UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended June 30, 2006March 31, 2007
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934 |
Commission file number: 001-7940
GOODRICH PETROLEUM CORPORATION
(Exact name of registrant as specified in its charter)
Delaware | ||
(State or other jurisdiction of incorporation or organization) | 76-0466193 (I.R.S. Employer Identification No.) |
808 Travis, Suite 1320
Houston, Texas 77002
(Address of principal executive offices) (Zip Code)
(Registrant’s telephone number, including area code): (713) 780-9494
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes xþ No ¨
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨ Accelerated filer xþ Non-accelerated filer ¨
Indicate by check mark whether the Registrant is a shell company (as defined in Exchange Act Rule 12b-2). Yes ¨No xþ
The number of shares outstanding of the Registrant’s common stock as of AugustMay 4, 20062007 was 24,962,966.28,303,019.
GOODRICH PETROLEUM CORPORATION AND SUBSIDIARIES
GOODRICH PETROLEUM CORPORATION
TABLE OF CONTENTS
Page | ||||
PART I | FINANCIAL INFORMATION | 3 | ||
ITEM 1. | FINANCIAL STATEMENTS | |||
Consolidated Balance | 3 | |||
4 | ||||
5 | ||||
6 | ||||
7 | ||||
ITEM 2. |
| |||
ITEM 3. | ||||
ITEM 4. | ||||
PART II | OTHER INFORMATION | |||
ITEM 1A. | ||||
ITEM | ||||
GOODRICH PETROLEUM CORPORATION AND SUBSIDIARIES
(In Thousands, Except Share Amounts)Amounts and Par Value)
June 30, 2006 | December 31, 2005 | March 31, 2007 | December 31, 2006 | |||||||||||||
(unaudited) | ||||||||||||||||
Assets | ||||||||||||||||
Current assets: | ||||||||||||||||
ASSETS | (unaudited) | |||||||||||||||
CURRENT ASSETS: | ||||||||||||||||
Cash and cash equivalents | $ | 4,081 | $ | 19,842 | $ | 7,572 | $ | 6,184 | ||||||||
Assets held for sale | 1,867 | — | ||||||||||||||
Accounts receivable, trade and other, net of allowance | 8,899 | 6,397 | 9,996 | 9,665 | ||||||||||||
Accrued oil and gas revenue | 9,848 | 11,863 | 10,949 | 10,689 | ||||||||||||
Fair value of oil and gas derivatives | 2,228 | 13,419 | ||||||||||||||
Fair value of interest rate derivatives | 312 | 107 | 54 | 219 | ||||||||||||
Prepaid expenses and other | 973 | 463 | 1,257 | 994 | ||||||||||||
Total current assets | 24,113 | 38,672 | 33,923 | 41,170 | ||||||||||||
Property and equipment: | ||||||||||||||||
PROPERTY AND EQUIPMENT: | ||||||||||||||||
Oil and gas properties (successful efforts method) | 460,750 | 316,286 | 497,466 | 575,666 | ||||||||||||
Furniture, fixtures and equipment | 1,308 | 1,075 | 1,686 | 1,463 | ||||||||||||
462,058 | 317,361 | 499,152 | 577,129 | |||||||||||||
Less: Accumulated depletion, depreciation and amortization | (101,911 | ) | (74,229 | ) | (94,761 | ) | (156,509 | ) | ||||||||
Net property and equipment | 360,147 | 243,132 | 404,391 | 420,620 | ||||||||||||
Other assets: | ||||||||||||||||
OTHER ASSETS: | ||||||||||||||||
Restricted cash | 2,039 | 2,039 | — | 2,039 | ||||||||||||
Fair value of interest rate derivatives | 459 | — | ||||||||||||||
Deferred tax asset | 3,602 | 11,580 | 9,041 | 9,705 | ||||||||||||
Other | 2,042 | 1,103 | 5,384 | 5,730 | ||||||||||||
Total other assets | 8,142 | 14,722 | 14,425 | 17,474 | ||||||||||||
Total assets | $ | 392,402 | $ | 296,526 | ||||||||||||
TOTAL ASSETS | $ | 452,739 | $ | 479,264 | ||||||||||||
Liabilities and Stockholders’ Equity | ||||||||||||||||
Current liabilities: | ||||||||||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||||
CURRENT LIABILITIES: | ||||||||||||||||
Accounts payable | $ | 55,359 | $ | 31,574 | $ | 29,860 | $ | 36,263 | ||||||||
Accrued liabilities | 17,966 | 15,973 | 37,579 | 26,811 | ||||||||||||
Fair value of oil and gas derivatives | 8,368 | 23,271 | ||||||||||||||
Accrued abandonment costs | 92 | 92 | 158 | 263 | ||||||||||||
Total current liabilities | 81,785 | 70,910 | 67,597 | 63,337 | ||||||||||||
Long-term debt | 84,500 | 30,000 | 175,000 | 201,500 | ||||||||||||
Accrued abandonment costs | 8,855 | 7,868 | 3,237 | 9,294 | ||||||||||||
Fair value of oil and gas derivatives | 1,547 | 6,159 | ||||||||||||||
Total liabilities | 176,687 | 114,937 | 245,834 | 274,131 | ||||||||||||
Stockholders’ equity: | ||||||||||||||||
Commitments and contingencies (See Note 8) | ||||||||||||||||
STOCKHOLDERS’ EQUITY: | ||||||||||||||||
Preferred stock: 10,000,000 shares authorized: | ||||||||||||||||
Series A convertible preferred stock, $1.00 par value, 791,968 shares issued and outstanding at December 31, 2005 | — | 792 | ||||||||||||||
Series B convertible preferred stock, $1.00 par value, issued and outstanding 2,250,000 and 1,650,000 shares, respectively | 2,250 | 1,650 | ||||||||||||||
Common stock: $0.20 par value, 50,000,000 shares authorized; issued and outstanding 24,947,133 and 24,804,737 shares, respectively | 4,989 | 4,961 | ||||||||||||||
Series B convertible preferred stock, $1.00 par value, 2,250,000 shares issued and outstanding | 2,250 | 2,250 | ||||||||||||||
Common stock: $0.20 par value, 50,000,000 shares authorized; issued and outstanding 28,321,464 and 28,218,422 shares, respectively | 5,066 | 5,049 | ||||||||||||||
Additional paid in capital | 209,912 | 187,967 | 215,153 | 213,666 | ||||||||||||
Retained earnings (deficit) | 2,703 | (8,649 | ) | |||||||||||||
Unamortized restricted stock awards | — | (2,066 | ) | |||||||||||||
Treasury stock | (517 | ) | — | |||||||||||||
Accumulated deficit | (15,047 | ) | (14,571 | ) | ||||||||||||
Accumulated other comprehensive loss | (4,139 | ) | (3,066 | ) | — | (1,261 | ) | |||||||||
Total stockholders’ equity | 215,715 | 181,589 | 206,905 | 205,133 | ||||||||||||
Total liabilities and stockholders’ equity | $ | 392,402 | $ | 296,526 | ||||||||||||
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 452,739 | $ | 479,264 | ||||||||||||
See accompanying notes to consolidated financial statementsstatements.
GOODRICH PETROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Amounts)
(Unaudited)
Three Months Ended June 30, | Six Months Ended | Three Months Ended March 31, | ||||||||||||||||||||||
2006 | 2005 | 2006 | 2005 | 2007 | 2006 | |||||||||||||||||||
Revenues: | ||||||||||||||||||||||||
Oil and natural gas revenues | $ | 29,334 | $ | 13,303 | $ | 54,239 | $ | 25,651 | ||||||||||||||||
Oil and gas revenues | $ | 23,317 | $ | 14,423 | ||||||||||||||||||||
Other | 1,292 | 238 | 1,638 | 713 | 225 | 346 | ||||||||||||||||||
30,626 | 13,541 | 55,877 | 26,364 | 23,542 | 14,769 | |||||||||||||||||||
Operating expenses: | ||||||||||||||||||||||||
Lease operating expense | 4,670 | 2,288 | 8,254 | 4,532 | 4,111 | 2,238 | ||||||||||||||||||
Production taxes | 1,631 | 971 | 3,215 | 1,757 | 318 | 902 | ||||||||||||||||||
Transportation | 1,676 | 52 | 1,676 | 91 | 1,075 | — | ||||||||||||||||||
Depreciation, depletion and amortization | 13,091 | 5,745 | 22,923 | 11,591 | 17,708 | 5,882 | ||||||||||||||||||
Exploration | 1,870 | 2,418 | 3,364 | 3,942 | 2,326 | 1,399 | ||||||||||||||||||
General and administrative | 4,195 | 1,805 | 7,966 | 3,425 | 5,338 | 3,771 | ||||||||||||||||||
Gain on sale of assets | — | (18 | ) | — | (169 | ) | ||||||||||||||||||
Other | 1,259 | 176 | 1,259 | 400 | ||||||||||||||||||||
28,392 | 13,437 | 48,657 | 25,569 | 30,876 | 14,192 | |||||||||||||||||||
Operating income | 2,234 | 104 | 7,220 | 795 | ||||||||||||||||||||
Operating income (loss) | (7,334 | ) | 577 | |||||||||||||||||||||
Other income (expense): | ||||||||||||||||||||||||
Interest expense | (1,502 | ) | (519 | ) | (2,197 | ) | (826 | ) | (2,624 | ) | (695 | ) | ||||||||||||
Gain (loss) on derivatives not qualifying for hedge accounting | 5,881 | (269 | ) | 19,423 | (10,112 | ) | (9,487 | ) | 13,542 | |||||||||||||||
4,379 | (788 | ) | 17,226 | (10,938 | ) | (12,111 | ) | 12,847 | ||||||||||||||||
Income (loss) before income taxes | 6,613 | (684 | ) | 24,446 | (10,143 | ) | (19,445 | ) | 13,424 | |||||||||||||||
Income tax (expense) benefit | (2,315 | ) | 239 | (8,556 | ) | 3,547 | 6,743 | (4,698 | ) | |||||||||||||||
Net income (loss) | 4,298 | (445 | ) | 15,890 | (6,596 | ) | ||||||||||||||||||
Income (loss) from continuing operations | (12,702 | ) | 8,726 | |||||||||||||||||||||
Discontinued operations (See Note 6): | ||||||||||||||||||||||||
Gain on disposal, net of tax | 10,913 | — | ||||||||||||||||||||||
Income from discontinued operations, net of tax | 2,825 | 2,866 | ||||||||||||||||||||||
13,738 | 2,866 | |||||||||||||||||||||||
Net income | 1,036 | 11,592 | ||||||||||||||||||||||
Preferred stock dividends | 1,512 | 158 | 2,993 | 316 | 1,512 | 1,481 | ||||||||||||||||||
Preferred stock redemption premium | 9 | — | 1,545 | — | — | 1,536 | ||||||||||||||||||
Net income (loss) applicable to common stock | $ | 2,777 | $ | (603 | ) | $ | 11,352 | $ | (6,912 | ) | $ | (476 | ) | $ | 8,575 | |||||||||
Net income (loss) per share applicable to common stock: | ||||||||||||||||||||||||
Income (loss) from continuing operations per common share: | ||||||||||||||||||||||||
Basic | $ | 0.11 | $ | (0.03 | ) | $ | 0.46 | $ | (0.31 | ) | $ | (0.51 | ) | $ | 0.35 | |||||||||
Diluted | $ | 0.11 | $ | (0.03 | ) | $ | 0.45 | $ | (0.31 | ) | $ | (0.51 | ) | $ | 0.34 | |||||||||
Weighted average number of common shares: | ||||||||||||||||||||||||
Income from discontinued operations per common share: | ||||||||||||||||||||||||
Basic | 24,936 | 23,461 | 24,898 | 22,129 | $ | 0.55 | $ | 0.12 | ||||||||||||||||
Diluted | 25,446 | 23,461 | 25,406 | 22,129 | $ | 0.54 | $ | 0.11 | ||||||||||||||||
Net income (loss) applicable to common stock per common share: | ||||||||||||||||||||||||
Basic | $ | (0.02 | ) | $ | 0.34 | |||||||||||||||||||
Diluted | $ | (0.02 | ) | $ | 0.34 | |||||||||||||||||||
Average common shares outstanding: | ||||||||||||||||||||||||
Basic | 25,141 | 24,860 | ||||||||||||||||||||||
Diluted | 25,386 | 25,366 | ||||||||||||||||||||||
See accompanying notes to consolidated financial statementsstatements.
GOODRICH PETROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
Six Months Ended June 30, | Three Months Ended March 31, | |||||||||||||||
2006 | 2005 | 2007 | 2006 | |||||||||||||
Cash flows from operating activities: | ||||||||||||||||
Net income (loss) | $ | 15,890 | $ | (6,596 | ) | |||||||||||
Adjustments to reconcile net income (loss) to net cash provided by operating activities - | ||||||||||||||||
Cash flows from operating activities: | ||||||||||||||||
Net income | $ | 1,036 | $ | 11,592 | ||||||||||||
Adjustments to reconcile net income to net cash provided by operating activities - | ||||||||||||||||
Depletion, depreciation and amortization | 22,923 | 11,591 | 17,708 | 9,832 | ||||||||||||
Unrealized (gain) loss on derivatives not qualifying for hedge accounting | (21,848 | ) | 10,333 | 13,124 | (16,121 | ) | ||||||||||
Deferred income taxes | 8,556 | (3,547 | ) | 654 | 6,241 | |||||||||||
Dry hole costs | 20 | 1,888 | 905 | — | ||||||||||||
Amortization of leasehold costs | 2,484 | 1,199 | 1,766 | 1,158 | ||||||||||||
Stock based compensation | 2,338 | 506 | ||||||||||||||
Stock based compensation (non-cash) | 1,350 | 932 | ||||||||||||||
Gain on sale of assets | — | (169 | ) | (16,789 | ) | — | ||||||||||
Other non cash items | 401 | 75 | 98 | (193 | ) | |||||||||||
Changes in assets and liabilities - | ||||||||||||||||
Accounts receivable and other assets | (1,211 | ) | 579 | |||||||||||||
Accounts payable and accrued liabilities | 25,451 | 13,930 | ||||||||||||||
Accounts receivable, trade and other, net of allowance | (331 | ) | (3,601 | ) | ||||||||||||
Accrued oil and gas revenue | (260 | ) | 1,926 | |||||||||||||
Prepaid expenses and other | (263 | ) | 7 | |||||||||||||
Accounts payable | (3,049 | ) | 8,524 | |||||||||||||
Accrued liabilities | 960 | 5,476 | ||||||||||||||
Net cash provided by operating activities | 55,004 | 29,789 | 16,909 | 25,773 | ||||||||||||
Cash flows from investing activities: | ||||||||||||||||
Additions to oil and gas properties | (143,701 | ) | (58,221 | ) | ||||||||||||
Additions to furniture and fixtures | (233 | ) | (130 | ) | ||||||||||||
Cash flows from investing activities: | ||||||||||||||||
Capital expenditures | (63,543 | ) | (63,504 | ) | ||||||||||||
Proceeds from sale of assets | 1,731 | 155 | 74,029 | 909 | ||||||||||||
Release of restricted cash funds | 2,039 | — | ||||||||||||||
Net cash used in investing activities | (142,203 | ) | (58,196 | ) | ||||||||||||
Net cash provided by (used in) investing activities | 12,525 | (62,595 | ) | |||||||||||||
Cash flows from financing activities: | ||||||||||||||||
Net proceeds from Series B Preferred Stock offering | 28,973 | — | ||||||||||||||
Redemption of Series A Preferred Stock | (9,319 | ) | — | |||||||||||||
Net proceeds from common stock offering | — | 53,175 | ||||||||||||||
Cash Flows from Financing Activities | ||||||||||||||||
Principal payments of bank borrowings | (3,000 | ) | (46,000 | ) | (65,000 | ) | — | |||||||||
Proceeds from bank borrowings | 57,500 | 19,000 | 38,500 | — | ||||||||||||
Net proceeds from preferred stock offering | — | 29,037 | ||||||||||||||
Redemption of preferred stock | — | (9,310 | ) | |||||||||||||
Preferred stock dividends | (1,511 | ) | (1,229 | ) | ||||||||||||
Deferred financing costs | — | (187 | ) | (35 | ) | — | ||||||||||
Exercise of stock options and warrants | 40 | 477 | ||||||||||||||
Preferred stock dividends | (2,741 | ) | (316 | ) | ||||||||||||
Production payments | — | (235 | ) | |||||||||||||
Other | (15 | ) | — | — | (15 | ) | ||||||||||
Net cash provided by financing activities | 71,438 | 25,914 | ||||||||||||||
Net cash provided by (used in) financing activities | (28,046 | ) | 18,483 | |||||||||||||
Decrease in cash and cash equivalents | (15,761 | ) | (2,493 | ) | ||||||||||||
Net increase (decrease) in cash and cash equivalents | 1,388 | (18,339 | ) | |||||||||||||
Cash and cash equivalents, beginning of period | 19,842 | 3,449 | 6,184 | 19,842 | ||||||||||||
Cash and cash equivalents, end of period | $ | 4,081 | $ | 956 | 7,572 | 1,503 | ||||||||||
Supplemental disclosures of cash flow information: | ||||||||||||||||
Cash paid during the period for interest | $ | 1,468 | $ | 742 | $ | 1,000 | 674 | |||||||||
Cash paid during the period for income taxes | $ | — | $ | 30 | $ | — | — | |||||||||
See accompanying notes to consolidated financial statementsstatements.
GOODRICH PETROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In Thousands)
(Unaudited)
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2006 | 2005 | 2006 | 2005 | |||||||||||||
Net income (loss) | $ | 4,298 | $ | (445 | ) | $ | 15,890 | $ | (6,596 | ) | ||||||
Other comprehensive loss: | ||||||||||||||||
Change in fair value of derivatives (1) | (1,096 | ) | (1,215 | ) | (2,175 | ) | (4,380 | ) | ||||||||
Reclassification adjustment (2) | 690 | 1,042 | 1,102 | 2,463 | ||||||||||||
Other comprehensive loss | (406 | ) | (173 | ) | (1,073 | ) | (1,917 | ) | ||||||||
Comprehensive income (loss) | $ | 3,892 | $ | (618 | ) | $ | 14,817 | $ | (8,513 | ) | ||||||
(1) Net of income tax benefit of: | $ | 590 | $ | 654 | $ | 1,171 | $ | 2,359 | ||||
(2) Net of income tax expense of: | 372 | 562 | 593 | 1,326 |
Three Months Ended March 31, | |||||||
2007 | 2006 | ||||||
Net income | $ | 1,036 | $ | 11,592 | |||
Other comprehensive income (loss): | |||||||
Change in fair value of derivatives (1) | — | (1,079 | ) | ||||
Reclassification adjustment (2) | 1,261 | 412 | |||||
Other comprehensive income (loss) | 1,261 | (667 | ) | ||||
Comprehensive income | $ | 2,297 | $ | 10,925 | |||
(1) Net of income tax benefit of: | $ | — | $ | 581 | |||
(2) Net of income tax expense of: | $ | 679 | $ | 222 |
See accompanying notes to consolidated financial statementsstatements.
GOODRICH PETROLEUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A—Basis1—Description of PresentationBusiness and Significant Accounting Policies
The consolidated financial statements of Goodrich Petroleum Corporation (“Goodrich” or “the Company” or “we”) included in this Form 10-Q have been prepared, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and, accordingly, certain information normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States has been condensed or omitted. The consolidated financial statements reflect all normal recurring adjustments that, in the opinion of management, are necessary for a fair presentation. Significant intercompany balances and transactions have been eliminated in consolidation. Certain reclassifications have been made to the prior year statements to conform to the current year presentation.
The accompanying consolidated financial statements of the Company should be read in conjunction with the consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K as amended, for the year ended December 31, 2005.2006. The results of operations for the sixthree months ended June 30, 2006March 31, 2007, are not necessarily indicative of the results to be expected for the full year.
NOTE B—Recent Accounting PronouncementsAssets Held for Sale—Assets Held for Sale as of March 31, 2007, represent our remaining assets in South Louisiana. These assets include the St. Gabriel, Bayou Bouillon and Plumb Bob fields. These assets are expected to be sold within one year.
Income Taxes—Uncertain Tax Positions—In JulyJune 2006, the Financial Accounting Standards Board (“FASB”) issued Financial Interpretation No.FIN 48, “Accounting for Uncertainty in Income Taxes – Taxes—an interpretationInterpretation of FASB Statement No. 109, Accounting for Income Taxes.” (“ This interpretation addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under FIN 48”), to clarify certain aspects of accounting for48, the Company may recognize the tax benefit from an uncertain tax positions, including issues relatedposition only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. FIN 48 also provides guidance on derecognition, classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures. The Company adopted the provisions of FIN 48 on January 1, 2007. There was no cumulative effect adjustment to retained earnings, our financial condition or results of operations as a result of implementing FIN 48. See Note 7 to the recognitionConsolidated Financial Statements.
Recently Released Accounting Pronouncements—In February 2007, the FASB issued Statement of Financial Accounting Standards (“SFAS”) 159,The Fair Value Option for Financial Assets and Financial Liabilities—including an amendment of FASB Statement No. 115,which allows measurement at fair value of those tax positions. This interpretationeligible financial assets and liabilities that are not otherwise measured at fair value. If the fair value option for an eligible item is elected, unrealized gains and losses for that item must be reported in current earnings at each subsequent reporting date. SFAS 159 also establishes presentation and disclosure requirements designed to draw comparison between the different measurement attributes the Company elects for similar types of assets and liabilities. SFAS 159 is effective for fiscal years beginning after DecemberNovember 15, 2006.2007. Early adoption is permitted. We are in the process of evaluatingcurrently assessing the impact of the adoption of this interpretationSFAS 159 on our consolidated financial position, results of operations or cash flows.statements.
In March 2006, the FASBWe do not believe that any other recently issued, SFAS No.156, “Accounting for Servicing of Financial Assets” (“SFAS 156”), which requires all separately recognized servicing assets and servicing liabilities be initially measured at fair value. SFAS 156 permits, but does not require, the subsequent measurement of servicing assets and servicing liabilities at fair value. Adoption is required as of the beginning of the first fiscal year that begins after September 15, 2006. The adoption of SFAS 156 is not expected toyet effective accounting pronouncements, if adopted, would have a material effect on our consolidated financial position, results of operations or cash flows.
In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments, an amendment of FASB Statements No. 133 and 140” (“SFAS 155”). SFAS 155 clarifies certain issues relating to embedded derivatives and beneficial interests in securitized financial assets. The provisions of SFAS 155 are effective for all financial instruments acquired or issued after fiscal years beginning after September 15, 2006. We are currently assessing the impact that the adoption of SFAS 155 will have on our consolidated financial position, results of operations or cash flows.
In December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123R”), replacing SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”), and superceding Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”). SFAS 123R requires recognition of share-based compensation in the financial statements. SFAS 123R was effective as of the first annual reporting period that began after June 15, 2005 and was adopted on January 1, 2006. See Note C for further details.
GOODRICH PETROLEUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE C—Stock-Based Compensation
Share-Based Employee Compensation Plans
In May 2006, our shareholders approved our 2006 Long-Term Incentive Plan (the “2006 Plan”), at our annual meeting of stockholders. The 2006 Plan is similar to and replaces our previously adopted 1995 Incentive Plan (the “1995 Plan”) and 1997 Non-Employee Directors’ Stock Option Plan (the “Directors’ Plan”). No further awards will be granted under the previously adopted plans, however, those plans shall continue to apply to and govern awards made thereunder. Under the 2006 Plan, a maximum of 2.0 million new shares are reserved for issuance as awards of share options to officers, employees and non-employee directors. Share options granted to officers and employees will generally become exercisable in one-third increments over a three year period and to the extent not exercised, expire on the tenth anniversary of the date of grant. Share options granted to non-employee directors will usually be immediately exercisable and to the extent not exercised, expire on the tenth anniversary of the date of grant. The exercise price of share options granted under the 2006 Plan will equal the market value of the underlying stock on the date of grant. The 1995 Plan expired according to its original terms on August 16, 2005. However, on February 1, 2006, our Board of Directors approved the extension of the 1995 Plan through December 31, 2005 and the granting of a total of 101,129 shares of restricted stock and 525,000 stock options to certain of our employees and directors as of December 6, 2005, which was approved at our 2006 annual meeting of stockholders in May 2006. For accounting purposes, such restricted shares and options have been valued as of February 9, 2006, the date on which our directors and executive officers reached a level of more than 50% ownership of our common stock, so that shareholder approval of those actions was no longer uncertain.
Share options previously granted under the 1995 Plan become exercisable in one-third increments over a three year period and to the extent not exercised, expire on the tenth anniversary of the date of grant. Share options previously granted under the Directors’ Plan generally become exercisable immediately and expire, if not exercised, ten years thereafter. The exercise price of share options granted under the 1995 Plan and the Directors’ Plan equals the market value of the underlying stock on the date of grant. At June 30, 2006, options to purchase 100,000 shares of our common stock were outstanding under the 2006 Plan and options to purchase 979,500 shares of our common stock were outstanding under the 1995 Plan and the Directors’ Plan. In order to satisfy share option exercises, shares are issued from authorized but unissued common stock.
Adoption of New Accounting Pronouncement
Stock based compensation for the three and six months ended June 30, 2006 of $1.4 million and $2.3 million, respectively, has been recognized as a component of general and administrative expenses in the accompanying Consolidated Financial Statements.
Effective January 1, 2006 we adopted SFAS 123R, which required us to measure the cost of stock based compensation granted, including stock options and restricted stock, based on the fair market value of the award as of the grant date, net of estimated forfeitures. SFAS 123R supersedes SFAS 123 and APB 25. We adopted SFAS 123R using the modified prospective application method of adoption, which required us to record compensation cost related to unvested stock awards as of December 31, 2005 by recognizing the unamortized grant date fair value of these awards over the remaining service periods of those awards with no change in historical reported earnings. Awards granted after December 31, 2005 are valued at fair value in accordance with provisions of SFAS 123R and recognized on a straight line basis over the service periods of each award. We estimated forfeiture rates for all unvested awards based on our historical experience. The January 1, 2006 balance of unamortized restricted stock awards of $2.1 million was reclassified against additional paid-in-capital upon adoption of SFAS 123R. In fiscal 2006 and future periods, common stock par value will be recorded when the restricted stock is issued and additional paid-in-capital will be increased as the restricted stock compensation cost is recognized for financial reporting purposes.
GOODRICH PETROLEUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Prior to 2006, we accounted for stock-based compensation in accordance with APB 25 using the intrinsic value method, which did not require that compensation cost be recognized for our stock options provided the option exercise price was established at 100% of the common stock fair market value on the date of grant. Under APB 25, we were required to record expense over the vesting period for the value of restricted stock granted. Prior to 2006, we provided pro forma disclosure amounts in accordance with SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure” (“SFAS 148”), as if the fair value method defined by SFAS 123 had been applied to our stock-based compensation. Our net loss and net loss per share for the three and six months ended June 30, 2005 would have been greater if compensation cost related to stock options had been recorded in the financial statements based on fair value at the grant dates.
Pro forma net loss as if the fair value based method had been applied to all awards for the three and six months ended June 30, 2005 is as follows (in thousands, except per share amounts):
Three Months Ended June 30, 2005 | Six Months Ended June 30, 2005 | |||||||
Net loss, as reported | $ | (445 | ) | $ | (6,596 | ) | ||
Add: Stock based compensation programs recorded as expense, net of tax | 171 | 329 | ||||||
Deduct: Total stock based compensation expense, net of tax | (278 | ) | (542 | ) | ||||
Pro forma net loss | $ | (552 | ) | $ | (6,809 | ) | ||
Net loss applicable to common stock, as reported | $ | (603 | ) | $ | (6,912 | ) | ||
Add: Stock based compensation programs recorded as expense, net of tax | 171 | 329 | ||||||
Deduct: Total stock based compensation expense, net of tax | (278 | ) | (542 | ) | ||||
Pro forma net loss applicable to common stock | $ | (710 | ) | $ | (7,125 | ) | ||
Net loss applicable to common stock per share: | ||||||||
Basic and diluted – as reported | $ | (0.03 | ) | $ | (0.31 | ) | ||
Basic and diluted – pro forma | $ | (0.03 | ) | $ | (0.32 | ) |
The estimated fair value of the options granted during 2006 and prior years was calculated using a Black Scholes Merton option pricing model (Black Scholes). The following schedule reflects the various assumptions included in this model as it relates to the valuation of our options:
June 30, 2006 | December 31, 2005 | |||||
Risk free interest rate | 4.50 –5.00 | % | 6.00 | % | ||
Weighted average volatility | 54-57 | % | 47 | % | ||
Dividend yield | 0 | % | 0 | % | ||
Expected years until exercise | 5-6 | 5 |
The Black Scholes model incorporates assumptions to value stock-based awards. The risk-free rate of interest for periods within the expected term of the option is based on a zero-coupon U.S. government instrument over the expected term of the equity instrument. Expected volatility is based on the historical volatility of our common stock. We generally use the midpoint of the vesting period and the life of the grant to estimate employee option exercise timing (expected term) within the valuation model. This methodology is not materially different from our historical data on exercise timing. In the case of director options, we used historical exercise behavior. Employees and directors that have different historical exercise behavior with regard to option exercise timing and forfeiture rates are considered separately for valuation and attribution purposes.
GOODRICH PETROLEUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes the components of our stock-based compensation programs recorded as expense (in thousands):
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2006 | 2005 | 2006 | 2005 | |||||||||||||
Restricted stock: | ||||||||||||||||
Pretax compensation expense | $ | 474 | $ | 263 | $ | 900 | $ | 506 | ||||||||
Tax benefit | (166 | ) | (92 | ) | (315 | ) | (177 | ) | ||||||||
Restricted stock expense, net of tax | $ | 308 | $ | 171 | $ | 585 | $ | 329 | ||||||||
Stock options: | ||||||||||||||||
Pretax compensation expense | $ | 932 | $ | — | $ | 1,438 | $ | — | ||||||||
Tax benefit | (326 | ) | — | (503 | ) | — | ||||||||||
Stock option expense, net of tax | $ | 606 | $ | — | $ | 935 | $ | — | ||||||||
Total share based compensation: | ||||||||||||||||
Pretax compensation expense | $ | 1,406 | $ | 263 | $ | 2,338 | $ | 506 | ||||||||
Tax benefit | (492 | ) | (92 | ) | (818 | ) | (177 | ) | ||||||||
Total share based compensation expense, net of tax | $ | 914 | $ | 171 | $ | 1,520 | $ | 329 | ||||||||
As of June 30, 2006, $3.8 million and $8.0 million of total unrecognized compensation cost related to restricted stock and stock options, respectively, is expected to be recognized over a weighted average period of approximately 1.8 years for restricted stock and 2.2 years for stock options.
Option activity under our stock option plans as of June 30, 2006 and changes during the six months ended June 30, 2006 were as follows:
Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term In Years | Aggregate Intrinsic Value | ||||||||
Outstanding at January 1, 2006 | 519,500 | $ | 13.70 | ||||||||
Granted | 625,000 | 24.10 | |||||||||
Exercised | (10,000 | ) | 4.00 | ||||||||
Forfeited | (55,000 | ) | 22.13 | ||||||||
Outstanding at June 30, 2006 | 1,079,500 | $ | 19.38 | 8.6 | $ | 9,727,023 | |||||
Exercisable at June 30, 2006 | 372,833 | $ | 12.95 | 7.2 | $ | 5,757,889 | |||||
The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between our closing stock price on the last trading day of the second quarter of 2006 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on June 30, 2006. The amount of aggregate intrinsic value will change based on the fair market value of our stock. The total intrinsic value of options exercised during the six months ended June 30, 2006 and 2005 was $233,000 and $772,300, respectively.
GOODRICH PETROLEUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes information on unvested restricted stock outstanding as of June 30, 2006:
Number of Shares | Weighted Average Grant-Date Fair Value | |||||
Unvested at December 31, 2005 | 263,890 | $ | 11.13 | |||
Vested | (116,102 | ) | 7.80 | |||
Granted | 109,629 | 23.70 | ||||
Forfeited | (5,332 | ) | 20.78 | |||
Unvested at June 30, 2006 | 252,085 | $ | 17.93 | |||
In May 2006, an officer of the Company resigned and the Company accelerated the vesting of (1) options to purchase 10,000 shares and (2) 2,916 shares of previously unvested restricted stock that had been issued to the officer in 2004. The affected options are required to be accounted for as a modification of an award with a service vesting condition under SFAS 123R. The fair market value was calculated immediately prior to the modification and immediately after the modification to determine the incremental fair market value. This incremental value and the unamortized balance of the restricted stock resulted in the immediate recognition of compensation expense of approximately $0.1 million.
NOTE D—2—Asset Retirement Obligations
SFAS 143 provides accounting requirements for retirement obligations associated with tangible long-lived assets and requires that an asset retirement cost should be capitalized as part of the cost of the related long- livedlong-lived asset and subsequently allocated to expense using a systematic and rational method. We adopted SFAS 143 on January 1, 2003 and recorded an incremental liability for asset retirement obligations of $1.4 million, additional oil and gas properties, net of accumulated depletion, depreciation and amortization, in the amount of $1.1 million and a net of tax cumulative effect of change in accounting principle of $0.2 million. The reconciliation of the beginning and ending asset retirement obligation for the period ending June 30, 2006March 31, 2007 is as follows (in thousands):
Beginning balance January 1, 2006 | $ | 7,960 | ||
Liabilities incurred | 867 | |||
Liabilities settled | (75 | ) | ||
Accretion expense (reflected in depletion, depreciation and amortization expense) | 195 | |||
Ending balance June 30, 2006 | $ | 8,947 | ||
Beginning balance | $ | 9,557 | ||
Liabilities incurred | — | |||
Liabilities settled or sold | (6,207 | ) | ||
Accretion expense (reflected in depletion, depreciation and amortization expense) | 45 | |||
Ending balance | 3,395 | |||
Less current portion | (158 | ) | ||
$ | 3,237 | |||
The liabilities settled in the first quarter of 2007 represent the Asset Retirement Obligation for substantially all of our properties in South Louisiana sold to a private company. The ending balance at March 31, 2007, includes $0.3 million for Assets Held for Sale. See Note 6.
NOTE E—3—Long-Term Debt
Long-term debt consisted of the following balances (in thousands):
June 30, 2006 | December 31, 2005 | March 31, 2007 | December 31, 2006 | |||||||||
Second lien term loan | $ | 30,000 | $ | 30,000 | ||||||||
Senior credit facility | 54,500 | — | ||||||||||
Senior Credit Facility | $ | — | $ | 26,500 | ||||||||
3.25% convertible senior notes due 2026 | 175,000 | 175,000 | ||||||||||
Total debt | 175,000 | 201,500 | ||||||||||
Less current maturities | — | — | — | — | ||||||||
Total long-term debt | $ | 84,500 | $ | 30,000 | $ | 175,000 | $ | 201,500 | ||||
In December 2006, we sold $175 million of 3.25% convertible senior notes due in December 2026. With a portion of the proceeds of the note offering we fully repaid the outstanding balance of the second lien term loan. The notes mature on December 1, 2026, unless earlier converted, redeemed or repurchased. The notes will be our senior unsecured obligations and will rank equally in right of payment to all of our other existing and future indebtedness. The notes accrue interest at a rate of 3.25% annually and interest will be paid semi-annually on June 1 and December 1 beginning June 1, 2007.
Prior to December 1, 2011, the notes will not be redeemable. On or after December 11, 2011, we may redeem for cash all or a portion of the notes, and the investors may require us to repay the notes on each of December 11, 2011, 2016 and 2021. The notes are convertible into shares of our common stock at a rate equal to the sum of:
a) | 15.1653 shares per $1,000 principal amount of notes (equal to a “base conversion price” of approximately $65.94 per share) plus |
b) | an additional amount of shares per $1,000 of principal amount of notes equal to the incremental share factor (2.6762), multiplied by a fraction, the numerator of which is the applicable stock price less the “base conversion price” and the denominator of which is the applicable stock price. |
GOODRICH PETROLEUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On November 17, 2005, we amended our existing credit agreement and entered into an amended and restated senior credit agreement (the “Amended and Restated“Senior Credit Agreement”Facility”) and a funded $30.0 million second lien term loan (the “Second Lien Term“Term Loan Agreement”)“) that expanded our borrowing capabilities and extended our credit facility for an additional two years. Total lender commitments under the Amended and RestatedSenior Credit AgreementFacility were increased from $50.0 million to $200.0 million and the maturity was extended from February 25, 2008 towhich matures on February 25, 2010. Revolving borrowings under the Amended and RestatedSenior Credit AgreementFacility are subject to periodic redeterminations of the borrowing base which is currently established at $105.0 million, and is currently scheduled to be redetermined in the third quarter$110.0 million. As of 2006, based upon our 2006 internally prepared mid-year reserve report. With a portion of the net proceeds of the offering of our 5.375% Series B Cumulative Convertible Preferred Stock (the “Series B Convertible Preferred Stock”) in December 2005,March 31, 2007, we fully repaid all outstanding indebtedness on our revolver inamounts of the amount of $47.5 million leaving a zero balance outstanding as of December 31, 2005.revolving borrowings under the Senior Credit Facility. Interest on revolving borrowings under the Amended and RestatedSenior Credit AgreementFacility accrues at a rate calculated, at our option, at either the bank base rate plus 0.00% to 0.50%, or LIBOR plus 1.25% to 2.00%, depending on borrowing base utilization. BNP Paribas (“BNP”) is the lead lender and administrative agent under the amended credit facility with Comerica Bank and Harris Nesbit Financing, Inc. as co-lenders.
The terms of the Amended and RestatedSenior Credit AgreementFacility require us to maintain certain covenants. Capitalized terms are defined in the credit agreement. The covenants include:
Current Ratio of 1.0/1.0;1.0:
Total Debt no greater than 3.5 times EBITDAX for the trailing four quarters.
As of June 30, 2006,March 31, 2007, we were in compliance with all of the financial covenants of the Amended and RestatedSenior Credit Agreement.
The Second Lien Term Loan Agreement provides for a 5-year, non-revolving loan of $30.0 million which was funded on November 17, 2005 and is due in a single maturity on November 17, 2010. Optional prepayments of term loan principal can be made in amounts of not less than $5.0 million during the first year at a 1% premium and without premium after the first year. Interest on term loan borrowings accrues at a rate calculated, at our option, at either base rate plus 3.50%, or LIBOR plus 4.50%, and is payable quarterly. BNP is the lead lender and administrative agent under the Second Lien Term Loan Agreement.
The terms of the Second Lien Term Loan Agreement require us to maintain certain covenants. Capitalized terms are defined in the loan agreement. The covenants include:
As of June 30, 2006, we were in compliance with all of the financial covenants of the Second Lien Term Loan Agreement.
GOODRICH PETROLEUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSFacility.
NOTE F—Preferred Stock
In December 2005, 1,650,000 shares of our Series B Convertible Preferred Stock were issued in a private placement for net proceeds of $79.8 million (after offering costs of $2.7 million). On January 23, 2006, the initial purchasers exercised their option to purchase an additional 600,000 shares of Series B Convertible Preferred Stock at the same price per share, resulting in net proceeds of $29.0 million.
As part of this transaction we filed a registration statement with the SEC on April 20, 2006 for the purpose of registering the resale of the shares of common stock issuable pursuant to the purchase agreement. The registration statement was declared effective by the SEC on August 9, 2006.
During the first quarter of 2006 we completed the redemption of our Series A Convertible Preferred Stock. Of the previously outstanding shares of Series A Convertible Preferred Stock, holders of 15,539 shares elected to convert such shares into a net total of 6,466 shares of our common stock and the remaining shares were redeemed in cash for $12 per share, plus accrued dividends. The total redemption cost to us was approximately $9.3 million and was funded from available cash resources. This amount includes a $1.5 million redemption premium which is treated in the same manner as preferred stock dividends on the Consolidated Statement of Operations.
NOTE G—4—Net Income (Loss) Per Share
Net income (loss) applicable to common stock was used as the numerator in computing basic and diluted income (loss) per common share for the three and six months ended June 30, 2006March 31, 2007 and 2005.2006. The following table reconciles the weighted average shares outstanding used for these computations (in thousands):
Three Months Ended June 30, | Six Months Ended June 30, | |||||||
2006 | 2005 | 2006 | 2005 | |||||
Weighted average shares outstanding – basic | 24,936 | 23,461 | 24,898 | 22,129 | ||||
Effect of dilutive securities – stock options and restricted stock | 316 | — | 314 | — | ||||
Effect of dilutive securities – warrants | 194 | — | 194 | — | ||||
Weighted average shares outstanding – diluted | 25,446 | 23,461 | 25,406 | 22,129 | ||||
For the Three Months Ended March 31, | ||||
2007 | 2006 | |||
Basic Method | 25,141 | 24,860 | ||
Dilutive Stock Warrants | — | 194 | ||
Dilutive Stock Options and Restricted Stock | 245 | 312 | ||
Dilutive Method | 25,386 | 25,366 | ||
NOTE H—5—Hedging Activities
Commodity Hedging Activity
We enter into swap contracts, costless collars or other hedging agreements from time to time to manage the commodity price risk for a portion of our production. We consider these to be hedging activities and, as such, monthly settlements on these contracts are reflected in our crude oil and natural gas sales, provided the contracts are deemed to be “effective” hedges under FAS 133. Our strategy, which is administered by the Hedging Committee of theour Board of Directors, and reviewed periodically by the entire Board of Directors, has been to generally hedge between 30% and 70% of our production. As of June 30, 2006,March 31, 2007, the commodity hedges we utilized were in the form of: (a) swaps, where we receive a fixed price and pay a floating price, based on NYMEX quoted prices; andprices, (b) collars, where we receive the excess, if any, of the floor price over the reference price, based on NYMEX quoted prices, and pay the excess, if any, of the reference price over the ceiling price. Hedge ineffectiveness results from differences betweenprice, and (c) fixed price physical contracts, whereby we agree in advance with the NYMEX contract terms and the physical location, grade and qualitypurchasers of our oilphysical gas volumes as to specific quantities to be delivered and specific prices to be received for gas production.deliveries at specific transfer points in the future. Our natural gas swaps and collars (all financial contracts) were deemed ineffective beginning in the fourth quarter of 2004, and since that time we have been required to reflect the change in the fair value of our natural gas swaps and collars in earnings rather than in accumulated other comprehensive loss, a
GOODRICH PETROLEUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
component of stockholders’ equity. Additionally, our oil swaps and collars (all financial contracts) were deemed ineffective during the fourth quarter of 2006, thus the change in the fair value of our oil hedges is reflected in earnings as well. To the extent that our financial hedge contracts do not qualify for hedge accounting in the future, we will likewise be exposed to volatility in earnings resulting from changes in the fair value of those hedge contracts. The fixed price physical contracts qualify for the normal purchase and normal sale exception. Contracts that qualify for this treatment do not require mark-to-market accounting which recognizes changes in the derivative value each period through earnings.
As of June 30, 2006,March 31, 2007, our open forward positionpositions on our outstanding commodity hedging contracts wasand fixed price physical contracts were as follows:
Swaps | Volume | Average Price | ||||
Natural gas (MMBtu/day) | ||||||
3Q 2006 | 15,000 | $ 6.95 | ||||
4Q 2006 | 15,000 | 6.95 | ||||
1Q 2007 | 10,000 | 7.77 | ||||
Oil (Bbl/day) | ||||||
3Q 2006 | 800 | $50.80 | ||||
4Q 2006 | 800 | 50.80 | ||||
2007 | 400 | 53.35 | ||||
Collars | Volume | Average Floor/Cap | ||||
Natural gas (MMBtu/day) | ||||||
1Q 2007 | 25,000 | $7.00 – $14.92 | ||||
2Q 2007 | 30,000 | 7.00 – 14.75 | ||||
3Q 2007 | 30,000 | 7.00 – 14.75 | ||||
4Q 2007 | 30,000 | 7.00 – 14.75 | ||||
Oil (Bbl/day) | ||||||
2007 | 400 | $60.00 –$76.50 |
Swaps | Volume | Average Price | ||
Oil (Bbl/day) | ||||
2Q 2007 | 400 | $53.35 | ||
3Q 2007 | 400 | $53.35 | ||
4Q 2007 | 400 | $53.35 |
Fixed Price Physical Contracts | Volume | Price | ||
Natural gas (MMBtu/day) | ||||
1Q 2008 | 23,500 | $8.03 | ||
2Q 2008 | 23,500 | $8.03 | ||
3Q 2008 | 23,500 | $8.03 | ||
4Q 2008 | 23,500 | $8.03 |
Collars | Volume | Floor/Cap | ||
Natural gas (MMBtu/day) | ||||
2Q 2007 | 10,000 | $9.00 – $10.65 | ||
3Q 2007 | 10,000 | $9.00 – $10.65 | ||
4Q 2007 | 10,000 | $9.00 – $10.65 | ||
2Q 2007 | 15,000 | $7.00 – $13.60 | ||
3Q 2007 | 15,000 | $7.00 – $13.60 | ||
4Q 2007 | 15,000 | $7.00 – $13.60 | ||
2Q 2007 | 5,000 | $7.00 – $13.90 | ||
3Q 2007 | 5,000 | $7.00 – $13.90 | ||
4Q 2007 | 5,000 | $7.00 – $13.90 | ||
1Q 2008 | 10,000 | $8.00 – $10.20 | ||
2Q 2008 | 10,000 | $8.00 – $10.20 | ||
3Q 2008 | 10,000 | $8.00 – $10.20 | ||
4Q 2008 | 10,000 | $8.00 – $10.20 |
The fair value of the oil and gas hedging contracts in place at June 30, 2006March 31, 2007, resulted in a net liabilityasset of $9.9$2.2 million. As of June 30, 2006, $3.3 million (net of $1.8 million in income taxes) of deferred losses on derivative instruments accumulated in other comprehensive loss are expected to be reclassified into earnings during the next twelve months. For the sixthree months ended June 30, 2006, $0.7 million of previously deferred losses (net of $0.4 million in income taxes) was reclassified out of accumulated other comprehensive loss as the cash flow settlement of the hedged items was recognized in earnings. For the six months ended June 30, 2006,March 31, 2007, we recognized in earnings a gain onloss from derivatives not qualifying for hedge accounting in the amount of $19.4$9.5 million which includes $2.4(this amount included realized gains of $3.7 million, in settlement payments on ineffectiveas well as unrealized losses of $13.2 million). All of our natural gas and oil hedges and a $0.5 million gain on interest rate derivatives. This unrealized gain was recognized because our gas swaps have beenwere deemed ineffective since the fourth quarter of 2004, andfor 2007; accordingly, the changes in fair value of such hedges could no longer be reflected in other comprehensive loss.income. In addition, allthe first quarter of our collars did2007, we reclassified $1.3 million of previously deferred losses (net of $0.7 million in income taxes) from accumulated other comprehensive loss to loss on derivatives not qualifyqualifying for hedge accounting treatment and those changesas the underlying properties to which the hedge was originally designated were sold.
GOODRICH PETROLEUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During the first quarter we also unwound an oil collar for 400 barrels per day. As a result, we recognized a gain of $0.9 million in fair value have been recognizedthe first quarter of 2007. In the first quarter of 2007, we entered into a series of physical sales contracts which will result in earnings.us selling approximately 23,500 MMbtu of gas per day in calendar year 2008 for an average price of $8.03 per MMbtu before transportation charges.
Despite the measures taken by us to attempt to control price risk, we remain subject to price fluctuations for natural gas and crude oil sold in the spot market. Prices received for natural gas sold on the spot market are volatile due primarily to seasonality of demand and other factors beyond our control. Domestic crude oil and gas prices could have a material adverse effect on our financial position, results of operations and quantities of reserves recoverable on an economic basis.
GOODRICH PETROLEUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Interest Rate Swaps
We have a variable-rate debt obligationsobligation that exposeexposes us to the effects of changes in interest rates. To partially reduce our exposure to interest rate risk, from time to time we enter into interest rate swap agreements. At June 30, 2006March 31, 2007, we had the following interest rate swaps in place with BNP (in millions):
Effective Date | Maturity Date | LIBOR Swap Rate | Notional Amount | |||||
02/27/06 | 02/26/07 | 4.08 | % | $ | 23.0 | |||
02/27/06 | 02/26/07 | 4.85 | % | 17.0 | ||||
02/26/07 | 02/26/09 | 4.86 | % | 40.0 |
Effective Date | Maturity Date | LIBOR Swap Rate | Notional Amount | |||||
02/27/07 | 02/26/09 | 4.86 | % | $ | 40.0 |
The fair value of the interest rate swap contracts in place at June 30, 2006,March 31, 2007, resulted in an asset of $0.8$54,000. For the three months ended March 31, 2007 and 2006, our earnings were not significantly affected by cash flow hedging ineffectiveness of the interest rates swaps.
NOTE 6—Discontinued Operations
On March 20, 2007, the Company and Malloy Energy Company, L.L.C. closed the sale of substantially all of their oil and gas properties in South Louisiana with the exception of the three properties discussed under Note 1 “Assets Held for Sale”. The total sales price for the Company’s interest in the oil and gas properties was $77 million. AsThe total sales price for Malloy Energy’s interests in these properties was approximately $22 million. The Chairman of June 30, 2006, $153,000 (netour Board of $82,000Directors, Patrick E. Malloy, III, is the President and controlling shareholder of Malloy Energy Company, L.L.C.
In accordance with SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets”, the results of operations and gain relating to the sale have been reflected as discontinued operations. We recorded an after tax gain on sale of $10.9 million (pre-tax gain of $16.8 million and tax of $5.9 million) on net proceeds of approximately $74.0 million after normal closing adjustments.
GOODRICH PETROLEUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes the amounts included in income taxes)from discontinued operations:
For the Three Months Ended March 31, | ||||||||
2007 | 2006 | |||||||
(in thousands) | ||||||||
Revenues | $ | 8,603 | $ | 10,482 | ||||
Income from discontinued operations | 4,346 | 4,409 | ||||||
Income tax expense | (1,521 | ) | (1,543 | ) | ||||
Income from discontinued operations net of tax | 2,825 | 2,866 |
The following presents the main classes of deferred net gainsassets and liabilities associated with long-lived assets classified as held for sale:
March 31, 2007 | |||
Assets held for sale | $ | 1,867 | |
Accrued liabilities | 105 | ||
Accrued abandonment costs | 276 |
NOTE 7—Income Taxes
Uncertain Tax Positions
The Company did not have any unrecognized tax benefits and there was no effect on derivative instruments accumulatedour financial condition or results of operations as a result of implementing FIN 48. The amount of unrecognized tax benefits did not materially change as of March 31, 2007.
It is expected that the amount of unrecognized tax benefits may change in other comprehensive income are expected to be reclassified into earnings during the next twelve months.months; however we do not expect the change to have a significant impact on the results of operations or the financial position of the Company.
The Company files a consolidated federal income tax return in the United States Federal jurisdiction and various combined and separate filings in several state and local jurisdictions. With limited exceptions, the Company is no longer subject to U.S. Federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 1992.
The Company’s continuing practice is to recognize estimated interest and penalties related to potential underpayment on any unrecognized tax benefits as a component of income tax expense in the Consolidated Statement of Operations. As of the date of adoption of FIN 48, Goodrich did not have any accrued interest or penalties associated with any unrecognized tax benefits, nor was any interest expense recognized during the quarter. The Company does not anticipate that total unrecognized tax benefits will significantly change due to the settlement of audits and the expiration of statute of limitations prior to March 30, 2008.
Provision for Income taxes
We entered into two interest rate swapsrecorded a net income tax benefit attributable to protect against movements in interest rates during the fourth quarter of 2005. The documentation was not prepared at the time of inception for these hedges and as a result, we were not entitled to apply hedge accounting to these instruments. The failure to qualify for hedge accounting requires that all changes in the fair value of the interest rate swap be recorded in the consolidated statements of operations. Accordingly, for the six months ended June 30, 2006, we recognized in earnings a gain of approximately $0.5continuing operations totaling $6.7 million, which is included inan effective tax rate of 34.7%. Our effective tax rate differs from the aforementioned total gain35% federal statutory rate primarily due to state income taxes. The income tax benefit includes tax expense of $19.4 million.$94 thousand ($63 thousand net of federal tax benefit) attributable to the Texas Margin Tax (“TMT”) which took effect for our Texas income tax reporting purposes on January 1, 2007.
GOODRICH PETROLEUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE I—8—Commitments and Contingencies
In July 2005, we received a Notice of Proposed Tax Due from the State of Louisiana asserting that we underpaid our Louisiana franchise taxes for the years 1998 through 2004 in the amount of $0.5$0.6 million. The Notice of Proposed Tax Due includes additional assessments of penalties and interest in the amount of $0.4 million for a total asserted liability of $0.9$1.0 million. In order to avoid future penalties and interest, the Company paid, under protest, $1.0 million to the State of Louisiana in April 2007. We have accrued for this amount at March 31, 2007, and recognized an expense equal to the full $1.0 million. We believe thatplan to pursue the reimbursement of the full $1.0 million paid under protest in April 2007. Should our efforts prevail, the taxes paid under protest would be refunded, at which time we have fully paid our Louisiana franchise taxes for the years in question; therefore, we intendwould book a credit to vigorously contest the Notice of Proposed Tax Due. We have commenced our analysis of this contingencygeneral and have not recorded any provision for possible payment of additional Louisiana franchise taxes nor any related penalties and interest.administrative expense.
We are party to additional lawsuits arising in the normal course of business. We intend to defend these actions vigorously and believe, based on currently available information, that adverse results or judgments from such actions, if any, will not be material to our financial position or results of operations.
NOTE J—Disposition9 – Acquisitions and Divestitures
On February 7, 2007, we announced the acquisition of Assets
In June 2006, we assigned 50% of our interest solelydrilling and development rights to acreage located in the deep rightsAngelina River play. We acquired a 60% working interest in the acreage and will operate the joint venture. The acquisition was completed in two separate transactions. In the initial transaction, we acquired a 40% working interest for $2.0 million from a private company. We also agreed to carry the private company for a 20% working interest in the drilling of five wells. In the second transaction, we purchased the remaining 20% working interest in the acreage in a like-kind exchange for our Cotton prospect30% interest in East Texas, defined as rights below the topMary Blevins field.
On March 20, 2007, the company closed the sale of the Knowles Lime formation at 12,901’ below the surface, while reservingsubstantially all of our rights toits oil and above the Upper, Middle and Lower Travis Peak sectiongas properties in approximately 20,500 net acres for approximately $1.6 million. We had received one-half of the sales price as of June 30, 2006 and one-half has been recorded as a receivable in the consolidated financial statements. Pursuant to the agreement, within 18 months of the assignment, the assignee will either pay all of our share of drilling costsSouth Louisiana to a depth of 16,500’ feet in a well (the “carried well”) drilled on the acreage or pay us a non participation fee of $4.0 million should no well be drilled. The transaction was accounted for as a recovery of cost.private company. See Note 6.
GOODRICH PETROLEUM CORPORATION AND SUBSIDIARIES
ITEM 2. |
Forward-Looking Statements
FINANCIAL CONDITION AND RESULTS OF OPERATIONSCertain statements in this report, including statements of the future plans, objectives, and expected performance of the Company, are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, that are dependent upon certain events, risks and uncertainties that may be outside the Company’s control, and which could cause actual results to differ materially from those anticipated. Some of these include, but are not limited to:
planned capital expenditures;
future drilling activity;
our financial condition;
business strategy;
the market prices of oil and gas;
economic and competitive conditions;
legislative and regulatory changes; and
financial market conditions.
There are numerous uncertainties inherent in estimating quantities of proved oil and gas reserves and in projecting future rates of production and the timing of development expenditures. The total amount or timing of actual future production may vary significantly from reserve and production estimates. The drilling of exploratory wells can involve significant risks, including those related to timing, success rates and cost overruns. Lease and rig availability, complex geology and other factors can affect these risks. Although from time to time we make use of futures contracts, swaps, costless collars and fixed-price physical contracts to mitigate risk, fluctuations in oil and gas prices, or a prolonged continuation of low prices may substantially adversely affect the Company’s financial position, results of operations and cash flows.
These factors, as well as additional factors that could affect our operating results and performance are described in our Form 10-K under the headings “Business—Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations”. We urge you to carefully consider those factors.
All forward-looking statements attributable to us are qualified in their entirety by this cautionary statement. We undertake no responsibility to update our forward-looking statements.
Executive Overview
General
We are an independent oil and gas company engaged in the exploration, exploitation, development and production of oil and natural gas properties primarily in the Cotton Valley trendTrend of East Texas and Northwest Louisiana and in the transition zone of South Louisiana.
Our business strategy is to provide long term growth in net asset value per share, through the growth and expansion of our oil and gas reserves and production. We focus on adding reserve value through the development of our relatively low risk development drilling program in the Cotton Valley trend, while maintaining our drilling activities in select high impact well locations in South Louisiana.Trend. We continue to aggressively pursue the acquisition and evaluation of prospective acreage, oil and gas drilling opportunities and potential property acquisitions.
Source of RevenueRevenues
We derive our revenues from the sale of oil and natural gas that is produced from our properties. Revenues are a function of both the volume produced and the prevailing market price at the time of sale. Production volumes, while somewhat predictable after wells
have begun producing, can be impacted for various reasons. Hurricanes Katrina and Rita in the third quarter of 2005 are an example of how production volumes can be impacted to defer volumes from the current period to future periods. The price of oil and natural gas is a primary factor affecting our revenues. To achieve more predictable cash flows and to reduce our exposure to downward price fluctuations, we utilize derivative instruments to hedge future sales prices on a portion of our oil and natural gas production. While the derivative instruments may protect downward price fluctuation, the use of certain types of derivative instruments may prevent us from realizing the full benefit of upward price movements.
Cotton Valley Trend
Our relatively low risk development drilling program in the Cotton Valley Trend is primarily centered in and around Rusk, Panola, Angelina and Nacogdoches Counties, Texas, and DeSoto and Caddo and Bienville Parishes, Louisiana. In addition, we have recently expanded our acreage position in the Trend to include Harrison, Smith and Upshur Counties of Texas. We have steadily increased our acreage position in these areas over the last two years to approximately 185,000 gross acres as of March 31, 2007. As of March 31, 2007, we have drilled and/or logged a cumulative total of 173 Cotton Valley wells with a success rate in excess of 99%, of which drilling operations were conducted on 23 gross wells during the first quarter of 2007. Our net production volumes from our Cotton Valley Trend wells aggregated approximately 36,677 Mcfe of gas per day in the first quarter of 2007, or approximately 98.5% higher than the Cotton Valley Trend production of the prior year period.
Sale of South Louisiana Assets
On March 20, 2007, we completed the sale of substantially all of our assets in South Louisiana to a private company. The sale resulted in total proceeds of $74.0 million, net to the Company, after normal closing adjustments. The effective date of the sale was July 1, 2006. We also expect to sell our remaining assets in South Louisiana within the next year. The remaining fields treated as held for sale are St. Gabriel, Bayou Bouillon and Plumb Bob.
SecondFirst Quarter 20062007 Highlights
ProductionOur development, financial and Revenue Growthoperating performance for the first quarter 2007 included the following highlights:
We completed the sale of substantially all of our assets in South Louisiana to a private company for $77 million.
We increased our oil and gas production volumes on continuing operations to approximately 43,70037,233 Mcfe per day, representing over a 100% increase from the second quarter of 2005 and an increase of approximately 20%, on a sequential basis,59% from the first quarter of 2006.
Drilling Activity
Cotton Valley Trend
We funded our capital expenditures of $73.4 million in the first quarter of 2007 through a combination of cash flow from operations, net proceeds from our sale of assets and available cash.
Our after-tax net loss from continuing operations reflected an income tax benefit rate of 35% in the first quarter of 2007; however, we did not incur any income taxes on a current basis due to our substantial tax net operating loss carrryforwards and other factors.
A more complete overview and discussion of our operations can be found in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 20052006 Form 10-K, as amended.10-K.
Hurricanes Katrina and Rita Update
In August and September 2005, Hurricanes Katrina and Rita caused damage to our assets on the Gulf Coast, significantly on one producing well (Norton) and offshore facilities in our Burrwood/West Delta 83 field. As of June 30, 2006, our share of hurricane related costs in these fields is approximately $6.8 million and we have received and accrued proceeds of $4.2 million. We anticipate that we will ultimately receive reimbursement for all but $0.9 million of our remaining insured losses, which represents our deductible and amounts exceeding insurance limits, $0.4 million of which has been expensed in 2006.
As claims are submitted to the insurance companies, they are reviewed and preliminary payments made until all losses are incurred and documented. A final payment will be made once we and our insurers agree on the total measurement value of the claim, which is expected sometime during the third quarter of 2006.
Results of Operations
Three Months Ended June 30, 2006March 31, 2007 Compared to Three Months Ended June 30, 2005March 31, 2006
The financial statements include discontinued operations presentation for our assets located in south Louisiana. See Note 6 to our consolidated financial statements.
For the three months ended June 30, 2006,March 31, 2007, we reported net income applicable to common stock of $2.8 million, or $0.11 per basic share on total revenue of $30.6 million as compared with a net loss applicable to common stock of $0.6$0.5 million, or $0.03$0.02 per basic share on total revenue of $13.5$23.5 million as compared with a net income applicable to common stock of $8.6 million, or $0.34 per basic share, on total revenue of $14.8 million for the three months ended June 30, 2005.March 31, 2006.
Oil and Natural Gas Revenues
Revenues presented in the table and the discussion below represent revenue from sales of our oil and natural gas production volumes and include the realized gains and losses on the effective portion of our derivative instruments for 2006 as further described under Note H5 to the Consolidated Financial Statements. All of our derivative instruments were ineffective in the first quarter of 2007 and did not qualify for hedge accounting.
Three Months Ended June 30, | % Change to 2006 | ||||||||||
2006 | 2005 | ||||||||||
Production: | |||||||||||
Natural gas (MMcf) | 3,295 | 1,194 | 176 | % | |||||||
Oil and condensate (MBbls) | 113 | 128 | (12 | )% | |||||||
Total (MMcfe) | 3,974 | 1,962 | 103 | % | |||||||
Revenues from production (in thousands): | |||||||||||
Natural gas | $ | 22,765 | $ | 8,523 | 167 | % | |||||
Effects of cash flow hedges | — | — | — | ||||||||
Total | $ | 22,765 | $ | 8,523 | 167 | % | |||||
Oil and condensate | $ | 7,740 | $ | 6,224 | 24 | % | |||||
Effects of cash flow hedges | (1,171 | ) | (1,444 | ) | (19 | )% | |||||
Total | $ | 6,569 | $ | 4,780 | 37 | % | |||||
Natural gas, oil and condensate | $ | 30,505 | $ | 14,747 | 107 | % | |||||
Effects of cash flow hedges | (1,171 | ) | (1,444 | ) | (19 | )% | |||||
Total revenues from production | $ | 29,334 | $ | 13,303 | 121 | % | |||||
Table continued on following page
Three Months Ended March 31, | % Change | ||||||||
2007 | 2006 | ||||||||
Production – Continuing Operations: | |||||||||
Natural gas (MMcf) | 3,195 | 1,975 | 62 | % | |||||
Oil and condensate (MBbls) | 26 | 22 | 18 | % | |||||
Total (MMcfe) | 3,351 | 2,107 | 59 | % | |||||
Production – Discontinued Operations: | |||||||||
Natural gas (MMcf) | 521 | 645 | (19 | %) | |||||
Oil and condensate (MBbls) | 82 | 89 | (8 | %) | |||||
Total (MMcfe) | 1,013 | 1,179 | (14 | %) | |||||
Revenues from production (in thousands): | |||||||||
Natural gas | $ | 21,861 | $ | 13,144 | 66 | % | |||
Effects of cash flow hedges | — | — | — | ||||||
Total | $ | 21,861 | $ | 13,144 | 66 | % | |||
Oil and condensate | $ | 1,455 | $ | 1,280 | 14 | % | |||
Effects of cash flow hedges | — | — | — | ||||||
Total | $ | 1,455 | $ | 1,280 | 14 | % | |||
Natural gas, oil and condensate | $ | 23,316 | $ | 14,424 | 62 | % | |||
Effects of cash flow hedges | — | — | — | ||||||
Total revenues from production | $ | 23,316 | $ | 14,424 | 62 | % | |||
Average sales price per unit: | |||||||||
Natural gas (per Mcf) | $ | 6.84 | $ | 6.66 | 3 | % | |||
Effects of cash flow hedges (per Mcf) | — | — | — | ||||||
Total (per Mcf) | $ | 6.84 | $ | 6.66 | 3 | % | |||
Oil and condensate (per Bbl) | $ | 56.68 | $ | 58.18 | (3 | %) | |||
Effects of cash flow hedges (per Bbl) | — | — | — | ||||||
Total (per Bbl) | $ | 56.68 | $ | 58.18 | (3 | %) | |||
Natural gas, oil and condensate (per Mcfe) | $ | 6.96 | $ | 6.85 | 2 | % | |||
Effects of cash flow hedges (per Mcfe) | — | — | — | ||||||
Total (per Mcfe) | $ | 6.96 | $ | 6.85 | 2 | % | |||
% Change to 2006 Average sales price per unit: Natural gas (per Mcf) Effects of cash flow hedges (per Mcf) Total (per Mcf) Oil and condensate (per Bbl) Effects of cash flow hedges (per Bbl) Total (per Bbl) Natural gas, oil and condensate (per Mcfe) Effects of cash flow hedges (per Mcfe) Total (per Mcfe) Three Months Ended
June 30,
from 2005 2006 2005 $ 6.91 $ 7.14 (3 )% — — — $ 6.91 $ 7.14 (3 )% $ 68.39 $ 48.63 41 % (10.35 ) (11.28 ) (8 )% $ 58.04 $ 37.35 55 % $ 7.68 $ 7.51 2 % (0.29 ) (0.74 ) (60 )% $ 7.39 $ 6.77 9 %
Excluding the effects of settled derivatives, revenuesRevenues from productionproduction-continuing operations increased 107%62% in the secondfirst quarter of 20062007 compared to the same period in 20052006 due primarily to a substantial increase in Cotton Valley trendTrend production. Revenues were also impacted favorably by a 2% increase in our sales price per unit.
Other. We own an approximate 2.5% working interest in the Yscloskey gas processing plant in South Louisiana. As a plant owner, we retain that same percentage of natural gas liquid (“NGL”) revenue extracted from third party gas as a fee for the services provided by the plant. In addition, some third party non-plant owners that process their gas at Yscloskey are required to pay the plant owners a monetary processing fee. We retain our 2.5% share of this fee. For the three months ended June 30, 2006, other revenue includes $1.1 million of such plant related revenues. The plant sustained extensive damage during Hurricane Katrina and normal operations did not resume until late June 2006.
Three Months Ended March 31, | Variance | ||||||||||||
Operating Expenses per Mcfe | 2007 | 2006 | |||||||||||
Lease operating expense | $ | 1.23 | $ | 1.06 | $ | 0.17 | 16 | % | |||||
Production taxes | 0.09 | 0.43 | (0.34 | ) | (79 | %) | |||||||
Transportation | 0.32 | — | — | — | |||||||||
Depreciation, depletion and amortization | 5.28 | 2.79 | 2.49 | 89 | % | ||||||||
Exploration | 0.69 | 0.66 | 0.03 | 5 | % | ||||||||
General and administrative | 1.59 | 1.79 | (0.20 | ) | (11 | %) |
Lease Operating.Lease operating expenses (“LOE”)expense for the secondfirst quarter of 20062007 increased on an absolute basis ($4.1 million compared to $4.7 million$2.2 million) as well as on a per unit basis ($1.181.23 per Mcfe compared to $1.06 per Mcfe) from $2.3 million ($1.17 per Mcfe) in the secondfirst quarter of 2005.2006. This increase in unit costs was primarily attributable to the aforementionedan industry wide increase in production. Also contributingoperating costs as well as high salt water disposal (“SWD”) costs prevalent in certain of our Cotton Valley Trend fields. Once we are able to this increasefully implement our low pressure gathering system in East Texas, which is an additional loss of $0.4 million of hurricane related costs that will notnearing completion, we expect these expenses to be covered by insurance reimbursement and $0.3 million of additional abandonment costs related to outside operated wells.meaningfully reduced on a per unit basis.
Production Taxes.Production taxes increaseddecreased to $1.6$0.3 million for the secondfirst quarter of 20062007 compared to $1.0$0.9 million for the comparable period in 20052006 due to an increase in production volumes and product prices. Mosta greater portion of our Cotton Valley trend wells qualifyqualifying for the “TightTight Gas Sands” credit allowed for severance taxSands (“TGS”) credits in the State of Texas. WhileThese TGS credits allow for reduced and in many cases the complete elimination of severance taxes in the State of Texas for qualifying wells for up to ten years of production. We only accrue for such credits once we have only reflected credits on wells that have been approved bynotified of the State,State’s approval, and we anticipate that we will incur a gradually lower production tax rate in the future as we add furtheradditional Cotton Valley Trend wells to our production base and as reduced rates are approved and credits are received.approved.
Transportation.Emerging Issues Task Force Issue 00-10, “Accounting for Shipping and Handling Fees and Costs” (“EITF 00-10”), requires that transportation expenses be shown as an Transportation expense in the statement of operations and not deducted from revenues. Transportation costs of $1.7increased to $1.1 million for the three months ended June 30, 2006 includes the reclassification of $0.5 million of costs previously classified($0.32 per Mcfe) in the first quarter of 2007 as a result of increased volumes in the Cotton Valley Trend. As disclosed in the Company’s Quarterly Report on Form 10-Q for the period ending June 30, 2006, prior to that quarter transportation expenses were shown as a deduction from oil and gas revenues. As such, for the first quarter of 2006, there were no transportation expenses booked. However, the Company did disclose in the aforementioned Form 10-Q that the amounts included as a reduction in revenues in that quarter. The increase inthe first quarter of 2006 comparedamounted to 2005 is primarily due to increased production in our Cotton Valley Trend and the utilization of different marketing arrangements.$0.5 million.
Depreciation, Depletion and Amortization. Depreciation, depletion and amortization (“DD&A”) expense increased to $13.0$17.7 million from $5.7$5.9 million for the same period in 20052006 primarily due to a higher DD&A rate coupled with higher levels of production. The average DD&A rate increased to $3.29$5.28 per Mcfe in the secondfirst quarter of 20062007, compared to $2.93$2.79 per Mcfe in the same quarter of 20052006, due to a higher percentage of production coming from fields with higher average DD&A rates.
Exploration. Exploration expense We calculated first quarter 2007 DD&A rates using the December 31, 2006 reserves, which were valued at 2006 year-end prices as required by the SEC. Given the significant pricing difference between December 31, 2006 and December 31, 2005, a number of our wells drilled during 2006 were credited with fewer proved developed reserves than originally anticipated, thus resulting in the higher DD&A rate. The Company is currently planning to engage its independent engineering firm to audit our mid-year 2007 reserves, at which time we may recalculate the DD&A rates for the secondremainder of 2007.
Exploration. Exploration expenses for the first quarter of 2007 increased to $2.3 million from $1.4 million during the first quarter of 2006, decreaseddue primarily to $1.9higher leasehold amortization costs and delay rental costs. As the Company has increased its undeveloped acreage position since last year, the amortization of leasehold costs, which is a non-cash expense, has increased to $1.8 million compared to $2.4 million for the second quarter of 2005. This decrease was primarily due to the fact that we incurred no dry hole costs in 2006 while incurring $1.6from $1.2 million in dry hole costs in the second quarter of 2005.prior year period.
General and Administrative.General and administrative expense increased to $4.2$5.3 million for the secondfirst quarter of 20062007, compared to $1.8$3.8 million for the same period of 2005. This increase was primarily due2006. We accrued a liability for $1.0 million in March 2007 representing $0.4 million in penalties and interest and $0.6 million owed to the implementationState of SFAS 123R which increased non cashLouisiana for franchise taxes (see Note 8 to our consolidated financial statements). While we paid this amount under protest in April 2007, we plan to pursue the reimbursement of the full $1.0 million. Should our efforts prevail, the taxes paid under protest would be refunded. Of the $5.3 million incurred in the first quarter of 2007, stock based compensation expense, by $1.1which is non-cash, amounted to $1.4 million from the second quarter of 2005 due to expensing the fair value of stock options granted. See Note C to the Consolidated Financial Statements for more information. In addition, an approximate 40% increaseversus $0.9 million in the number of employees at June 30, 2006 versus June 30, 2005 generated higher compensation related costs.2006.
Other.We own an approximate 2.5% working interest in the Yscloskey gas processing plant in South Louisiana. As a plant owner, we share in the costs of operating the plant. For the three months ended June 30, 2006, we recorded $1.2 million of such plant related expenses. The plant sustained extensive damage during Hurricane Katrina and normal operations resumed in late June 2006.
Three Months Ended March 31, | ||||||||
2007 | 2006 | |||||||
(in thousands) | ||||||||
Other income (expense): | ||||||||
Interest Expense | $ | (2,624 | ) | $ | (695 | ) | ||
Gain (loss) on derivatives not qualifying for hedge accounting | (9,487 | ) | 13,542 | |||||
Income tax (expense) benefit | 6,743 | (4,698 | ) | |||||
Gain on disposal, net of tax | 10,913 | — | ||||||
Income from discontinued operations, net of tax | 2,825 | 2,866 |
Interest Expense.Interest expense increased to $1.5$2.6 million from the secondfirst quarter 20052006 amount of $0.5$0.7 million as a result of athe higher average interest rate and higher borrowings inlevel of funded debt during the secondfirst quarter of 2007, due largely to our financing activities consummated during fiscal year 2006.
Gain (Loss) on Derivatives Not Qualifying for Hedge Accounting. GainLoss on derivatives not qualifying for hedge accounting was $5.9$9.5 million for the secondfirst quarter of 20062007 compared to a lossgain of $0.3$13.5 million for the secondfirst quarter of 2005.2006. The gainloss in 20062007 includes an unrealized gainloss of $5.4$13.2 million for the changeschange in fair value of our ineffective oil and gas hedges, and a realized gain of $0.2$3.7 million for the effect of settled derivatives on our ineffective gas hedges.derivatives. Our natural gas hedges were deemed ineffective beginning in the fourth quarter of 2004, and we have been required to reflect the changeschange in the fair value of our natural gas hedges in earnings rather than in accumulated other comprehensive loss, a component of stockholders’ equity. Also includedAdditionally, our oil hedges were deemed ineffective beginning in the 2006 amount is an unrealized gainfourth quarter of $0.3 million related to interest rate swaps that did not qualify for hedge accounting treatment.2006. To the extent that our hedges do not qualify for hedge accounting in the future, we will likewise be exposed to volatility in earnings resulting from changes in the fair value of our hedges.
Income taxes. Income taxes were a non cash expensebenefit of $2.3$6.7 million for the secondfirst quarter of 20062007 compared to a benefitan expense of $0.2$4.7 million for the secondfirst quarter of 2005.2006. The amounts in both periods essentially represented 35% of pre-tax income (loss). from continuing operations. We did not however, incur any income taxes on a current basis due to our substantial tax net operating loss carrryforwards and significant drilling activity.carryforwards.
Six Months Ended June 30, 2006 Compared to Six Months Ended June 30, 2005Discontinued Operations
For. Income from discontinued operations for the sixthree months ended June 30,March 31, 2007 and 2006, we reported net income applicablerelated to common stock of $11.4 million, or $0.46 per basic share on total revenue of $55.9 million as compared with a net loss applicable to common stock of $6.9 million, or $0.31 per basic share, on total revenue of $26.4 million for the six months ended June 30, 2005.
Oil and Natural Gas Revenues
Revenues presented in the table and the discussion below represent revenue from salesour South Louisiana assets. We sold substantially all of our oil and natural gas production volumes and include the realized gains and losses on the effective portion of our derivative instruments as further described under Note H to the Consolidated Financial Statements.
Six Months Ended June 30, | % Change to 2006 | ||||||||||
2006 | 2005 | ||||||||||
Production: | |||||||||||
Natural gas (MMcf) | 5,915 | 2,520 | 135 | % | |||||||
Oil and condensate (MBbls) | 224 | 226 | (1 | )% | |||||||
Total (MMcfe) | 7,261 | 3,876 | 87 | % | |||||||
Revenues from production (in thousands): | |||||||||||
Natural gas | $ | 41,429 | $ | 17,060 | 145 | % | |||||
Effects of cash flow hedges | — | — | — | ||||||||
Total | $ | 41,429 | $ | 17,060 | 145 | % | |||||
Oil and condensate | $ | 14,732 | $ | 11,243 | 31 | % | |||||
Effects of cash flow hedges | (1,922 | ) | (2,652 | ) | (28 | )% | |||||
Total | $ | 12,810 | $ | 8,591 | 49 | % | |||||
Natural gas, oil and condensate | $ | 56,161 | $ | 28,303 | 98 | % | |||||
Effects of cash flow hedges | (1,922 | ) | (2,652 | ) | (28 | )% | |||||
Total revenues from production | $ | 54,239 | $ | 25,651 | 111 | % | |||||
Average sales price per unit: | |||||||||||
Natural gas (per Mcf) | $ | 7.01 | $ | 6.77 | 3 | % | |||||
Effects of cash flow hedges (per Mcf) | — | — | — | ||||||||
Total (per Mcf) | $ | 7.01 | $ | 6.77 | 3 | % | |||||
Oil and condensate (per Bbl) | $ | 65.64 | $ | 49.73 | 32 | % | |||||
Effects of cash flow hedges (per Bbl) | (8.57 | ) | (11.73 | ) | (27 | )% | |||||
Total (per Bbl) | $ | 57.07 | $ | 38.00 | 50 | % | |||||
Natural gas, oil and condensate (per Mcfe) | $ | 7.73 | $ | 7.30 | 6 | % | |||||
Effects of cash flow hedges (per Mcfe) | (0.26 | ) | (0.68 | ) | (61 | )% | |||||
Total (per Mcfe) | $ | 7.47 | $ | 6.62 | 13 | % | |||||
Excluding the effects of settled derivatives, revenues from production increased 98% in the first half of 2006 compared to the same period in 2005 due primarilySouth Louisiana assets to a substantial increaseprivate company in Cotton Valley trend production. Revenues werea sale that closed March 20, 2007. We also impacted favorably byrecorded a 6% increase in our sales price per unit.
Other. We own an approximate 2.5% working interest ingain on disposal, net of tax, of $10.9 million. Our remaining South Louisiana assets, the Yscloskey gas processing plant in South Louisiana. As a plant owner, we retain that same percentage of natural gas liquid (“NGL”) revenue extracted from third party gas as a fee for the services provided by the plant. In addition, some third party non-plant owners that process their gas at Yscloskey are required to pay the plant owners a monetary processing fee. We retain our 2.5% share of this fee. For the first half of 2006, other revenue includes $1.1 million of such plant related revenues. The plant sustained extensive damage during Hurricane KatrinaSt. Gabriel, Bayou Bouillon and normal operations resumed in late June 2006.
Lease Operating.Lease operating expenses for the first half of 2006 increased to $8.3 million ($1.14 per Mcfe) from $4.5 million ($1.17 per Mcfe) in the first half of 2005. This increase was primarily attributable to the aforementioned increase in production. Also contributing to this increase is an additional loss of $0.4 million of hurricane related costs that will not be covered by insurance reimbursement, $0.3 million of additional abandonment costs related to outside operated wells and the uninsured portion of costs for an oil spill that occurred from a non-producing well in our Plumb Bob field onfields, were considered held for sale at March 21, 2006. The spill of an estimated 2,000 barrels of oil was quickly contained and the costs of site restoration less our deductible will be covered by our insurance.
Production Taxes.Production taxes increased to $3.2 million for the first half of 2006 compared to $1.8 million for the comparable period in 2005 due to an increase in production volumes and product prices. Most of our Cotton Valley trend wells qualify for the “Tight Gas Sands” credit allowed for severance tax in the State of Texas. While we have only reflected credits on wells that have been approved by the State, we anticipate that we will incur a gradually lower production tax rate in the future as we add further Cotton Valley wells to our production base and as reduced rates are approved and credits are received.
Transportation.EITF 00-10 requires that transportation expenses be shown as an expense in the statement of operations and not deducted from revenues. Transportation costs of $1.7 million in the first half of 2006 relate primarily to our Cotton Valley trend and increased compared to the same period in 2005 due to increased production in our Cotton Valley trend and the utilization of different marketing arrangements.
Depreciation, Depletion and Amortization. DD&A expense increased to $22.9 million in the first half of 2006 from $11.6 million for the same period in 2005 primarily due to higher levels of production. The average DD&A rate increased to $3.16 per Mcfe in the first half of 2006 compared to $2.99 per Mcfe in the same period in 2005 due to a higher percentage of production coming from fields with higher average DD&A rates.
Exploration. Exploration expense for the first half of 2006 decreased to $3.4 million compared to $3.9 million for the first half of 2005. This decrease was primarily due to the fact that we incurred no dry hole costs in 2006 while incurring $1.9 million in dry hole costs in the first half of 2005. Partially offsetting this decrease was an increase in leasehold amortization.
General and Administrative.General and administrative expense increased to $8.0 million for the first half of 2006 compared to $3.4 million for the same period of 2005. This increase was primarily due to the implementation of SFAS 123R which increased non cash stock based compensation expense by $1.8 million from the first half of 2005 due to expensing the fair value of stock options granted. See Note C to the Consolidated Financial Statements for more information. In addition, an approximate 40% increase in the number of employees at June 30, 2006 versus June 30, 2005 generated higher compensation related costs.
Other.We own an approximate 2.5% working interest in the Yscloskey gas processing plant in South Louisiana. As a plant owner, we share in the costs of operating the plant. For the first half of 2006, we recorded $1.2 million of such plant related expenses. The plant sustained extensive damage during Hurricane Katrina and normal operations resumed in late June 2006.
Interest Expense.Interest expense increased to $2.2 million from the first half 2005 amount of $0.9 million as a result of a higher average interest rate and higher borrowings in the first half of 2006.
Gain (Loss) on Derivatives Not Qualifying for Hedge Accounting. Gain on derivatives not qualifying for hedge accounting was $19.4 million for the first half of 2006 compared to a loss of $10.1 million for the first half of 2005. The gain in 2006 includes an unrealized gain of $21.3 million for the changes in fair value of our ineffective oil and gas hedges, and a realized loss of $2.4 million for the effect of settled derivatives on our ineffective gas hedges. Our natural gas hedges were deemed ineffective, beginning in the fourth quarter of 2004, and we have been required to reflect the changes in the fair value of our natural gas hedges in earnings rather than in accumulated other comprehensive loss, a component of stockholders’ equity. Also included in the 2006 amount is an unrealized gain of $0.5 million related to interest rate swaps that did not qualify for hedge accounting treatment. To the extent that our hedges do not qualify for hedge accounting in the future, we will likewise be exposed to volatility in earnings resulting from changes in the fair value of our hedges.
Income taxes. Income taxes were a non cash expense of $8.6 million for the first half of 2006 compared to a benefit of $3.5 million for the first half of 2005. The amounts in both periods essentially represented 35% of pre-tax income (loss). We did not however, incur any income taxes on a current basis due to our substantial tax net operating loss carrryforwards and significant drilling activity.31, 2007.
Liquidity and Capital Resources
Cash Flows
Three Months Ended March 31, | ||||||||||||
2007 | 2006 | Variance | ||||||||||
(in thousands) | ||||||||||||
Cash flow statement information: | ||||||||||||
Net cash: | ||||||||||||
Provided by operating activities | $ | 16,909 | $ | 25,773 | $ | (8,864 | ) | |||||
Provided by (used in) investing activities | 12,525 | (62,595 | ) | 75,120 | ||||||||
Provided by (used in) financing activities | (28,046 | ) | 18,483 | (46,529 | ) | |||||||
Increase (decrease) in cash and cash equivalents | $ | 1,388 | $ | (18,339 | ) | $ | 19,727 | |||||
Operating activities. Net cash provided by operating activities increaseddecreased to $55.0$16.9 million up 85%for the first quarter of 2007, from $29.8$25.8 million in the first halfquarter of 2005. The increase was a result2006. Virtually all of an increase in production levels and natural gas and crude oil pricesthis decrease resulted from the impact of working capital changes on our operating cash flow. During the first quarter of 2007, these changes used $2.9 million of available cash flow, whereas in the first halfquarter of 2006, comparedthese changes provided an additional $12.3 million of cash flow. Given the nature of our ongoing operations in the Cotton Valley Trend and the number of rigs we currently have under contract, these working capital changes will likely fluctuate from time to the first halftime between being a source of 2005, partially offset by increasesfunds or a use of funds in lease operating expenses and general and administrative expenses. Excluding the effect of settled derivatives, sales of oil and gas increased $27.9any given quarter. Our cash flows before working capital changes were up from $13.5 million in the first halfquarter of 2006 compared to the same period in 2005, with realized oil and natural gas prices increasing 6% from the first half of 2005. Production volumes increased 87%$19.8 million in the first halfquarter of 2006 compared to the first half of 2005. Operating cash flow amounts are net of changes in2007 based primarily on our current assets and current liabilities, which resulted in adjustments to our operating cash flow in the amounts of $24.2 million and $14.5 million in the six months ended June 30, 2006 and 2005, respectively, primarily reflecting increased revenue and expenditure activity associated with our Cotton Valley trend wells.production volumes.
Investing activities. Net cash used in investing activities was $142.2a source of $12.5 million for the first halfquarter of 20062007 compared to $58.2a use of $62.6 million for the first halfquarter of 2005. For2006. We received proceeds of $74.0 million resulting from the six months ended June 30, 2006, additions to oil and gas properties totaled $143.7 million primarily due to accelerated developmentsale of substantially all of our Cotton Valley trend, which accounted for 89% of the capital costs incurredSouth Louisiana assets in the first halfquarter of 2006.2007, which more than offset capital expenditures of $63.5 million. We also released $2.0 million from restricted cash held in escrow related to the sale properties. We conducted drilling operations on approximately 5719 gross wells, 15 gross wells located in our Cotton Valley Trend and 4 gross wells located in Angelina River, during the first quarter of 2007. As a comparison, we conducted drilling operations on approximately 30 gross wells, of which 5128 were located in our Cotton Valley trend,Trend, during the first halfquarter of 2006. We also received proceeds of $1.7$0.9 million from the sale of twoa salt water disposal wells and the sale of a partial interest in deep rightsfacility in the Cotton prospect in East Texas.first quarter of 2006.
Financing activities. Net cash used in financing activities was $28.0 million for the first quarter of 2007. Net cash provided by financing activities was $71.4$18.5 million for the first halfquarter of 2006 compared to $25.9 million for2006. We used proceeds from our sale of properties in the first halfquarter of 2005. On January 23, 2006,2007 to pay the initial purchasers offull outstanding balance on our 5.375% Series B Cumulative Convertible Preferred Stock (the “Series B Convertible Preferred Stock”) exercised their over-allotment optionSenior Credit Facility, which had grown to purchase an additional 600,000 shares at$65.0 million by the same price per share, resulting in net proceeds of $29.0 million. In February 2006,time we fully redeemed all issued and outstanding shares of our Series A Convertible Preferred Stock at a cost of approximately $9.3 million. Financing activities also included net borrowings of $54.5 million under our senior revolver, resulting in amounts outstanding and borrowing availability under this facility of $54.5 million and $50.5 million, respectively, at June 30, 2006. Subsequent to the issuance of the Series B Convertible Preferred Stock, we have approximately $37.5 million of securities available for issue under the current shelf registration statement.received these proceeds.
In MayDecember 2006, our Board of Directors approved a preliminary 20062007 capital expenditure budget of approximately $220.0$275 million, of which approximately 85% is expected to be focused on the relatively low riskused to fund our development drilling program, lease acquisitions and installation of infrastructure in the Cotton Valley trendTrend of East Texas and Northwest Louisiana and the remainder on our existing properties and new exploration programs in South Louisiana. Our Board of Directors may increase our capital expenditure budget for 2006,2007, subject to future economic conditions and financial resources. We expect to finance our 20062007 capital expenditures through a combination of cash flow from operations, proceeds from the aforementioned asset sales, and borrowings under our existing bank credit facility (see “Senior Credit Facility and Term Loan”Facility”). In the future, we may issue additional debt or equity securities to provide additional financial resources for our capital expenditures and other general corporate purposes. Our senior credit facility and term loan includeSenior Credit Facility includes certain financial covenants with which we were in compliance as of June 30, 2006.March 31, 2007. We do not anticipate a lack of borrowing capacity under our senior credit facility or term loan in the foreseeable future due to an inability to meet any such financial covenants nor a reduction in our borrowing base.
Senior Credit Facility and Term Loan
On November 17, 2005, we amended our existing credit agreement and entered into an amended and restated senior credit agreement (the “Amended and Restated“Senior Credit Agreement”Facility”) and a funded $30.0 million second lien term loan (the “Second Lien Term Loan Agreement”“Term Loan”) that expanded our borrowing capabilities and extended our credit facility for an additional two years. Total lender commitments under the Amended and RestatedSenior Credit AgreementFacility were increased from $50.0 million to $200.0 million and the maturity was extended from February 25, 2008 towhich matures on February 25, 2010. Revolving borrowings under the Amended and RestatedSenior Credit AgreementFacility are subject to periodic redeterminations of the borrowing base, which is currently established at $105.0$110.0 million, and is currently scheduled to be redetermined in the third quarter of 2006, based upon our 2006 internally prepared mid-year reserve report. With a portion2007. As of the net proceeds of the offering of our Series B Convertible Preferred Stock in December 2005,March 31, 2007, we fully repaid all outstanding indebtedness on our revolver inamounts of the amount of $47.5 million leaving a zero balance outstanding as of December 31, 2005.revolving borrowings under the Senior Credit Facility. Interest on revolving borrowings under the Amended and RestatedSenior Credit AgreementFacility accrues at a rate calculated, at our option, at either the bank base rate plus 0.00% to 0.50%, or LIBOR plus 1.25% to 2.00%, depending on borrowing base utilization. BNP Paribas (“BNP”) is the lead lender and administrative agent under the amended credit facility with Comerica Bank and Harris Nesbit Financing, Inc. as co-lenders.
The terms of the Amended and RestatedSenior Credit AgreementFacility require us to maintain certain covenants. Capitalized terms are defined in the credit agreement. The covenants include:
Current Ratio of 1.0/1.0;1.0,
Interest Coverage Ratio which is not less than 3.0/1.0 for the trailing four quarters, and
Total Debt no greater than $53,392,838, plus 50% of cumulative net3.5 times EBITDAX for the trailing four quarters.
EBITDAX is earnings before interest expense, income after September 30, 2004, plus 100% of the net proceeds of any subsequent equity issuance.
As of June 30, 2006,March 31, 2007, we were in compliance with all of the financial covenants of the Amended and RestatedSenior Credit Agreement.
The Second Lien Term Loan Agreement provides for a 5-year, non-revolving loan of $30.0 million which was funded on November 17, 2005 and is due in a single maturity on November 17, 2010. Optional prepayments of term loan principal can be made in amounts of not less than $5.0 million during the first year at a 1% premium and without premium after the first year. Interest on term loan borrowings accrues at a rate calculated, at our option, at either base rate plus 3.50%, or LIBOR plus 4.50%, and is payable quarterly. BNP is the lead lender and administrative agent under the Second Lien Term Loan Agreement.
The terms of the Second Lien Term Loan Agreement require us to maintain certain covenants. Capitalized terms are defined in the loan agreement. The covenants include:
As of June 30, 2006, we were in compliance with all of the financial covenants of the Second Lien Term Loan Agreement.
Cotton Valley Trend
Our relatively low risk development drilling program in the Cotton Valley trend is primarily centered in and around Rusk, Panola, Angelina and Nacogdoches Counties, Texas, and DeSoto and Caddo Parishes, Louisiana. In addition, we have recently expanded our acreage position in the trend to include Harrison, Smith and Upshur Counties of Texas. We have steadily increased our acreage position in these areas over the last two years to approximately 142,000 gross acres (94,000 net acres) as of July 31, 2006. As of July 31, 2006, we have drilled and/or logged a cumulative total of 128 Cotton Valley wells with a 100% success rate, of which drilling operations were conducted on 30 gross wells during the second quarter of 2006. Our net production volumes from our Cotton Valley trend wells aggregated approximately 32,800 Mcfe of gas per day in the second quarter of 2006, or approximately 75% of our total oil and gas production in the period.
In June 2006, we assigned 50% of our interest solely in the deep rights in our Cotton prospect in East Texas, defined as rights below the top of the Knowles Lime formation at 12,901’ below the surface, while reserving all of our rights to and above the Upper, Middle and Lower Travis Peak section in approximately 20,500 net acres for approximately $1.6 million. We had received one-half of the sales price as of June 30, 2006 and one-half has been recorded as a receivable in the consolidated financial statements. Pursuant to the agreement, within 18 months of the assignment, the assignee will either pay all of our share of drilling costs to a depth of 16,500’ feet in a well (the “carried well”) drilled on the acreage or pay us a non participation fee of $4.0 million should no well be drilled. The transaction was accounted for as a recovery of cost.
South Louisiana Operations
Burrwood/West Delta 83 Fields— In June 2006, our Norton II prospect came on line and as of July 31, 2006 was producing approximately 1,700 Mcf/day and 150 Bbl/day. In late August 2005, our Burrwood/West Delta 83 field was shut-in due to Hurricane Katrina and, except for the partial restoration of oil production in mid September, remained shut-in for the remainder of the third quarter of 2005. Production was gradually restored beginning in the fourth quarter of 2005 through the second quarter of 2006. As of June 30, 2006, we had returned to production all of our total pre-hurricane volumes in South Louisiana, including the Burrwood/West Delta 83 field and the Second Bayou field, which was impacted to a lesser extent by Hurricane Rita in September 2005. Damage to our facilities from both hurricanes was substantially covered by insurance.
St. Gabriel Field— In the first quarter of 2006, we commenced an exploratory test well on our Bordeaux Prospect. In March 2006, we announced that an open hole log on the test well, the Gueymard No. 1, had encountered approximately 60 feet of net pay. The well is currently being completed and was preliminarily tested at a gross production rate of approximately 4,000 Mcf of gas per day and 200 barrels of oil per day with 5,000 pounds of flowing tubing pressure. We anticipate first production in the third quarter of 2006.Facility.
Accounting Pronouncements
See Note B1 to our Consolidated Financial Statements for a discussion of recently issued accounting pronouncements.
Other Developments
Texas House Bill 3 (“HB3”), which was signed into law in May, 2006, provides a comprehensive change in the method of business taxation in Texas. HB3 eliminates the taxable capital and earned surplus components of the existing Texas franchise tax and replaces these components with a taxable margin tax. This change is effective for tax reports filed on or after January 1, 2008 (which are based upon 2007 business activity) and results in no impact on our current Texas income tax.
We are required to include, in income, the impact of HB3 on our deferred state income taxes during the period which includes the date of enactment. Based upon the available information regarding the proposed implementation of this new tax, we have determined that no change in the amount of net deferred state income taxes is needed since the impact is not significant to the results of operations.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations are based on consolidated financial statements which have been prepared in accordance with generally accepted accounting principles in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts or assets, liabilities, revenues and expenses. We believe that certain accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements. Our 20052006 Annual Report on Form 10-K, as amended, includes a discussion of our critical accounting policies. In addition, following the adoption of SFAS 123R, we consider our policies related to share-based compensation to be a critical accounting policy.
Share-Based Compensation Plans.Income TaxesIn January 2006, we — FASB Interpretation No. 48,Accounting for Uncertainty in Income Taxes, provides guidance on recognition and measurement of uncertainties in income taxes and is applicable for fiscal years beginning after December 15, 2006. The Company adopted SFAS 123R which amends SFAS 123 and supercedes APB 25. SFAS 123R requires new, modified and unvested share-based payment transactions with employees to be measured at fair value and recognized as compensation expense over the vesting period. The fair value of each option award is estimated using a Black-Scholes option valuation model that requires us to develop estimates for assumptions usedFIN 48 in the model. The Black-Scholes valuation model uses the following assumptions: expected volatility, expected termfirst quarter of option, risk-free interest rate2007. See Notes 1 and dividend yield. Expected volatility estimates are developed by us based on historical volatility of7 to our stock. We use historical data to estimate the expected term of the options. The risk-free interest rate for periods within the expected life of the option is based on the U.S. Treasury yield in effect at the grant date. Our common stock does not pay dividends; therefore the dividend yield is zero.consolidated financial statements.
Disclosure Regarding Forward Looking Statement
Certain statements in this Quarterly Report on Form 10-Q regarding future expectations and plans for future activities may be regarded as “forward looking statements” within the meaning of Private Securities Litigation Reform Act of 1995. They are subject to various risks, such as financial market conditions, operating hazards, drilling risks and the inherent uncertainties in interpreting engineering data relating to underground accumulations of oil and gas, as well as other risks discussed in detail in our Annual Report on Form 10-K, and such material changes to these factors, if any, which are discussed in Part II, Item 1A of this Form 10-Q. Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be correct.
Item 3. Quantitative and Qualitative Disclosures Aboutabout Market Risk
Commodity Price Risk
Despite the measures taken by us to attempt to control price risk, we remain subject to price fluctuations for natural gas and crude oil sold in the spot market. Prices received for natural gas sold on the spot market are volatile due primarily to seasonality of demand and other factors beyond our control. Domestic crude oil and gas prices could have a material adverse effect on our financial position, results of operations and quantities of reserves recoverable on an economic basis.
We enter into futures contracts or other hedging agreements from time to time to manage the commodity price risk for a portion of our production. We consider these agreements to be hedging activities and, as such, monthly settlements on the contracts that qualify for hedge accounting are reflected in our crude oil and natural gas sales. Our strategy, which is administered by the Hedging Committee of theour Board of Directors, and reviewed periodically by the entire Board of Directors, has been to generally hedge between 30% and 70% of our production. As of June 30, 2006,March 31, 2007, the commodity hedges we utilized were in the form of: (a) swaps, where we receive a fixed price and pay a floating price, based on NYMEX quoted prices; andprices, (b) collars, where we receive the excess, if any, of the floor price over the reference price, based on NYMEX quoted prices, and pay the excess, if any, of the reference price over the ceiling price.price, and (c) fixed price physical contracts which qualify for normal purchase and normal sale treatment, whereby we agree in advance with the purchasers of our physical gas volumes as to specific quantities to be delivered and specific prices to be received for gas deliveries at specific transfer points in the future. See Note H5 “Hedging Activities” to the Consolidated Financial Statementsour consolidated financial statements for additional information.
Our hedging contracts fall within our targeted range of 30% to 70% of our estimated net oil and gas production volumes for the applicable periods of 2007. The fair value of the crude oil and natural gas hedging contracts in place at June 30, 2006March 31, 2007, resulted in a liabilityan asset of $9.9$2.2 million. Based on oil and gas pricing in effect at June 30, 2006,March 31, 2007, a hypothetical 10% increase in oil and gas prices would have increaseddecreased the derivative liabilityasset to $16.1$1.6 million while a hypothetical 10% decrease in oil and gas prices would have decreasedincreased the derivative liabilityasset to an asset of $4.8$2.9 million.
Interest Rate Risk
We have a variable-rate debt obligationsobligation that exposeexposes us to the effects of changes in interest rates. To partially reduce our exposure to interest rate risk, from time to time we enter into interest rate swap agreements. At June 30, 2006March 31, 2007, we had the following interest rate swaps in place with BNP (in millions).
Effective Date | Maturity Date | LIBOR Swap Rate | Notional Amount | |||||
02/27/06 | 02/26/07 | 4.08 | % | $ | 23.0 | |||
02/27/06 | 02/26/07 | 4.85 | % | 17.0 | ||||
02/26/07 | 02/26/09 | 4.86 | % | 40.0 |
Effective | Maturity Date | LIBOR Swap Rate | Notional Amount | |||
02/27/07 | 02/26/09 | 4.86% | $40.0 |
The fair value of the interest rate swap contracts in place at June 30, 2006March 31, 2007, resulted in an asset of $0.8 million.$54,000. Based on interest rates at June 30, 2006,March 31, 2007, a hypothetical 10% increase or decrease in interest rates would not have a material effect on the asset.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We have established disclosure controls and procedures designed to ensure that material information required to be disclosed in our reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission and that any material information relating to us is recorded, processed, summarized and reported to our management including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures. In designing and evaluating our disclosure controls and procedures, our management recognizes that controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving desired control objectives. In reaching a reasonable level of assurance, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
We conducted a review and evaluation,
As required by SEC rule 13a-15(b), we have evaluated, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in rules 13a-15(c) and 15d-15(e) under the Exchange Act) as of June 30, 2006.the end of the period covered by this report. Our Chief Executive Officer and Chief Financial Officer, based upon their evaluation as of June 30, 2006,March 31, 2007, the end of the fiscal quarterperiod covered in this report, concluded that our disclosure controls and procedures were effective.
Changes in Internal Control over Financial Reporting
The followingThere were no changes in our internal control over financial reporting that occurred during ourthe most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect our internal control over financial reporting.
As previously reported in our quarterly report on Form 10-Q for the quarter ended March 31, 2006, a material weakness was identified in our internal control over financial reporting with respect to recording the fair value of all outstanding derivatives. The Public Company Accounting Oversight Board’s Auditing Standard No. 2 defines a material weakness as a significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected.
In order to remediate the material weakness, we implemented changes in our internal control over financial reporting during the quarter ended June 30, 2006. Specifically, we now automatically receive a mark to market valuation from our existing counterparties for all outstanding derivatives. For any new contracts entered into with a new counterparty, we will concurrently request this automatic distribution. We also added another layer of review for the fair value calculation prior to review by the Chief Financial Officer.
Our management believes that these additional policies and procedures have enhanced our internal control over financial reporting relating to the determination and review of fair value calculations on outstanding derivatives. Our management also believes that, as a result of these measures described above, the material weakness was remediated and that our internal control over financial reporting is effective as of June 30, 2006, the end of the fiscal quarter covered in this report.
There are no material changes from risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005 and in the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2006.
Item 4 – Submission of Matters to a Vote of Security Holders
The Annual Meeting of Stockholders of the Company was held on May 18, 2006. Set forth below is a brief description of each matter acted upon at the meeting and the number of votes cast for, against or withheld, and abstaining or not voting as to each matter:
For | Against | Abstained or Withheld | ||||||
(i) | Election of Class II Directors: | |||||||
Henry Goodrich | 22,354,182 | — | 1,424,026 | |||||
Patrick E. Malloy, III | 22,195,522 | — | 1,582,686 | |||||
Michael J. Perdue | 23,725,587 | — | 52,621 | |||||
Steven A. Webster | 21,041,260 | — | 2,736,948 | |||||
(ii) | Approval of First Amendment to the Goodrich Petroleum Corporation 1995 Stock Option Plan. | 16,997,730 | 465,438 | 6,315,040 | ||||
(iii) | Approval of Goodrich Petroleum Corporation 2006 Long-Term Incentive Compensation Plan. | 16,948,301 | 513,462 | 6,316,445 | ||||
(iv) | Ratification of the appointment of KPMG LLP as the Company’s independent registered public accounting firm for 2006. | 23,641,679 | 112,574 | 23,955 |
*31.1 | Certification of Chief Executive Officer Pursuant to 15 U.S.C Section 7241, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
*31.2 | Certification of Chief Financial Officer Pursuant to 15 U.S.C. Section 7241, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
**32.1 | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
**32.2 | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
* | Filed herewith |
** | Furnished herewith |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned and thereunto duly authorized.
GOODRICH PETROLEUM CORPORATION | ||||
(Registrant) | ||||
Date: | By: | /s/ Walter G. Goodrich | ||
Walter G. Goodrich | ||||
Vice Chairman & Chief Executive Officer | ||||
Date: | By: | /s/ | ||
David R. Looney | ||||
David R. Looney Executive Vice President & | ||||
Chief Financial Officer |
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