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EOX > SEC Filings for EOX > Form 10-Q on 8-Nov-2012All Recent SEC Filings

Show all filings for EMERALD OIL, INC.

Form 10-Q for EMERALD OIL, INC.


8-Nov-2012

Quarterly Report


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

The following discussion and analysis of our financial condition and results of operations should be read together with our financial statements appearing in this Form 10-Q. This discussion contains forward-looking statements that involve risks and uncertainties because they are based on current expectations and relate to future events and future financial performance. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many important factors, including those set forth in Part II, Item 1A of this Form 10-Q and in our Annual Report on Form 10-K under the heading "Risk Factors".

Overview

Emerald Oil, Inc., a Montana corporation ("Emerald," the "Company," "we," "us," or "our"), is a Denver-based independent exploration and production company focused primarily on the development of our approximately 48,800 net acres in the Williston Basin in North Dakota and Montana. We have identified approximately 267 net potential drilling locations on this acreage prospective for oil in the Bakken and Three Forks formations. The majority of our capital expenditures in 2012 and 2013 are expected to be directed toward drilling operated and non-operated Bakken and Three Forks wells. We plan to leverage our management team's collective extensive technical, land, financial, and industry operating experience to transition from our historical non-operated strategy to a balanced operated and non-operated approach that we believe provides superior risk-adjusted returns on capital while enhancing the strategic value of our company.

In addition to our Williston Basin position, we have also assembled significant positions in two emerging Rocky Mountain oil plays. We have approximately 45,100 net acres in the Sandwash Basin in northwest Colorado and southwest Wyoming prospective for oil in the Niobrara formation. We also have approximately 33,500 net acres in central Montana prospective for oil in the Heath formation. We do not plan to allocate substantial capital to either of these areas in 2012 or 2013. However, we may increase Sandwash Basin appraisal activity in 2013 in areas with demonstrated production potential. With our multi-year lease terms in both areas, we believe we are well-positioned to monitor the significant offset operator activity that we believe may ultimately mitigate geologic risk and further evaluate the prospectivity of both oil plays. In addition to these emerging oil plays, we also have approximately 74,700 net acres in the Tiger Ridge Field located in Blaine, Hill, and Chouteau Counties, Montana, prospective for natural gas, and another approximately 2,100 net acres in the Denver-Julesburg Basin ("DJ Basin") in Weld County, Colorado.

As of September 30, 2012 our oil and natural gas production is derived from participation in wells as a non-operating partner, primarily on a heads-up, or pro rata, basis proportionate to our working interest, allowing us to participate with established operators in well economics that have high return potential with relatively low overhead cost. On July 9, 2012, we entered into a Securities Purchase Agreement (the "Purchase Agreement") with Emerald Oil & Gas NL (the "Parent") and Emerald Oil, Inc. ("Target"), a wholly owned subsidiary of the Parent, pursuant to which we purchased all of the outstanding capital stock of Target for approximately 19.9% of the total shares of our common stock outstanding as of the closing date. We completed the acquisition of Target on July 26, 2012 and issued approximately 1.66 million of our shares of common stock to the Parent of which 71,428 shares are being held in escrow by the Company pending resolution of certain title defects. As part of the acquisition, we agreed to maintain Target's liabilities, including approximately $20.2 million in debt owed by Target. Included in the acquisition were approximately 10,600 net acres located in Dunn County, North Dakota and approximately 45,000 net acres in the Sandwash Basin Niobrara shale oil play in northwestern Colorado and southwestern Wyoming. In connection with the closing of the acquisition, five existing members of our board of directors resigned, and their vacancies were filled with directors selected by the remaining members of our board of directors. Also in connection with the closing of the Emerald acquisition, we entered into employment agreements with six officers, J.R. Reger (Executive Chairman-formerly our Chief Executive Officer), Mike Krzus (Chief Executive Officer), McAndrew Rudisill (President), Paul Wiesner (Chief Financial Officer), Karl Osterbuhr (Vice President of Exploration and Business Development) and Mitchell R. Thompson (Chief Accounting Officer-formerly our Chief Financial Officer).

We intend to enhance our return on capital and growth potential by adding operating capabilities with our recent acquisition of Target. We believe adding operating capabilities provides increased control over the planning and designing of well development and increases our long-term growth prospects and attractiveness to partner with others. The delineation of the Williston Basin continues to expand and evolve as development activity increases and well designs improve to enhance production and well economics.

We intend to trade or swap our acreage with other operators to increase our operating acreage or potential working interests in areas where we have existing acreage. Most trades are for comparable acreage and mutually beneficial for both parties as we consolidate and increase our working interests.

Recent Events

Equity Offering

On September 28, 2012, we completed a public offering of 13,392,857 shares of common stock to the public at $5.60 per share. The gross proceeds from the offering were $75 million, and the net proceeds were approximately $69.9 million, after deducting underwriting discounts and commissions and other offering expenses. The sale of the shares of common stock closed on September 28, 2012. The underwriters elected to exercise the over-allotment option to sell an additional 484,698 shares of common stock at $5.60 per share. The gross proceeds from the over-allotment exercise were $2.7 million, and the net proceeds are approximately $2.5 million after deducting underwriting discounts and commissions. The over-allotment exercise closed on October 26, 2012.

We used a portion of the net proceeds from this offering, along with cash on hand, to repay a portion of outstanding indebtedness and for additional operable leasehold acquisitions. We intend to use the remaining proceeds to fund drilling and development expenditures in the Williston Basin and for general corporate purposes, including working capital.

McKenzie County Acquisition

On October 5, 2012 we acquired 4,453 net acres in McKenzie County, North Dakota for $3,200 per acre from Slawson Exploration Company, Inc. ("Slawson"). Under the terms of the purchase agreement, we agreed to acquire certain oil and gas leaseholds, and various other related rights, interests, equipment and other assets. The effective time for the transfer of the leases was September 1, 2012. The purchase included operating permits for four wells and a recently constructed well pad and tank battery at an additional cost of $1.18 million, for a total cash purchase price of $15.4 million.

Special Shareholder Meeting

On October 22, 2012, we held a special meeting of our shareholders. Our shareholders approved the Articles of Amendment to the Articles of Incorporation of the Company to (i) effect a name change of the Company to Emerald Oil, Inc.,
(ii) effect a 1-for-7 reverse stock split of our common stock, and (iii) increase the aggregate number of authorized shares of common stock available for issuance to 500,000,000.

On October 22, 2012, we filed the Articles of Amendment with the Montana Secretary of State to effect the name change, the reverse stock split and the authorized share increase. The Articles of Amendment became effective upon its filing with the Montana Secretary of State. As a result of the reverse stock split, every seven outstanding shares of our common stock combined automatically into one share of common stock. Each shareholder's percentage ownership and proportional voting power remains unchanged after the reverse stock split, except for minor changes and adjustments resulting from the treatment of fractional shares. As a result of the reverse stock split, adjustments were automatically made to certain terms of certain of our outstanding securities, including its outstanding options, restricted stock, restricted stock units and warrants.

Our shareholders also approved a proposal to amend our 2011 Equity Incentive Plan (the "2011 Plan") to increase the number of shares of our common stock authorized for issuance under the 2011 Plan to 24,500,000 shares. As a result of the reverse stock split, the number of shares of common stock now available for issuance under the 2011 Plan is 3,500,000 shares.

Assets and Acreage Holdings

We currently controlled approximately 200,000 net acres in the following five primary prospect areas:

48,800 net acres in the Williston Basin targeting the Bakken and Three Forks shale oil formations in North Dakota and Montana;

45,100 net acres in the Green River Basin targeting the Niobrara shale oil formations in Colorado and Wyoming;

33,500 net acres in a joint venture targeting the Heath shale oil formation in Musselshell, Petroleum, Garfield and Fergus Counties of Montana;

2,100 net acres in the Denver-Julesburg Basin targeting the Niobrara shale oil formation in Colorado and Wyoming; and

74,700 net acres in a joint venture in and around the Tiger Ridge natural gas field in Blaine, Hill and Chouteau Counties of Montana.

Williston Basin - Bakken and Three Forks

The Williston Basin is one of the largest oil resource plays in North America and has been the focus of extensive industry activity over the last several years. As of November 1, 2012, according to the North Dakota Industrial Commission, 186 rigs were drilling in the basin, and since the application of modern horizontal drilling techniques began in 2007, thousands of Bakken and Three Forks wells have been drilled throughout the basin. We believe that this industry activity, including drilling activity, in close proximity to our leasehold, has substantially mitigated the geologic risks of our anticipated drilling locations. The Williston Basin is geologically and aerially well-defined, and almost all of our approximately 48,800 net acres are positioned within McKenzie, Dunn, Williams and Mountrail Counties, North Dakota, and Richland County, Montana, which are all generally recognized as being prospective for both the Bakken and Three Forks formations.

At present, our Williston Basin acreage position consists of approximately 16,000 net operated acres in McKenzie and Dunn Counties, North Dakota and Richland County, Montana where we have either secured operatorship through approved drilling permits or we believe we have sufficient working interests to claim operatorship in individual drilling spacing units pending approval of drilling permit applications. In addition, we hold approximately 2,200 net acres in Williams and McKenzie Counties in North Dakota and Richland County in Montana, with working interests that we believe are sufficient to enable us to claim operatorship if we can achieve modest increases through continued acreage acquisitions and swaps. Our remaining acreage position consists of approximately 30,600 net acres in Williams, McKenzie, Dunn and Mountrail Counties in North Dakota, and Richland County, Montana, where we hold relatively low working interests and expect to continue to maintain our non-operated working interests or to utilize such leasehold to consolidate our operated working interests in current or future selected core focus areas.

We are currently in the process of optimizing our participation in our non-operated acreage. While we cannot control the timing of capital expenditures for our non-operated properties, we may choose to selectively participate in proposed wells, based on our internal capital return criteria and our internal geologic knowledge. We consider the experience gained from our non-operated interests to be valuable due to the high quality of the operators. These interests have allowed and will continue to allow us to leverage valuable technical data across the basin in order to analyze our election to participate in what we believe to be the most economic wells. The amount of detailed, well-specific data we have acquired as a result of our participation in approximately 200 gross non-operated wells to date, together with publicly available information, has allowed us to compile a valuable database of well information that we use to select our operated development areas and formulate optimal well designs.

Using industry-accepted well down-spacing assumptions, we believe there could be over 267 net potential drilling locations on our acreage prospective for oil in the Bakken and Three Forks formations. Consistent with such assumptions, we believe that each 1,280-acre unit can support approximately four Bakken and three Three Forks well locations. We plan to embark on an aggressive drilling program to convert our substantial undeveloped operated leasehold position to production, cash flow and reserves. For the 15-month period ending December 31, 2013, we plan to spend approximately $72.5 million on well development in the Williston Basin. Specifically, we plan to spend approximately $55.0 million to drill 5.0 net operated wells at an average estimated cost of $11.0 million per well and approximately $17.5 million to participate in 1.9 net non-operated wells at an average estimated cost of $9.2 million per well.

The following table presents summary data for our Williston Basin project area as of November 8, 2012:

                                                                                          Planned Capital Expenditures*
                           Net Acres         Net Identified Drilling Locations         Net Wells             Drilling Capex
Operated                         16,000                                      88                 5.0         $            55.0
Non-Operated                     32,800                                     179                 1.9         $            17.5
Total Williston Basin            48,800                                     267                 6.9         $            72.5

* October 1, 2012 through December 31, 2013

Sandwash Basin - Niobrara

As of September 30, 2012, we own an interest in approximately 45,100 net acres in the Sandwash Basin prospective for the Niobrara formation in northwestern Colorado and southwestern Wyoming. Four experimental single-stage fracturing treatments were completed with limited success in three tightly-spaced appraisal wells drilled in 2011, using various well completion designs during 2012. Appraisal activities for the 2013 program will focus on areas that have historically demonstrated significant oil and gas flows. With our multi-year lease terms, we believe we are well-positioned to monitor the significant offset operator activity that we believe will enable us to further mitigate geologic risk and assist us to evaluate the prospectivity of the oil play. Most of our leases in the Sandwash Basin expire after 2014, providing the opportunity to monitor offset operator drilling activity and well results before committing capital to a significant drilling program. We are encouraged by competitor announcements of substantial drilling plans and initial production rates in the Sandwash Basin over 500 Boe/d in one horizontal well and vertical well completions producing over 100 Boe/d.

Big Snowy Joint Venture - Heath Shale Oil

As of September 30, 2012, we own an interest in approximately 33,500 net acres located in central Montana as part of a joint venture targeting the Heath shale oil. We have begun to see substantial permitting activity and drilling in the area. We believe the Heath shale has similar characteristics to the Bakken and Three Forks formations, and several of the same development partners are operating in the area. Our five-year primary term leases have three-year extension options that will allow us to hold our leases with minimal incremental capital into 2017.

DJ Basin - Niobrara

As of September 30, 2012, we own an interest in approximately 2,100 net acres in Weld County, Colorado and Laramie County, Wyoming, with 1,400 net acres currently held by production as we continue to monitor the performance and characteristics of the producing wells. We have no plans for drilling any additional development wells in the DJ Basin under this development program during 2012.

Major Joint Venture - Tiger Ridge Natural Gas

As of September 30, 2012, we own an interest in approximately 74,700 net acres in and around the Tiger Ridge natural gas field in Montana. We participated in the drilling of two wells with Devon Energy Corporation, both of which were drilled and shut-in in 2010. We conducted a 3-D seismic program during 2010 and drilled and completed six exploratory wells in the fourth quarter of 2011 with our joint venture partners, Hancock Enterprises and MCR, LLC, as operators. We have an average working interest of 70% in these initial wells. These wells are currently shut-in and awaiting pipeline hook-up.

Productive Wells

The following table summarizes gross and net productive oil wells by state at September 30, 2012 and 2011. A net well represents our fractional working ownership interest of a gross well. The following table also does not include 21 gross (1.08 net) Bakken and Three Forks wells that were in the process of being drilled, awaiting completion, in the process of completion or awaiting flow back subsequent to fracture stimulation as of September 30, 2012 and 56 gross (1.79 net) Bakken and Three Forks wells as of September 30, 2011.

                                                   September 30,
                                             2012                  2011
                                       Gross       Net       Gross      Net
North Dakota Bakken and Three Forks     160        6.39        43       1.00
Montana Bakken and Three Forks           21        1.86         3       0.66
Colorado Niobrara in DJ Basin             4        2.00         5       2.50
Total:                                  185       10.25        51       4.16

Exploratory Wells

In 2012, we participated in the drilling of the Johnson 31-17 SWH well in an undeveloped area of Mountrail County, North Dakota with a 3.13% working interest. The well was abandoned after experiencing poor oil shows during the drilling process. The dry hole costs associated with this well were $149,714. The costs associated with this well were included in the full cost pool and subject to the depletion base. Of the 185 gross productive wells that we have participated in we have participated in only two dry holes.

Results of Operations



Comparison of the Three and Nine Months Ended September 30, 2012 with the Three
and Nine Months Ended September 30, 2011.



                                                Three Months Ended                Nine Months Ended
                                                  September 30,                     September 30,
                                               2012            2011             2012             2011
REVENUES
Oil and Natural Gas Sales                  $  7,111,569     $ 2,872,674     $ 18,973,331     $  5,371,830
Loss on Commodity Derivatives                (1,635,435 )             -         (296,327 )              -
                                              5,476,134       2,872,674       18,677,004        5,371,830
OPERATING EXPENSES
Production Expenses                             687,646         221,509        1,639,105          419,822
Production Taxes                                809,062         241,412        2,043,671          488,793
General and Administrative Expenses           3,503,273         509,893        5,660,622        1,910,824
Depletion of Oil and Natural Gas
Properties                                    2,818,650       1,324,771        7,977,077        2,293,099
Impairment of Oil and Natural Gas
Properties                                            -               -       10,191,234                -
Depreciation and Amortization                    12,345          10,849           34,559           19,761
Accretion of Discount on Asset
Retirement Obligations                            4,037           1,717           10,027            3,306
Total Expenses                                7,835,013       2,310,151       27,556,295        5,135,605

INCOME (LOSS) FROM OPERATIONS                (2,358,879 )       562,523       (8,879,291 )        236,225

OTHER INCOME (EXPENSE)                        4,353,721        (506,649 )      3,656,855       (1,535,182 )

INCOME (LOSS) BEFORE INCOME TAXES             1,994,842          55,874       (5,222,436 )     (1,298,957 )

INCOME TAX EXPENSE                                    -               -                -                -

NET INCOME (LOSS)                          $  1,994,842     $    55,874     $ (5,222,436 )   $ (1,298,957 )

Revenues

The following table presents information about our revenues and produced oil and natural gas volumes during the three and nine months ended September 30, 2012, compared to the three and nine months ended September 30, 2011. As of September 30, 2012, we were selling oil and natural gas from a total of 185 gross wells (approximately 10.25 net wells), compared to 51 gross wells (4.16 net wells) at September 30, 2011. Revenues from sales of oil and natural gas were $7,111,569 and $18,973,331 during the three and nine months ended September 30, 2012, respectively, compared to $2,872,674 and $5,371,830 during the three and nine months ended September 30, 2011, respectively. Our production volumes increased 168% and 277% in the three and nine months ended September 30, 2012, respectively, as compared to the three and nine months ended September 30, 2011, respectively. The production primarily increased due to the addition of 6.59 net productive Bakken and Three Forks wells from October 1, 2011 to September 30, 2012. During the three and nine months ended September 30, 2012, we realized $83.56 and $85.16 average price per barrel of oil, respectively, before the effect of settled oil derivatives compared to $87.83 and $88.57 average price per barrel of oil during the three and nine months ended September 30, 2011, respectively. For the three and nine months ended September 30, 2012, crude oil represented 97% and 98% of revenues, respectively, and 93% and 94% of production volume, respectively.

All data presented below is derived from accrued revenue and production volumes for the relevant period indicated.

                                               Three Months Ended               Nine Months Ended
                                                  September 30,                   September 30,
                                              2012            2011             2012            2011
Net Oil and Natural Gas Revenues:
Oil                                        $ 6,916,704     $ 2,818,383     $ 18,636,837     $ 5,309,598
Natural Gas and Other Liquids                  194,865          54,291          336,494          62,232
Total Oil and Natural Gas Sales              7,111,569       2,872,674       18,973,331       5,371,830

Net Production:
Oil (Bbl)                                       82,775          32,088          218,833          59,948
Natural Gas and Other Liquids (Mcf)             39,648           7,387           76,662           8,990
Barrel of Oil Equivalent (Boe)                  89,383          33,319          231,610          61,446

Average Sales Prices:
Oil (per Bbl)                              $     83.56     $     87.83     $      85.16     $     88.57
Effect of Settled Oil Derivatives on
Average Price (per Bbl)                          (1.46 )             -            (0.27 )             -
Oil Net of Settled Derivatives (per Bbl)   $     82.10     $     87.83     $      84.89     $     88.57

Natural Gas and Other Liquids (per Mcf)    $      4.91     $      7.35     $       4.39     $      6.92

Barrel of Oil Equivalent with Realized
Derivatives (per Boe)                      $     78.21     $     86.22     $      81.66     $     87.42




                                                Three Months Ended               Nine Months Ended
                                                  September 30,                    September 30,
                                               2012            2011             2012            2011
Net Revenues:
Total Oil and Natural Gas Sales            $  7,111,569     $ 2,872,674     $ 18,973,331     $ 5,371,830
Realized Loss on Commodity Derivatives         (120,706 )             -          (59,681 )             -
Unrealized Loss on Commodity Derivatives     (1,514,729 )             -         (236,646 )             -
Revenues                                   $  5,476,134     $ 2,872,674     $ 18,677,004     $ 5,371,830

Loss on Commodity Derivatives

Realized commodity derivative losses were $120,706 and $59,681, for the three and nine months ended September 30, 2012, respectively. Unrealized commodity derivative losses were $1,514,729 and $236,646, for the three and nine months ended September 30, 2012, respectively. There were no commodity derivates losses during the three and nine months ended September 30, 2011. Our derivatives are not designated for hedge accounting and are accounted for using the mark-to-market accounting method whereby gains and losses from changes in the fair value of derivative instruments are recognized immediately into earnings. Mark-to-market accounting treatment creates volatility in our revenues as unrealized gains and losses from derivatives are included in total revenues and are not included in accumulated other comprehensive income in the accompanying balance sheets. As commodity prices increase or decrease, such changes will have an opposite effect on the mark-to-market value of our derivatives. Future derivatives gains will be offset by lower future wellhead revenues. Conversely, future derivatives losses will be offset by higher future wellhead revenues based on the value at the settlement date. At September 30, 2012, all of our derivative contracts are recorded at their fair value, which was a net liability of $236,646. We did not incur any net asset or liability with respect to derivative contracts prior to January 1, 2012.

Expenses



All data presented below is derived from costs and production volumes for the
relevant period indicated.



                                              Three Months Ended            Nine Months Ended
                                                 September 30,                September 30,
                                              2012           2011           2012          2011
Costs and Expenses Per Boe of Production
:
Production Expenses                        $     7.69      $    6.65     $     7.08     $    6.83
Production Taxes                                 9.05           7.25           8.82          7.95
G&A Expenses (Excluding Share-Based
Compensation)                                   16.34          10.76          12.48         21.97
Shared-Based Compensation                       22.86           4.54          11.96          9.13
Depletion of Oil and Natural Gas
Properties                                      31.53          39.76          34.44         37.32
Impairment of Oil and Natural Gas
Properties                                          -              -          44.00             -
Depreciation and Amortization                    0.14           0.33           0.15          0.32
Accretion of Discount on Asset
Retirement Obligation                            0.05           0.05           0.04          0.05

Production Expenses

Production expenses were $687,646 and $1,639,105 during the three and nine . . .

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