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

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Form 10-Q for LUCAS ENERGY, INC.


13-Nov-2012

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, 2012 (the "2012 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. See also, "Cautionary Note Regarding Forward-Looking Statements," below.

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, LEI Alcalde Holdings, LLC explores for, develops, produces and markets primarily crude oil and to a much lesser extent, natural gas, from various known productive 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; and the Eaglebine formation in Leon and Madison Counties north of the City of Houston in Texas. Incorporated in Nevada in December 2003 under the name Panorama Investments Corp., the Company changed its name to Lucas Energy, Inc. effective June 9, 2006. Our goal is to acquire, develop, and produce crude oil and natural gas from areas located in, or near, established oil fields.

The Company's strategy is as follows:

Locate and acquire what we believe to be undervalued, underdeveloped oil and gas properties in known areas which were neglected when oil prices were below $20 per barrel. Re-establish or improve production from existing well bores. Look for underlying potential in the form of new drilling, new laterals from existing wells, and/or deeper undeveloped horizons. The Company does not participate in exploration activities, or rank wildcat drilling activities,

Develop the properties out of current cash flow, or using project financing, which may include joint interest participation partners (what are commonly known as joint ventures), and

Seek out additional product financing and joint venture partners to expand the asset base and increase production.

Our website address is http://www.lucasenergy.com. Our fiscal year ends on the last day of March of each year. We refer to the twelve-month periods ended March 31, 2012 and March 31, 2011 as our 2012 fiscal year and 2011 fiscal year, respectively.

At September 30, 2012, the Company had leasehold interests (working interests) in approximately 27,770 gross acres. Total net developed and undeveloped acreage as measured from the surface to the base of the Austin Chalk formation was approximately 21,845 acres. The Company has approximately 6,225 net acres in the Eagle Ford (and lower depths) in the southern part of the Eagle Ford trend near San Antonio, Texas. Further, the Company has approximately 3,745 net acres in the Eaglebine area of the Eagle Ford trend to the north of Houston, Texas.

At the end of September 2012, Lucas was producing approximately 360 BOPD (approximately 220 BOPD net) from 67 active well bores, of which 10 wells accounted for almost 85% of the production. The ratio between the gross and net production varies due to varied working interests and net revenue interests in each well. An affiliate of Marathon Oil Corporation operates two Eagle Ford horizontal wells, in each of which we have a 15% working interest. The wells produced a cumulative of approximately 120,000 barrels of oil through July 31, 2012 and were recently put on artificial lift.

At March 31, 2012, Lucas Energy's total estimated net proved reserves were 8.8 million barrels of oil equivalent (BOE), of which 7.0 million barrels (BBLs) were crude oil reserves, and 10.7 million cubic feet (MMCF) were natural gas reserves (see Supplemental Information to Consolidated Financial Statements of the 2012 Annual Report). Lucas is currently reviewing these reserves. As of September 30, 2012, Lucas employed 19 full-time employees. We also utilized approximately 10 contractors on an "as-needed" basis to carry out various functions of


the Company, including but not limited to field operations, land administration, corporate activity and information technology maintenance.

Industry Segments

Lucas Energy's operations are all crude oil and natural gas exploration and production related.

Operations and Oil and Gas Properties

We operate in known productive areas; that is, we do not drill wildcat wells. Our holdings are found in a broad area of current industry activity in Gonzales, Wilson, Karnes, Atascosa, Leon and Madison Counties in Texas. We concentrate on three vertically adjoining formations in Gonzales, Wilson, Karnes and Atascosa Counties: the Austin Chalk, Eagle Ford and Buda formations, listed in the order of increasing depth measuring from the land surface. The recent development of the Eagle Ford as a high potential producing zone has heightened industry interest and success. Lucas Energy's acreage position is in the oil window of the Eagle Ford trend. Prior to the active development of the Eagle Ford trend in the Gonzales County, Texas area, Lucas investigated the potential of the Eagle Ford formation using modern well logs. Subsequent to this research, Lucas sought to acquire over 15,000 acres in the Gonzales and Wilson County, Texas area. In 2010 the Company sold an 85% working interest in the acreage in Gonzales County, Texas to Hilcorp Resources, LLC (now Marathon Resources EF,
LLC); and in 2011 the Company sold a 50% working interest to Marathon Oil Company in Wilson County, Texas. In December 2011, we acquired 3,745 net acres in Leon and Madison Counties and thereby expanded our holdings of the Eagle Ford trend into the Eaglebine area.

Austin Chalk

The Company's original activity started in Gonzales County by acquiring existing shut-in and stripper wells and improving production from those wells. Most of the wells had produced from the Austin Chalk. The Austin Chalk is a dense limestone, varying in thickness along its trend from approximately 200 feet to more than 800 feet. It produces by virtue of localized fractures within the formation.

Eagle Ford

Drilling activities by other operators and the improvement in horizontal drilling, well stimulation, and completion technologies, have brought the Eagle Ford play to prominence as one of the foremost plays in the United States today.

On Lucas' leases, the Eagle Ford is a porous limestone with organic shale matter. The Eagle Ford formation directly underlies the Austin Chalk formation and is believed to be the primary source of oil and gas produced from the Austin Chalk. Reservoir thickness in the area of the Company's leases varies from approximately 60 feet to 80 feet.

Buda

The Buda limestone underlies the Eagle Ford formation separated by a 10 foot to 20 foot inorganic shale barrier. Its thickness varies from approximately 100 feet to more than 150 feet in this area. The Buda produces from natural fractures and matrix porosity and is prospective across this whole area. There are a number of Buda wells with cumulative production of more than 100,000 barrels of oil.

Eaglebine

The Eaglebine is so named because the Eagle Ford formation overlies the Woodbine formation. This is a continuation of the Eagle Ford trend that is productive from south Texas to the east north of Houston, Texas. The Woodbine formation is best known as the prolific reservoir in the famous East Texas Oil Field. There has been increased interest and activity in the Eaglebine formation in the Leon, Houston, and Madison County areas. There is established production from horizontal and vertical wells to the east and south of Lucas' holdings and numerous permits for horizontal wells have been filed for additional exploratory and development drilling.

General

The ultimate goal of the management of Lucas is to maximize shareholder value. Specific targets include: increasing production, increasing new revenues, increasing profitability margins, increasing property values and reserves, and expanding the asset base.


Overview of Properties

During our 2012 fiscal year, the Company continued to acquire Austin Chalk and Eagle Ford assets. These acquisitions were done with minimal cash outlay and at prices which Lucas believes were under the current market. These acquisitions included the following:

Acquisition of Austin Chalk producing and non-producing properties, along with some Eagle Ford assets, from our Nordic Oil USA I LLLP joint venture partner,

Acquisition of Eagle Ford undeveloped properties from an affiliate of Hall Financial Group of Dallas, Texas, and

Acquisition of Eaglebine producing and non-producing properties north of Houston, Texas from an affiliate of Hall Financial Group.

The Company ended the 2012 fiscal year with approximately 5,900 net acres in the Eagle Ford trend and approximately 3,700 net acres in the Eaglebine trend.

Lucas continues to review additional areas of interest. During the 2011 fiscal year, the Company invested approximately $2 million in a property in New Mexico. After careful review of the property, it was decided that the New Mexico property was not as good an investment as the Austin Chalk and Eagle Ford areas. Therefore, Lucas sold its New Mexico assets for more than it paid for them within less than a year.

The Company evaluated its Eagle Ford assets in the Gonzales, Wilson, Atascosa, and Karnes Counties, Texas areas with respect to potential reserves and benefit to shareholder value with the conclusion that the cash resulting from a sale of these Eagle Ford assets would be more beneficial to the price of the common stock than to have the proved undeveloped reserves of the same properties. The Company does not believe that there exists a development plan that would benefit the shareholders more than having the cash and investing it in the Austin Chalk, and other, asset development.

Operations and New Drilling

During the first six months of the 2013 fiscal year, the Company had very little new activity in either drilling or workovers.

Expense workovers of wells with production of less than 10 BOPD continue to have an impact on lease operating expenses. As newer wells, or newer laterals from existing well bores, are drilled on these leases, the expense of workover costs will diminish in the future. An increase in the drilling program of the older leases could significantly reduce expense workover costs, and as a result, reduce our lifting costs per BBL (barrel).

Our Strengths

We believe our strengths will help us successfully execute our business strategies:

We benefit from the increasing value, attention and activity in the Eagle Ford. Activity levels in the Eagle Ford continue to increase. It was reported by the US Energy Information Administration ("USEIA") on April 23, 2012, that the number of oil and natural gas well starts in the Eagle Ford increased from around 50 in January 2010 to approximately 350 in March 2012. We benefit from the increasing number of wells drilled and the corresponding data available from public and governmental sources. This activity and data have begun to define the geographic extent of the Eagle Ford formation, which we believe will assist us in evaluating future leasehold acquisitions and development operations. In addition, the leading operators in the Eagle Ford have developed drilling and completion technologies that have significantly reduced production risk and decreased per unit drilling and completion costs.

Our size, local knowledge and contacts allow us to pursue a broader range of acquisition opportunities. Our size provides us with the opportunity to acquire smaller acreage blocks that may be less attractive to larger operators in the area. Certain local landowners have expressed their preference to have Lucas operate on their properties rather than other companies. We believe that our acquisition of these smaller blocks will have a meaningful impact on our overall acreage position.

Experienced management team with proven acquisition, operating and financing capabilities. Mr. William A. Sawyer, our Chief Executive Officer, has 35 years of oil and gas experience. His operations experience includes ARCO, Houston Oil & Minerals, Superior Oil and ERCO. Mr. Sawyer is a registered professional engineer and is the founder of Exploitation Engineers, a petroleum consulting firm. He is complemented by Anthony C. Schnur, our recently appointed Chief Financial Officer, who has 15 years of oil and gas industry experience.


RESULTS OF OPERATIONS

The following discussion and analysis of the results of operations for the three-month and six-month periods ended September 30, 2012 and 2011 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 "NGL" stands for natural gas liquids, "Bbls" stands for barrels, "Mcf" for thousand cubic feet and "Boe" for barrels of oil equivalent on the basis of six Mcf per barrel.

Three Months Ended September 30, 2012 vs. Three Months Ended September 30, 2011

We reported a net loss for the three months ended September 30, 2012 of $1.5 million, or $0.06 per share. For the same period a year ago, we reported a net loss of $2.1 million, or $0.11 per share. Our net loss decreased by $0.6 million primarily due to an increase in net operating revenues of $1.8 million, partially offset by an increase in operating expenses of $1.1 million.

The following table sets forth the operating results and production data for the three-month periods ended September 30, 2012 and 2011.

                                            Three Months Ended September
                                                         30,                    Increase            %
                                               2012             2011           (Decrease)       Incr(Decr)
Sale Volumes:
Crude Oil (Bbls)                                 27,204             10,674          16,530              155 %
Natural Gas & NGL (Mcf)                           4,326              8,739          (4,413 )            -50 %
Total (Boe)                                      27,925             12,131          15,794              130 %

Crude Oil (Bbls per day)                            299                116             183              158 %
Natural Gas & NGL (Mcf per day)                      48                 95             (47 )            -49 %
Total (Boe per day)                                 307                132             175              133 %

Average Sale Price:
Crude Oil ($/Bbl)                          $      99.34    $         86.93     $     12.41               14 %
Natural Gas & NGL ($/Mcf)                  $       7.01    $          4.52     $      2.49               55 %


Net Operating Revenues:
Crude Oil                                  $  2,702,465    $       927,924     $ 1,774,541              191 %
Natural Gas & NGL                                30,344             39,518          (9,174 )            -23 %
      Total Revenues                       $  2,732,809    $       967,442     $ 1,765,367              182 %

Oil and Gas Revenues

Total crude oil and natural gas revenues for the three months ended September 30, 2012 increased $1.8 million, or 182%, to $2.7 million from $1.0 million for the same period a year ago due primarily to a favorable crude oil volume variance of $1.6 million and a slightly favorable crude oil price variance of less than $0.1 million.


Operating and Other Expenses

                                                Three Months Ended September 30,           Increase            %
                                                  2012                    2011            (Decrease)       Incr(Decr)
Lease Operating Expenses                    $       1,153,151       $       1,033,286     $   119,865               12 %
Severance and Property Taxes                          134,201                  59,749          74,452              125 %
Depreciation, Depletion, and Amortization           1,176,537                 290,933         885,604              304 %

General and Administrative ("G&A")          $       1,348,270       $       1,273,721     $    74,549                6 %
Share-Based Compensation                               98,360                 112,942         (14,582 )            -13 %
 Total G&A Expense                          $       1,446,630       $       1,386,663     $    59,967                4 %

Other Income (Expense), Net                             6,751                (292,555 )       299,306
Interest Expense                                     (350,360 )                (2,355 )      (348,005 )

Lease Operating Expenses

Lease operating expenses increased $0.1 million for the current quarter as compared to the prior year period principally due to higher lease rental expenses.

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

DD&A increased $0.9 million primarily due to an increase in production of 15,794 Boe. The DD&A rate per Boe also increased from $30.50 to $40.93.

General and Administrative Expenses

G&A expenses, including share-based compensation, for the current quarter remained basically the same as that of the prior year's quarter, increased $0.1 million, or 4%. The slight increase was primarily due to higher employee-related costs.

Other Income (Expense), Net

Other Income (Expense) for the quarter ended September 30, 2011, 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 three months ended September 30, 2012, we incurred interest expense of $350,360 on the Nordic 1 note issued during a property acquisition (described in greater detail below under "Liquidity and Capital Resources").

Six Months Ended September 30, 2012 vs. Six Months Ended September 30, 2011

We reported a net loss for the six months ended September 30, 2012 of $3.4 million, or $0.15 per share. For the same period a year ago, we reported a net loss of $3.0 million, or $0.17 per share. Our net loss increased by $0.4 million primarily due to an increase in total operating expenses of $2.3 million and interest expense of $0.7 million, partially offset by an increase in net operating revenues of $2.3 million and a decrease in other expenses of $0.3 million.


The following table sets forth the operating results and production data for the six months ended September 30, 2012 and 2011.

                                         Six Months Ended September 30,                %
                                      2012            2011          Increase       Increase
 Sale Volumes:
 Crude Oil (Bbls)                       46,281          22,841          23,440           103 %
 Natural Gas & NGL (Mcf)                 5,789          12,839          (7,050 )         -55 %
 Total (Boe)                            47,246          24,981          22,265            89 %

 Crude Oil (Bbls per day)                  253             125             128           102 %
 Natural Gas & NGL (Mcf per day)            32              70             (38 )         -54 %
 Total (Boe per day)                       258             137             121            88 %

 Average Sale Price:
 Crude Oil ($/Bbl)                 $     95.40     $     93.36     $      2.04             2 %
 Natural Gas & NGL ($/Mcf)         $      6.08     $      5.26     $      0.82            16 %


 Net Operating Revenues:
 Crude Oil                         $ 4,415,416     $ 2,132,344     $ 2,283,072           107 %
 Natural Gas & NGL                      35,198          67,545         (32,347 )         -48 %
       Total Revenues              $ 4,450,614     $ 2,199,889     $ 2,250,725           102 %

Oil and Gas Revenues

Total crude oil and natural gas revenues for the six months ended September 30,
2012 increased $2.3 million, or 102%, to $4.5 million from $2.2 million for the
same period a year ago due primarily to a favorable crude oil volume variance of
$2.2 million coupled with a slight favorable crude oil price variance of $0.1
million.

Operating and Other Expenses

                                              Six Months Ended September 30,         Increase            %
                                                  2012                 2011         (Decrease)       Incr(Decr)
Lease Operating Expenses                    $      2,082,906       $  1,634,769     $   448,137               27 %
Severance and Property Taxes                         227,380            119,524         107,856               90 %
Depreciation, Depletion, and Amortization          1,998,328            698,866       1,299,462              186 %

General and Administrative                  $      2,698,742       $  2,213,826     $   484,916               22 %
Share-Based Compensation                             196,107            217,551         (21,444 )            -10 %
 Total G&A Expense                          $      2,894,849       $  2,431,377     $   463,472               19 %

Other Income (Expense), Net                           15,887           (291,709 )       307,596
Interest Expense                                    (691,529 )           (5,842 )      (685,687 )

Lease Operating Expenses

Lease operating expenses increased $0.4 million for the current period as compared to the prior year period principally due to increased production costs of $0.2 million from expanded efforts during the current period to increase production volumes from existing wells, to higher lease rental expenses of $0.1 million and higher work-over costs of $0.1 million.


Depreciation, Depletion, Amortization and Accretion

DD&A increased $1.3 million primarily due to an increase in production of 22,265 Boe. The DD&A rate per Boe also increased from $30.47 to $40.93.

General and Administrative Expenses

G&A expenses, including share-based compensation, increased $0.5 million, or 19%, for the six months ended September 30, 2012 as compared to the prior year period. The increase is primarily due to higher employee-related costs of $0.3 million and rental expenses of $0.1 million.

Other Income (Expense), Net

Other Income (Expense) for the six-month period ended September 30, 2011, primarily consisted of an expense 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 in August 2011. The value was calculated based on the Black Scholes option pricing model.

Interest Expense

During the six months ended September 30, 2012, we incurred interest expense of $691,529 on the Nordic 1 note issued during a property acquisition (described in greater detail below under "Liquidity and Capital Resources").

LIQUIDITY AND CAPITAL RESOURCES

The primary sources of cash for Lucas during the six months ended September 30, 2012 were funds generated from sales of crude oil and natural gas production and proceeds from sale of units consisting of shares of the Company's common stock and warrants to purchase shares of common stock. The primary uses of cash were funds used in operations and additions of oil and gas properties.

At September 30, 2012, our Total Current Liabilities of $31.4 million exceeded our Total Current Assets of $2.4 million due primarily to the $22.0 million non-recourse senior secured promissory note issued in November 2011 in connection with the Nordic 1 acquisition. The note holder is Nordic Oil USA I, LP ("Nordic 1") and the note has a maturity date of November 17, 2012. The Company is in discussion with Nordic 1 regarding making various modifications to the note, which include, among other items, an extension of the term and maturity date of the note. Based on the previous dealings with Nordic 1 and the ongoing affable relationship between the two companies, Lucas is hopeful that the parties will reach an agreement in the near future which will not require Lucas to repay the note on the maturity date. In the event that the note is not modified, the Company intends to return to Nordic 1 the oil and gas properties underlying the note pursuant to the note agreement. The estimated quantities of proved developed and proved undeveloped crude oil reserves of the properties are approximately 35 thousand barrels and 1.2 million barrels, respectively.

In April 2012, the Company closed its registered direct offering of $5.9 million
(approximately $5.5 million net, after deducting commissions and other expenses)
of securities to certain institutional investors. In total, the Company sold 2.95 million units at a price of $2 per unit. Each unit consists of one share of the Company's common stock and 0.35 of a warrant to purchase one share of the Company's common stock. Each warrant can be exercised to purchase one share of the Company's common stock at an exercise price of $2.30 per share and will become exercisable after six months from the closing date of the offering and for a period of five years thereafter. A total of 2,950,000 shares and 1,032,500 warrants were sold in connection with the offering. In September 2012, the Company sold an aggregate of 800,000 units to certain selected investors. Each unit consists of one share of the Company's common stock and 0.25 of a warrant to purchase one share of the Company's common stock at an exercise price of $2.00 per share with a term of one year, at a price of $1.65 per unit, for an aggregate of $1,320,000 in total gross funding. The Company used the funds raised in the offerings to pay down expenses related to drilling, lease operating, workover activities and for general corporate purposes, including general and administrative expenses.


The only material debt that the Company has other than the accounts payable and accrued interest is the $22.0 million non-recourse senior secured promissory note issued in connection with the Nordic Oil USA I, LLLP (Nordic 1), acquisition. In November 2011, Lucas entered into a purchase and sale agreement with Nordic 1, with an effective date of July 1, 2011, to purchase all of Nordic 1's interests in certain oil, gas and mineral leases, rights and assets located in Gonzales, Karnes and Wilson Counties, Texas, which represent all of Nordic 1's interests in the existing two capital programs operated by Lucas (the "Nordic 1 Transaction"). Lucas paid $22 million to Nordic 1 in the form of a . . .

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