UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| ý | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2012 |
| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| For the transition period from _______________________to____________________________ |
Commission File No. 000-53591
RIDGEWOOD ENERGY X FUND, LLC
(Exact name of registrant as specified in its charter)
Delaware (State or other jurisdiction of incorporation or organization) | 26-0870318 (I.R.S. Employer Identification No.) |
14 Philips Parkway, Montvale, NJ 07645
(Address of principal executive offices) (Zip code)
(800) 942-5550
(Registrant’s telephone number, including area code)
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 x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | o | Accelerated filer | o |
Non-accelerated filer (Do not check if a smaller reporting company) | o | Smaller reporting company | x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No x
As of November 5, 2012 the Fund had 477.8874 shares of LLC Membership Interest outstanding.
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| PART I - FINANCIAL INFORMATION | |||
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| PART II - OTHER INFORMATION | |||
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PART I – FINANCIAL INFORMATION
RIDGEWOOD ENERGY X FUND, LLC
(in thousands, except share data)
| September 30, 2012 | December 31, 2011 | |||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 9,306 | $ | 14,687 | ||||
| Short-term investments in marketable securities | 9,497 | 5,500 | ||||||
| Salvage fund | 71 | - | ||||||
| Production receivable | 1,087 | 1,532 | ||||||
| Other current assets | 97 | 136 | ||||||
| Total current assets | 20,058 | 21,855 | ||||||
| Salvage fund | 1,095 | 1,145 | ||||||
| Oil and gas properties: | ||||||||
| Advances to operators for working interests and expenditures | - | 235 | ||||||
| Unproved properties | 2,182 | 608 | ||||||
| Proved properties | 15,653 | 20,357 | ||||||
| Equipment and facilities – in progress | 175 | - | ||||||
| Less: accumulated depletion, depreciation and amortization | (10,936 | ) | (12,025 | ) | ||||
| Total oil and gas properties, net | 7,074 | 9,175 | ||||||
| Total assets | $ | 28,227 | $ | 32,175 | ||||
| Liabilities And Members' Capital | ||||||||
| Current liabilities: | ||||||||
| Due to operators | $ | 657 | $ | 863 | ||||
| Accrued expenses | 30 | 33 | ||||||
| Asset retirement obligations | 71 | - | ||||||
| Total current liabilities | 758 | 896 | ||||||
| Asset retirement obligations | 573 | 644 | ||||||
| Total liabilities | 1,331 | 1,540 | ||||||
| Commitments and contingencies (Note 6) | ||||||||
| Members' capital: | ||||||||
| Manager: | ||||||||
| Distributions | (3,448 | ) | (2,235 | ) | ||||
| Retained earnings | 2,629 | 1,505 | ||||||
| Manager's total | (819 | ) | (730 | ) | ||||
| Shareholders: | ||||||||
| Capital contributions (500 shares authorized; | ||||||||
| 477.8874 issued and outstanding) | 94,698 | 94,698 | ||||||
| Syndication costs | (11,080 | ) | (11,080 | ) | ||||
| Distributions | (21,713 | ) | (14,838 | ) | ||||
| Accumulated deficit | (34,190 | ) | (37,415 | ) | ||||
| Shareholders' total | 27,715 | 31,365 | ||||||
| Total members' capital | 26,896 | 30,635 | ||||||
| Total liabilities and members' capital | $ | 28,227 | $ | 32,175 | ||||
The accompanying notes are an integral part of these unaudited condensed financial statements.
RIDGEWOOD ENERGY X FUND, LLC
(in thousands, except per share data)
| Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
| 2012 | 2011 | 2012 | 2011 | |||||||||||||
| Revenue | ||||||||||||||||
| Oil and gas revenue | $ | 2,736 | $ | 4,447 | $ | 9,968 | $ | 10,723 | ||||||||
| Expenses | ||||||||||||||||
| Depletion, depreciation and amortization | 953 | 2,763 | 3,198 | 5,062 | ||||||||||||
| Dry-hole costs | (12 | ) | 7 | 84 | (34 | ) | ||||||||||
| Management fees to affiliate (Note 4) | 334 | 362 | 1,058 | 1,085 | ||||||||||||
| Operating expenses | 228 | 399 | 1,007 | 923 | ||||||||||||
| General and administrative expenses | 68 | 45 | 238 | 249 | ||||||||||||
| Total expenses | 1,571 | 3,576 | 5,585 | 7,285 | ||||||||||||
| Income from operations | 1,165 | 871 | 4,383 | 3,438 | ||||||||||||
| Other income (loss) | 10 | 110 | (34 | ) | 79 | |||||||||||
| Net income | $ | 1,175 | $ | 981 | $ | 4,349 | $ | 3,517 | ||||||||
| Manager Interest | ||||||||||||||||
| Net income | $ | 307 | $ | 535 | $ | 1,124 | $ | 1,234 | ||||||||
| Shareholder Interest | ||||||||||||||||
| Net income | $ | 868 | $ | 446 | $ | 3,225 | $ | 2,283 | ||||||||
| Net income per share | $ | 1,815 | $ | 933 | $ | 6,748 | $ | 4,777 | ||||||||
The accompanying notes are an integral part of these unaudited condensed financial statements.
RIDGEWOOD ENERGY X FUND, LLC
(in thousands)
| Nine months ended September 30, | ||||||||
| 2012 | 2011 | |||||||
| Cash flows from operating activities | ||||||||
| Net income | $ | 4,349 | $ | 3,517 | ||||
| Adjustments to reconcile net income to net cash | ||||||||
| provided by operating activities: | ||||||||
| Depletion, depreciation and amortization | 3,198 | 5,062 | ||||||
| Dry-hole costs | 84 | (34 | ) | |||||
| Derivative instrument loss (income) | 59 | (48 | ) | |||||
| Derivative instrument settlements | 6 | 2 | ||||||
| Changes in assets and liabilities: | ||||||||
| Decrease (increase) in production receivable | 445 | (319 | ) | |||||
| Increase in other current assets | (30 | ) | (302 | ) | ||||
| (Decrease) increase in due to operators | (62 | ) | 221 | |||||
| Decrease in accrued expenses | (3 | ) | (21 | ) | ||||
| Net cash provided by operating activities | 8,046 | 8,078 | ||||||
| Cash flows from investing activities | ||||||||
| Payments to operators for working interests | ||||||||
| and expenditures | - | (3 | ) | |||||
| Capital expenditures for oil and gas properties | (1,325 | ) | (514 | ) | ||||
| Proceeds from sale of oil and gas properties | - | 2,330 | ||||||
| Investments in marketable securities | (20,995 | ) | (12,000 | ) | ||||
| Proceeds from maturity of investments | 17,002 | 13,000 | ||||||
| Interest reinvested in salvage fund | (21 | ) | (21 | ) | ||||
| Net cash (used in) provided by investing activities | (5,339 | ) | 2,792 | |||||
| Cash flows from financing activities | ||||||||
| Distributions | (8,088 | ) | (8,940 | ) | ||||
| Net cash used in financing activities | (8,088 | ) | (8,940 | ) | ||||
| Net (decrease) increase in cash and cash equivalents | (5,381 | ) | 1,930 | |||||
| Cash and cash equivalents, beginning of period | 14,687 | 6,694 | ||||||
| Cash and cash equivalents, end of period | $ | 9,306 | $ | 8,624 | ||||
| Supplemental schedule of non-cash investing activities | ||||||||
Advances used for capital expenditures in oil and gas properties reclassified to unproved and proved properties | $ | 235 | $ | 452 | ||||
The accompanying notes are an integral part of these unaudited condensed financial statements.
RIDGEWOOD ENERGY X FUND, LLC
1. Organization and Summary of Significant Accounting Policies
Organization
The Ridgewood Energy X Fund, LLC (the “Fund”), a Delaware limited liability company, was formed on August 30, 2007 and operates pursuant to a limited liability company agreement (the “LLC Agreement”) dated as of January 2, 2008 by and among Ridgewood Energy Corporation (the “Manager”) and the shareholders of the Fund. The Fund was organized to primarily acquire interests in oil and gas properties located in the United States offshore waters of Texas, Louisiana, and Alabama in the Gulf of Mexico.
The Manager has direct and exclusive control over the management of the Fund’s operations. With respect to project investments, the Manager locates potential projects, conducts due diligence, and negotiates and completes the transactions in which the investments are made. The Manager performs, or arranges for the performance of, the management, advisory and administrative services required for Fund operations. Such services include, without limitation, the administration of shareholder accounts, shareholder relations and the preparation, review and dissemination of tax and other financial information. In addition, the Manager provides office space, equipment and facilities and other services necessary for Fund operations. The Manager also engages and manages the contractual relations with unaffiliated custodians, depositories, accountants, attorneys, broker-dealers, corporate fiduciaries, insurers, banks and others as required. See Notes 4 and 6.
Basis of Presentation
These unaudited interim condensed financial statements have been prepared by the Fund’s management in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and in the opinion of management, contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the Fund’s financial position, results of operations and cash flows for the periods presented. Certain information and note disclosures normally included in annual financial statements prepared in accordance with GAAP have been omitted in these unaudited interim condensed financial statements. The results of operations, financial position, and cash flows for the periods presented herein are not necessarily indicative of future financial results. These unaudited interim condensed financial statements should be read in conjunction with the Fund’s December 31, 2011 financial statements and notes thereto included in the Fund’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”). The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP.
Use of Estimates
The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenue and expense during the reporting period. On an ongoing basis, the Manager reviews its estimates, including those related to the fair value of financial instruments, property balances, determination of proved reserves, impairments and asset retirement obligations. Actual results may differ from those estimates.
Cash and Cash Equivalents
All highly liquid investments with maturities, when purchased, of three months or less, are considered cash and cash equivalents. At times, deposits may be in excess of federally insured limits, which, for interest bearing deposits, are $250 thousand per insured financial institution. Additionally, non-interest bearing deposits are fully insured through December 31, 2012, after which they will be included within the $250 thousand limit. At September 30, 2012, the Fund’s bank balances exceeded federally insured limits by $7.3 million, all of which was invested in money market accounts that invest solely in U.S. Treasury bills and notes.
Investments in Marketable Securities
At times, the Fund may invest in U.S. Treasury bills and notes. These investments are considered short-term when their maturities are one year or less, and long-term when their maturities are greater than one year. At September 30, 2012, the Fund had short-term, held-to-maturity investments totaling $9.5 million, which matured in October 2012. Held-to-maturity investments are those securities that the Fund has the ability and intent to hold until maturity, and are recorded at cost plus accrued income, adjusted for the amortization of premiums and discounts, which approximates fair value.
For all investments, interest income is accrued as earned and amortization of premium or discount, if any, is included in interest income.
Salvage Fund
The Fund deposits in a separate interest-bearing account, or salvage fund, money to provide for the dismantling and removal of production platforms and facilities and plugging and abandoning its wells at the end of their useful lives, in accordance with applicable federal and state laws and regulations. At September 30, 2012, the Fund had investments in U.S. Treasury securities within its salvage fund that are classified as held-to-maturity of $0.9 million, which mature in August 2013. Interest earned on the account will become part of the salvage fund. There are no restrictions on withdrawals from the salvage fund.
Oil and Gas Properties
The Fund invests in oil and gas properties, which are operated by unaffiliated entities that are responsible for drilling, administering and producing activities pursuant to the terms of the applicable operating agreements with working interest owners. The Fund’s portion of exploration, drilling, operating and capital equipment expenditures is billed by operators.
Exploration, development and acquisition costs are accounted for using the successful efforts method. Costs of acquiring unproved and proved oil and natural gas leasehold acreage, including lease bonuses, brokers’ fees and other related costs are capitalized. Costs of drilling and equipping productive wells and related production facilities are capitalized. Costs of developing production facilities and pipelines that service multiple oil and gas properties are segregated as “Equipment and facilities - in progress.” Exploratory costs are capitalized pending determination of whether proved reserves have been found. If proved commercial reserves are not found, exploratory drilling costs are expensed as dry-hole costs. Annual lease rentals and exploration expenses are expensed as incurred.
Upon the sale or retirement of a proved property, the cost and related accumulated depletion, depreciation and amortization will be eliminated from the property accounts, and the resultant gain or loss is recognized. Upon the sale or retirement of an unproved property, gain or loss on the sale is recognized.
At September 30, 2012 and December 31, 2011, amounts recorded in due to operators totaling $0.4 million and $0.6 million, respectively, related to capital expenditures for oil and gas properties.
Advances to Operators for Working Interests and Expenditures
The Fund’s acquisition of a working interest in a well or a project requires it to make a payment to the seller for the Fund’s rights, title and interest. The Fund may be required to advance its share of estimated cash expenditures for the succeeding month’s operation. The Fund accounts for such payments as advances to operators for working interests and expenditures. As drilling costs are incurred, the advances are reclassified to unproved or proved properties.
Asset Retirement Obligations
For oil and gas properties, there are obligations to perform removal and remediation activities when the properties are retired. When a project reaches drilling depth and is determined to be either proved or dry, an asset retirement obligation is incurred. Plug and abandonment costs associated with unsuccessful projects are expensed as dry-hole costs. As indicated above, the Fund maintains a salvage fund to provide for the funding of future asset retirement obligations.
Syndication Costs
Syndication costs are direct costs incurred by the Fund in connection with the offering of the Fund’s shares, including professional fees, selling expenses and administrative costs payable to the Manager, an affiliate of the Manager and unaffiliated broker-dealers, which are reflected on the Fund’s balance sheet as a reduction of shareholders’ capital.
Revenue Recognition and Imbalances
Oil and gas revenues are recognized when oil and gas is sold to a purchaser at a fixed or determinable price, when delivery has occurred and title has transferred, and if collectability of the revenue is probable. The Fund uses the sales method of accounting for gas production imbalances. The volumes of gas sold may differ from the volumes to which the Fund is entitled based on its interests in the properties. These differences create imbalances that are recognized as a liability only when the properties’ estimated remaining reserves net to the Fund will not be sufficient to enable the underproduced owner to recoup its entitled share through production. The Fund’s recorded liability, if any, would be reflected in other liabilities. No receivables are recorded for those wells where the Fund has taken less than its share of production.
Derivative Instruments
The Fund may periodically utilize derivative instruments to manage the price risk attributable to its oil and gas production. Derivative instruments are carried on the balance sheet at fair value and recorded as either an asset or liability. Changes in the fair value of the derivatives are recorded currently in earnings unless specific hedge accounting criteria are met. At this time, the Fund has elected not to use hedge accounting for its derivatives and, accordingly, the derivatives are marked-to-market each quarter with fair value gains and losses recognized currently as other income on the statement of operations. The related cash flow impact of the derivative activities are reflected as cash flows from operating activities on the statement of cash flows. See Note 2. “Derivative Instruments,” for more information.
Impairment of Long-Lived Assets
The Fund reviews the value of its oil and gas properties whenever management determines that events and circumstances indicate that the recorded carrying value of properties may not be recoverable. Impairments of producing properties are determined by comparing future net undiscounted cash flows to the net book value at the time of the review. If the net book value exceeds the future net undiscounted cash flows, the carrying value of the property is written down to fair value, which is determined using net discounted future cash flows from the producing property. The Fund provides for impairments on unproved properties when it determines that the property will not be developed or a permanent impairment in value has occurred. The fair value determinations require considerable judgment and are sensitive to change. Different pricing assumptions, reserve estimates or discount rates could result in a different calculated impairment. Given the volatility of oil and natural gas prices, it is reasonably possible that the Fund’s estimate of discounted future net cash flows from proved oil and natural gas reserves could change in the near term. If oil and natural gas prices decline significantly, even if only for a short period of time, it is possible that write-downs of oil and gas properties could occur.
Depletion, Depreciation and Amortization
Depletion, depreciation and amortization of the cost of proved oil and gas properties are calculated using the units-of-production method. Proved developed reserves are used as the base for depleting capitalized costs associated with successful exploratory well costs, development costs and related facilities. The sum of proved developed and proved undeveloped reserves is used as the base for depleting or amortizing leasehold acquisition costs. In certain circumstances, equipment and facilities costs are depreciated over the estimated useful life of the asset.
Income Taxes
No provision is made for income taxes in the financial statements. The Fund is a limited liability company, and as such, the Fund’s income or loss is passed through and included in the tax returns of the Fund’s shareholders.
Income and Expense Allocation
Profits and losses are allocated 85% to shareholders in proportion to their relative capital contributions and 15% to the Manager, except for interest income and certain expenses such as dry-hole costs, trust fees, depletion, depreciation and amortization, which are allocated 99% to shareholders and 1% to the Manager.
Distributions
Distributions to shareholders are allocated in proportion to the number of shares held. Certain shares have early investment incentive and advance distribution rights, as defined in the LLC Agreement, which range from approximately $8 thousand to $16 thousand per share. The Fund commenced distributions to eligible early investors in 2008 and to all investors in April 2011.
The Manager determines whether available cash from operations, as defined in the LLC Agreement, will be distributed. Such distributions are allocated 85% to the shareholders and 15% to the Manager, as required by the LLC Agreement.
Available cash from dispositions, as defined in the LLC Agreement, will be paid 99% to shareholders and 1% to the Manager until the shareholders have received total distributions equal to their capital contributions. After shareholders have received distributions equal to their capital contributions, 85% of available cash from dispositions will be distributed to shareholders and 15% to the Manager.
In January 2011, proceeds from the sale of the Aspen Project were distributed to the Manager and shareholders totaling $23 thousand and $2.3 million, respectively.
Recent Accounting Pronouncements
The Fund has considered recent accounting pronouncements and believes that these recent pronouncements will not have a material effect on the Fund’s financial statements.
2. Derivative Instruments
The Fund periodically enters into derivative contracts relating to its oil or gas production. The use of such derivative instruments limits the downside risk of adverse price movements. Currently, the Fund has elected not to use hedge accounting for its derivatives and consequently, the derivatives are marked-to-market each quarter with fair value gains and losses recognized as other income on the statement of operations. The estimated fair value of such contracts is based upon various factors, including reported prices on the New York Mercantile Exchange (“NYMEX”) and the Intercontinental Exchange (“ICE”), volatility, and the time value of options. See Note 5. “Fair Value Measurements.” The Fund has exposure to credit risk to the extent the derivative instrument counterparty is unable to satisfy its settlement commitment. The Fund actively monitors the creditworthiness of each counterparty and assesses the impact, if any, on its derivative positions.
Derivative instruments are carried at their fair value on the balance sheet within “Other current assets”. The derivative contracts relating to gas pricing are settled based upon reported prices on NYMEX. The derivative contracts relating to oil pricing are settled based upon averaged reported prices on ICE. The Fund recognizes all unrealized and realized gains and losses related to these contracts on a mark-to-market basis in the statement of operations under the caption “Other income (loss).” Settlements of derivative contracts are reflected in operating activities on the statement of cash flows.
At September 30, 2012, the Fund had no outstanding derivative contracts with respect to its future production. For the three and nine months ended September 30, 2012 and 2011, the Fund’s derivative instrument income consisted of the following:
| Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
| 2012 | 2011 | 2012 | 2011 | |||||||||||||
| (in thousands) | ||||||||||||||||
| Realized losses on derivative instruments | $ | - | $ | (53 | ) | (59 | ) | (91 | ) | |||||||
| Unrealized gains on derivative instruments | - | 154 | - | 139 | ||||||||||||
| $ | - | $ | 101 | $ | (59 | ) | $ | 48 | ||||||||
3. Oil and Gas Properties
Leasehold acquisition and exploratory drilling costs are capitalized pending determination of whether the well has found proved reserves. Unproved properties are assessed on a quarterly basis by evaluating and monitoring if sufficient progress is made on assessing the reserves. At September 30, 2012, the Fund had no unproved properties with capitalized exploratory well costs in excess of one year.
In December 2010, after determining not to proceed with the completion of the Aspen Project, the Fund entered into an agreement to sell its working interest in the Aspen Project to Stone Energy Corporation, for net proceeds of $2.3 million in cash, which resulted in a loss of $3.6 million. The proceeds from the sale of the Aspen Project were collected in January 2011.
Capitalized exploratory well costs are expensed as dry-hole costs in the event that reserves are not found or are not in sufficient quantities to complete the well and develop the field. At times, the Fund receives credits on certain wells from their respective operators upon review and audit of the wells’ costs.
4. Related Parties
The LLC Agreement provides that the Manager render management, administrative and advisory services. For such services, the Manager is paid an annual management fee, payable monthly, of 2.5% of total capital contributions, net of cumulative dry-hole and related well costs incurred by the Fund. Management fees for the three months ended September 30, 2012 and 2011 were $0.3 million and $0.4 million, respectively. Management fees for each of the nine months ended September 30, 2012 and 2011 were $1.1 million.
The Manager is entitled to receive a 15% interest in cash distributions made by the Fund. Distributions paid to the Manager for the three months ended September 30, 2012 and 2011 were $0.3 million and $0.4 million, respectively. Distributions paid to the Manager for the nine months ended September 30, 2012 and 2011, were $1.2 million and $1.0 million, respectively.
At times, short-term payables and receivables, which do not bear interest, arise from transactions with affiliates in the ordinary course of business.
None of the amounts paid to the Manager have been derived as a result of arm’s length negotiations.
The Fund has working interest ownership in certain projects to acquire and develop oil and natural gas projects with other entities that are likewise managed by the Manager.
5. Fair Value Measurements
At September 30, 2012 and December 31, 2011, cash and cash equivalents, short-term investments in marketable securities, salvage fund, production receivable and accrued expenses approximate fair value. At December 31, 2011, derivative instruments were recorded at fair value based on Level 2 inputs, as the instruments are over-the-counter derivatives with a third party.
6. Commitments and Contingencies
Capital Commitments
The Fund has entered into multiple agreements for the drilling and development of its investment properties. The estimated capital expenditures associated with these agreements vary depending on the stage of development on a property-by-property basis. As of September 30, 2012, the Fund had committed to spend an additional $4.7 million related to its investments in oil and gas properties, of which $1.3 million is expected to be spent during the next twelve months. Such commitments anticipate financing arrangements for the Delta House Project, for which the estimates included above may change upon finalization.
Environmental Considerations
The exploration for and development of oil and natural gas involves the extraction, production and transportation of materials which, under certain conditions, can be hazardous or cause environmental pollution problems. The Manager and operators of the Fund’s properties are continually taking action they believe appropriate to satisfy applicable federal, state and local environmental regulations and do not currently anticipate that compliance with federal, state and local environmental regulations will have a material adverse effect upon capital expenditures, results of operations or the competitive position of the Fund in the oil and gas industry. However, due to the significant public and governmental interest in environmental matters related to those activities, the Manager cannot predict the effects of possible future legislation, rule changes, or governmental or private claims. At September 30, 2012 and December 31, 2011, there were no known environmental contingencies that required the Fund to record a liability.
In response to the April 2010 oil spill in the Gulf of Mexico, the United States Congress is considering a number of legislative proposals relating to the upstream oil and gas industry both onshore and offshore. Such proposals could result in significant additional laws or regulations governing the Fund’s operations in the United States, including a proposal to raise or eliminate the cap on liability for oil spill cleanups under the Oil Pollution Act of 1990. Although it is not possible at this time to predict whether proposed legislation or regulations will be adopted as initially written, if at all, or how legislation or new regulation that may be adopted would impact our business, any such future laws and regulations could result in increased compliance costs or additional operating restrictions, which could have a material adverse effect on the Fund’s operating results and cash flows.
Insurance Coverage
The Fund is subject to all risks inherent in the exploration for and development of oil and natural gas. Insurance coverage as is customary for entities engaged in similar operations is maintained, but losses may occur from uninsurable risks or amounts in excess of existing insurance coverage. The occurrence of an event that is not insured or not fully insured could have an adverse impact upon earnings and financial position. Moreover, insurance is obtained as a package covering all of the funds managed by the Manager. Claims made by other funds managed by the Manager can reduce or eliminate insurance for the Fund.
7. Subsequent Events
The Fund has assessed the impact of subsequent events through the date of issuance of its financial statements, and has concluded that there were no such events that require adjustment to, or disclosure in, the notes to the financial statements.
Cautionary Statement Regarding Forward-Looking Statements
Certain statements in this Quarterly Report on Form 10-Q (“Quarterly Report”) and the documents Ridgewood Energy X Fund, LLC (the “Fund”) has incorporated by reference into this Quarterly Report, other than purely historical information, including estimates, projections, statements relating to the Fund’s business plans, strategies, objectives and expected operating results, and the assumptions upon which those statements are based, are “forward-looking statements” within the meaning of the US Private Securities Litigation Reform Act of 1995 that are based on current expectations and assumptions and are subject to risks and uncertainties that may cause actual results to differ materially from the forward-looking statements. You are therefore cautioned against relying on any such forward-looking statements. Forward-looking statements can generally be identified by words such as “believe,” “project,” “expect,” “anticipate,” “estimate,” “intend,” “strategy,” “plan,” “target,” “pursue,” “may,” “will,” “will likely result,” and similar expressions and references to future periods. Examples of events that could cause actual results to differ materially from historical results or those anticipated include weather conditions, such as hurricanes, changes in market conditions affecting the pricing of oil and natural gas, the cost and availability of equipment, and changes in governmental regulations. Examples of forward-looking statements made herein include statements regarding future projects, investments and insurance. Forward-looking statements made in this document speak only as of the date on which they are made. The Fund undertakes no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
Critical Accounting Policies and Estimates
The following discussion and analysis of the Fund’s financial condition and operating results is based on its financial statements. The preparation of this Quarterly Report requires the Fund to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of the Fund’s financial statements, and the reported amount of revenue and expense during the reporting period. Actual results may differ from those estimates and assumptions. See “Notes to Unaudited Condensed Financial Statements” in Part I of this Quarterly Report for a presentation of the Fund’s significant accounting policies. No changes have been made to the Fund’s critical accounting policies and estimates disclosed in its 2011 Annual Report on Form 10-K.
Overview of the Fund’s Business
The Fund is a Delaware limited liability company formed on August 30, 2007 to primarily acquire interests in oil and natural gas properties located in the United States offshore waters of Texas, Louisiana and Alabama in the Gulf of Mexico. The Fund’s primary investment objective is to generate cash flow for distribution to its shareholders by generating returns across a portfolio of exploratory or development oil and natural gas projects. However, the Fund is not required to make distributions to shareholders except as provided in the Fund’s limited liability company agreement (the “LLC Agreement”).
Ridgewood Energy Corporation (the “Manager” or “Ridgewood Energy”) is the Manager, and as such, has direct and exclusive control over the management of the Fund’s operations. The Manager performs certain duties on the Fund’s behalf including the evaluation of potential projects for investment and ongoing management, administrative and advisory services associated with these projects. For these services, the Manager receives an annual management fee equal to 2.5% of capital contributions, net of cumulative dry-hole and related well costs incurred by the Fund, payable monthly. The Fund does not currently, nor is there any plan to, operate any project in which the Fund participates. The Manager enters into operating agreements with third-party operators for the management of all exploration, development and producing operations, as appropriate. The Manager also participates in distributions.
Revenues are subject to market pricing for oil and natural gas, which has been volatile, and is likely to continue to be volatile in the future. This volatility is caused by numerous factors and market conditions that the Fund cannot control or influence. Therefore, it is impossible to predict the future price of oil and natural gas with any certainty. Low commodity prices could have an adverse effect on the Fund’s future profitability.
Business Update
Information regarding the Fund’s current projects, all of which are located in the offshore waters of the Gulf of Mexico, is provided in the following table.
| Total Spent | |||||||||||||
| Working | through | Total Fund | |||||||||||
| Project | Interest | September 30, 2012 | Budget | Status | |||||||||
| (in thousands) | |||||||||||||
| Equipment and Facilities | |||||||||||||
| Delta House Project | 0.58 | % | $ | 175 | $ | 513 | Floating production facility to service the Diller and Marmalard wells. Expected to be placed in service in 2015. Financing options currently being evaluated. | ||||||
| Non-producing Properties | |||||||||||||
| Diller Project | 0.88 | % | $ | 1,234 | $ | 3,366 | Deemed to be a discovery in March 2012. Expected to commence production in 2015. | ||||||
| Marmalard Project | 0.88 | % | $ | 948 | $ | 3,133 | Deemed to be a discovery in May 2012. Expected to commence production in 2015. | ||||||
| Producing Properties | |||||||||||||
| Carrera Project | 5.0 | % | $ | 7,578 | $ | 7,578 | Production commenced June 2011. Separator upgrade completed in third quarter 2012 at a cost of $41 thousand. | ||||||
| Liberty Project | 5.0 | % | $ | 7,526 | $ | 7,526 | Production commenced in 2010. | ||||||
| Fully Depleted Properties | |||||||||||||
| Main Pass 283/279 well # 1 | 14.0 | % | $ | 4,219 | $ | 4,219 | Production commenced in 2008. Workover at a cost of $15 thousand was completed during first quarter 2012, which resulted in modest additional production. The Fund elected to go non-consent on any additional workovers for this well and is in the process of withdrawing its interest in the project. | ||||||
Results of Operations
The following table summarizes the Fund’s results of operations for the three and nine months ended September 30, 2012 and 2011, and should be read in conjunction with the Fund’s financial statements and notes thereto included within Item 1. “Financial Statements” in Part I in this Quarterly Report.
| Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
| 2012 | 2011 | 2012 | 2011 | |||||||||||||
| (in thousands) | ||||||||||||||||
| Revenue | ||||||||||||||||
| Oil and gas revenue | $ | 2,736 | $ | 4,447 | $ | 9,968 | $ | 10,723 | ||||||||
| Expenses | ||||||||||||||||
| Depletion, depreciation and amortization | 953 | 2,763 | 3,198 | 5,062 | ||||||||||||
| Dry-hole costs | (12 | ) | 7 | 84 | (34 | ) | ||||||||||
| Management fees to affiliate | 334 | 362 | 1,058 | 1,085 | ||||||||||||
| Operating expenses | 228 | 399 | 1,007 | 923 | ||||||||||||
| General and administrative expenses | 68 | 45 | 238 | 249 | ||||||||||||
| Total expenses | 1,571 | 3,576 | 5,585 | 7,285 | ||||||||||||
| Income from operations | 1,165 | 871 | 4,383 | 3,438 | ||||||||||||
| Other income (loss) | 10 | 110 | (34 | ) | 79 | |||||||||||
| Net income | $ | 1,175 | $ | 981 | $ | 4,349 | $ | 3,517 | ||||||||
Overview. The following table provides information related to the Fund’s oil and gas production and oil and gas revenue during the three and nine months ended September 30, 2012 and 2011.
| Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
| 2012 | 2011 | 2012 | 2011 | |||||||||||||
| Number of wells producing | 2 | 3 | 3 | 3 | ||||||||||||
| Total number of production days | 158 | 236 | 557 | 616 | ||||||||||||
| Oil sales (in thousands of barrels) | 25 | 35 | 84 | 79 | ||||||||||||
| Average oil price per barrel | $ | 102 | $ | 104 | $ | 107 | $ | 104 | ||||||||
| Gas sales (in thousands of mcfs) | 42 | 107 | 171 | 336 | ||||||||||||
| Average gas price per mcf | $ | 3.01 | $ | 4.41 | $ | 2.26 | $ | 4.16 | ||||||||
The decreases in the number of production days and sales volumes during the three and nine months ended September 30, 2012, were attributable to natural declines in well production, primarily Main Pass 283/279 well #1, which reached the end of its productive life in March 2012. The increase in oil sales volume during the nine months ended September 30, 2012, was principally attributable to the onset of production of the Carrera Project in June 2011, which was partially offset by Main Pass 283/279 well #1. For additional property discussion see “Business Update” section above.
Oil and Gas Revenue. Oil and gas revenue for the three months ended September 30, 2012 was $2.7 million, a $1.7 million decrease from the three months ended September 30, 2011. The decrease is primarily attributable to a decrease in sales volumes totaling $1.6 million coupled with the impact of the change in average prices totaling $0.1 million.
Oil and gas revenue for the nine months ended September 30, 2012 was $10.0 million, a $0.8 million decrease from the nine months ended September 30, 2011. The decrease is primarily attributable to a decrease in sales volumes totaling $0.7 million coupled with the impact of the change in average prices totaling $0.1 million. The decrease in sales volume is primarily attributable to decreased gas sales volume totaling $1.2 million, which includes NGL volumes, partially offset by increased oil sales volume of $0.5 million.
See “Overview” above for additional information.
Depletion, Depreciation and Amortization. Depletion, depreciation and amortization for the three months ended September 30, 2012 was $1.0 million, a decrease of $1.8 million from the three months ended September 30, 2011. The decrease resulted from a decrease in production volumes totaling $1.2 million coupled with a decrease in average depletion rates totaling $0.6 million. Depletion, depreciation and amortization for the nine months ended September 30, 2012 was $3.2 million, a decrease of $1.9 million from the nine months ended September 30, 2011. The decrease resulted from a decrease in production volumes totaling $1.0 million coupled with a decrease in average depletion rates totaling $0.8 million. The decreases in average depletion rates were primarily attributable to revisions in reserve estimates, principally related to the Liberty and Carrera projects.
Dry-hole Costs. Dry-hole costs are those costs incurred to drill and develop a well that is ultimately found to be incapable of producing either oil or natural gas in sufficient quantities to justify completion of the well. At times, the Fund receives credits on certain wells from their respective operators upon review and audit of the wells’ costs. Dry-hole costs for the three months ended September 30, 2012 and 2011 were comprised of credits totaling $12 thousand and costs incurred of $7 thousand, respectively. Dry-hole costs for the nine months ended September 30, 2012 and 2011 were comprised of costs incurred of $84 thousand and credits totaling $34 thousand, respectively.
Management Fees to Affiliate. Management fees for the three months ended September 30, 2012 and 2011 were $0.3 million and $0.4 million, respectively. Management fees for each of the nine months ended September 30, 2012 and 2011 were $1.1 million. An annual management fee, totaling 2.5% of total capital contributions, net of cumulative dry-hole and related well costs incurred by the Fund, is paid monthly to the Manager.
Operating Expenses. Operating expenses represent costs specifically identifiable or allocable to the Fund’s wells, as detailed in the following table.
| Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
| 2012 | 2011 | 2012 | 2011 | |||||||||||||
| (in thousands) | ||||||||||||||||
| Lease operating expense | $ | 240 | $ | 396 | $ | 896 | $ | 896 | ||||||||
| Geological costs and other | 1 | 3 | 96 | 27 | ||||||||||||
| Workover expenses | (13 | ) | - | 15 | - | |||||||||||
| $ | 228 | $ | 399 | $ | 1,007 | $ | 923 | |||||||||
Lease operating expense relates to the Fund’s producing properties during each period as outlined above in “Overview”. The average production cost was $1.15 per mcfe and $1.19 per mcfe during the three and nine months ended September 30, 2012, respectively, compared to $1.09 per mcfe and $0.94 per mcfe during the three and nine months ended September 30, 2011, respectively. Geological costs, which represent costs incurred to obtain seismic data, surveys and lease rentals for the Fund’s projects, primarily related to the Diller and Marmalard projects. Workover expenses, which represent costs to restore or stimulate production of existing reserves of a proved property, related to Main Pass 283/279 well #1, which underwent maintenance in advance of its cessation of production.
General and Administrative Expenses. General and administrative expenses represent costs specifically identifiable or allocable to the Fund, as detailed in the following table.
| Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
| 2012 | 2011 | 2012 | 2011 | |||||||||||||
| (in thousands) | ||||||||||||||||
| Insurance expense | $ | 34 | $ | 31 | $ | 118 | $ | 123 | ||||||||
| Accounting fees | 27 | 7 | 100 | 103 | ||||||||||||
| Trust fees and other | 7 | 7 | 20 | 23 | ||||||||||||
| $ | 68 | $ | 45 | $ | 238 | $ | 249 | |||||||||
Insurance expense represents premiums related to producing well and control of well insurance, which varies depending upon the number of wells producing or drilling, and directors’ and officers’ liability insurance. Accounting fees represent audit and tax preparation fees, quarterly reviews and filing fees incurred by the Fund. Trust fees represent bank fees associated with the management of the Fund’s cash accounts.
Other Income (Loss). Other income (loss) for the three and nine months ended September 30, 2012 and 2011 is detailed in the following table.
| Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
| 2012 | 2011 | 2012 | 2011 | |||||||||||||
| (in thousands) | ||||||||||||||||
| Interest income | $ | 10 | $ | 9 | $ | 25 | $ | 31 | ||||||||
| Realized losses on derivative instruments | - | (53 | ) | (59 | ) | (91 | ) | |||||||||
| Unrealized gains on derivative instruments | - | 154 | - | 139 | ||||||||||||
| $ | 10 | $ | 110 | $ | (34 | ) | $ | 79 | ||||||||
Capital Resources and Liquidity
Operating Cash Flows
Cash flows provided by operating activities for the nine months ended September 30, 2012 were $8.0 million, primarily related to revenue received of $10.4 million, partially offset by operating expenses paid of $1.1 million, management fees of $1.1 million and general and administrative expenses paid of $0.3 million.
Cash flows provided by operating activities for the nine months ended September 30, 2011 were $8.1 million, primarily related to revenue received of $10.4 million, partially offset by management fees of $1.1 million, operating expenses paid of $0.7 million, general and administrative expenses paid of $0.4 million and the purchase of derivative instruments of $0.2 million.
Investing Cash Flows
Cash flows used in investing activities for the nine months ended September 30, 2012 were $5.3 million, primarily related to investments in U.S. Treasury securities of $21.0 million coupled with capital expenditures for oil and gas properties of $1.3 million, partially offset by proceeds received from the maturity of U.S. Treasury securities of $17.0 million.
Cash flows provided by investing activities for the nine months ended September 30, 2011 were $2.8 million, primarily related to proceeds from the maturity of U.S. Treasury securities of $13.0 million coupled with proceeds received from the sale of the Aspen Project of $2.3 million, partially offset by investments in U.S. Treasury securities of $12.0 million and capital expenditures for oil and gas properties of $0.5 million, inclusive of advances.
Financing Cash Flows
Cash flows used in financing activities for the nine months ended September 30, 2012 were $8.1 million, related to manager and shareholder distributions.
Cash flows used in financing activities for the nine months ended September 30, 2011 were $8.9 million, related to manager and shareholder distributions.
Estimated Capital Expenditures
The Fund has entered into multiple agreements for the acquisition, drilling and development of its investment properties. The estimated capital expenditures associated with these agreements can vary depending on the stage of development on a property-by-property basis. As of September 30, 2012, the Fund had committed to spend an additional $4.7 million related to its investments in oil and gas properties, of which $1.3 million is expected to be spent during the next twelve months. Such commitments anticipate financing arrangements for the Delta House Project, for which the estimates included above may change upon finalization.
Capital expenditures for investment properties are funded with the capital raised by the Fund in its private placement offering, which may be all the capital it will obtain. The number of projects in which the Fund can invest is limited, and each unsuccessful project the Fund experiences exhausts its capital and reduces its ability to generate revenue.
Liquidity Needs
The Fund’s primary short-term liquidity needs are to fund its operations, inclusive of capital expenditures for its investment properties. Operations are funded utilizing operating income, existing cash on-hand, short-term investments, if any, and income earned therefrom.
The Manager is entitled to receive an annual management fee from the Fund regardless of the Fund’s profitability in that year. Generally, all or a portion of the management fee is paid from operating income.
Distributions, if any, are funded from available cash from operations, as defined in the LLC Agreement, and the frequency and amount are within the Manager’s discretion.
Off-Balance Sheet Arrangements
The Fund had no off-balance sheet arrangements at September 30, 2012 and December 31, 2011 and does not anticipate the use of such arrangements in the future.
Contractual Obligations
The Fund enters into participation and joint operating agreements with operators. On behalf of the Fund, an operator enters into various contractual commitments pertaining to exploration, development and production activities. The Fund does not negotiate such contracts. No contractual obligations exist at September 30, 2012 and December 31, 2011 other than those discussed in “Estimated Capital Expenditures” above.
Recent Accounting Pronouncements
The Fund has considered recent accounting pronouncements and believes that these recent pronouncements will not have a material effect on the Fund’s financial statements.
Not required.
In accordance with Rules 13a-15 and 15d-15 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the Fund’s management, including its Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Fund’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Fund’s disclosure controls and procedures were effective as of September 30, 2012.
There has been no change in the Fund’s internal control over financial reporting that occurred during the three months ended September 30, 2012 that has materially affected, or is reasonably likely to materially affect, the Fund’s internal control over financial reporting.
PART II – OTHER INFORMATION
None.
Not required.
None.
None.
None.
None.
EXHIBIT NUMBER | TITLE OF EXHIBIT | METHOD OF FILING |
| 31.1 | Certification of Robert E. Swanson, Chief Executive Officer of the Fund, pursuant to Exchange Act Rule 13a-14(a) | Filed herewith |
| 31.2 | Certification of Kathleen P. McSherry, Executive Vice President and Chief Financial Officer of the Fund, pursuant to Exchange Act Rule 13a-14(a) | Filed herewith |
| 32 | Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, signed by Robert E. Swanson, Chief Executive Officer of the Fund and Kathleen P. McSherry, Executive Vice President and Chief Financial Officer of the Fund | Filed herewith |
| 101.INS | XBRL Instance Document | * |
| 101.SCH | XBRL Taxonomy Extension Schema | * |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase | * |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | * |
| 101.LAB | XBRL Taxonomy Extension Label Linkbase | * |
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase | * |
* Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Act of 1934 and otherwise are not subject to liability.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
RIDGEWOOD ENERGY X FUND, LLC | ||||||
| Dated: | November 5, 2012 | By: | /s/ | ROBERT E. SWANSON | ||
| Name: | Robert E. Swanson | |||||
| Title: | Chief Executive Officer | |||||
| (Principal Executive Officer) | ||||||
| Dated: | November 5, 2012 | By: | /s/ | KATHLEEN P. MCSHERRY | ||
| Name: | Kathleen P. McSherry | |||||
| Title: | Executive Vice President and Chief Financial Officer | |||||
(Principal Financial and Accounting Officer) |
17