Item 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Statements we make in this Quarterly Report on Form 10-Q (the “Quarterly Report”) which express a belief, expectation or intention, as well as those that are not historical fact, may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Our forward-looking statements are subject to various risks, uncertainties and assumptions, including those to which we refer under the headings “Cautionary Statement Concerning Forward-Looking Statements” and “Risk Factors” in Items 1 and 1A of Part 1 of our 2011 Annual Report and under the heading “Risk Factors” in Item 1A of Part II of this Quarterly Report.
OVERVIEW
We were incorporated as a Delaware corporation in January 1998 and operate in a single segment as an independent oil and natural gas exploration and production company. Our current operations are concentrated in the U.S. Gulf of Mexico shelf focusing on state and federal waters offshore Louisiana, which we consider our core area. We have focused on acquiring and developing assets in the Gulf of Mexico and the Gulf Coast region, as it offers a balanced and expansive array of existing and prospective exploration, exploitation and development opportunities in both established productive horizons and deeper geologic formations.
Effective September 1, 2012, we changed our legal corporate name from “Energy Partners, Ltd.” to “EPL Oil & Gas, Inc.” The name change was effected through a short-form merger pursuant to Section 253 of the General Corporation Law of the State of Delaware (the “DGCL”).
Under the DGCL, the merger did not require approval of our stockholders. The merger had the effect of amending Energy Partners, Ltd.’s certificate of incorporation to reflect our new legal name.
We maintain a website at
www.eplweb.com
that contains information about us, including links to our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all related amendments as soon as reasonably practicable after providing such reports to the Securities and Exchange Commission (the “SEC”).
We use the successful efforts method of accounting for oil and natural gas producing activities. Under this method, we capitalize lease acquisition costs, costs to drill and complete exploration wells in which proven reserves are discovered and costs to drill and complete development wells. Exploratory drilling costs are charged to expense if and when activities result in no reserves in commercial quantities. Seismic, geological and geophysical, and delay rental expenditures are expensed as they are incurred. We conduct various exploration and development activities jointly with others and, accordingly, recorded amounts for our oil and natural gas properties reflect only our proportionate interest in such activities. Our 2011 Annual Report includes a discussion of our critical accounting policies, which have not changed significantly since the end of the last fiscal year.
We produce both oil and natural gas. Throughout this Quarterly Report, when we refer to “total production,” “total reserves,” “percentage of production,” “percentage of reserves,” or any similar term, we have converted our natural gas reserves or production into barrel of oil equivalents. For this purpose, six thousand cubic feet of natural gas is equal to one barrel of oil, which is based on the relative energy content of natural gas and oil. Natural gas liquids are aggregated with oil in this Quarterly Report.
Recent Developments
On October 31, 2012, we acquired from Hilcorp Energy GOM Holdings, LLC (“Hilcorp”) 100% of the member
ship
interests of Hilcorp Energy GOM, LLC (“Hilcorp Acquisition”), which owns certain shallow water Gulf of Mexico shelf oil and natural gas interests (the “Hilcorp Properties”)
,
for $550 million in cash, subject to customary adjustments to reflect an economic effective date of July 1, 2012. The Hilcorp Acquisition was
financed with
the net proceeds from the sale of $300 million in aggregate principal amount of 8.25% senior notes due 2018 (the “Senior Notes”) an
d borrowings under our
expanded
senior cr
edit facility. Also on October 31, 2012, we obtained a
n increase in our senior
credit facility from $250 million to $750 million. See Note 2, “Acquisitions,” and Note 5, “Indebtedness,” for more information regarding these subsequent events.
On May 15, 2012, we acquired from W&T Offshore, Inc. (“W&T”) an asset package consisting of certain shallow-water Gulf of Mexico shelf oil and natural gas interests in our South Timbalier 41 field (“ST 41 Interests”) located in the Gulf of Mexico for $32.4 million in cash, subject to customary adjustments to reflect an economic effective date of April 1, 2012 (the “ST 41 Acquisition”). We estimate that the proved reserves as of the April 1, 2012 economic effectiv
e date totaled approximately 1.2
Mmboe, of which 51% were oil and 84% were proved developed reserves. Prior to the
ST41 A
cquisition, we owned a 60% working interest in the
se
properties
,
and W&T owned a 40% working interest. As a result of the
ST41 A
cquisition, we have become the sole working interest owner of the South Timba
lier 41 field. We funded the ST
41 Acquisition with cash on hand.
On June 20, 2012, we were the high bidder on six leases at the Central Gulf of Mexico Lease Sale 216/222. The six high bid lease blocks cover a total of 27,148 acres on a gross and net basis and are all located in the shallow Gulf of Mexico shelf within our core area of operations. Our share of the high bids totaled $7 million.
As of September 30, 2012, we had been awarded two (2) of the leases totaling $0.8 million.
As of October 31, 2012, we had been awarded all six leases with amounts due subsequent to September 30, 2012 totaling $6.2 million.
Overview and Outlook
Our fis
cal year 2012 capital budget has been expanded to
$
226
million, of which $
134
million is allocated to development activities, $
85
million to exploration projects
within existing core field areas
, including seismic purchases, and $7 million to the recently bid leases in the shallow Gulf of Mexico shelf. We recently acquired additional 2-D and 3-D seismic data sets regionally across our current offshore operating areas and extending onshore Louisiana where the geology is characterized by the same productive horizons and structural features. Additionally, we plan to spend approximately $
36
milli
on in 2012 on plugging, abandonment and other decommissioning activities.
On October 30, 2012, our board of directors set
our 2013 capital budget
at $300 million
(excluding plugging and abandonment expenditures)
.
We establish our capital spending on exploration and development with a goal to remain within cash flow from operations, allowing free cash flow from current and acquired assets to provide natural delevering.
We allocate capital in a rigorous and disciplined manner intended to achieve an overall lower risk capital expenditure profile that focuses on maximizing rate of return and requires projects to compete on that basis. This allocation has led us to focus on oil-weighted projects, which has resulted in a trend of increasing oil production volumes and declining natural gas production volumes.
We continually review and monitor opportunities to acquire producing properties, leasehold acreage and drilling prospects so that we can act quickly as acquisition opportunities become available. We intend to focus our acquisition strategy on assets in the Gulf of Mexico and the Gulf Coast region that are characterized by production-weighted reserves, seismic coverage, operated positions and the ability to consolidate interests in existing properties. We intend to use acquisitions of this type as a key method to replace and grow reserves and production, because we believe this strategy increases production and cash flow while reducing dry hole and exploration risk. We believe our expertise in the Gulf of Mexico shelf and in plugging and abandonment operations allows us to effectively evaluate acquisitions and to operate any properties we eventually acquire.
We continue to generate prospects, strive to maintain an extensive inventory of drillable prospects in-house and maintain exposure to new opportunities through relationships with industry partners. Generally, we fund any exploration and development expenditures with internally generated cash flows.
Our longer term operating strategy is to increase our oil and natural gas reserves and production while focusing on reducing exploration and development costs and operating costs to remain competitive with our offshore Gulf of Mexico industry peers.
We believe that our
core competency in plugging, abandonment and decommissioning operations will enable us to achieve our objectives of prudently removing idle infrastructure throughout the remaining productive lives of our fields and, over time, to reduce ongoing lease operating expenses (“LOE”) associated with maintaining idle infrastructure.
Our revenue, profitability and future growth rate depend substantially on factors beyond our control, such as oil and natural gas prices, tropical weather, economic, political and regulatory developments and availability of other sources of energy. Oil and natural gas prices historically have been volatile and may fluctuate widely in the future. Sustained periods of low prices for oil and natural gas could have a material adverse effect on our financial position, our results of operations, our cash flows, the quantities of oil and natural gas reserves that we can economically produce and our access to capital. See “Risk Factors” in Item 1A of our 2011 Annual Report and Item 1A of Part II of this Quarterly Report for a more detailed discussion of these risks.
Results of Operations
Three Months Ended September
30, 2012
Du
ring the three months ended September
30, 2012, we
completed two (2) development drilling oper
ations
and two (2
) recompletion operations, all of which were successful.
Our operating results for the t
hree months ended September
30, 2012, compare
d to the three months ended September
30, 2011, reflect a
n
11
% increase in oil production, partially offset by lower natural gas production and lower average selling prices for our oil and natural gas. Our product mix for
the three months ended September
30, 2012 was 82
%
oil (including nat
ural gas liquids) compared to 75
%
for the three months ended September
30, 2011. Production from the acquired Main Pass Interests and ST41 Interests had an impact of approximatel
y
777
Bo
e per day on the production rat
e in the three months ended September
30, 2012, compared to results
for the three months ended September
30, 2011, which do not include production from the Main Pass Interests and ST41 Interests. We expect our full-year 2012 oil production to increase as compared to our full-year 2011 oil production.
For the three months ended September
30
, 2012, our revenues increased 2
%
,
as compare
d to the three months ended September
30, 2011,
due primarily to the 11
% increase in oil production. Our overall pr
oduction volumes increased by 1
%
for the three months ended September
30, 2012 when compare
d to the three months ended September
30, 2011. Our Gulf of Mexi
co shelf production increased 2
% in the three months ended September
30, 2012, as compare
d to the three months ended September
30, 2011, due primarily to production increases in our West Delta field, partially offset by production declines in our p
redominantly natural gas field
s
. During the three months ended September 30, 2012, due to the impact of Hurricane Isaac
,
our Gulf of Mexico shelf production was shut in or
reduced resulting in reductions in
production
totaling approximately
161,000
Boe, or an impact of
approximately 1,750
Boe per day on the production rate for the quarter.
In addition to the items
addressed above, our net loss
for the three mo
nths ended September
30, 2012 includes a net loss
on derivative in
struments of $
22.1
million as
compared to a net gain of $
26.6
millio
n for the three months ended
September
30, 2011.
The income tax benefit
that we recorded for the three months
ended September 30, 2012 was increased
due to applying the change in our estimated effective income tax rate to our net deferred tax liabilities. The change in our estimated
effective income tax rate from 37.3% in 2011 to 36.6
% in 2012 was primarily related to estimated state income taxes.
Our state income taxes primarily relate to income apportioned to Louisiana. Our estimated Louisiana income apportionment factor can change as our production mix changes and commodity prices fluctuate. Further, our estimated Louisiana income apportionment factor can impact our estimated utilization of our net operating losses. We expect that changes in these estimates will continue to result in changes in our
estimated
effective income tax rate.
We expect our revenues, lease operating expenses and depreciation, depletion and amortization and accretion of asset retirement obligations to increase materially in future periods due to the acquisition of the Hilcorp Properties on October 31, 2012. We also expect our interest expense to increase materially due to the issuance of the Senior Notes and the borrowing on the Senior Credit Facility used to fund the acquisition of the Hilcorp Properties. Additionally, in order to have the financing necessary to complete the Hilcorp Acquisition, we had obtained a commitment for $200 million in the form of a senior unsecured bridge loan, which
was not
utilized
because we successfully completed our offering of the Senior Notes
. On October 31, 2012, we paid a fee of $2.0 million for this bridge loan commitment, which will be recorded as interest expense in the three months ended December 31, 2012.
Nine
Months Ended
September
30, 2012
During the nine
months ended
September
30, 2012, we completed
seven (7
)
development drilling operations, all of w
hich were successful, and fourteen (14) recompletion operations, twelve (12
) of which were successful. We also completed three (3) exploratory drilling operations, one of which was successful in a development zone.
Our operating results for the
nine
months ended
September
30, 2012, compared to the
nine
months ended
September
30, 2011, reflect a 22
% increase in oil production and higher average selling prices for our oil, partially offset by lower natural gas production and lower average selling prices for our natural gas. Our product mix for the
nine
months ended
September
30, 2012 was 80
% oil (including nat
ural gas liquids) compared to 71
% for the
nine
months ended
September
30, 2011. Production from the acquired ASOP Properties, Main Pass Interests and ST41 Interests had an impact of approximately
4,841
Boe per day on the production rate in the
nine
months ended
September
30, 2012, compared to results for the
nine
months ended
September
30, 2011, which include production from the ASOP Properties for the period from February 14, 2011 to
September
30, 2011, reflecting only a
3,023
Boe p
er day impact on the production rate in the prior period. We expect our full-year 2012 oil production to increase as compared to our full-year 2011 oil production.
For the
nine
months ended
September
30,
2012, our revenues increased 16
%
,
as compared to the
nine
months ended
September
3
0, 2011, due primarily to the 22
% increase in oil production and higher oil sales prices. Our overall production volumes
increased by 9
% for the nine
months ended
September
3
0, 2012 when compared to the nine
months ended
September
30, 2011. Our Gulf of Mexi
co shelf production increased 16
% in the
nine
months ended
September
30, 2012, as compared to the
nine
months ended
September
30, 2011, due primarily to production increases in our West Delta
field
and production from the ASOP Properties, Main Pass Interests and ST41 Interests, partially offset by production declines in our predominantly natural gas fields. In addition, our deepwater production, primarily natural gas, was curtailed during the
nine
months ended
September
30, 2012 due to third party downstream facility modifications.
In addition to the items addressed above, our net i
ncome for the nine months ended
September
30, 2012 includes significant exploration ex
penditures, primarily due to
area-wide 2-D and 3-D
seismic purchases totaling $10.7 million, impairments of $6.2 million and a net loss
on derivative in
struments of $11.9
million. The net income for the
nine
months ended
September
30, 20
11 reflects impairments of $19.2 million, a net gain
on
derivative instruments of $14.9
million and a $2.4 million loss on early extinguishment of debt as a result of the termination of our prior credit facility.
Our effective income tax rate for the
nine
months ended
September
30, 2012 was
32
.0
%.
The income tax expense
that we recorded for the nine months ended September 30, 2012 was reduced due to applying the change in our estimated effective income tax rate to our net deferred tax liabilities. The change in our estimated
effective income tax rate from 37.3% in 2011 to 36.6
% in 2012 was primarily related to estimated state income taxes.
RESULTS OF OPERATIONS
The following table presents information about our oil and natural gas operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 30,
|
|
September 30,
|
|
|
2012
|
|
2011
|
|
2012
|
|
2011
|
Net production (per day):
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil (Bbls)
|
|
|
8,901
|
|
|
8,034
|
|
|
9,350
|
|
|
7,634
|
Natural gas (Mcf)
|
|
|
11,558
|
|
|
16,358
|
|
|
14,378
|
|
|
18,888
|
Total (Boe)
|
|
|
10,827
|
|
|
10,760
|
|
|
11,746
|
|
|
10,782
|
Average sales prices:
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil (per Bbl)
|
|
$
|
101.91
|
|
$
|
106.23
|
|
$
|
107.19
|
|
$
|
106.71
|
Natural gas (per Mcf)
|
|
|
3.00
|
|
|
4.21
|
|
|
2.55
|
|
|
4.35
|
Total (per Boe)
|
|
|
86.98
|
|
|
85.72
|
|
|
88.44
|
|
|
83.19
|
Oil and natural gas revenues (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil
|
|
$
|
83,453
|
|
$
|
78,518
|
|
$
|
274,629
|
|
$
|
222,410
|
Natural gas
|
|
|
3,192
|
|
|
6,335
|
|
|
10,037
|
|
|
22,456
|
Total
|
|
|
86,645
|
|
|
84,853
|
|
|
284,666
|
|
|
244,866
|
Impact of derivatives instruments settled during the period
(1)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil (per Bbl)
|
|
$
|
(0.11)
|
|
$
|
(2.01)
|
|
$
|
(1.49)
|
|
$
|
(7.79)
|
Natural gas (per Mcf)
|
|
|
(0.01)
|
|
|
-
|
|
|
-
|
|
|
-
|
Average costs (per Boe):
|
|
|
|
|
|
|
|
|
|
|
|
|
LOE
|
|
$
|
25.09
|
|
$
|
19.46
|
|
$
|
19.28
|
|
$
|
17.84
|
Depreciation, depletion and amortization (“DD&A”)
|
|
|
27.21
|
|
|
26.76
|
|
|
24.52
|
|
|
24.83
|
Accretion of liability for asset retirement obligations
|
|
|
3.49
|
|
|
4.84
|
|
|
3.12
|
|
|
4.14
|
Taxes, other than on earnings
|
|
|
3.20
|
|
|
3.53
|
|
|
3.06
|
|
|
3.57
|
General and administrative (“G&A”) expenses
|
|
|
6.02
|
|
|
4.51
|
|
|
5.28
|
|
|
4.94
|
Increase (decrease) in oil and natural gas revenues due to:
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in prices of oil
|
|
$
|
(3,193)
|
|
|
|
|
$
|
1,000
|
|
|
|
Changes in production volumes of oil
|
|
|
8,128
|
|
|
|
|
|
51,219
|
|
|
|
Total increase in oil sales
|
|
|
4,935
|
|
|
|
|
|
52,219
|
|
|
|
Changes in prices of natural gas
|
|
$
|
(1,819)
|
|
|
|
|
$
|
(9,307)
|
|
|
|
Changes in production volumes of natural gas
|
|
|
(1,324)
|
|
|
|
|
|
(3,112)
|
|
|
|
Total decrease in natural gas sales
|
|
|
(3,143)
|
|
|
|
|
|
(12,419)
|
|
|
|
(1)
See “—Other Income and Expense” section for further discussion of the impact of derivative instruments.
Three Months Ended September
30, 2012 Com
pared to Three Months Ended September
30, 2011
Revenue and Net Income
(Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
|
|
2012
|
|
2011
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
$ Change
|
|
|
% Change
|
Oil and natural gas revenues
|
|
$
|
86,645
|
|
$
|
84,853
|
|
$
|
1,792
|
|
|
2%
|
Net income (loss)
|
|
|
(2,247)
|
|
|
23,458
|
|
|
(25,705)
|
|
|
NM
|
NM—Not Meaningful
Our oil and natural gas revenues increased
primarily as a result of the 11
% increase in oil productio
n in the three months ended September
30, 2012, as compare
d to the three months ended September
30, 2011, offset in part by a 4
% decline in average
selling prices for our oil, a 29
% decline in
natural gas production and a 29
% decline in average selling prices for our natural ga
s in the three months ended September
30, 2012
,
as compare
d to the three months ended September
30, 2011. Oil represented 82
% of total production
for the three months ended September
30, 2012 as compared to
75
% of total production
for the three months ended September
30, 2011.
During the three months ended September 30, 2012, due to the impact of Hurricane Isaac, our Gulf of Mexico shelf production was shut in or reduced resulting in reductions in production totaling approximately161,000 Boe, or an impact of approximately 1,750 Boe per day on the production rate for the quarter.
Operating Expenses
Our operating expenses primarily consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
|
|
2012
|
|
2011
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
$ Change
|
|
|
% Change
|
LOE
|
|
$
|
24,995
|
|
$
|
19,266
|
|
$
|
5,729
|
|
|
30%
|
Exploration expenditures and dry hole costs
|
|
|
966
|
|
|
973
|
|
|
(7)
|
|
|
-1%
|
Impairments
|
|
|
498
|
|
|
5,523
|
|
|
(5,025)
|
|
|
-91%
|
DD&A, including accretion expense
|
|
|
30,578
|
|
|
31,289
|
|
|
(711)
|
|
|
-2%
|
G&A expenses
|
|
|
5,995
|
|
|
4,461
|
|
|
1,534
|
|
|
34%
|
Taxes, other than on earnings
|
|
|
3,189
|
|
|
3,493
|
|
|
(304)
|
|
|
-9%
|
LOE increased
for the three months ended September
30, 2012, as compared to the three
months ended September
30, 2011, primarily due to approximately $3.0 million in expenses related to
Hurricane Isaac in the 2012 period
.
Furthermore, the increased LOE from
the
2011 acquisitions of the Main Pass Interests and ST41 Interests
were included in the 2012 period, but not in the 2011 period
,
because both of these acquisitions occurred
subsequent to September 30, 2011.
Impairments for the three months ended September 30, 2011 were primarily related to the decline in our estimate of future natural gas prices as of September 30, 2011 as compared to June 30, 2011 affecting our deepwater producing well (primarily natural gas), which was determined to have future net cash flows less than its carrying value resulting in the write down of this property to its estimated fair value as of September 30, 2011. Additionally, we increased our estimate of future abandonment costs for our deepwater fields in the three months ended September 30, 2011.
G&A expenses
increased for the three months ended September 30, 2012, as compared to the three months ended September 30, 2011, primarily as a result of an increase in
non-cash
share-b
ased compensation
,
which was
$1.2
million and
$
0.6
million in the three months ended
September
30, 2012 and 2011, respectively.
Taxes, other than on earnings, were lower in the three months ended
September
30, 2012, as compared to the three months ended
September
30, 2011. The decrease is primarily related to severance taxes
and an increase in the portion of our product
ion coming from federal leases
(which are not subject to a severance tax regime)
.
Other Income and Expense
For the three months ended
September
30, 2012 and 2011, our interest expense consists pri
marily of interest on our Original
Notes issued in connection with the ASOP Acquisition on February 14, 2011.
Other income (expense) in the three months ended
September
30, 2012 includes a net loss
on derivative instruments of $
22.1
million consisting
primarily of an unrealized loss
of $
22.0
million due to the change in fair market value of derivative instruments
.
Other income (expense) in the three months ended
September
30, 2
011 includes a net gain of $26.6
million consistin
g of an unrealized gain of $28.1
million due to the change in fair market value of derivativ
e instruments and a loss of $1.5
million on derivative instruments settled during the quarter primarily from the impact of our oil fixed-price swaps.
Nine
Months Ended
September
30, 2012 C
ompared to Nine Months Ended September
30, 2011
Revenue and Net Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
|
|
2012
|
|
2011
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
$ Change
|
|
|
% Change
|
Oil and natural gas revenues
|
|
$
|
284,666
|
|
$
|
244,866
|
|
$
|
39,800
|
|
|
16%
|
Net income
|
|
|
34,657
|
|
|
33,952
|
|
|
705
|
|
|
NM
|
NM—Not Meaningful
Our oil and natural gas revenues increased
primarily as a result of the 22
% increase in oil production
in the nine months ended September
30, 2012, as compared to the nine
months ended
September
30, 2011, offset in part by a 24
% decline in
natural gas production and a 41
% decline in average selling price
s for our natural gas in the nine
months ended
September 30, 2012
,
as compared to the nine
months ended
September
30, 2011. Oil represented
80
%
of total production for the nine
months ended
September
30, 2012
,
as compared to 71
% of total productio
n for the nine
months ended
September
30, 2011.
Operating Expenses
Our operating expenses primarily consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
|
|
2012
|
|
2011
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
$ Change
|
|
|
% Change
|
LOE
|
|
$
|
62,067
|
|
$
|
52,505
|
|
$
|
9,562
|
|
|
18%
|
Exploration expenditures and dry hole costs
|
|
|
17,862
|
|
|
2,343
|
|
|
15,519
|
|
|
NM
|
Impairments
|
|
|
6,206
|
|
|
19,197
|
|
|
(12,991)
|
|
|
-68%
|
DD&A, including accretion expense
|
|
|
88,963
|
|
|
85,253
|
|
|
3,710
|
|
|
4%
|
G&A expenses
|
|
|
16,993
|
|
|
14,544
|
|
|
2,449
|
|
|
17%
|
Taxes, other than on earnings
|
|
|
9,834
|
|
|
10,506
|
|
|
(672)
|
|
|
-6%
|
NM—Not Meaningful
LOE increased for the nine
months ended
September
30, 2012, as compared to the nine
months ended
September
30, 2011, primarily due to
the
2011 acquisitions of the ASOP Properties and Main Pass Interests and the 2012 acquisition of the ST41 Interests
and approximately $3.0 million of expenses related to
Hurricane Isaac in the 2012 period.
During the nine
months ended
September
30, 2012
, we recorded approximately $4.1
million of dry hole costs, primarily associated with two exploratory wells which reached their target depths in January 2012 and were determined to be unsuccessful and an unsuccessful exploratory portion of a well that was successfully completed i
n a development zone drilled
in
June
2012. In addition, explora
tion expenditures during the nine
months ended
September 30, 2012 include $10.7
million of seismic expense.
Impairments for the nine
months ended
September
30, 2012 were primarily due to the decline in our estimate of future natural gas prices, which affected two of our natural gas producing fields and reservoir performance at one of those fields. These fields were determined to have future net cash flows less than their carrying values resulting in the write downs of these properties to their estimated fair
values. Impairments for the nine
months ended
September
30, 2011 were primarily related to reservoir performance at one of our natural gas producing fields, which was determined to have future net cash flows less than its carrying value resulting in the write down of this property to its estimated fair value.
G&A expenses increased for the nine months ended September 30, 2012, as compared to the nine months ended September 30, 2011, primarily as a result of an increase in non-cash share-based compensation, which was
$3.5
million an
d $
1.8
m
illion in the nine
months ended
September
30, 2012 and 2011, respe
ctively. G&A expenses in the nine
months ended
September
30, 2011 also inclu
de $0.5
million in acquisition costs related to the ASOP Acquisition.
Taxes, other than on earn
ings, were lower in the nine
months ended
September
30, 2012, as compared to the nine
months ended
September
30, 2011. The decrease is prima
rily related to severance taxes
and an increase in the portion of our production coming from federal leases
(which are not subject to a severance tax regime)
.
Other Income and Expense
For the nine months ended September
30, 2012 and 2011, our interest expense consists pri
marily of interest on our Original
Notes issued in connection with the ASOP Acquisition on February 14, 2011.
O
ther income (expense) in the nine months ended September
30, 2012 includes a net loss
on
derivative instruments of $11.9
million consisting
of an unrealized loss of $8.1
million due to the change in fair market
value of derivative instruments
and a realize
d loss of $3.8
million on derivative instruments settled during the quarter primarily from the impact of higher oil prices during 2012. O
ther income (expense) in the nine months ended September
30, 2011 includes a net gain
o
f $14.9
million consisting of an unrealized gain of $3
1
.1 million due to the change in fair market value of derivative
instruments and
a loss of $16.2
million on derivative instruments settled durin
g the period primarily from the impact of our oil fixed-price swaps.
LIQUIDITY AND CAPITAL RESOURCES
At
September
30, 2012, we had unrestricted cash on hand of approx
imately $7.3
million and no amounts drawn under our cred
it facility, which had
a borrowing base of $200 million.
On October 31, 2012, in connection with the Hilcorp Acquisition, we obtained an increase in the borrowing base to $425.0 million and borrowed $
190.0
million to fund a portion of the Hilcorp Acquisition. We also
used the net proceeds of $289.5
million from the issuance of $300 million in aggregate principal am
ount of our Senior Notes
to fund the Hilcorp Acquistion (see
Senior Notes
below for more information).
Our fiscal
year 2012 capital budget is $226 million, of which $134
million is allocate
d to development activities, $85
million to exploration projects within existing core field areas
,
in
cluding seismic purchases
,
and $7
million to the recently bid leases in the shallow Gulf of Mexico shelf. Additionally, w
e plan to spend approximately $36
million in 2012 on plugging, abandonment and other decommissioning activities.
On October 30, 2012, our board of directors set
our 2013 capital budget
at $300 million
(excluding plugging and abandonment expenditures). We establish our capital spending on exploration and development with a goal to remain within cash flow from operations, allowing free cash flow from current and acquired assets to provide natural delevering.
Sources and Uses of Capital
As of
September
30, 2012, we had ca
sh and cash equivalents of $7.3
million and no amounts drawn under our Senior Credit Facility (described below).
On October 31, 2012, in connection with the closing of the Hilcorp Acquisition, our Senior Credit Facility was amended and restated, expanding the facility from $250 million to $750 million and increasing the borrowing base from $200 million to $425 million.
On October 31,
2012, after borrowings of $190.0
million to fund a portion of th
e Hilcorp Acquisition, we had $205.0
milli
on outstanding and $220.0
million available under the Senior Credit Facility
.
Capital Expenditures
. During the nine
months ended
September
30, 2012, we incurr
ed costs of approximately $153.6
million on development and explora
tion activities, including $
10.7
million on the seismic purchases previously described. W
e also spent approximately $
27.6
million on plugging, abandonment and other decommiss
ioning activities during the nine
months ended
September
30, 2012.
Acquisitions
.
On October 31, 2012, we acquired the Hilcorp Properties for $550 million in cash, subject to customary adjustments to reflect an economic effective date of July 1, 2012. The Hilcorp Acquisition
was financed with
the net proceeds from the sale of $300 million in aggregate principal amount of t
he Senior Notes
a
nd borrowings under our Senior Credit F
acility.
On May 15, 2012, we acquired the remaining 40% working interest in our South Timbalier 41 field for $32.4 million in cash, subject to customary adjustments to reflect an economic effective date of Apri
l 1, 2012. We funded the ST41 A
cquisition with cash on hand. We may fund future acquisitions with a combination of cash on hand, borrowings on our
Senior Credit F
acility and issuances of one or more debt and equity securities under our universal shelf registration statement that became effective under the Securities Act of 1933 in July 2011.
Share Repurchase Program
. In August 2011, the Board of Directors authorized a program for the repurchase of our outstanding common stock for up to an aggregate cash purchase price of $20.0 million and increased the program to $40.0 million in May 2012. Under the progra
m, we have repurchased 1,465,300
shares at an aggregate cash purchase price of approxi
mately $20.1 million, including 446,300
shares
purchased for approximately $7.3
million during 2012. Such shares are held in treasury and could be used to provide available shares for possible resale in future public or private offerings and our employee benefit plans. The repurchases have been, and will be, carried out in accordance with certain volume, timing and price constraints imposed by the SEC’s rules applicable to such transactions. The amount, timing and price of purchases otherwise depend on market conditions and other factors.
Working Capital
. At
September
30, 2012, we had a
working capital deficit of $
93.6
million, compared to working capital of $10.2 million at December 31, 2011.
The working capital deficit at September 30, 2012 is primarily due to the deposit paid on the Hilcorp Properties and increased accounts payable and accrued expenses related to exploration and development costs.
We have experienced, and expect to
experience in the future,
significant
working capital deficits. Our working capital deficits have historically resulted from increased accounts payable and accrued expenses related to ongoing exploration and development costs, which may be capitalized as noncurrent assets
, or increased investment in oil and natural gas properties
.
Restricted Cash
. We maintain restricted escrow funds in a trust for future plugging, abandonment and other decommissioning costs at our East Bay field. The trust was originally funded with $15.0 million and, with accumulated interest, had increased to $16.7 million at December 31, 2008. We have made draws to date of $10.7 million. We were able
to draw from the trust upon the authorization, and subsequent completion, of qualifying abandonment activities at our East Bay field. As of the date of this Quarterly Report, we had $6.0 million remaining in restricted escrow funds for decommissioning work in our East Bay field, which will remain restricted until substantially all required decommissioning in the East Bay field is complete. Amounts on deposit in the trust account are reflected in Restricted cash on our condensed consolidated balance sheets.
The Bureau of Ocean Energy Management (“BOEM”), the Bureau of Safety and Environmental Enforcement (“BSEE”) and other regulatory bodies, including those regulating the decommissioning of our pipelines and facilities under the jurisdiction of the state of Louisiana, may change their requirements or enforce requirements in a manner inconsistent with our expectations, which could materially increase the cost of such activities and/or accelerate the timing of cash expenditures and could have a material adverse effect on our financial position, results of operations and cash flows. For important additional information regarding risks related to our regulatory environment, see “Risk Factors” in Part II, Item 1A of this Quarterly Report and in Part I, Item 1A of our 2011 Annual Report.
Original
Notes.
On February 14, 2011, we issued $210 million in aggrega
te principal amount of the Original
Notes. We used the net proceed
s from the offering of the Original
Notes of $202 million, after deducting the initial purchasers’ discount and estimated offering expenses payable by us, to acquire the ASOP Properties for a purchase price of $200.7 million, before adjustments to reflect an economic effective date of January 1, 2011, and for gener
al corporate purposes. The Original
Notes bear interest from the date of their issuance at an annual rate of 8.25% with interest
due
on outstanding notes payable semi-annually, in arrears, on February 15
th
and August 15
th
of each year, commenci
ng on August 15, 2011. The Original
Notes are fully and unconditionally guaranteed, jointly and severally, on an unsecured senior basis initially by each of our existing direct and indirect domestic subsidiaries (other than imm
aterial subsidiaries). The Original
Notes will mature on February 15, 2018. F
or more information on our Original
Notes, see Note 7, “Indebtedness,” of our consolidated financial statements contained in Part II, Item 8 of our 2011 Annual Report.
Senior Notes.
On October 25, 2012, we issued the $300 million in aggregate principal amount of ou
r Senior Notes under the Indenture
. As described in Note 2, “Acquisitions,” we used the net proceeds from the offeri
ng of the Senior Notes of $289.5
million, after deducting the
initial purchasers’ discount
, to fund a portion of the Hilcorp Acquisition. The Senior Notes bear interest from August 15, 2012 at an annual rate of 8.25% with interest due semi-annually, in arrears on February 15th and August 15th of each year commencing on February 15, 2013. The Senior Notes are fully and unconditionally guaranteed on a senior basis initially by each of our existing direct and indirect domestic subsidiaries (other than immaterial subsidiaries) The Senior Notes mature on February 15, 2018.
The Senior Notes have terms that are substantially identica
l to the terms of our Original Notes
, other than with respect to special mandatory redemption provisions related to the closing of the Hilcorp Acquisition (which are now inapplicable because the Hilcorp Acquisition has closed)
. Howe
ver, the notes were issued under a different indenture as a separate class of securities and therefore, until exchanged for an issue of additional n
otes to be publicly registered
, will not trade together with the Original Notes. Pursuant to a registration rights agreement executed as part of the sale of the Senior Notes, we have agreed to issue publicly registered additional notes under our indenture dated February 14, 2011 in exchange for the Senior Notes.
For more information regarding the Senior Note
s
, see Note 5,
“
Indebtedness
”
, of our condensed consolidated financial statements in Item 1 of this Quarterly Report.
Senior Credit Facility
.
On February 14, 2011, we entered
into
our Senior Credit Facility with BMO Capital Markets, as lead arranger, and Bank of Montreal, as administrative agent and a lender, and the other lender parties thereto. The terms of our Senior Credit Facility established a revolving credit facility with a four-year term that could be used for revolving credit loans and letters of credit up to an aggregate principal amount of $250.0 million.
On October 31, 2012, in connection with the Hilcorp Acquisition, through an amendment and restatement of our Senior Credit Facility, the
aggregate
commitment under
this facility was increased to a maximum of $750.0 million and the maturity
date was extended to October 31
, 2016
.
The maximum amount of letters of credit that may be
outstanding at any one time is $20.0
million. The amount available under the revolving credit facility is limited by the borrowing base. The Senior Credit Facility is secured by substantially all of our assets, in
cluding
a)
mortgages on at least 80
%
of the total value
of our oil and gas properties
evaluated in the most recently completed reserve report, after giving effect to exploration and production activities, acquisitions and dispositions
,
and
b)
the stock of certain wholly-owned subsidiaries. The borrowing base under our Senior Credit Facility has been determined at the discretion of the lenders, based on the collateral value of our proved reserves and the proved reserves of the Hilcorp Properties, and is subject to potential special and regular semi-annual redeterminations.
On October 31, 2012, the borrowing base under the expanded
credit facility was increased
from $200.0 million to
$425.0 million.
Borrowings under our Senior Credit Facility bear interest ranging from a
base rate plus a margin of 0.75% to 1.75
% on base rate borrowings
and LIBOR plus a margin of 1.75% to 2.75
% on LIBOR borrowings.
Commitment fees ranging from 0.375% to 0.50% are payable on the unused portion of the borrowing bases. On
Octobe
r 31, 2012, we borrowed $190.0
million under the Senior Credit Facility to fund a portion of the purchase price and related expenses of the Hilcorp Acquisition
, and we have approximately
$220.0
million in availability under our Senior Credit Facility
.
For additional information regarding our Senior Credit Facility, see Note 7, “Indebtednes
s,” of our 2011 Annual Report.
Terminated Credit Facility
.
On February 14, 2011,
w
e te
rminated the then existing
credit facility in connection with entering into our current credit facility described above, resulting in a loss on early extinguishment of debt of $2.4 million, primarily due to writing off the unamortized deferred financing costs associated with the terminated facility.
Analysis of Cash Flows—Nine Months Ended September
30, 2012
The following table sets forth our cash flows (in thousands):
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
September 30,
|
|
|
2012
|
|
2011
|
Cash flows from operating activities
|
|
$
|
162,620
|
|
$
|
105,935
|
Cash flows used in investing activities
|
|
|
(226,882)
|
|
|
(244,145)
|
Cash flows provided by (used in) financing activities
|
|
|
(8,547)
|
|
|
191,925
|
The increase in our 2012 cash flows from operating activities primarily reflects increases in revenues due to the increase
in our oil production
, partially offset by decreases in nat
ural gas revenues during the nine
months ended September
30, 2012, as compared to the nine months ended September
30, 2011.
Net cash used in investing
activities was lower in the nine
months ended
September
30, 2012, as compared to the nine
months ended
September
30, 2011, due to our acquisition of the ASOP Pro
perties during the nine
months ended
September
30, 2011. However, our exploration and development exp
enditures were higher in the nine
months ended
September
30, 2012, due to our higher 2012 capital expenditures budget. In addition, we acquir
ed the ST41 Interests
and paid
the
deposit for the Hilcorp Acquisition
in the nine
months ended
September
30, 2012.
For the remainder of 2012, we expect our cash flows used in investing activities to increase materially due to the Hilcorp Acquistion.
Net cash used in fin
ancing activities during the nine
months ended
September
30, 2012 reflects the settlements of purchases of shares of our common stock (which have been kept as treasury shares) pursuant to our repurchase pro
gram during the nine
months ended
September
30, 2012. Net cash provided by fin
ancing activities during the nine
months ended
September
30, 2011 reflects
$203.8 million of net cash proceeds (before offering expenses of $1.8 million) from
the issuance of the Original
Notes, partiall
y offset by expenditures of $6.5
million for financing costs primarily associated with our Senior Credit Facility and the offering ex
penses associated with our Original
Notes.
For the remainder of 2012, we expect to have material cash flows provided by financing activities due to the issuance of the Senior Notes and borrowings on the Senior Credit Facility to fund the Hilcorp Acquistion on October 31, 2012.
We have not paid any cash dividends in the past on our common stock. The covenants in certain debt instruments to which we are a party, including our Senior Credit Facility
, the Original Indenture
and t
he
Indenture
, place certain restrictions and conditions on our ability to pay dividends. Any future cash dividends would depend on contractual limitations, future earnings, capital requirements, our financial condition and other factors determined by our board of directors.
New Accounting Pronouncements
See Note 9 of the condensed consolidated financial statements in Item 1, Part 1 of this Quarterly Report.
Cautionary Statement Concerning Forward Looking Statements
This Quarterly Report contains forward-looking statements within the meaning of, and we intend that such forward-looking statements be subject to th
e safe harbor provisions of,
U.S. federal securities laws. Forward-looking statements are, by definition, statements that are not historical in nature and relate to possible future events. They may be, but are not necessarily, identified by words such as “will,” “would,” “should,” “likely,” “estimates,” “thinks,” “strives,” “may,” “anticipates,” “expects,” “believes,” “intends,” “goals,” “plans,” or “projects” and similar expressions.
These forward-looking statements reflect our current views with respect to possible future events, are based on various assumptions and are subject to risks and uncertainties. These forward-looking statements are not guarantees or predictions of our future performance, and our actual results and future developments may differ materially from those projected in, and contemplated by, the forward-looking statements. As a result, you should not place undue reliance on these forward-looking statements. Our actual results could differ materially from those anticipated in these forward-looking statements. Among the
factors that could cause actual results to differ materially are the risks and uncertainties described under, “Risk Factors” in Item 1A of Part I of our 2011 Annual Report and Item 1A of Part II of this Quarterly Report, including the following:
•
planned and unplanned capital expenditures;
•
adequacy of capital resources and liquidity including, but not limited to, access to additional capacity under our credit facility;
•
our substantial level of indebtedness;
•
our ability to incur additional indebtedness;
•
volatility in oil and natural gas prices;
•
volatility in the financial and credit markets;
•
changes in general economic conditions;
•
uncertainties in reserve and production estimates;
•
replacing our oil and natural gas reserves;
•
unanticipated recovery or production problems;
•
availability, cost and adequacy of insurance coverage;
•
hurricane and other weather-related interference with business operations;
•
drilling and operating risks;
•
production expense estimates;
•
the impact of derivative positions;
•
our ability to retain and motivate key executives and other necessary personnel;
•
availability of drilling and production equipment and field service providers;
•
the effects of delays in completion of, or shut-ins of, gas gathering systems, pipelines and processing facilities;
•
potential costs associated with complying with new or modified regulations promulgated by the BOEM and BSEE
and the Pipeline Hazardous Materials Administration of the U.S. Department of Transportation;
•
the impact of political and regulatory developments;
•
risks and liabilities associated with acquired properties or businesses;
•
our ability to make and integrate acquisitions;
•
oil and gas prices and competition; and
•
our ability to generate sufficient cash flow to meet our debt service and other obligations.
Many of these factors are beyond our ability to control or predict. Any, or a combination, of these factors could materially affect our future financial condition or results of operations and the ultimate accuracy of the forward-looking statements. These forward-looking statements are not guarantees of our future performance, and our actual results and future developments may differ materially from those projected in the forward-looking statements. Management cautions against putting undue reliance on forward-looking statements or projecting any future results based on such statements.
For a further list and description of various risks, relevant factors and uncertainties that could cause future results or events to differ materially from those expressed or implied in our forward-looking statements, see “Risk Factors” in Part 1, Item 1A of our 2011 Annual Report and elsewhere in our 2011 Annual Report and Part II, Item 1A of this Quarterly Report and elsewhere in this Quarterly Report; our reports and registration statements filed from time to time with the SEC; and other announcements we make from time to time. Given these risks and uncertainties, you should not place undue reliance on these forward-looking statements.
Although we believe that the assumptions on which any forward-looking statements are based in this Quarterly Report and other periodic reports filed by us are reasonable when and as made, no assurance can be given that such assumptions will prove correct. All forward-looking statements in this Quarterly Report are expressly qualified in their entirety by the cautionary statements in this section and elsewhere in this Quarterly Report and we undertake no obligation to publicly update or revise any forward-looking statements, except as required by applicable securities laws and regulations.