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FXEN > SEC Filings for FXEN > Form 10-Q on 7-Nov-2013All Recent SEC Filings

Show all filings for FX ENERGY INC

Form 10-Q for FX ENERGY INC


7-Nov-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. Our operations in Poland, which are a combination of existing production and substantial exploration, have grown considerably. Oil and gas production, oil and gas revenues, oil and gas reserves, and oil and gas expenditures in this area have grown significantly over the last three years.

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

Results of Operations by Business Segment

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

Exploration and Production Segment

Gas Revenues. Revenues from gas sales were $6.9 million during the third quarter of 2013, compared to $8.0 million during the same quarter of 2012. Lower production in the 2013 quarter led to the decrease 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 September 30, 2013 and 2012, is set forth in the following table:

                                              For the Quarter Ended
                                                  September 30,
                                                2013          2012       Change
    Gas revenues                             $6,923,000    $7,994,000     -13%
    Average price (per thousand cubic feet)       $7.02         $7.05      -0%
    Production volumes (thousand cubic feet)    986,000     1,135,000     -13%

Daily gas production decreased to 10.7 million cubic feet of natural gas per day, or MMcfd, in the third quarter of 2013, compared to 12.3 MMcfd in the third quarter of 2012, a decrease of 13%. Production from our Zaniemysl and Roszkow wells decreased by 243,000 thousand cubic feet of natural gas, or Mcf, over 2012 third quarter levels, due to normal production declines. New production at our Winna Gora well of 96,000 Mcf partially offset the production declines at our other wells.

Natural gas prices were essentially unchanged during the 2013 quarter. The Polish low-methane tariff, which serves as the reference price for our gas sales agreements, was 3% lower during the third quarter of 2013 than the same quarter of 2012, due to a tariff decrease that became effective for us on January 1, 2013. However, mild 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 third quarter of 2013 was 3.21 zlotys per U.S. dollar. The average exchange rate during the third quarter of 2012 was 3.31 zlotys per U.S. dollar, also a change of approximately 3%.

During the third quarter of 2013, our Kromolice-1, Sroda-4, and Kromolice-2, or KSK, wells were shut in for two weeks for annual maintenance and pressure testing. Production at our Lisewo-1 well is expected to begin in November 2013.


Oil Revenues. Oil revenues were $1.1 million for the third quarter of 2013, a 10% increase from $1.0 million recognized during the third quarter of 2012. Production levels decreased, due to normal production declines, by approximately 8% from 2012 to 2013. The decrease in production was offset by higher prices received during the third quarter of 2013. Our average oil price during the third quarter of 2013 was $88.14 per barrel, a 19% increase from $74.30 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 September 30, 2013 and 2012, is set forth in the following table:

                                  For the Quarter Ended September 30,
                                       2013                 2012          Change
    Oil revenues                     $1,111,000           $1,014,000       +10%
    Average price (per barrel)           $88.14               $74.30       +19%
    Production volumes (barrels)         12,600               13,700        -8%

Lease Operating Costs. Lease operating costs of $932,000 during the third quarter of 2013 were 8% higher than the third quarter of 2012 amount of $862,000. Poland operating costs increased approximately 9% from quarter to quarter, with the bulk of the increase attributable to new production at Winna Gora. In addition, operating costs and production taxes in the U.S. increased by approximately 7% from 2012 to 2013, due to higher production taxes and workover costs. The net effect of these changes was an increase in total operating costs of $70,000 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 $7.2 million during the third quarter of 2013, compared to $10.9 million during the same period of 2012.

Third quarter of 2013 exploration costs included approximately $5.3 million associated with three-dimensional, or 3-D, seismic surveys at both our Fences area and our 100%-owned concessions in Poland, $478,000 associated with new two-dimensional, or 2-D, seismic surveys and other costs at our other project areas in Poland, and $1.4 million of dry-hole costs associated primarily with the unsuccessful fracture stimulation of our Plawce-2 well. Third quarter 2012 exploration costs included our share of dry-hole costs at the Kutno-2 well incurred through September 30, 2012, of approximately $9.0 million. In addition, the remaining third quarter 2012 geological and geophysical costs were primarily associated with 2-D seismic surveys on our 100%-owned acreage in Poland.

Property Impairment. There were no property impairments during the third quarter of 2013. Third quarter 2012 property impairment costs totaled $2.0 million. In the United States, we impaired all of the drilling costs associated with our Montana Bakken project, totaling approximately $1.3 million. In addition, in Poland, we impaired the costs of our Kutno concessions and certain of our Warsaw South concessions that either expired during the quarter or were deemed to be non-prospective for hydrocarbon potential. The impairments in Poland totaled approximately $700,000.

DD&A Expense - Exploration and Production. DD&A expense for producing properties was $878,000 for the third quarter of 2013, an increase of 21% compared to $725,000 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 $16,000 for the third 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 $0.2 million during the third quarter of 2013, a decrease of 60% compared to $0.5 million for the third quarter of 2012. During the third quarter of 2013, we drilled one well for third parties, along with additional well service work. During the third quarter of 2012, we drilled two wells for third parties, 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 own properties, and other factors.

Oilfield Services Costs. Oilfield services costs were $0.2 million during the third quarter of 2013, compared to $0.4 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 own properties, and other factors.

DD&A Expense - Oilfield Services. DD&A expense for oilfield services was $237,000 during the third quarter of 2013, compared to $273,000 during the same period of 2012. The quarter-to-quarter decrease was primarily due to prior-year capital additions becoming fully depreciated during 2012.

Nonsegmented Information

G&A Costs. G&A costs were $1.8 million during the third quarter of 2013, compared to $1.8 million during the third quarter of 2012.

Stock Compensation (G&A). For the three-month periods ended September 30, 2013 and 2012, we recognized $701,000 and $557,000, respectively, of stock compensation expense related to the amortization of deferred compensation related to stock option and restricted stock grants.

Interest and Other Income (Expense). During the third quarter of 2013, we incurred $1.4 million in interest expense. We recorded $797,000 of amortization of loan fees, including $677,000 related to our prior credit facility that was charged to interest expense by virtue of our refinance, and $72,000 in unused commitment fees during the quarter. During the third quarter of 2012, we incurred $602,000 in interest expense, which included $124,000 of amortization of loan fees and $104,000 in unused commitment fees.

Foreign Exchange Gain. During the third quarter of 2013, we recorded foreign currency transaction gains of approximately $11.5 million, principally attributable to decreases in the amount of Polish zlotys necessary to satisfy outstanding intercompany dollar-denominated loans. We recorded foreign exchange gains of $10.5 million during the same quarter of 2012, which were also principally related to our intercompany loans. During the third quarter of 2013 and 2012, the zloty strengthened by approximately 6% against the U.S. dollar from the beginning to the end of the quarter, which caused us to recognize foreign currency transaction gains.

Nine Months Ended September 30, 2013, Compared to the Same Period of 2012

Exploration and Production Segment

Gas Revenues. Revenues from gas sales were $22.7 million during the first nine months of 2013, compared to $21.7 million during the same period of 2012.


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 nine months ended September 30, 2013 and 2012, is set forth in the following table:

                                            For the Nine Months Ended
                                                  September 30,
                                              2013            2012         Change
  Revenues                                 $22,700,000     $21,679,000       +5%
  Average price (per thousand cubic feet)        $7.06           $6.64       +6%
  Production volumes (thousand cubic feet)   3,213,000        3,265,000      -2%

Daily gas production for the first nine months of 2013 was 11.8 MMcfd, compared to 11.9 MMcfd during the same period of 2012. Production from our KSK wells increased by 471,000 Mcf over 2012 nine-month levels. Production from our Winna Gora well added another 219,000 Mcf during 2013. These increases mostly offset normal production declines at our Zaniemysl-3 and Roszkow wells.

We recognized a 6% increase in natural gas prices period over period. The Polish low-methane tariff was 2% higher during the first nine months of 2013, compared to the same period 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 nine months of 2013 was 3.19 zlotys per U.S. dollar. The average exchange rate during the first nine months of 2012 was 3.29 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 were shut in for two weeks for annual maintenance and pressure testing. Production at our Lisewo-1 well is expected to begin in November, 2013.

Oil Revenues. Oil revenues were $3.0 million for the first nine months of 2013, a 6% decrease from the $3.1 million recognized during the first nine months of 2012. Production from our U.S. properties declined 10% during the first nine months of 2013 due to regular production declines. The decline in production was partially offset by higher prices received during the first nine months of 2013. Our average oil price during the first nine months of 2013 was $80.75 per barrel, a 4% increase from $77.32 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 nine months ended September 30, 2013 and 2012, is set forth in the following table:

                                 For the Nine Months Ended September 30,
                                      2013                   2012            Change
  Revenues                         $2,963,000              $3,137,000          -6%
  Average price (per barrel)           $80.75                   $77.32         +4%
  Production volumes (barrels)         36,700                  40,600         -10%

Lease Operating Costs. Lease operating costs were $2.7 million during the first nine months of 2013, an increase of 2% compared to the same period of 2012. Poland operating costs increased approximately 10% 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 2% from 2012 to 2013, due to lower production taxes and workover costs. The net effect of these changes was an increase in total operating costs of $45,000 from year to year.


Exploration Costs. Our exploration costs consist of geological and geophysical costs and the costs of exploratory dry holes. Exploration costs were $17.4 million during the first nine months of 2013, compared to $15.9 million during the same period of 2012.

Our 2013 exploration costs included approximately $6.6 million of dry-hole costs, including approximately $3.8 million associated with our Mieczewo well, which was plugged at the end of the first quarter of the year, and approximately $2.4 million associated with the unsuccessful fracture stimulation of our Plawce-2 well. In addition, we spent approximately $9.0 million associated with 3-D seismic surveys at both our Fences area and our 100%-owned concessions in Poland, and $1.7 million associated with new 2-D seismic surveys and other costs at our other project areas in Poland. Nine-month 2012 exploration costs included our share of dry-hole costs at the Kutno-2 well incurred through September 30, 2012, of approximately $9.0 million. In addition, the remaining 2012 exploration costs included approximately $560,000 associated with our Lisewo southeast 3-D seismic survey in our Fences concession, $5.8 million associated with 2-D seismic projects at our other existing Polish concessions, and approximately $485,000 in dry-hole costs associated with a Bakken test well in Montana.

Property Impairment. During the first nine months of 2013, we recorded property impairment costs of $5.6 million. We impaired approximately $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 2013, 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. Our first nine months of 2012 property impairment costs totaled $2.0 million. In the United States, we impaired all of the capitalized drilling costs associated with our Montana Bakken project, totaling approximately $1.3 million. In addition, in Poland, we impaired the costs of our Kutno concessions and certain of our Warsaw South concessions that either expired during 2012 or were deemed to be non-prospective for hydrocarbon potential. The impairments in Poland totaled approximately $700,000.

DD&A Expense - Exploration and Production. DD&A expense for producing properties was $2.8 million for the first nine months of 2013, an increase of 46% compared to $1.9 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 $67,000 and $46,000 for the first nine months 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 $0.3 million during the first nine months of 2013, compared to $1.9 million for the first nine months of 2012. We drilled one well for third parties during the first nine months of 2013, along with additional well service work. We drilled seven wells for third parties, including one drilled for our Alberta Bakken joint venture, during the first nine months of 2012, 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 own properties, and other factors.


Oilfield Services Costs. Oilfield services costs were $0.4 million during the first nine months of 2013, compared to $1.5 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 own properties, and other factors.

DD&A Expense - Oilfield Services. DD&A expense for oilfield services was $714,000 during the first nine months of 2013, compared to $834,000 during the same period of 2012. The year-to-year decrease was primarily due to prior-year capital additions becoming fully depreciated during 2012.

Nonsegmented Information

G&A Costs. G&A costs were $6.5 million during the first nine months of 2013, compared to $6.0 million during the first nine months of 2012, an increase of $409,000. The increase is primarily due to higher compensation costs, including the payment of a company-wide incentive award of approximately $500,000 related to 2008, which had been deferred until we met certain performance benchmarks, which were met in 2013.

Stock Compensation (G&A). For the nine-month periods ended September 30, 2013 and 2012, we recognized $2.1 million and $1.7 million, respectively, of stock compensation expense related to the amortization of deferred compensation related to stock option and restricted stock grants.

Interest and Other Income (Expense). During the first nine months of 2013, we incurred $2.6 million in interest expense. We recorded $1.1 million of amortization of loan fees, including $677,000 related to our prior credit facility that was charged to interest expense by virtue of our refinance, and $226,000 in unused commitment fees. During the first nine months of 2012, we incurred $1.9 million in interest expense. We recorded $374,000 of amortization of loan fees and $256,000 in unused commitment fees.

Foreign Exchange Gain (Loss). As discussed in Note 10 to the financial statements, during the first nine months of 2013, we recorded foreign currency transaction losses of approximately $1.0 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 nine months of 2013, the zloty weakened 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 losses. Foreign currency transaction gains during the first nine months of 2012 were $12.0 million. During the first nine months of 2012, the zloty strengthened by approximately 7% against the U.S. dollar from the beginning to the end of the period, which caused us to recognize foreign currency transaction gains.

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 September 30, 2013, down $11.0 million from December 31, 2012. Our current assets at September 30, 2013, included approximately $3.1 million in accrued oil and gas sales from both the United States and Poland. Our current liabilities at September 30, 2013, included approximately $4.3 million in costs related to capital and exploration projects in Poland. Our total outstanding long-term debt at September 30, 2013, was $42.0 million. Our cash and cash equivalents at September 30, 2013, totaled $19.2 million, $17.0 million of which was held in Poland at ING Bank N.V. We have not historically repatriated any cash held in Poland to the United States nor do we plan to do so in the foreseeable future. Consequently, there will be no repatriation taxes incurred.

Operating Activities. Net cash provided by operating activities was $2.9 million during the first nine months of 2013, down 51% from the $5.8 million during the first nine months of 2012. The 2013 decrease was due primarily to higher exploration expenses and a reduction of current liabilities.

Investing Activities. During the first nine months of 2013, we used cash of $17.5 million in investing activities. We used $16.7 million for capital additions at our producing properties and $869,000 for capital additions in our office and drilling equipment. During the first nine months of 2012, we used cash of $12.1 million in investing activities. We used $11.8 million for capital additions in Poland and $464,000 for capital additions in our office and drilling equipment, offset by $221,000 in proceeds from the sale of assets.

Financing Activities. During the first nine months of 2013, we paid $2.0 million in fees for our new credit facility that closed in July of this year. We used proceeds of $42.0 million from our new facility to repay the prior facility, as well as to pay for the new facility fees. These fees have been capitalized as loan fees and are being amortized over the life of the new facility, beginning in the third quarter of 2013. There were no financing transactions during the first nine months 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 September 30, 2013, available credit under our expanded credit facility, and cash available from future operations.

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 to increase the commitment 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.

In consideration of the new credit facility, we paid various arrangement, structuring, legal, and other fees totaling approximately $2.0 million. These fees, along with approximately $400,000 associated with our previous 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 charged approximately $677,000 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 unused commitment fee of 40% of the applicable interest margin is charged monthly based on the average daily unused portion of the new credit facility. There are no financial covenants associated with the new credit facility.

We expect that our 2013 production will be slightly lower than our 2012 production with the addition of production at our Winna Gora-1 and Lisewo-1 wells, as well as full production from our KSK wells, which mostly offset production declines at some of our older wells. Production began at Winna Gora-1 in late January of 2013. Production is expected to begin at Lisewo-1 during November 2013 and at Komorze-3K in early 2014. We have contracts in place that call for us to receive 86% of the published low-methane tariff, adjusted for energy content, for the Winna Gora-1 and Lisewo-1 wells, and expect to receive similar pricing for the Komorze-3K well. The amount of revenue from this new production will depend on applicable gas sales prices and prevailing currency exchange rates.

We have an effective Securities Act universal shelf registration statement under which we may sell up to $200 million of equity or debt securities of various kinds. In June 2012, we entered into an agreement to possibly sell up to $50 million in common stock during the next two years in at-the-market transactions. Through the date of this filing, we have not sold any stock under that agreement. Assuming all $50 million of common stock covered by the at-the-market facility were sold, the remaining $150 million balance of securities available for sale under the registration statement is available for sale at any time, subject to market conditions and our ability to access the capital markets, to further finance our exploration and development plans in Poland and for other corporate purposes.

At September 30, 2013, we were in the process of building pipelines and production facilities at our Lisewo and Komorze-3K wells and were drilling the Lisewo-2 well in the Fences area and the Gorka-Duchowna well in Block 246. On . . .

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