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FXEN > SEC Filings for FXEN > Form 10-Q on 8-Aug-2013All Recent SEC Filings

Show all filings for FX ENERGY INC

Form 10-Q for FX ENERGY INC


8-Aug-2013

Quarterly Report


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

Introduction

The majority of our operations are in Poland, and we have devoted most of our technical talent and capital expenditures in the last several years to our operations in that country. The decision to devote most of our available capital to this area drives our operating results and the changes to our balance sheet and liquidity. Our operations in Poland are a combination of existing production and substantial exploration. Oil and gas production, oil and gas revenues, cash flow, earnings, oil and gas reserves, and oil and gas expenditures have grown significantly over the last four years.

Our U.S. operations also have an impact. Our U.S. operations are smaller than those in Poland and do not present the same level of opportunities for expansion; however, our U.S. operations are a relatively stable source of cash flow. This, too, is reflected in our operating results.

Results of Operations by Business Segment

Quarter Ended June 30, 2013, Compared to the Same Period of 2012

Exploration and Production Segment

Gas Revenues. Revenues from gas sales were $7.2 million during the second quarter of 2013, compared to $6.9 million during the same quarter of 2012. Higher prices and production in the 2013 quarter led to the increase in natural gas revenues.

A summary of the amount and percentage change, as compared to the respective prior-year period, for gas revenues, average gas prices, and gas production volumes for the quarters ended June 30, 2013 and 2012, is set forth in the following table:

                                           For the Quarter Ended June 30,
                                              2013               2012         Change
Gas revenues                                  $7,231,000         $6,914,000    +5%
Average price (per thousand cubic feet)            $6.97              $6.86     +2%
Production volumes (thousand cubic feet)       1,038,000          1,008,000    +3%


Daily gas production increased to 11.4 million cubic feet of natural gas per day, or MMcfd, in the second quarter of 2013, compared to 11.1 MMcfd in the second quarter of 2012, an increase of 2%. Production from our Kromolice-1, Sroda-4, and Kromolice-2, or KSK, wells increased by 222,000 thousand cubic feet of natural gas, or Mcf, over 2012 second quarter levels, as second quarter 2012 production at KSK was constrained due to a pipeline bottleneck issue. In addition, new production at our Winna Gora well combined with the KSK increase to offset production declines at our Zaniemysl-3 well.

Natural gas prices were also slightly higher during the 2013 quarter. The Polish low-methane tariff, which serves as the reference price for our gas sales agreements, was 3.0% lower during the second quarter of 2013, due to a tariff decrease that became effective for us on January 1, 2013. However, period-to-period weakness in the U.S. dollar against the Polish zloty increased our U.S. dollar-denominated gas prices. The average exchange rate during the first quarter of 2013 was 3.21 zlotys per U.S. dollar. The average exchange rate during the first quarter of 2012 was 3.33 zlotys per U.S. dollar, a change of approximately 4%. In addition, production declines at Zaniemysl-3 were replaced by production gains at both KSK and Winna Gora, where our average price per Mcf is approximately 20% higher than at Zaniemysl-3.

During the second quarter of 2013, our Roszkow and Winna Gora wells were shut in for two weeks for annual maintenance and pressure testing.

In June of 2013, we signed a new gas sales agreement for our Lisewo-1 well that will become effective for us when we begin production at Lisewo-1, which is expected to be later in the third quarter of 2013. The terms of the agreement are similar to those covering our KSK wells.

Oil Revenues. Oil revenues were $952,000 for the second quarter of 2013, a 2% decrease from $971,000 recognized during the second quarter of 2012. Production levels decreased approximately 8% from 2012 to 2013, due to normal production declines. Higher oil prices in the second quarter of 2013 partially offset the production decline. Our average oil price during the second quarter of 2013 was $77.30 per barrel, a 6% increase from $72.64 per barrel received during the same quarter of 2012.

A summary of the amount and percentage change, as compared to the respective prior-year period, for oil revenues, average oil prices, and oil production volumes for the quarters ended June 30, 2013 and 2012, is set forth in the following table:

                               For the Quarter Ended June 30,
                                  2013               2012         Change
Oil revenues                        $952,000           $971,000    -2%
Average price (per barrel)            $77.30             $72.64    +6%
Production volumes (barrels)          12,315             13,370    -8%

Lease Operating Costs. Lease operating costs of $843,000 during the second quarter of 2013 were 3% lower than the second quarter 2012 amount of $870,000. Poland operating costs increased approximately 9% from quarter to quarter, with the bulk of the increase attributable to new production at Winna Gora. Conversely, operating costs and production taxes in the U.S. declined by approximately 9% from 2012 to 2013, due to lower production taxes and workover costs. The net effect of these changes was a decrease in total operating costs of $27,000 from quarter to quarter.


Exploration Costs. Our exploration costs consist of geological and geophysical costs and the costs of exploratory dry holes. Exploration costs were $4.0 million during the second quarter of 2013, compared to $2.0 million during the same period of 2012, an increase of 103%. Second quarter 2013 exploration costs included approximately $2.2 million of dry hole costs, including $736,000 associated with our Mieczewo well, which was plugged at the end of the first quarter of the year, $1.3 million associated with the unsuccessful fracture stimulation of our Plawce-2 well, and $200,000 associated with a dry hole drilled at the Dry Lake prospect in Nevada. In addition, we spent $1.0 million associated with Fences area three-dimensional, or 3-D, seismic surveys and $800,000 associated with two-dimensional, or 2-D, seismic surveys and other costs at our other project areas in Poland. Second quarter 2012 geological and geophysical costs included approximately $1.2 million associated with new 2-D seismic surveys on our Warsaw South acreage, $0.7 million associated with 2-D seismic surveys on our 100%-owned acreage, and $0.1 million associated with our 3-D seismic survey at our Lisewo southeast project.

Property Impairments. During the second quarter of 2013, we recorded property impairment costs of $5.4 million. We impaired $4.7 million of prior-year costs associated with our Plawce-2 well, following its unsuccessful fracture stimulation. In addition, our Zaniemysl-3 well ceased production during the quarter, causing us to charge its remaining net book value of $366,000 to impairment expense. Finally, we recorded an impairment charge of $474,000 related to concession costs in our Northwest project area, where we have made the determination to cease all exploration efforts. There were no property impairments in the second quarter of 2012.

Loss on Sale of Assets. During the second quarter of 2012, we sold certain leases in Montana associated with our Bakken exploration project, resulting in a loss of approximately $49,000. There was no corresponding transaction during 2013.

DD&A Expense - Exploration and Production. DD&A expense for producing properties was $875,000 for the second quarter of 2013, an increase of 50%, compared to $582,000 during the same period of 2012. Higher DD&A expense in 2013 was due to increased depreciation expense at our KSK and Winna Gora wells, reflecting higher and new production in 2013.

Accretion Expense. Accretion expense was $22,000 and $15,000 for the second quarter of 2013 and 2012, respectively. Accretion expense is related entirely to our asset retirement obligation associated with expected future plugging and abandonment costs.

Oilfield Services Segment

Oilfield Services Revenues. Oilfield services revenues were $20,000 during the second quarter of 2013 compared to $693,000 for the second quarter of 2012. During the second quarter of 2013, our drilling rig was largely inactive. During the second quarter of 2012, we drilled two wells for third parties. Oilfield services revenues will continue to fluctuate from period to period based on market demand, weather, the number of wells drilled, downtime for equipment repairs, the degree of emphasis on utilizing our oilfield servicing equipment on our Company-owned properties, and other factors.

Oilfield Services Costs. Oilfield services costs were $116,000 during the second quarter of 2013, compared to $455,000 during the same period of 2012. Oilfield services costs will also continue to fluctuate period to period based on market demand, weather, the number of wells drilled, downtime for equipment repairs, the degree of emphasis on utilizing our oilfield servicing equipment on our Company-owned properties, and other factors.


DD&A Expense - Oilfield Services. DD&A expense for oilfield services was $238,000 during the second quarter of 2013, compared to $274,000 during the same period of 2012. The period-to-period decrease was primarily due to certain capital additions from prior years becoming fully depreciated in 2013.

Nonsegmented Information

G&A Costs. G&A costs were $2.8 million during the second quarter of 2013, compared to $2.4 million during the second quarter of 2012. The increase is primarily due to higher compensation costs, including the payment of an incentive award of approximately $500,000 related to 2008, which had been deferred until the Company met certain performance benchmarks.

Stock Compensation (G&A). For the three-month periods ended June 30, 2013 and 2012, we recognized $693,000 and $551,000, respectively, of stock compensation expense related to the amortization of unexercised options and restricted stock.

Interest and Other Income (Expense). Interest and other income was $256,000 during the second quarter of 2013, an increase of $169,000 compared to $87,000 during the same period of 2012. The increase was due to the recognition of $204,000 in insurance proceeds, offset by lower cash balances available for investment and lower interest rates. During the second quarter of 2013, we incurred $626,000 in interest expense, which included $127,000 of amortization of previously incurred loan fees and $74,000 in commitment fees. During the second quarter of 2012, we incurred $640,000 in interest expense, which included $123,000 of amortization of previously incurred loan fees and $75,000 in commitment fees.

Foreign Exchange Gain (Loss). During the second quarter of 2013, we recorded foreign currency transaction losses of approximately $3.4 million, principally attributable to increases in the amount of Polish zlotys necessary to satisfy outstanding intercompany dollar-denominated loans. We recorded foreign exchange losses of approximately $13.0 million during the same quarter of 2012, which were also principally related to our intercompany loans. During the second quarter of 2013, the U.S. dollar strengthened against the zloty by approximately 2% from the beginning to the end of the quarter, which caused us to recognize foreign currency transaction losses. During the second quarter of 2012, the U.S. dollar strengthened against the zloty by approximately 9% from the beginning to the end of the quarter.

Six Months Ended June 30, 2013, Compared to the Same Period of 2012

Exploration and Production Segment

Gas Revenues. Revenues from gas sales were $15.8 million during the first half of 2013, compared to $13.7 million during the same period of 2012. Higher natural gas prices combined with higher production from our Kromolice-1 and -2 and Winna Gora wells to produce the higher revenues.

A summary of the amount and percentage change, as compared to the respective prior-year period, for gas revenues, average gas prices, and gas production volumes for the six months ended June 30, 2013 and 2012, is set forth in the following table:

                               For the Six Months Ended June 30,
                                    2013                2012          Change
Revenues                           $15,777,000         $13,684,000     +15%
Average price (per thousand              $7.08               $6.42     +10%
cubic feet)
Production volumes (thousand         2,228,000           2,130,000     +5%
cubic feet)


Daily gas production for the first half of 2013 was 12.3 MMcfd, compared to 11.7 MMcfd during the same period of 2012. Production from our KSK wells increased by 597,000 Mcf over 2012 first half levels. Production from our Winna Gora well added another 123,000 Mcf during 2013. These increases helped offset production declines at our Zaniemysl-3 and Roszkow wells.

We recognized a 10% increase in natural gas prices period over period. The Polish low-methane tariff was 4% higher during the first half of 2013, compared to the same half of 2012. However, period-to-period weakness in the U.S. dollar against the Polish zloty increased our U.S. dollar-denominated gas prices. The average exchange rate during the first half of 2013 was 3.18 zlotys per U.S. dollar. The average exchange rate during the first half of 2012 was 3.27 zlotys per U.S. dollar, a change of approximately 3%. In addition, production declines at Zaniemysl-3 were replaced by production gains at both KSK and Winna Gora, where our average price per Mcf is approximately 20% higher than at Zaniemysl-3.

During the third quarter of 2013, our KSK wells are scheduled to be shut in for up to two weeks for annual maintenance and pressure testing, which will reduce our third quarter and nine-month production and revenues.

In June of 2013, we signed a new gas sales agreement for our Lisewo-1 well that will become effective for us when we begin production at Lisewo-1, which is expected to be later in the third quarter of 2013. The terms of the agreement are similar to those covering our KSK wells.

Oil Revenues. Oil revenues were $1.9 million for the first half of 2013, a 13% decrease from the $2.1 million recognized during the first half of 2012. Production from our U.S. properties declined 11% during the first half of 2013, due to normal production declines. The other factor in the decrease in oil revenues was the lower prices received during the first half of 2013. Our average oil price during the first half of 2013 was $76.89 per barrel, a 2% decrease from $78.85 per barrel received during the same period of 2012.

A summary of the amount and percentage change, as compared to the respective prior-year period, for oil revenues, average oil prices, and oil production volumes for the six months ended June 30, 2013 and 2012, is set forth in the following table:

                              For the Six Months Ended June 30,
                                   2013                2012         Change
Revenues                           $1,852,000          $2,123,000    -13%
Average price (per barrel)             $76.89              $78.85    -2%
Production volumes (barrels)           24,087              26,923    -11%

Lease Operating Costs. Lease operating costs were $1.7 million during the first half of 2013, comparable to $1.7 million during the first half of 2012. Poland operating costs increased approximately 9% from year to year, with the bulk of the increase attributable to new production at Winna Gora. Conversely, operating costs and production taxes in the U.S. declined by approximately 7% from 2012 to 2013, due to lower production taxes and workover costs. The net effect of these changes was a decrease in total operating costs of $23,000 from quarter to quarter.

Exploration Costs. Our exploration costs consist of geological and geophysical costs and the costs of exploratory dry holes. Exploration costs were $10.2 million during the first half of 2013, compared to $5.0 million during the same period of 2012, an increase of 108%.


First half 2013 exploration costs included approximately $5.2 million of dry hole costs, including approximately $3.7 million associated with our Mieczewo well, which was plugged at the end of the first quarter of the year, approximately $1.3 million associated with the unsuccessful fracture stimulation of our Plawce-2 well, and $200,000 associated with a dry hole drilled at the Dry Lake prospect in Nevada. In addition, we spent $3.5 million associated with Fences area 3-D seismic surveys and $1.5 million associated with 2-D seismic surveys and other costs at our other project areas in Poland. First half 2012 exploration costs included approximately $500,000 associated with our Lisewo southeast 3-D seismic survey in our Fences concession, $3.9 million associated with 2-D seismic projects at our other existing Polish concessions, and approximately $470,000 in dry-hole costs associated with a Bakken test well in Montana.

Property Impairments. During the first half of 2013, we recorded property impairment costs of $5.6 million. We impaired $4.6 million of prior-year costs associated with our Plawce-2 well following its unsuccessful fracture stimulation, along with approximately $200,000 of prior-year costs associated with our Mieczewo well. In addition, our Zaniemysl-3 well ceased production during the second quarter of 2013, causing us to charge its remaining net book value of $347,000 to impairment expense. Finally, we recorded an impairment charge of $474,000 related to concession costs in our Northwest project area, where we have made the determination to cease all exploration efforts. There were no property impairments in the first half of 2012.

Loss on Sale of Assets. During the first half of 2012, we sold certain leases in Montana associated with our Bakken exploration project, resulting in a loss of approximately $49,000. There was no corresponding transaction during 2013.

DD&A Expense - Exploration and Production. DD&A expense for producing properties was $1.9 million for the first half of 2013, compared to $1.2 million during the same period of 2012. Higher DD&A expense in 2013 was due to increased depreciation expense at our KSK and Winna Gora wells, reflecting higher and new production in 2013.

Accretion Expense. Accretion expense was $45,000 and $31,000 for the first half of 2013 and 2012, respectively. Accretion expense is related entirely to our asset retirement obligation.

Oilfield Services Segment

Oilfield Services Revenues. Oilfield services revenues were $62,000 during the first half of 2013, compared to just under $1.4 million for the first half of 2012. During the first half of 2012, we performed limited services for third parties. During the first half of 2012, we drilled five wells for third parties, including one drilled for our Alberta Bakken joint venture, along with additional well service work. Oilfield services revenues will continue to fluctuate from period to period based on market demand, weather, the number of wells drilled, downtime for equipment repairs, the degree of emphasis on utilizing our oilfield servicing equipment on our Company-owned properties, and other factors.

Oilfield Services Costs. Oilfield services costs were $248,000 during the first half of 2013, compared to $1.1 million during the same period of 2012. Oilfield services costs will also continue to fluctuate period to period based on market demand, weather, the number of wells drilled, downtime for equipment repairs, the degree of emphasis on utilizing our oilfield servicing equipment on our Company-owned properties, and other factors.

DD&A Expense - Oilfield Services. DD&A expense for oilfield services was $476,000 during the first half of 2013, compared to $560,000 during the same period of 2012. The period-to-period decrease was primarily due to certain capital additions from prior years becoming fully depreciated in 2013.


Nonsegmented Information

G&A Costs. G&A costs were $4.6 million during the first half of 2013, compared to $4.3 million during the first half of 2012, an increase of $358,000. The increase is primarily due to higher compensation costs, including the payment of an incentive award of approximately $500,000 related to 2008, which had been deferred until the Company met certain performance benchmarks.

Stock Compensation (G&A). For the six-month periods ended June 30, 2013 and 2012, we recognized $1.4 million and $1.1 million, respectively, of stock compensation expense related to the amortization of unexercised options and restricted stock purchase rights.

Interest and Other Income (Expense). Interest and other income was $308,000 during the first half of 2013, an increase of $137,000, compared to $171,000 during the same period of 2012. The increase was due to the recognition of $204,000 in insurance proceeds, offset by lower cash balances available for investment and lower interest rates. During the first half of 2013, we incurred $1.3 million in interest expense, which included $257,000 of amortization of previously incurred loan fees and $154,000 in commitment fees. During the first half of 2012, we incurred $1.3 million in interest expense, which included $250,000 of amortization of previously incurred loan fees and $152,000 in commitment fees.

Foreign Exchange Loss. As discussed in Note 10 to the financial statements, during the first half of 2012, we recorded foreign currency transaction losses of approximately $12.6 million, principally attributable to increases in the amount of Polish zlotys necessary to satisfy outstanding intercompany dollar-denominated loans and unpaid interest to FX Energy, Inc. During the first half of 2013, the U.S. dollar strengthened by approximately 7% against the Polish zloty from the beginning to the end of the period, which caused us to recognize foreign currency transaction losses. During the first half of 2012, the zloty strengthened by approximately 1% against the U.S. dollar from the beginning to the end of the period, which caused us to recognize foreign currency transaction gains of $1.5 million.

Liquidity and Capital Resources

For much of our history, we have financed our operations principally through the sale of equity securities, bank borrowings, and agreements with industry participants that funded our share of costs in certain exploratory activities in return for an interest in our properties. However, as our gas production and prices have increased in Poland in the last several years and as higher oil prices have improved the profitability of our U.S. production, our internally generated cash flow has become a significant source of operations financing.

2013 Liquidity and Capital

Working Capital (current assets less current liabilities). Our working capital was $19.4 million as of June 30, 2013, down $11.0 million from December 31, 2012. Our current assets at June 30, 2013, included approximately $3.2 million in accrued oil and gas sales from both the United States and Poland. Our current liabilities at quarter-end included approximately $3.1 million in costs related to capital and exploration projects in Poland, along with a $7.0 million current portion of our long-term debt. Our total outstanding long-term debt at quarter-end, including the current portion, was $40 million.

Operating Activities. Net cash provided by operating activities was $4.2 million during the first six months of 2013, down 6% from the $4.4 million during the first six months of 2012. Higher exploration expenses, along with reductions in receivables at June 30, 2013, offset higher revenues in the first half of the year.


Investing Activities. During the first half of 2013, we used cash of $13.6 million in investing activities. We used $13.1 million for capital additions at our producing properties and $484,000 for capital additions in our office and drilling equipment. During the first half of 2012, we used cash of $9.4 million in investing activities. We used $9.3 million for capital additions in Poland and $303,000 for capital additions in our office and drilling equipment, offset by $222,000 in proceeds from the sale of assets.

Financing Activities. During the first half of 2013, we paid $53,000 in fees for our new credit facility that closed in July of this year. These fees have been capitalized as loan fees and will be amortized over the life of the new facility, beginning in the third quarter of 2013. There were no financing transactions during the first half of 2012.

Our Capital Resources and Future Expenditures

Our anticipated sources of liquidity and capital for 2013 include our working capital of $19.4 million at June 30, 2013, available credit under our expanded credit facility, and cash available from future operations.

Our 2010 credit facility agreement with The Royal Bank of Scotland, ING Bank N.V., and KBC Bank NV provided for a borrowing base of $55 million, a periodic interest rate of LIBOR, plus an interest margin of 4.0%, and a term of five years, with semiannual borrowing base reductions of $11 million each beginning on June 30, 2013. Accordingly, our borrowing base was reduced to $44 million on that date.

In consideration for the credit facility, we paid various arrangement, structuring, legal, and other fees totaling approximately $2.5 million. These fees have been capitalized as loan fees and are being amortized over the five-year term of the loan. An annual unused commitment fee of one-half of the applicable interest margin is charged quarterly based on the average daily unused portion of the expanded credit facility. As of June 30, 2013, the total amount drawn under the credit facility was $40 million, and the interest rate was 4.2% per annum.

On July 8, 2013, we finalized a new five-year, up to $100 Million Senior Reserve Based Lending Facility with BNP Paribas (Suisse) SA and ING Bank N.V. The initial commitment of the facility amounts to $65 million. We can seek additional commitments up to $100 million under certain conditions via an embedded accordion mechanism. Initial proceeds from the new facility were used to repay our previously existing facility. Payment of the credit facility is secured by our assets in Poland and guaranteed by us. Had the new facility closed prior to June 30, 2013, all outstanding debt at that date would have been classified as long-term debt on our balance sheet.

In consideration for the new credit facility, we paid various arrangement, structuring, legal, and other fees totaling approximately $1.8 million. These fees, along with approximately $400,000 associated with our existing facility, have been capitalized as loan fees and will be amortized over the five-year term of the loan, beginning in the third quarter of 2013. By virtue of the refinance, we expect to charge approximately $700,000 in unamortized loan fees associated with our existing facility to interest expense during the third quarter of 2013.

The credit facility calls for a periodic interest rate of LIBOR, plus an interest margin of 3.75%, and has a term of five years, with semiannual borrowing base reductions beginning on June 30, 2016. An annual unused . . .

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