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AE > SEC Filings for AE > Form 10-Q on 13-Nov-2012All Recent SEC Filings

Show all filings for ADAMS RESOURCES & ENERGY, INC. | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for ADAMS RESOURCES & ENERGY, INC.


13-Nov-2012

Quarterly Report


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

Results of Operations

- Marketing

Marketing segment revenues, operating earnings and depreciation were as follows (in thousands):

                          Nine Months Ended            Three Months Ended
                            September 30,                 September 30,
                        2012            2011           2012          2011
Revenues
Crude oil            $ 2,438,815     $ 2,133,485     $ 773,611     $ 735,514
Natural gas                4,069           4,256         1,121         1,563
Total                $ 2,442,884     $ 2,137,741     $ 774,732     $ 737,077

Operating Earnings
Crude oil            $    29,880     $    26,341     $  13,278     $  15,401
Natural gas                1,057           1,734           174           654
Total                $    30,937     $    28,075     $  13,452     $  16,055

Depreciation
Crude oil            $     4,324     $     2,565     $   1,596     $   1,027
Natural gas                   16               3            15             1
Total                $     4,340     $     2,568     $   1,611     $   1,028

Supplemental volume and price information is as follows:

                                                Nine Months Ended           Three Months Ended
                                                  September 30,               September 30,
                                               2012          2011           2012          2011
Field Level Purchase Volumes - Per day (1)
Crude oil - barrels                             87,022        79,057         86,301        83,002
Natural gas - mmbtu's                          130,566       187,367         94,568       182,302

Average Purchase Price
Crude oil - per barrel                       $  100.90     $   95.36     $    96.44     $   91.71
Natural Gas - per mmbtu's                    $    2.40     $    4.14     $     2.75     $    4.08



(1) Reflects the volume purchased from third parties at the oil and gas wellhead or lease level.


Crude oil revenues were greater in 2012 because of increased field level purchase volumes and generally higher average crude oil prices as shown in the table above. Volume increases resulted from new well production established by the Company's customer base in the Eagle Ford shale trend of South Texas, while prices fluctuated with general market trends.

Two significant factors affecting comparative crude oil segment operating earnings are inventory valuations and forward commodity contract (derivatives or mark-to-market) valuations. As a purchaser and shipper of crude oil, the Company holds inventory in storage tanks and third-party pipelines. Inventory sales turnover occurs approximately every three days, but the quantity held in stock at the end of a given period is reasonably consistent. As a result, during periods of increasing crude oil prices, the Company recognizes inventory liquidation gains while during periods of falling prices, the Company recognizes liquidation and valuation losses. Over time, these gains and losses tend to offset and have limited impact on cash flow. While crude oil prices are fluctuating in 2012, the net impact through September 30, 2012 has yielded inventory liquidation losses totaling $1,543,000 for the first nine months of 2012. However, during the third quarter of 2012, prices trended up from $85 per barrel in the beginning of the quarter to $98 per barrel at the end of the quarter. This produced a $3,217,000 inventory liquidation gain for the quarter. As of September 30, 2012, the Company held 266,860 barrels of crude oil inventory at an average price of $98.03 per barrel.

Crude oil marketing operating earnings are also affected by the differing report date valuations of the Company's forward month commodity contracts (derivative instruments). Such non-cash valuations are calculated and recorded at each period end based on the underlying data existing as of such date. The Company generally enters into these derivative instruments as part of a pricing strategy based on crude oil purchases at the wellhead (field-lease level). The valuation of derivative instruments at each period end requires the recognition of "mark-to-market" gains and losses. The impact on crude oil operating earnings of inventory liquidations and derivative valuations is summarized as follows (in thousands):

                                           Nine Months Ended          Three Months Ended
                                             September 30,               September 30,
                                           2012          2011          2012          2011

As reported segment operating earnings   $  29,880     $ 26,341     $   13,278     $ 15,401
Add (less) -
Inventory liquidation (gains) losses         1,543         (156 )       (3,217 )      2,185
Derivative valuation (gains) losses          3,278        3,229          1,509        3,305

Field level segment operating earnings   $  34,701     $ 29,414     $   11,570     $ 20,891

Comparative field level crude oil operating earnings increased in 2012 with the noted volume additions and overall improved unit margins for the comparative nine month current period. Unit margins first began to widen during the third quarter of 2011 when South Texas sourced production started selling at a discount to world crude oil prices due to its relative abundance in relation to the infrastructure available to deliver such oil to market. The initial burst in unit margins was most prevalent during the third quarter of 2011 as shown in the table above. Favorable unit margins continued into 2012, although they diminished as competition and additional industry infrastructure development progressed in the region.

Natural gas sales are reported net of underlying natural gas acquisition costs and thus reflect gross margins. Volume declines have reduced earnings during 2012 with the current low level of natural gas prices curtailing drilling activity and creating a generally stagnant period for the Company's natural gas operation.


- Transportation

Transportation segment revenues, earnings and depreciation are as follows (in thousands):

                           Nine Months Ended                            Three Months Ended
                             September 30,            Increase            September 30,            Increase
                           2012          2011        (Decrease)         2012          2011        (Decrease)

Revenues                $   50,137     $  49,547             1.2 %   $   16,741     $  15,398             8.7 %

Operating earnings      $    7,919     $   7,003            13.1 %   $    2,607     $   2,078            25.5 %

Depreciation            $    4,186     $   2,915            43.6 %   $    1,574     $   1,041            51.2 %

Customer demand and revenues for the transportation segment were consistent and strong during all periods presented. However, an industry wide shortage of qualified drivers has affected the Company by suppressing current year revenues and results of operations. For 2012, the Company recognized $2,399,000 in gains from the sale of 128 used truck-tractors with gains totaling $1,070,000 occurring during the third quarter. For the first nine months of 2011 equipment sales gains totaled $1,024,000 with $632,000 of such gains occurring during the third quarter of 2011. The transport segment currently benefits from the present low price environment for natural gas, a basic feedstock for the Company's petrochemical industry customer base. The petrochemical industry has been expanding capacity and the long-term prospect for demand for chemical hauling services remains positive. Presently, the Company has experienced a slowing of activity, but business has remained fundamentally sound.

Transportation segment depreciation increased in 2012 with higher capitalized equipment costs following the replacement of substantial portions of the fleet during 2010, 2011 and 2012.

- Oil and Gas

Oil and gas segment revenues and operating earnings are primarily a function of crude oil and natural gas prices and volumes. Comparative amounts for revenues, operating earnings and depreciation and depletion are as follows (in thousands):

                           Nine Months Ended                             Three Months Ended
                             September 30,            Increase              September 30,            Increase
                           2012          2011        (Decrease)          2012           2011        (Decrease)

Revenues                $   11,467     $  10,091            13.6 %    $    4,052      $   3,520            15.1 %

Operating earnings
(loss), excluding
gains from property
sale                    $     (316 )   $  (2,420 )         (86.9 )%   $     (161 )    $  (1,462 )         (88.9 )%

Gains from property
sales                   $      475     $   2,833           (83.2 )%   $      475      $       -             N/C

Depreciation and
depletion               $    6,113     $   5,578             9.6 %    $    2,265      $   1,884            20.2 %

Oil and gas segment revenues improved during 2012 with increased production volumes despite reduced natural gas prices as shown below. Volume increases were the direct result of drilling efforts during 2012 and 2011. Depreciation and depletion expense increased in 2012 consistent with increased production volumes, but such increase was partially offset by the effect from reduced capitalized costs following the recording of a year-end 2011 impairment of oil and gas property. Oil and gas operating earnings excluding gains from property sales improved for 2012 with increased revenues and reduced dry hole and impairment expense (see table below) partially offset by the increased provision for depreciation and depletion.


Production volumes and price information is as follows (in thousands):

                                Nine Months Ended            Three Months Ended
                                  September 30,                 September 30,
                              2012            2011           2012          2011
Crude Oil
Volume - barrels                69,012          38,801        27,545        15,309
Average price per barrel   $     87.59     $     96.38     $   79.76     $   88.20

Natural gas
Volume - mcf                 1,939,167       1,344,271       642,661       487,601
Average price per mcf      $      2.80     $      4.72     $    2.89     $    4.45

Comparative exploration costs are summarized in the table below. Exploration cost components were as follows (in thousands):

                                      Nine Months Ended          Three Months Ended
                                        September 30,               September 30,
                                       2012         2011         2012           2011
Dry hole expense                    $       43     $ 1,165     $      2       $    654
Prospect and property impairments          878       1,208          249            646
Seismic and geological                      83         303            1            110
Total                               $    1,004     $ 2,676     $    252       $  1,410

During the first nine months of 2012, the Company participated in the drilling of 86 successful wells with no dry holes. Additionally, the Company has an interest in 38 wells that were in process on September 30, 2012. Evaluation on the in-process wells is anticipated during the fourth quarter of 2012. Participation in the drilling of approximately 34 wells is planned for the remainder of 2012 on the Company's prospect acreage in Texas, Kansas, Arkansas and Louisiana.

- Oil and Gas Property Sales

In August 2012, the Company sold fifty percent of its interest in certain Kansas oil and gas properties. The properties contained one producing oil and gas well with insignificant production history. The sale was consummated to spur outside interests to further development on the properties. Total proceeds from the sale were $578,000 and the Company recorded a $475,000 gain on sale. The Company will continue to participate in the development of these Kansas properties.

In January 2011, the Company completed the sale of its interest in certain producing oil and gas properties located in the on-shore Gulf Coast region of Texas. Proceeds from the sale totaled $6.2 million and the pre-tax gain from this transaction totaled $2,708,000. Total proved reserves sold were approximately 26,000 barrels of crude oil and 2,148,000 mcf of natural gas. Sales negotiations were conducted by the third party operator of the properties on behalf of all working interest owners and the transaction was completed with a separate third party investment entity. The Company's proportionate interest in the transaction was approximately 5 percent and the Company elected to participate in the sale due to attractive pricing. Also during the first quarter 2011, the Company sold a portion of its interest in certain non-producing oil and gas properties located in West Texas. Total proceeds from the sale were $329,000 and the Company recorded a $125,000 gain from this transaction. Proceeds from the sales were used for general working capital purposes and the Company is continuing with oil and gas exploration operations in the vicinity of the properties sold.

- Discontinued Operation

During the first quarter of 2012, the Company sold contracts, inventory and certain equipment associated with its refined products market segment and discontinued that operation. The pre-tax gain from this sale, net of operating expenses and wind-down cost totaled $523,000. See also Note 6 - Discontinued Operation to Unaudited Condensed Consolidated Financial Statements.


- Outlook

The marketing and transportation segments are performing at expected levels, but narrowing unit margins are anticipated for the South Texas marketing region due to third party pipeline infrastructure projects being completed which increases competition in the area. Oil and gas segment operating earnings are beginning to show positive results as new crude oil production is brought on line. Absent price declines, this trend for the oil and gas segment should continue.

Liquidity and Capital Resources

The Company's liquidity primarily derives from net cash provided by operating activities and such amount was $51,242,000 and $57,442,000 for the nine-month periods ended September 30, 2012 and 2011, respectively. As of September 30, 2012 and December 31, 2011, the Company had no bank debt or other forms of debenture obligations. Cash and cash equivalents totaled $52,054,000 as of September 30, 2012, and such balances are maintained in order to meet the timing of day-to-day cash needs. Working capital, the excess of current assets over current liabilities, totaled $47,691,000 as of September 30, 2012.

Capital expenditures during the first nine months of 2012 included $24,563,000 for marketing and transportation equipment additions and $18,566,000 in property additions associated with oil and gas exploration and production activities. Over the remainder of 2012, the Company anticipates expending approximately $5 million on oil and gas exploration projects while truck and trailer replacements and additions within the transportation and marketing fleets are substantially completed for the year.

From time to time, the Company may make cash prepayments to certain suppliers of crude oil and natural gas for the Company's marketing operations. Such prepayments totaled $5,000,000 as of September 30, 2012 and such amounts will be recouped and advanced from month to month as the suppliers deliver product to the Company. The Company also requires certain counterparties to post cash collateral with the Company in order to support their purchases from the Company. Such cash collateral held by the Company totaled $2,156,000 as of September 30, 2012. Management believes current cash balances, together with expected cash generated from future operations and the ease of financing truck and trailer additions through leasing arrangements (should the need arise) will be sufficient to meet short-term and long-term liquidity needs.

The Company utilizes cash from operations to make discretionary investments in its oil and natural gas exploration, marketing and transportation businesses, which comprise substantially all of the Company's investing cash outflows for each of the periods in this filing. The Company does not look to proceeds from property sales to fund its cash flow needs. Except for an approximate $10 million commitment for transportation equipment operating leases and storage tank terminal arrangements and office lease space, the Company's future commitments and planned investments can be readily curtailed if operating cash flows contract.

Historically, the Company pays an annual dividend in the fourth quarter of each year. In December 2011, the Company paid a $.57 per common share or $2,404,000 dividend to its shareholders. The most significant item affecting future increases or decreases in liquidity is earnings from operations and such earnings are dependent on the success of future operations (see Item 1A Risk Factors in the Annual Report on Form 10-K for the year ended December 31, 2011).

Critical Accounting Policies and Use of Estimates

There have been no material changes to the Company's "Critical Accounting Policies and Use of Estimates" disclosures that have occurred since the disclosures provided in the Company's Annual Report on Form 10-K for the year ended December 31, 2011.


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