Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
TGC > SEC Filings for TGC > Form 10-Q on 14-Nov-2012All Recent SEC Filings

Show all filings for TENGASCO INC

Form 10-Q for TENGASCO INC


14-Nov-2012

Quarterly Report


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

Results of Operations and Financial Condition

During the first nine months of 2012, the Company sold 212 MBbl of oil from its Kansas wells. Of the 212 MBbl, 170 MBbl were net to the Company after required payments to all of the royalty interests and drilling program participants. The Company's net sales for the first nine months of 2012 of 170 MBbl of oil compares to 139 MBbl net to the Company's interest in the first nine months of 2011. This 31 MBbl increase was due primarily to increased sales volumes on the Coddington, Hilgers "B", Liebenau, McElhaney "A", Veverka "A", Zerger "A" and various other leases resulting from the 2011 and 2012 drilling and polymer programs. The Company's net revenue from the Kansas properties was $15.1 million in the first nine months of 2012 compared to $12.3 million in 2011. This increase in net revenue was due primarily to $2.7 million increase related to the 31 MBbl increase in sales volumes and a $0.06 million increase related to the $0.36 per barrel increase in the average Kansas oil price from $88.22 per barrel in 2011 to $88.58 per barrel in 2012. For the first nine months of 2012 and 2011, the Company's sales included $0.3 million from Swan Creek, and MMC revenues of $0.5 million and $0.2 million for 2012 and 2011, respectively.

Comparison of the Quarters Ended September 30, 2012 and 2011

The Company recognized $5.81 million in revenues during the third quarter of 2012 compared to $4.36 million in the third quarter of 2011. The increase in 2012 revenues was primarily due to a $1.1 million increase related to a 13 MBbl increase in Kansas oil sales volumes and a $0.2 million increase related to a $2.81 per barrel increase in average Kansas oil prices. Kansas oil prices in the third quarter of 2012 averaged $85.30 per barrel compared to $82.49 per barrel in the third quarter of 2011. In addition, MMC revenues increased $0.055 million from $0.09 million in the third quarter 2011 to $0.145 million in the third quarter 2012. The Company realized net income attributable to common shareholders of $1.2 million or $0.02 per share of common stock during the third quarters of both 2012 and 2011. In the third quarter of 2012, the Company had income from operations of $2.13 million, compared to $1.65 million during the third quarter of 2011. Although revenues increased $1.46 million, this increase was partially offset by a $0.29 million increase in operating cost, a $0.29 million increase in depreciation, depletion, and amortization and a $0.39 increase in general and administrative costs.

Production costs and taxes in the third quarter of 2012 increased $0.29 million to $1.81 million from $1.52 million in the third quarter of 2011. This increase was primarily due to a $0.24 million franchise tax refund received and recorded in 2011.

Depreciation, depletion, and amortization expense was $0.986 million and $0.694 million for the third quarters of 2012 and 2011, respectively. This increase was primarily due to increased oil volumes as well as an increase in the oil and gas depletion rate. General and administrative costs increased $0.39 million from $0.50 million for the third quarter of 2011 to $0.89 million for the third quarter of 2012. This increase was primarily due to a $0.24 million allowance recorded in 2012 for Hoactzin related receivables as well as increased accounting, consulting and legal fees.

During the third quarter of 2012, the Company recorded a $(0.035) million non-cash unrealized loss on derivatives compared to a $0.54 million non-cash unrealized gain on derivatives, and a $(0.12) million realized loss on derivatives resulting from settlement payments made to Macquarie recorded during the third quarter of 2011. No payments were made to Macquarie during the third quarter of 2012. Interest expense was $0.19 million and $0.16 million for the third quarters of 2012 and 2011, respectively. This increase in interest expense was due to increase borrowings to supplement funding of material inventory purchases and the 2012 drilling and polymer program.

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

The Company recognized $16.0 million in revenues during the first nine months of 2012 compared to $12.8 million in the first nine months of 2011. The increase in revenues was primarily due to a $2.7 million increase related to a 31 MBbl increase in Kansas oil sales volumes during the first nine months of 2012 and a $0.06 million increase related to a $0.36 per barrel increase in average Kansas oil prices from $88.22 during the first nine months of 2011 to $88.58 during the first nine months of 2012. In addition MMC revenues increased $0.3 million from $0.2 million during the first nine months for 2011 to $0.5 million during the first nine months of 2012. Electric revenues contributed $0.345 million of this


Tengasco, Inc. and Subsidiaries

increase as a result of installation of an electric generator in January 2012 at the methane facilities. The Company realized net income attributable to common shareholders of $3.2 million or $0.05 per share of common stock during the first nine months of 2012 compared to a net income in the first nine months of 2011 to common shareholders of $2.5 million or $0.04 per share of common stock. During the first nine months of 2012, the Company had income from operations of $5.5 million compared to income from operations of $4.4 million during the first nine months of 2011. The increase in net income attributable to common shareholders and the increase in income from operations were primarily due to the increase in Kansas sales volumes and MMC revenues, partially offset by a $2.1 million increase in costs and expenses.

Production cost and taxes in the first nine months of 2012 increased $0.86 million from $4.7 million in the first nine months of 2011 to $5.6 million in the first nine months of 2012. This increase resulted primarily from a $0.24 million franchise tax refund received and recorded in 2011, a $0.19 million increase related to a change in oil inventory, $0.15 increase in MMC costs and increases in miscellaneous Kansas field operating costs.

Depletion, depreciation, and amortization expense increased $0.71 million for the first nine months of 2012, from $1.93 million in the first nine months of 2011 to $2.64 million in the first nine months of 2012. This increase was primarily due to increased oil volumes as well as an increase in the oil and gas depletion rate. General and administrative costs increased $0.51 million for the first nine months of 2012 from $1.74 million for the first nine months of 2011 to $2.25 million during the first nine months of 2012. This increase was primarily related to a $0.24 million allowance recorded in 2012 for Hoactzin related receivables as well as increased accounting, consulting and legal fees.

During the first nine months of 2012, the Company recorded a $(0.14) million non-cash unrealized loss on derivatives compared to an $0.976 million non-cash unrealized gain on derivatives, and a $(0.862) million realized loss on derivatives resulting from settlement payments made to Macquarie, in the first nine months of 2011. Interest expense was $0.59 million and $0.47 million for the first nine months of 2012 and 2011, respectively. The increase in the interest expense was due to increased borrowings to supplement funding of material inventory purchases and the 2012 drilling and polymer program.

Liquidity and Capital Resources

At September 30, 2012, the Company had a revolving credit facility with F&M Bank & Trust Company ("F&M Bank"). Under the credit facility, loans and letters of credit are available to the Company on a revolving basis in an amount outstanding not to exceed the lesser of $40 million or the Company's borrowing base in effect from time to time. The credit facility is secured by substantially all of the Company's producing and non-producing oil and gas properties and pipeline and the Company's Methane Project assets. The credit facility includes certain covenants with which the Company is required to comply. These covenants include leverage, interest coverage, minimum liquidity, and general and administrative coverage ratios. At September 30, 2012 and December 31, 2011, the Company was in compliance with all covenants.


Tengasco, Inc. and Subsidiaries

On September 12, 2012, the Company's senior credit facility with F&M Bank after F&M Bank's semiannual review of the Company's then owned producing properties was amended to decrease the Company's borrowing base from $23 million to $21.5 million. The term of the facility and interest rate remained unchanged (rate at September 30, 2012 was 5.25%).

On March 14, 2012, the Company's senior credit facility with F&M Bank and Trust Company, N.A. of Dallas, Texas (F&M Bank") after F&M Bank's semiannual review of the Company's then owned producing properties was amended to increase the Company's borrowing base from $20 million to $23 million and extend the term of the facility to January 27, 2014. The interest rate remained the greater of prime plus 0.25% or 5.25% per annum.

The total borrowing by the Company under the F&M Bank credit facility at September 30, 2012 and December 31, 2011 was $11.4 million and $11.5 million, respectively. The next borrowing base review will occur in March 2013.

Although the Company has not been required as of the date of this Report to make any payment of principal on the credit facility, the Company can make no assurance that in view of the conditions in the national and world economies, including the realistic possibility of low commodity prices being received for the Company's oil and gas production for extended periods, that F&M Bank may in the future make a redetermination of the Company's borrowing base to a point below the level of current borrowings. In such event, F&M Bank may require installment or other payments in such amount in order to reduce the principal of the Company's outstanding borrowing to a level not in excess of the borrowing base as it may be redetermined. During 2011 and 2012, the Company remained focused on increasing production. However, the Company can make no assurance that it can continue normal operations indefinitely or for any specific period of time in the event of extended periods of low commodity prices, such as occurred in late 2008 and early 2009, or upon the occurrence of any significant downturn or losses in operations. In such event, the Company may be required to reduce costs of operations by various means, including not undertaking certain maintenance or reworking operations that may be necessary to keep some of the Company's properties in production or to seek additional working capital by additional means such as issuance of equity including preferred stock or such other means as may be considered and authorized by the Company's Board of Directors from time to time. During the first nine months of the year, net cash provided by operating activities was $7.41 million in 2012 and $5.85 million in 2011. The increase of cash provided by operating activities from 2011 to 2012 was primarily due to increased revenues partially offset by higher production costs and an increase in materials and equipment inventory. Cash flow used in working capital increased $(0.29) million to $(0.55) million in 2012 from $(0.26) million in 2011. The increase was due primarily to an increase in inventory. Net cash used in investing activities was $(7.16) million in 2012 and 2011. Drilling and polymer costs increased $(2.3) million from $(5.4) million in 2011 to $(7.7) million in 2012. This increase in drilling and polymer costs were offset by a $1.2 million reduction in derivative cost, receipt in 2012 of a $1.0 million payment in lieu of tax credits related to the methane facilities and a $0.1 million reduction in methane facility costs. This payment in lieu of tax credits was authorized under section 1603 of division B of the American Recovery and Reinvestment Act of 2009. Cash flow used in financing activities during the first nine months of 2012 was $(0.26) million compared to $1.25 million provided by financial activities during the first nine months of 2011. The change in financing activities was primarily due to a decrease in net borrowings during the first nine months of 2012.


Tengasco, Inc. and Subsidiaries

During the quarter ended September 30, 2012, Hoactzin has not made payments to reduce past due balances of vendors contracted by the Company in its role as operator for the Hoactzin Gulf of Mexico properties. Based on these circumstances, the Company has elected to establish an allowance for the $0.238 million that was outstanding at September 30, 2012. This allowance is recorded in its Consolidated Balance Sheets under "Accounts receivable - related party" and in its Consolidated Statements of Operations in "General and administrative".

Critical Accounting Policies

The Company prepares its Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States of America, which require the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the year. Actual results could differ from those estimates. The Company considers the following policies to be the most critical in understanding the judgments that are involved in preparing the Company's financial statements and the uncertainties that could impact the Company's results of operations, financial condition and cash flows.

Revenue Recognition

Revenues are recognized based on actual volumes of oil and gas sold to purchasers at a fixed or determinable price, when delivery has occurred and title has transferred, and collectability is reasonably assured. Crude oil is stored and at the time of delivery to the purchasers, revenues are recognized. Natural gas meters are placed at the customer's location and usage is billed each month. There were no material natural gas imbalances at September 30, 2012.

Inventory

Inventory consists of crude oil in tanks and equipment and materials to be used in its Kansas operations. Inventory is carried at lower of cost or market value.

Full Cost Method of Accounting

The Company follows the full cost method of accounting for oil and gas property acquisition, exploration, and development activities. Under this method, all costs incurred in connection with acquisition, exploration and development of oil and gas reserves are capitalized. Capitalized costs include lease acquisitions, seismic surveys, drilling, completion, and estimated asset retirement costs. The capitalized costs of oil and gas properties, plus estimated future development costs relating to proved reserves and estimated asset retirement costs, which are not already included net of estimated salvage value, are amortized on the unit-of-production method based on total proved reserves. The Company has determined its reserves based upon reserve reports provided by LaRoche Petroleum Consultants Ltd. in 2011, and 2010. The costs of unproved properties are excluded from amortization until the properties are evaluated, subject to an annual assessment of whether impairment has occurred. The Company has $0.46 million in unevaluated properties as of September 30, 2012. Proceeds from the sale of oil and gas


Tengasco, Inc. and Subsidiaries

properties are accounted for as reductions to capitalized costs unless such sales cause a significant change in the relationship between costs and the estimated value of proved reserves, in which case a gain or loss is recognized.

At the end of each reporting period, the Company performs a "ceiling test" on the value of the net capitalized cost of oil and gas properties. This test compares the net capitalized cost (capitalized cost of oil and gas properties, net of accumulated depreciation, depletion and amortization and related deferred income taxes) to the present value of estimated future net revenues from oil and gas properties using an average price (arithmetic average of the beginning of month prices for the prior 12 months) and current cost discounted at 10% plus cost of properties not being amortized and the lower of cost or estimated fair value of unproven properties included in the cost being amortized (ceiling).

Oil and Gas Reserves / Depletion of Oil and Gas Properties

The capitalized costs of oil and gas properties, plus estimated future development costs relating to proved reserves and estimated costs of plugging and abandonment, net of costs relating to proved reserves and estimated costs of plugging and abandonment, net of estimated salvage value, are amortized on the unit-of-production method based on total proved reserves. The costs of unproved properties are excluded from amortization until the properties are evaluated, subject to an annual assessment of whether impairment has occurred.

The Company's proved oil and gas reserves as of December 31, 2011 were determined by LaRoche Petroleum Consultants, Ltd. Projecting the effects of commodity prices on production, and timing of development expenditures includes many factors beyond the Company's control. The future estimates of net cash flows from the Company's proved reserves and their present value are based upon various assumptions about future production levels, prices, and costs that may prove to be incorrect over time. Any significant variance from assumptions could result in the actual future net cash flows being materially different from the estimates.

Asset Retirement Obligations

The Company's asset retirement obligations relate to the plugging, dismantling and removal of wells drilled to date. The Company follows the requirements of FASB ASC 410, "Asset Retirement Obligations and Environmental Obligations". Among other things, FASB ASC 410 requires entities to record a liability and corresponding increase in long-lived assets for the present value of material obligations associated with the retirement of tangible long-lived assets. Over the passage of time, accretion of the liability is recognized as an operating expense and the capitalized cost is depleted over the estimated useful life of the related asset. The Company's asset retirement obligations relate primarily to the plugging, dismantling and removal of wells drilled to date. The Company's calculation of asset retirement obligations currently uses a credit adjusted risk free rate of 5.25% and an estimated useful life of wells ranging from 30-40 years. Management continues to periodically evaluate the appropriateness of these assumptions.


Tengasco, Inc. and Subsidiaries

  Add TGC to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for TGC - All Recent SEC Filings
Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.