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ISRL > SEC Filings for ISRL > Form 10-Q on 9-Nov-2012All Recent SEC Filings

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Form 10-Q for ISRAMCO INC


9-Nov-2012

Quarterly Report


ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

THE FOLLOWING COMMENTARY SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES CONTAINED ELSEWHERE IN THIS REPORT ON FORM 10-Q. THE DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THESE STATEMENTS RELATE TO FUTURE EVENTS OR OUR FUTURE FINANCIAL PERFORMANCE. IN SOME CASES, YOU CAN IDENTIFY THESE FORWARD-LOOKING STATEMENTS BY TERMINOLOGY SUCH AS "MAY," "WILL," "SHOULD," "EXPECT," "PLAN," "ANTICIPATE," "BELIEVE," "ESTIMATE," "PREDICT," "POTENTIAL," "INTEND," OR "CONTINUE," AND SIMILAR EXPRESSIONS. THESE STATEMENTS ARE ONLY PREDICTIONS. OUR ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF A VARIETY OF FACTORS, INCLUDING, BUT NOT LIMITED TO, THOSE SET FORTH UNDER "RISK FACTORS" AND ELSEWHERE IN THIS REPORT ON FORM 10-Q. ISRAMCO INC. DISCLAIMS ANY OBLIGATION TO UPDATE SUCH FORWARD LOOKING STATEMENTS.

Overview

Isramco is predominately independent oil and natural gas Company engaged in the exploration, development and production of oil and natural gas properties located onshore in the United States and ownership of various royalty interests in oil and gas concessions located offshore Israel. The Company also operates a well service company that provides well maintenance, workover services, well completion and recompletion services. Our properties are primarily located in Texas, New Mexico and Oklahoma. We also act as the operator of certain of these properties. Historically, we have grown through acquisitions, with a focus on properties within our core operating areas that we believe have significant development and exploration opportunities and where we can apply our technical experience and economies of scale to increase production and proved reserves, while lowering lease operating costs.

Our financial results depend upon many factors, but are largely driven by the volume of our oil and natural gas production and the price that we receive for that production. Our production volumes will decline as reserves are depleted unless we expend capital in successful development and exploration activities or acquire additional properties with existing production. The amount we realize for our production depends predominantly upon commodity prices, which are affected by changes in market demand and supply, as impacted by overall economic activity, weather, pipeline capacity constraints, inventory storage levels, basis differentials and other factors, and secondarily upon our commodity price hedging activities. Accordingly, finding and developing oil and natural gas reserves at economical costs is critical to our long-term success. Our future drilling plans are subject to change based upon various factors, some of which are beyond our control, including drilling results, oil and natural gas prices, the availability and cost of capital, drilling and production costs, availability of drilling services and equipment, gathering system and pipeline transportation constraints and regulatory approvals. To the extent these factors lead to reductions in our drilling plans and associated capital budgets in future periods, our financial position, cash flows and operating results could be adversely impacted.

Liquidity and Capital Resources

Our primary source of cash during the nine months ended September 30, 2012 was cash flow from operating activities, loans from related party lender ("Related Party Loans") and net proceeds from sale of our investment in shares of JOEL Jerusalem Oil Exploration Ltd, ("JOEL") a related party. We continuously monitor our liquidity and evaluate our development plans in light of a variety of factors, including, but not limited to, our cash flows, capital resources and drilling success.

In February, 2012 the Company sold all of its shares of an investment in a company called JOEL. The net proceeds of $4,737,000 from sale were used for to reduce principal amounts owed under our Senior Credit Agreement.

Our future capital resources and liquidity may depend, in part, on our success in developing the leasehold interests that we have acquired. Cash is required to fund capital expenditures necessary to offset inherent declines in production and proven reserves, which is typical in the capital-intensive oil and gas industry. Future success in growing reserves and production will be highly dependent on the capital resources available and our success in finding and acquiring additional reserves. Our oil well service subsidiary also requires capital resources to acquire and maintain equipment and continue growth. We expect to fund our future capital requirements through internally generated cash flows, borrowings under loans, and a future credit facility. Long-term cash flows are subject to a number of variables, including the level of production, prices, amount of work orders received, and our commodity price hedging activities, as well as various economic conditions that have historically affected the oil and natural gas industry.


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Debt

As of As of
September 30, December 31,
2012 2011
Long - term debt - related party $ 42,075 $ 60,211 Short - term debt - related party 19,955 6,456 Current maturities of long-term debt, short-term debt and bank overdraft 29,287 32,009 Total debt 91,317 98,676

Stockholders' equity 19,378 18,548

Debt to capital ratio 82.5 % 84 %

As of September 30, 2012, our total debt was $91,317,000, compared to total debt of $98,676,000 at December 31, 2011. During the nine months ended September 30, 2012 the Company repaid all outstanding balances under its Senior Credit Facility.

On March 29, 2012, the Company entered into a Loan Agreement with I.O.C, pursuant to which it borrowed the sum of $3,500,000. The loan bears interest at a rate of Libor + 5.5% per annum and matures on March 29, 2013, when all accrued interest and principal is due and payable. The loan may be prepaid at any time without penalty or premium. The loan is unsecured. The purpose of the loan was to provide funds to Isramco for the payment of certain of the amounts were due under the Senior Credit Facility at maturity, which was paid off in full June 29, 2012.

On April 29, 2012 the company entered into a Loan Agreement with I.O.C, pursuant to which it borrowed an additional $10,000,000. The loan bears interest of Libor+5.5% per annum and payable on April 30, 2013, when all accrued interest and principal is due and payable. The loan may be prepaid at any time without penalty or premium. The loan was funded by Lender in three monthly installments starting April 2012. The loan is unsecured. The purpose of the loan was to provide funds to Isramco for the payment of amounts due under the Senior Credit Facility which was paid off in full June 29, 2012.

Cash Flow

Our primary source of cash during the nine months ended September 30, 2012 was cash flow from operating activities, loans from related party and proceeds from sale of shares of marketable securities of JOEL to an affiliate. In 2012 cash received from operations, sale of marketable securities, proceeds from loan of related party was used primarily to repay borrowings under our Senior Credit Facility and investing in equipment for well service subsidiary. Our primary source of cash during the nine months ended September 30, 2011 was cash flow from operating activities, loans from related party and proceeds from sale of investment in shares of MediaMind Ltd. In 2011 cash received from operations and from related party was offset by repayments of borrowings under our Senior Credit Agreements, purchase of equipment and payments made on settled derivatives contracts.

Operating cash flow fluctuations were substantially driven by changes in commodity prices and changes in our production volumes. Working capital was substantially influenced by these variables. Fluctuation in commodity prices and our overall cash flow may result in an increase or decrease in our future capital expenditures. Prices for oil and natural gas have historically been subject to seasonal fluctuations characterized by peak demand and higher prices in the winter heating season; however, the impact of other risks and uncertainties have influenced prices throughout recent years. See Results of Operations below for a review of the impact of prices and volumes on sales.

                                               Nine Months Ended September 30,
                                                2012                    2011
                                                       (In thousands)
   Cash flows provided by operating
   activities                              $       14,156         $          4,632
   Cash flows provided by (used in)
   investing activities                            (6,891 )                  4,564
   Cash flows used in financing
   activities                                      (7,249 )                (10,065 )
   Net increase (decrease) in cash         $           16         $           (869 )


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Operating Activities, During the nine months of 2012, compared to the nine months of 2011, net cash flow provided by operating activities increased by $9,524,000 to $14,156,000 This increase was primarily attributable to a net cash onetime payment in 2011 on settled derivatives contracts of $7,007,000, lower lease operating expenses which were partially offset by decrease in natural gas and natural gas liquids ("NGLs) revenues. The decrease in natural gas and NGLs revenues was caused by both decrease in natural gas and NGLs prices and as well as decrease in production volumes of natural gas and NGLs. The decrease in revenues was primarily attributable to lower average gas prices for the nine months ended September 30, 2012 of $3.60/Mcf, compared to $4.89/Mcf and natural gas liquids average prices for the nine months ended September 30, 2012 of $36.93/Bbl, compared to $47.64/ Bbl to the corresponding period in 2011.

Investing Activities, Net cash flows provided (used) in investing activities for the nine months ended September 30, 2012 and 2011 were $(6,891,000) and $4,564,000, respectively. During the nine months of 2012 the Company invested in equipment for its well service subsidiary and auxiliary equipment for oil and gas operations amount of $9,141,000 and $2,716,000 in oil and gas properties. These investments of $11,857,000 were partially offset by proceeds from sale of investment in marketable securities in the amount of $4,737,000.

Financing Activities, Net cash flows used in financing activities were $(7,249,000) and $(10,065,000) for the nine months ended September 30, 2012 and 2011, respectively. The Company has fully repaid the outstanding debt under Senior Credit Facility in the amount of $20,000,000 which was partially offset by new borrowings of $13,500,000 from a related party.

Results of Operations

Three Months Ended September 30, 2012 Compared to Three Months Ended September
30, 2011

                                     Selected Data
                                              Three Months Ended September 30,
                                                2012                    2011
                                               (In thousands except per share
                                                     and MBOE amounts)
  Financial Results
  Oil and Gas sales                       $          9,931        $         11,002
  Production Services                                2,617                       -
  Other                                                207                     175
  Total revenues and other                          12,755                  11,177

  Cost and expenses                                 11,538                   9,294
  Other expenses (income)                            2,966                 (20,724 )
  Income tax (expenses) benefit                        625                  (7,913 )
  Net income (loss) attributable to
  common shareholders                               (1,124 )                14,694
  Net income attributable to
  non-controlling interests                             35                       -
  Net income (loss) attributable to
  Isramco                                           (1,159 )                14,694
  Earnings (loss) per common share -
  basic                                   $          (0.43 )      $           5.41
  Earnings (loss) per common share -
  diluted                                 $          (0.43 )      $           5.41

  Weighted average number of shares
  outstanding- basic                             2,717,691               2,717,691
  Weighted average number of shares
  outstanding- diluted                           2,717,691               2,717,691

  Operating Results
  Adjusted EBITDAX (1)                    $          6,658        $         21,896
  Sales volumes (MMBOE)                                198                     202

  Average cost per MBOE:
  Production (excluding transportation
  and taxes)                              $          20.23        $          18.51
  General and administrative              $           5.93        $           4.49
  Depletion                               $          15.09        $          14.95

(1) See Adjusted EBITDAX for a description of Adjusted EBITDAX, which is not a Generally Accepted Accounting Principles (GAAP) measure, and a reconciliation of Adjusted EBITDAX to income from operations before income taxes, which is presented in accordance with GAAP.


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Financial Results

Net Income (loss), in the third quarter of 2012, our net loss was $(1,159,000) thousand, or $(0.43) per share. This compares to net income of $14,694,000 thousand, or $5.41 per share, for the third quarter of 2011.

This decrease was primarily due to sale of our investment in shares of Media Mind in 2011, net loss from derivative contracts in 2012 that were partially offset by increase in revenues from well service activities and decrease in income taxes. This increase was partially offset by decreased revenues from natural gas and natural gas liquids ("NGLs") sales comparing to the third quarter of 2011.

Revenues, Volumes and Average Prices

                                 Sales Revenues

                                             Three Months Ended September 30,
   In thousands except percentages      2012               2011           D vs. 2011
   Gas sales                         $     2,037       $       2,707              (25 )%
   Oil sales                               6,922               6,411               8
   Natural gas liquid sales                  972               1,884              (48 )
   Total                             $     9,931       $      11,002              (10 )%

Our sales revenues for the third quarter of 2012 decreased by 10% when compared to same period in 2011, due to lower prices received for natural gas and NGLs and lower volumes produced of natural gas and NGLs. The lower revenues from natural gas and NGLs were partially offset by increase in crude oil production volume.

                           Volumes and Average Prices

                                           Three Months Ended September 30,
                                       2012               2011          D vs. 2011
      Natural Gas
      Sales volumes Mmcf (2)             540.23             564.10               (4 )%
      Average Price per Mcf (1)    $       3.77       $       4.80              (21 )
      Total gas sales revenues
      (thousands)                  $      2,037       $      2,707              (25 )%

      Crude Oil
      Sales volumes MBbl                  76.75              71.86                7 %
      Average Price per Bbl (1)    $      90.19       $      89.21                1
      Total oil sales revenues
      (thousands)                  $      6,922       $      6,411                8 %

      Natural gas liquids
      Sales volumes MBbl (2)              31.60              35.98              (12 )%
      Average Price per Bbl (1)    $      30.76       $      52.37              (41 )
      Total natural gas liquids
      sales revenues (thousands)   $        972       $      1,884              (48 )%

(1) Amounts exclude the impact of cash paid/received on settled contracts as we did not elect to apply hedge accounting.


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The company's natural gas sales volumes decreased by 4%, crude oil sales volumes increased by 7% and natural gas liquids sales volumes decreased by 12% for the third quarter of 2012 compared to the same period of 2011.

Our average natural gas price received for the third quarter of 2012 decreased by 21%, or $1.03 per Mcf, when compared to the same period of 2011. Our average crude oil price for the third quarter of 2011 increased by 1%, or $0.98 per Bbl, when compared to the same period of 2011. Our average natural gas liquids price for the third quarter of 2012 decreased by 41%, or $21.61 per Bbl, when compared to the same period of 2011.

               Analysis of Oil and Gas Operations Sales Revenues

The following table provides a summary of the effects of changes in volumes and
prices on Isramco's sales revenues for the three months ended September 30, 2012
compared to the same period of 2011.

                                                                      Natural gas
      In thousands                  Natural Gas         Oil             liquids
      2011 sales revenues          $       2,707     $    6,411     $         1,884
      Changes associated with
      sales volumes                         (115 )          436                (229 )
      Changes in prices                     (555 )           75                (683 )
      2012 sales revenues          $       2,037     $    6,922     $           972



Operating Expenses

                                            Three Months Ended September 30,
       In thousands except
       percentages                     2012               2011           D vs. 2011
       Lease operating expense,
       transportation and taxes     $     5,015        $     5,116              (2 )%
       Depreciation, depletion
       and amortization (1)               2,994              3,018              (1 )
       Accretion expense                    221                216               2
       Loss from plugging and
       abandonment of wells                  (7 )               37            (119 )
       General and administrative         1,176                907              30
                                    $     9,399        $     9,294               1 %

(1) Excluding equipment depreciation expenses for well service subsidiary.

During three months ended September 30, 2012, our operating expenses increased by 1% when compared to the same period of 2011 due to the following factors:

Lease operating expense, transportation cost and taxes decreased by 2%, or $101,000, in 2012 when compared to 2011. This decrease was the result of lower number of workovers performed on our operated properties than in the three months ended September 2011. On a per unit basis, lease operating expenses (excluding transportation and taxes) increased by $1.72 per MBOE to $20.23 per MBOE in 2012 from $18.51 per MBOE in 2011.

Depreciation, Depletion & Amortization ("DD&A") of the cost of proved oil and gas properties is calculated using the unit-of-production method. Our DD&A rate and expense are the composite of numerous individual field calculations. There are several factors that can impact our composite DD&A rate and expense, including but not limited to field production profiles, drilling or acquisition of new wells, disposition of existing wells, and reserve revisions (upward or downward) primarily related to well performance and commodity prices, and impairments. Changes in these factors may cause our composite DD&A rate and expense to fluctuate from period to period. DD&A decreased by 1%, or $24,000 in 2012 when compared to 2011, primarily due to higher prices (per MBOE) that impacted our estimated total reserves, which are the basis for the depletion calculation, and the impact of a 2011 impairment of $4,034,000 on the depletable base used to calculate DD&A. On a per unit basis, depletion expense increased by $0.14 per MBOE to $15.09 per MBOE in 2012 from $14.95 per MBOE in 2011.

Accretion expense for asset retirement obligations slightly increased by 2%, or $5,000, in 2012 when compared to 2011.

Losses from plugging and abandonment expenses decreased by (119)%, or $44,000 in 2012 when compared to 2011 primarily due to reduction of number of properties required to be plugged by state and federal regulations governing our wells.

General and administrative expenses increased by 30%, or $269,000 in 2012 when compared to 2011 primarily due legal professional services.


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Other expenses (income)

Three Months Ended September 30, In thousands except percentages 2012 2011 D vs. 2011 Interest expense, net $ 1,625 $ 1,987 (18 )% Realized gain on sale of investment - (15,910) (100 ) Net loss (gain) on derivative contracts 1,341 (6,801) 120 $ 2,966 $ (20,724) 114 %

Interest expense. Isramco's interest expense decreased by 18%, or $362,000, for the three months ended September 30, 2012 compared to the same period of 2011. This decrease was primarily due to lower average outstanding loan balances during the third quarter of 2012 comparing to 2011.

Sale of Marketable Securities. In August 2011 the company sold all of its investment in a company called MediaMind Ltd. The realized gain from this transaction amounted to $15,910,000.

Net loss (gain) on derivative contracts. On August 15, 2012, pursuant to an agreement with Macquarie Bank, the derivative contracts between Isramco and Macquarie Bank were terminated early and the Company received an amount of $1,737,000 for outstanding hedge positions.

At September 30, 2012, the Company had a $0 commodity derivative asset. For the three months ended September 30, 2012, the Company recorded a net derivative loss of $1.34 million ($3.37 million unrealized loss and a $2.03 million gain from net cash received on settled contracts).

At September 30, 2011, the Company had a $8.2 million commodity derivative asset, of which $4.5 million was classified as current. For the three months ended September 30, 2011, the Company recorded a net derivative gain of $6.8 million ($6 million unrealized gain and a $0.8 million gain from net cash received on settled contracts).

Adjusted EBITDAX.

To assess the operating results of Isramco, management analyzes income from operations before income taxes, interest expense, exploration expense, unrealized gain (loss) on derivative contracts and DD&A expense and impairments ("Adjusted EBITDAX"). EBITDAX is not a GAAP measure. Isramco's definition of Adjusted EBITDAX excludes exploration expense because exploration expense is not an indicator of operating efficiency for a given reporting period, but rather is monitored by management as a part of the costs incurred in exploration and development activities. Similarly, Isramco excludes DD&A expense and impairments from Adjusted EBITDAX as a measure of segment operating performance because capital expenditures are evaluated at the time capital costs are incurred. The Company's definition of Adjusted EBITDAX also excludes interest expense to allow for assessment of segment operating results without regard to Isramco's financing methods or capital structure. Adjusted EBITDAX is a widely accepted financial indicator of a company's ability to incur and service debt and fund capital expenditures and make payments on its long term loans and Management believes that the presentation of Adjusted EBITDAX provides information useful in assessing the Company's financial condition and results of operations.

However, Adjusted EBITDAX, as defined by Isramco, may not be comparable to similarly titled measures used by other companies. Therefore, Isramco's consolidated Adjusted EBITDAX should be considered in conjunction with income
(loss) from operations and other performance measures prepared in accordance with GAAP, such as operating income or cash flow from operating activities. Adjusted EBITDAX has important limitations as an analytical tool because it excludes certain items that affect income from continuing operations and net cash provided by operating activities. Adjusted EBITDAX should not be considered in isolation or as a substitute for an analysis of Isramco's results as reported under GAAP. Below is a reconciliation of consolidated Adjusted EBITDAX to income
(loss) from operations before income taxes.


Table of Contents

Three Months Ended September 30, In thousands except percentages 2012 2011 Income (loss) from operations before
income taxes $ (1,749 ) $ 22,607 (1) Depreciation, depletion and
amortization expense 3,192 3,018 Interest expense 1,625 1,987 Unrealized loss on derivative
contract 3,369 (5,932 ) Accretion Expenses 221 216 Consolidated Adjusted EBITDAX $ 6,658 $ 21,896

(1) Including net gain from sale of investment in shares of Media Mind in the amount of $15,910,000

Nine Months Ended September 30, 2012 Compared to Nine Months Ended September 30,

2011

                                     Selected Data
                                                        September 30,
                                                   2012                 2011
                                               (In thousands except per share
                                                      and MBOE amounts)
     Financial Results
     Oil and Gas sales                       $         30,430       $     33,555
     Production Services                                6,098                  -
     Other                                                519                519
     Total revenues and other                          37,047             34,074

     Cost and expenses                                 31,639             29,552
     Other expense (income)                               852            (13,463 )
     Income tax expense                                 1,546              6,296
     Net income attributable to common
. . .
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