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AE > SEC Filings for AE > Form 10-Q on 9-May-2013All 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.


9-May-2013

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 and certain costs are as follows (in thousands):

                                              Segment        Depreciation          Fleet
                                             Operating      Depletion and       Diesel Fuel
                              Revenues       Earnings        Amortization          Costs
Period ended March 31, 2013

- Crude Oil                   $ 931,876     $    13,434     $        1,794     $       3,264
- Natural gas                     1,066             148                 15                 -
 Total                        $ 932,942     $    13,582     $        1,779     $       3,264

Period ended March 31, 2012

- Crude oil                   $ 855,846     $     7,765     $        1,290     $       2,593
- Natural gas                     1,584             393                  1                 -
Total                         $ 857,430     $     8,158     $        1,291     $       2,593


Supplemental volume and price information is as follows:

                                               Three Months Ended
                                                    March 31,
                                               2013          2012
Field Level Purchase Volumes - Per day (1)
Crude oil - barrels                            100,631        87,036
Natural gas - mmbtu's                           94,745       195,752

Average Purchase Price
Crude Oil - per barrel                       $  102.36     $  106.82
Natural Gas - per mmbtu                      $    3.35     $    2.50


_____________________________


(1) Reflects the volume purchased from third parties at the oil and natural gas field level and pipeline pooling points.

Crude oil revenues increased during the first quarter 2013 with higher volumes partially offset by lower prices as shown in the table above. Volume increases resulted from new well production developed by the Company's customer base primarily in the Eagle Ford shale trend of South Texas coupled with the Company establishing a new area of operation in the Bakken field of North Dakota

- Crude Oil - Field Level Operating Earnings (Non GAAP Measure)

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 inventory liquidation and valuation losses. Over time, these gains and losses tend to offset and have limited impact on cash flow. While crude oil prices fluctuated during the first quarter of 2013, the net impact yielded inventory liquidation gains totaling $994,000 as prices increased from a weighted average of $98 per barrel in the beginning of the year to $101 per barrel at quarter end. Similarly, crude oil prices were generally increasing during the first quarter of 2012 producing inventory valuation gains of $2,538,000. As of March 31, 2013, the Company held 300,614 barrels of crude oil inventory at an average price of $101.57 per barrel.

Crude oil marketing operating earnings are also affected by the valuations of the Company's forward month commodity contracts (derivative instruments) as of the various report dates. 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 contracts as part of a pricing strategy based on crude oil purchases at the wellhead (field level). Only those contracts qualifying as derivative instruments are accorded fair value treatment while the companion contracts to purchase crude oil at the wellhead (field level) are not accorded fair value treatment. The valuation of derivative instruments at period end requires the recognition of ?mark-to-market" gains and losses. The impact on crude oil segment operating earnings of inventory liquidations and derivative valuations is summarized as follows (in thousands):


                                             First Quarter
                                           2013         2012

As reported segment operating earnings   $ 13,434     $  7,765
Add (less) -
Inventory liquidation (gains) losses         (994 )     (2,538 )
Derivative valuation (gains) losses          (150 )      3,476

Field level operating earnings(1)        $ 12,290     $  8,703



(1) Such designation is unique to the Company and is not comparable to any similar measures developed by industry participants.

Field level operating earnings and field level purchase volumes (see earlier table) depict the Company's day-to-day operation of acquiring crude oil at the wellhead, transporting the material, and delivery to market at the sales point. Comparative crude oil field level operating earnings increased in 2013 relative to 2012 with the noted volume additions and improved unit margins for the comparative periods. The Company anticipates continued volume growth as South Texas sourced production is still being developed. However unit margins are expected to diminish as competition and additional industry infrastructure develop in the region.

Historically, prices received for crude oil and natural gas have been volatile and unpredictable with price volatility expected to continue. See Item 1A Risk Factors in the Annual Report on Form 10-K for the year ended December 31, 2012.

- Transportation

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

Three Months Ended

                            March 31,
                        2013          2012        Change(1)

Revenues             $   17,346     $ 16,268               6 %

Operating earnings   $    1,398     $  3,054             (54 )%

Depreciation         $    1,736     $  1,251              39 %


____________________________________


(1) Represents the percentage increase (decrease) from the prior year.

Customer demand and revenues for the transportation segment were consistent and strong during the comparative first quarters of 2013 and 2012. The 2012 period benefitted from $1,269,000 in gains from the sale of 66 used truck-tractors and such items did not recur in 2013. Operating earnings for 2013 were also burdened with additional depreciation charges as new equipment was placed in service. The transport segment is currently benefitting from the present low price environment for natural gas as this commodity is a basic feed stock 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 is operating at near full capacity with the availability of qualified drivers a significant constraint.


- 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):

                               Three Months Ended
                                    March 31,
                                2013          2012        Change(1)
Revenues                     $    3,213      $ 3,791             (15 )%

Operating earnings (loss)    $     (116 )    $   402            (129 )%

Depreciation and depletion   $    2,014      $ 1,621              24 %



(1) Represents the percentage increase (decrease) from the prior year.

Oil and gas segment revenues declined for the current period with reduced volumes. Operating earnings declined with revenues while depreciation and depletion expense was elevated in 2013 on increased capitalized costs.

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

                             Three Months Ended
                                  March 31,
                             2013          2012
Crude Oil(1)
Volume - barrels              20,962        21,880
Average price per barrel   $   71.06     $   98.17

Natural gas
Volume - mcf                 494,049       540,973
Average price per mcf      $    3.49     $    3.04



(1) Crude oil volumes and prices included the value of associated natural gas liquids productions.

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

                           Three Months Ended
                                March 31,
                          2013           2012
Dry hole expense         $     -       $      11
Prospect impairments          52             265
Seismic and geological         1               2
Total                    $    53       $     278

During the first three months of 2013, the Company participated in the drilling of 18 successful wells with no dry holes. Additionally, the Company has an interest in 33 wells that were in process on March 31, 2013. Evaluation on the in-process wells is anticipated during the second quarter of 2013. Participation in the drilling of approximately 31 wells is planned for the remainder of 2013 on the Company's prospect acreage in Texas, Kansas, Arkansas and Louisiana.


- 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 first quarter 2012 operating expenses and wind-down cost totaled $808,000. See also Note 6 - Discontinued Operations to Unaudited Condensed Consolidated Financial Statements.

- Outlook

The marketing and transportation segments are performing at expected levels with narrowing unit margins anticipated in the South Texas region as the year progresses due to a number of third party pipeline infrastructure projects currently under way that will increase competition in the area. Oil and gas segment operating earnings are hampered by low natural gas prices with some recent price improvement. However, absent further improvement in natural gas prices, a significant change in the current level of operating earnings from the oil and gas segment is not expected.

Liquidity and Capital Resources

The Company's liquidity primarily derives from net cash provided by operating activities and such amount was $9,211,000 for the three-month period ended March 31, 2012. In comparison, $10,868,000 of cash was used by operating activities during the first quarter of 2013 as the Company utilized available cash balances to fund the acquisition of additional quantities of crude oil supply while reducing the amount of letters of credit outstanding. Letter of credit fees and other bank charges totaled $130,000 and $229,000 for the three month periods ended March 31, 2013 and 2012, respectively. As of March 31, 2013 and December 31, 2012, the Company had no bank debt or other forms of debenture obligations. Cash and cash equivalents totaled $32,503,000 as of March 31, 2013, 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 $69,467,000 as of March 31, 2013. The Company heavily relies on its ability to obtain open-line trade credit from its suppliers especially with respect to its crude oil marketing operation. In this regard, the Company generally maintains substantial cash balances and avoids debt obligations.

Capital expenditures during the first three months of 2013 included $1,506,000 for marketing and transportation equipment additions and $2,397,000 in property additions associated with oil and gas exploration and production activities. Over the course of the next nine months, the Company anticipates expending approximately $6 million on oil and gas exploration projects and approximately $13 million for truck and trailer replacements and additions within the Company's transportation and marketing fleets.

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 March 31, 2013. Prepayment amounts are recouped and advanced from day-to-day as the suppliers deliver product to the Company. In addition, in order to secure crude oil supply, the Company may also ?early pay" its suppliers in advance of the normal payment due date of the twentieth of the month following the month of production. Such ?early payments" serve to reduce accounts payable as of the balance sheet date. The Company also requires certain counterparties to make similar early payments or to post cash collateral with the Company in order to support their purchases from the Company. Such cash collateral held by the Company totaled $1,391,000 as of March 31, 2013. Early payments received from customers serve to reduce accounts receivable as of the balance sheet date. 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 $9.9 million commitment for 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 paid an annual dividend in the fourth quarter of each year. In December 2012, the Company paid a dividend of $.62 per common share or $2,615,000 to its shareholders. Effective June 15, 2013, the Company will initiate a quarterly dividend of $.22 per common share or $928,000. 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, 2012.

Critical Accounting Policies and Use of Estimates

There has 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, 2012.

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