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PDO > SEC Filings for PDO > Form 10-Q on 14-Nov-2012All Recent SEC Filings

Show all filings for PYRAMID OIL CO

Form 10-Q for PYRAMID OIL CO


14-Nov-2012

Quarterly Report


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

FORWARD LOOKING INFORMATION

Looking forward into the balance of fiscal 2012, crude oil prices have decreased by $6.50 per barrel.

The Company is in the process of acquiring Victory Oil Company's 32% working interest in the Pike 1-H well and 50 acres of surface and mineral interests associated with Victory's Murphy Fee property. The transaction will give Pyramid 100% working interest in the Pike 1-H. Both Companies expect to conclude the transaction in the fourth quarter of 2012.

The Company has further strengthened its financial position as it continues to evaluate opportunities to increase reserves and production volumes. At September 30, 2012, Pyramid's balance sheet remained free of long-term debt and included cash, cash equivalents and short-term investments of $5.7 million, up from $4.9 million at December 31, 2011. Pyramid also held long-term assets in the form of certificates of deposit of $1.1 million.

Pyramid has maintained a strong balance sheet and working capital position, and management continues to seek and evaluate opportunities within the energy sector to enhance the value of the Company. Pyramid's growth during the balance of 2012 will be highly dependent on the level of success the Company has in its operations and capital investments, including the outcome of wells that have not yet been drilled. The Company's future capital investment program may be modified due to exploration and development successes or failures, market conditions and other variables. The production and sales of oil and gas involves many complex processes that are subject to numerous uncertainties, including reservoir risk, mechanical failures, human error and market conditions.

The Company has positioned itself, over the past several years, to withstand various types of economic uncertainties, with a program of consolidating operations on certain producing properties and concentrating on properties that provide the major revenue sources. The drilling of a new well and several limited work-overs of certain wells have allowed the Company to maintain its crude oil reserves for the last three years. The Company expects to maintain its reserve base in 2012 by drilling new wells and routine maintenance of its existing wells.

The Company may be subject to future costs necessary for compliance with the new implementation of air and water environmental quality requirements of the various state and federal governmental agencies. The requirements and costs are unknown at this time, but management believes that costs could be significant in some cases. As the scope of the requirements become more clearly defined, management may be better equipped to determine the true costs to the Company.

The Company continues to absorb the costs for various state and local fees and permits under new environmental programs, the sum of which were not material during 2011. The Company retains outside consultants to assist the Company in maintaining compliance with these regulations. The Company is actively pursuing an ongoing policy of upgrading and restoring older properties to comply with current and proposed environmental regulations. The costs of upgrading and restoring older properties to comply with environmental regulations have not been determined. Management believes that these costs will not have a material adverse effect upon its financial position or results of operations.

CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS

Portions of the Quarterly Report, including Management's Discussion and Analysis, contain forward-looking statements within the meaning of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the Company's actual results and performance in future periods to be materially different from any future results or performance suggested in forward-looking statements in this release. Such forward-looking statements speak only as of the date of this report and the Company expressly disclaims any obligation to update or revise any forward-looking statements found herein to reflect any changes in Company expectations or results or any change in events. Factors that could cause results to differ materially include, but are not limited to: the timing and extent of changes in commodity prices of oil, gas and electricity, environmental risk, drilling and operational costs, uncertainties about estimates of reserves and government regulations.

ANALYSIS OF SIGNIFICANT CHANGES IN RESULTS OF OPERATIONS

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2012

COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 2011

REVENUES

The decrease in oil and gas sales of $213,922 is due primarily to lower crude oil production combined with lower average sales prices for the three months ended September 30, 2012. The Company's net revenue share of crude oil production/sales decreased by approximately 1,400 barrels for the third quarter of 2012. The average sales price of the Company's oil and gas for the third quarter of 2012 decreased by approximately $5.25 per equivalent barrel when compared to the same period of 2011. The decline in production for the third quarter of 2012 is not attributable to any one property. Many of the Company's oil and gas leases had lower production due primarily to natural decline.

OPERATING EXPENSES

Operating expenses increased by $54,717 for the third quarter of 2012. The cost to produce an equivalent barrel of crude oil during the second quarter of 2012 was approximately $39.69 per barrel, an increase of approximately $8.31 per barrel when compared with production costs for the third quarter of 2011. The net increase in lease operating expenses is caused by many offsetting factors. These include higher costs for equipment fuel, gas engine repairs, licenses and permits and well abandonment costs. These were offset by lower costs for pump repairs.

Equipment fuel costs increased by $13,220 due primarily to an increase in average fuel costs for gasoline and diesel and higher volumes purchased during the third quarter of 2012. In 2011, the Company recorded the purchase of approximately $4,100 of fuel costs as rig maintenance costs for the Pike 1-H well. Gas engine repairs increased by $13,205 due primarily to maintenance activities on the Santa Fe and Anderson wells. Licenses and permits increased by $11,015 due primarily to fees related to the Santa Fe lease. The costs to abandon two wells increased by $7,384 during the third quarter of 2012. No wells were abandoned in the third quarter of 2011. Downhole pump repairs decreased by $10,488 due to lower activity in this cost category.

Inventory change increased operating expenses by $10,143 for the third quarter of 2012 and decreased operating expenses by $10,492 for the third quarter of 2011. As a result, operating expenses increased by $20,635 for the third quarter of 2012, when compared with the same period of 2011. The decrease in inventory at September 30, 2012 of $10,143 is due primarily to lower inventory volumes at September 30, 2012 offset by higher average per unit inventory values. The increase in inventory at September 30, 2011 of $10,492 is due primarily to higher inventory volumes combined with higher average per barrel inventory valuations.

GENERAL AND ADMINISTRATIVE

General and administrative expenses decreased by $29,673 for the third quarter of 2012 when compared with the same period for 2011. Accounting services decreased by $19,533 due primarily to lower fees for audit services. Legal services decreased by $17,200 due primarily to the filing of a Registration Statement on Form S-8 that was filed in the third quarter of 2011. This was offset by higher fees for outside services. Outside services increased by $8,396 due primarily to the hiring of temporary help for the corporate office staff.

PROVISION FOR DEPLETION, DEPRECIATION AND AMORTIZATION

The provision for depletion, depreciation and amortization decreased by $32,706 for the third quarter of 2012, when compared with the same period for 2011. The decrease is due primarily to a decrease in depletion of the Company's oil and gas properties due to a decline in the volume of oil and gas sales.

VALUATION ALLOWANCES

During the third quarter of 2011, the Company recorded a valuation allowance of $673,000 against the costs of drilling the Pike 1-H well. The Pike 1-H was drilled in the first quarter of 2011 and did not respond favorably to efforts by the Company to stimulate production from the well. There have been no valuation allowances recorded in 2012.

RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2012

COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 2011

REVENUES

The decrease in oil and gas sales of $379,877 is due primarily to lower crude oil sales volumes offset by higher average sales prices for the nine months ended September 30, 2012. The Company's net revenue share of crude oil production/sales decreased by approximately 4,600 barrels for the nine months ended September 30, 2012. The decline in production for the first nine months of 2012 is not attributable to any one property. Many of the oil and gas leases had lower production due primarily to natural decline. The average sales price of the Company's oil and gas for the nine months ended September 30, 2012 increased by approximately $2.76 per equivalent barrel when compared to the same period of 2011.

OPERATING EXPENSES

Operating expenses increased by $82,911 for the nine months ended September 30, 2012. The cost to produce an equivalent barrel of crude oil during the nine months ended September 30, 2012 was approximately $37.22 per barrel, an increase of approximately $6.18 per barrel when compared with production costs for the same period of 2011. The increase in lease operating expenses is caused by many factors. These include higher costs for equipment fuel, gas engine repairs, parts and supplies, licenses and fees, professional services and contract operations. These were offset by lower costs for pump repairs, outside services, insurance expense and equipment rental.

Equipment fuel costs increased by $40,608 due primarily to an increase in fuel consumed combined with higher average fuel costs for gasoline and diesel used by the Company's vehicles and production equipment. Gas engine repairs increased by $28,006 due primarily to maintenance activities on the Santa Fe and Anderson wells. Parts and supplies increased by $14,767 due to higher maintenance activities for the nine months ended September 30, 2012. Licenses and permits increased by $13,433 due primarily to fees related to the Santa Fe lease. Professional services increased by $8,388 due to a review of the Company's Pike #1-H well that was conducted by a third-party petroleum engineering firm. Contract operations increased by $8,282 due to higher costs on the New York and Wyoming joint ventures.

Downhole pump repairs decreased by $15,048 due to lower activity in this cost category. Outside services decreased by $12,848 due to lower demand for third-party repair and maintenance services. Insurance expense decreased by $12,223 due to lower premiums for auto, health and workers' compensation insurance. Equipment rental costs decreased by $9,937 due primarily to lower costs on the Pike lease during the nine months ended September 30, 2012. The Company leased the surface pumping unit and a crude oil storage tank for the new 1-H well that was drilled in the first quarter of 2011.

Inventory change increased operating expenses by $12,131 for the nine months ended September 30, 2012 and decreased operating expenses by $10,336 for the nine months ended September 30, 2011. As a result, operating expenses increased by $22,467 for the nine months ended September 30, 2012, when compared with the same period of 2011. The decrease in inventory at September 30, 2012 of $12,131 is due primarily to lower inventory volumes at September 30, 2012 offset by higher average per unit values. The increase in inventory at September 30, 2011 of $10,336 is due primarily to higher average per barrel inventory valuations offset by lower inventory volumes.

GENERAL AND ADMINISTRATIVE

General and administrative expenses decreased by $33,571 for the nine months ended September 30, 2012 when compared with the same period for 2011. Accounting services decreased by $47,404 due to lower audit fees and lower fees paid to a third-party individual who has assisted with the training and implementation of a new oil and gas accounting software that was effective January 1, 2011. Legal fees declined by $19,337 during the nine months ended September 30, 2012 due primarily to the filing of a Form S-8 during 2011. The legal fees expended for the filing of the Form S-8 during 2011 were $17,500. Outside services increased by $10,417 due primarily to the hiring of temporary help for the corporate office staff. General expenses increased by $8,000 due to a donation the Company made during the second quarter of 2012 to a local medical facility. General liability insurance increased by $6,973 due to an increase in the allocation of insurance costs to general and administrative expense from operating expenses during 2012. The remaining net increase in general and administrative costs of $7,780 is attributable to many different cost categories, none of them significant in amount.

STOCK BASED COMPENSATION

Effective June 2, 2011, the Company's board of directors approved the issuance of options to purchase 5,000 shares of the Company's common stock to the Company's two outside directors. These options vest immediately and must be exercised within ninety days after the director leaves office. The Company recorded $43,743 in stock based compensation during the third quarter of 2011, based on a valuation performed using a Black-Scholes option-pricing model.

PROVISION FOR DEPLETION, DEPRECIATION AND AMORTIZATION

The provision for depletion, depreciation and amortization decreased by $76,235 for the nine months ended September 30, 2012, when compared with the same period for 2011. The amortization of Texas leaseholds decreased by approximately $48,000 during 2012. The Texas leaseholds were fully amortized as of June 30, 2011. Depletion of oil and gas properties decreased by $25,613 due primarily to a decline in the volume of oil and gas sales.

VALUATION ALLOWANCES

During the third quarter of 2011, the Company recorded a valuation allowance of $673,000 against the costs of drilling the Pike 1-H well. The Pike 1-H was drilled in the first quarter of 2011 and did not respond favorably to efforts by the Company to stimulate production from the well.

On March 21, 2011, the Company participated in the drilling of a joint venture well in Menard County, Texas. Log analysis of this well indicated that the well would not be commercially viable, and was plugged and abandoned. The Company owned a 30% interest in the joint venture. The Company recorded a valuation allowance of $54,384 against the costs incurred during the six months ended June 30, 2011 for the drilling of this well.

There have been no valuation allowances recorded in 2012.

LIQUIDITY AND CAPITAL RESOURCES

Cash and cash equivalents increased by $819,966 for the nine months ended September 30, 2012. During the nine months ended September 30, 2012, operating activities provided cash of $1,745,498. Cash was used for capital spending of $848,952 and principal payments on long-term debt of $48,634. See the Statements of Cash Flows for additional detailed information. The Company had available a line of credit of $500,000 and short-term and long-term investments of $3,228,310 at September 30, 2012 that provided additional liquidity during the first nine months of 2012.

IMPACT OF CHANGING PRICES

The Company's revenue is affected by crude oil prices paid by the major oil companies. Average crude oil prices for the nine months ended September 30, 2012 increased by approximately $2.76 per equivalent barrel when compared with the same period of 2011. The Company cannot predict the future course of crude oil prices.

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