further secure the funding for its capital expenditure program, the Company entered into a purchase and sale agreement with Nordic Oil USA 2 LLLP (Nordic 2) on October 13, 2011. Pursuant to the agreement, which had an effective date of February 1, 2011, the Company agreed to sell to Nordic 2 for $4 million all of its interests, or a 7.56% working interest, in and to certain oil, gas and mineral leases located in McKinley County, New Mexico. A total of $0.5 million of the $4 million due pursuant to the agreement has been received as of the date of this report. The Company acquired the properties in January 2011 in a purchase transaction for $2.5 million, which included a deposit of $0.5 million. Nordic 2 acquired, among other things, the rights to the $0.5 million deposit. Net proceeds to the Company from the sale were approximately $3.6 million after deducting commission.

Major Expenditures. The table below sets out the major components of our expenditures (including amounts capitalized) for the six months ended September 30, 2011 and 2010:

Six Months Ended September 30, 2011 2010 Additions to Oil and Gas Properties (Capitalized)

    Acquisitions Using Cash                     $        416,001       $  4,926,634
    Tangible and Intangible Drilling Costs
    and Title Related Expenses                         4,607,329          2,126,102
       Subtotal                                        5,023,330          7,052,736
    Acquisitions Using Shares                            441,000            317,506
    Other Non-Cash Acquisitions (a)                            -             21,947
    Total Additions to Oil and Gas Properties          5,464,330          7,392,189
    Lease Operating Expenditures (Expensed)            1,634,769            619,197
    Severance and Property Taxes (Expensed)              119,524             88,774
                                                $      7,218,623       $  8,100,160

    General and Administrative Expense (Cash)   $      2,213,826       $  1,271,857
    Share-Based Compensation (Non-Cash)         $        217,551       $     86,340

(a) Other non-cash acquisitions include assumption of note payable and discharge of note receivable.

RESULTS OF OPERATIONS

The following discussion and analysis of the results of operations for the three and six months ended September 30, 2011 and 2010 should be read in conjunction with the condensed consolidated financial statements of Lucas Energy and notes thereto included in this Quarterly Report on Form 10-Q. As used below, the abbreviations "Bbls" stands for barrels, "Mcf" for thousand cubic feet and "Boe" for barrels of oil equivalent on the basis of six Mcf per barrel.

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Three Months Ended September 30, 2011 vs. Three Months Ended September 30, 2010

We reported a net loss for the three months ended September 30, 2011 of $2.1 million, or $0.11 per share. For the same period a year ago, we reported a net loss of $0.5 million, or $0.04 per share. Net loss increased by $1.6 million primarily due to increased operating expenses, a non-cash non-operating expense related to the modification of the Series C Warrant and decreased crude oil sale volumes.

The following table sets forth the operating results and production data for continuing operations for the three months ended September 30, 2011 and 2010.

                                  Three Months Ended
                                     September 30,            Increase             %
                                  2011          2010         (Decrease)       Incr (Decr)
    Sale Volumes:
    Crude Oil (Bbls)               10,674        12,991           (2,317 )             -18 %
    Natural Gas (Mcf)               8,739           580            8,159              1407 %
    Total (Boe)                    12,131        13,088             (957 )              -7 %

    Per Day Sale Volumes:
    Crude Oil (Bbls per day)          116           141              (25 )             -18 %
    Natural Gas (Mcf per day)          95             6               89              1483 %
    Total (Boe per day)               132           142              (10 )              -7 %

    Average Sale Price:
    Crude Oil ($/Bbl)           $   86.93     $   72.12     $      14.81                21 %
    Natural Gas ($/Mcf)         $    4.52     $    3.00     $       1.52                51 %


    Net Operating Revenues:
    Crude Oil                   $ 927,924     $ 936,849     $     (8,925 )              -1 %
    Natural Gas                    39,518         1,741           37,777              2170 %
          Total Revenues        $ 967,442     $ 938,590     $     28,852                 3 %

Oil and Gas Revenues

Total crude oil and natural gas revenues for the three months ended September
30, 2011 increased slightly to $1.0 million from $0.9 million for the same
period a year ago due primarily to a favorable crude oil price variance of $0.2
million offset by an unfavorable crude oil volume variance of $0.1 million.

Operating and Other Expenses
                                  Three Months Ended
                                     September 30,            Increase             %
                                  2011           2010        (Decrease)       Incr (Decr)
   Lease Operating Expenses    $ 1,033,286     $ 309,090     $   724,196               234 %
   Severance and Property
   Taxes                            59,749        50,473           9,276                18 %
   Depreciation, Depletion,
   and Amortization                290,933       352,183         (61,250 )             -17 %
   General and
   Administrative (Cash)         1,273,721       689,361         584,360                85 %
   Share-Based Compensation
   (Non-Cash)                      112,942        74,420          38,522                52 %
   Other Income (Expense),
   Net                            (292,555 )      (7,810 )      (284,745 )            3646 %
   Interest Expense                  2,355             -           2,355               100 %

Lease operating expenses increased $0.7 million for the current quarter as compared to the prior year period principally due to higher work-over costs of $0.4 million resulting from expanding efforts during the current quarter to increase production volumes from existing wells.

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Depreciation, Depletion, Amortization and Accretion ("DD&A")

DD&A decreased $61,000 primarily due to a decrease in production for the current quarter ended September 30, 2011 totaling 957 barrels of oil equivalent less than the prior year period. The rate per BOE increased from $25.40 to $30.50.

General and Administrative Expenses

General and administrative expenses, including share-based compensation, increased $0.6 million for the current quarter as compared to the prior year's quarter. The increase is primarily due to higher employee-related costs ($0.3 million) and higher legal and other professional fees ($0.2 million).

Other Income (Expense), Net

Other Income (Expense) primarily consisted of $293,277 representing the increase in the value of the Series C Warrants as a result of the modification of the warrant agreements to incentivize the warrant holders to exercise the warrants. The value was calculated based on the Black Scholes option pricing model.

Six Months Ended September 30, 2011 vs. Six Months Ended September 30, 2010

We reported a net loss for the six months ended September 30, 2011 of $3.0 million, or $0.17 per share. For the same period a year ago, we reported a net loss of $1.4 million, or $0.10 per share. Net loss increased by $1.6 million primarily due to increased operating expenses of $2.3 million partially offset by increased net operating revenues of $0.7 million and reduced interest expense of $0.3 million.

The following table sets forth the operating results and production data for continuing operations for the six months ended September 30, 2011 and 2010.

                                   Six Months Ended
                                     September 30,              Increase             %
                                 2011            2010          (Decrease)       Incr (Decr)
  Sale Volumes:
  Crude Oil (Bbls)                 22,841          20,876            1,965                 9 %
  Natural Gas (Mcf)                12,839             580           12,259              2114 %
  Total (Boe)                      24,981          20,973            4,008                19 %

  Per Day Sale Volumes:
  Crude Oil (Bbls per day)            125             114               11                10 %
  Natural Gas (Mcf per day)            70               3               67              2233 %
  Total (Boe per day)                 137             115               22                19 %

  Average Sale Price:
  Crude Oil ($/Bbl)           $     93.36     $     72.54     $      20.82                29 %
  Natural Gas ($/Mcf)         $      5.26     $      3.00     $       2.26                75 %


  Net Operating Revenues:
  Crude Oil                   $ 2,132,344     $ 1,514,389     $    617,955                41 %
  Natural Gas                      67,545           1,741           65,804              3780 %
        Total Revenues        $ 2,199,889     $ 1,516,130     $    683,759                45 %

Oil and Gas Revenues

Total crude oil and natural gas revenues for the six months ended September 30, 2011 increased $0.7 million, or 47%, to $2.2 million from $1.5 million for the same period a year ago due primarily to a favorable crude oil price variance of $0.4 million and a favorable crude oil volume variance of $0.3 million.

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Operating and Other Expenses

                                   Six Months Ended
                                     September 30,             Increase             %
                                 2011            2010         (Decrease)       Incr (Decr)
  Lease Operating Expenses    $ 1,634,769     $   619,197     $ 1,015,572               164 %
  Severance and Property
  Taxes                           119,524          88,774          30,750                35 %
  Depreciation, Depletion,
  and Amortization                698,866         564,292         134,574                24 %
  General and
  Administrative (Cash)         2,213,826       1,271,857         941,969                74 %
  Share-Based Compensation
  (Non-Cash)                      217,551          86,340         131,211               152 %
  Other Income (Expense),
  Net                            (291,709 )       (22,660 )      (269,049 )            1187 %
  Interest Expense                  5,842         261,212        (255,370 )             -98 %

Lease operating expenses increased $1.0 million for the current period as compared to the prior year period principally due to higher work-over costs of $0.5 million resulting from expanding efforts commencing in the second quarter of fiscal 2012 to increase production volumes from existing wells.

Depreciation, Depletion, Amortization and Accretion

DD&A increased $135,000 primarily due to an increase in production for the six months ended September 30, 2011 totaling 4,008 barrels of oil equivalent in excess of the prior year period. The rate per BOE increased from $25.46 to $30.47.

General and Administrative Expenses

General and administrative expenses, including share-based compensation, increased $1.1 million for the six months ended September 30, 2011 as compared to the prior year period. The increase is primarily due to higher employee-related costs ($0.7 million) resulting from expanded land, production management and production administration functions and higher legal and other professional fees ($0.2 million).

Other Income (Expense), Net

Other Income (Expense) primarily consisted of $293,277 representing the increase in the value of the Series C Warrants as a result of the modification of the warrant agreements to incentivize the warrant holders to exercise the warrants. The value was calculated based on the Black Scholes option pricing model.

Interest Expense

During the six months ended September 30, 2011, we incurred interest expense of $5,800 on a note assumed during a property acquisition. Interest expense of $261,000 for the six months ended September 30, 2010 was due primarily to our expensing the remaining unamortized balance of deferred financing costs originally incurred in connection with our credit facility with Amegy Bank, which we terminated and repaid in full during the six months ended September 30, 2010.

LIQUIDITY AND CAPITAL RESOURCES

The primary sources of cash for Lucas during the six months ended September 30, 2011 were funds generated from operations and proceeds from the exercise of the Series C Warrants as further discussed below. The primary uses of cash were funds used in operations and additions of oil and gas properties. Our cash balance decreased from $2.5 million to $1.5 million as of September 30, 2011 as compared to March 31, 2011.

In an effort to secure the funding for the capital expenditure program for the current fiscal year and to avoid the unpredictable nature of the financial market, the Company incentivized the institutional investors who purchased securities in the Company's December 2010 unit offering to exercise the Series C Warrants they purchased as part of the offering by entering into an amendment to the original Series C Warrant Agreement on July 18, 2011 (the "Amendment Agreement"). The expiration date for the Series C Warrants was August 3, 2011. Without changing the original expiration date, the Amendment Agreement required the investors to exercise immediately 25% of the Series C Warrants they held and the Company to lower the exercise price to purchase a share of the Company's common stock to $2.48 per share from the original exercise price of $2.62 per share. Pursuant to the Series C

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Warrant Agreement, as amended, the investors were required to exercise all of their remaining Series C Warrants if the closing bid price of the Company's stock was higher than the amended exercise price on August 3, 2011. Since the closing bid price on that date for the Company's stock was $2.51, all remaining Series C Warrants were exercised. Net proceeds to the Company from the exercises of all of the 2,510,506 Series C Warrants were approximately $5.8 million after deducting commissions paid to the placement agent. The Company used the net proceeds for general corporate purposes, including the funding of capital expenditures.

Cash Flows.

The primary sources of cash for Lucas during the six months ended September 30, 2011 were funds generated from sales of crude oil production, net proceeds from the exercises of the Series C Warrants and proceeds from asset sales. The primary uses of cash were funds used in operations and capital expenditures. During the first six months of its fiscal year 2011, Lucas's cash balance decreased $1 million to $1.5 million from $2.5 million at March 31, 2011.

Net cash used in operating activities for the six months ended September 30, 2011 decreased $0.6 million to $2.1 million from $2.7 million for the prior year period. The $0.6 million decrease was primarily due to favorable changes in working capital and other assets of $1.9 million and increased revenues of $0.7 million, partially offset by the increase of cash operating expenses of $2.0 million.

Net cash used in investing activities for the six months ended September 30, 2011 of $4.7 million decreased by $7.8 million compared to net cash provided by investing activities of $3.1 million for the prior year period due primarily to a decrease in proceeds from sale of oil and gas properties ($9.6 million), partially offset by a decrease in oil and gas property additions ($2.0 million). Proceeds from sale of oil and gas properties of $9.7 million for the prior year period was due primarily to our sale of an undivided 85% interest in our "deep rights" located in Gonzales County, Texas.

Net cash provided by financing activities for the six months ended September 30, 2011 was $5.7 million resulting primarily from the proceeds from the exercise of the Series C Warrants as discussed above. For the six months ended September 30, 2010, net cash flow used in financing activities was $0.8 million and consisted of funds expended to pay off the outstanding principal on our credit facility with Amegy Bank of $2.2 million, less net proceeds from the sale of common stock in our "at-the-market" public equity offering of $1.4 million.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, (the "Securities Act") and Section 21E of the Securities Exchange Act of 1934, as amended, (the "Exchange Act"). These forward-looking statements are generally located in the material set forth under the headings "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" but may be found in other locations as well. These forward-looking statements are subject to risks and uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from the results, performance or achievements expressed or implied by the forward-looking statements. You should not unduly rely on these statements. Factors, risks, and uncertainties that could cause actual results to differ materially from those in the forward-looking statements include, among others,

our growth strategies;

anticipated trends in our business;

our ability to make or integrate acquisitions;

our liquidity and ability to finance our exploration, acquisition and development strategies;

market conditions in the oil and gas industry;

the timing, cost and procedure for proposed acquisitions;

the impact of government regulation;

estimates regarding future net revenues from oil and natural gas reserves and the present value thereof; planned capital expenditures (including the amount and nature thereof);

increases in oil and gas production;

the number of wells we anticipate drilling in the future;

. . .

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