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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT 1934 |
For the quarterly period ended June 30, 2005
Or
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT 1934 |
For the transition period from to
Commission File Number: 1-7940
Goodrich Petroleum Corporation
(Exact name of registrant as specified in its charter)
Delaware | 76-0466193 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer ID. No.) |
808 Travis Street, Suite 1320, Houston, Texas | 77002 | |
(Address of principal executive offices) | (Zip Code) |
(713) 780-9494
(Registrant’s telephone number, including area code)
None
(Former name, former address and former fiscal year, if changed since last report.)
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. x Yes ¨ No
Indicate by checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes x No
At August 12, 2005, there were 24,780,496 shares of Goodrich Petroleum Corporation common stock outstanding.
Table of Contents
GOODRICH PETROLEUM CORPORATION
INDEX TO FORM 10-Q
June 30, 2005
Page No. | ||
PART 1 - FINANCIAL INFORMATION | ||
Item 1. Financial Statements. | ||
Consolidated Balance Sheets June 30, 2005 (Unaudited) and December 31, 2004 | 3-4 | |
Consolidated Statements of Operations (Unaudited) | 5 | |
6 | ||
Consolidated Statements of Cash Flows (Unaudited) | 7 | |
8 | ||
9-16 | ||
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations. | 17-22 | |
Item 3.Quantitative and Qualitative Disclosures About Market Risk. | 23 | |
Item 4.Controls and Procedures. | 25 | |
PART II - OTHER INFORMATION | 26 | |
Item 1.Legal Proceedings. | ||
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds. | ||
Item 3.Defaults upon Senior Securities. | ||
Item 4.Submission of Matters to a Vote of Security Holders. | ||
Item 5.Other Information. | ||
Item 6.Exhibits. |
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GOODRICH PETROLEUM CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
June 30, 2005 | December 31, 2004 | |||||||
(unaudited) | ||||||||
ASSETS | ||||||||
CURRENT ASSETS | ||||||||
Cash and cash equivalents | $ | 955,600 | $ | 3,449,210 | ||||
Accounts receivable | ||||||||
Trade and other, net of allowance | 5,562,982 | 7,183,356 | ||||||
Accrued oil and gas revenue | 4,339,580 | 3,121,932 | ||||||
Prepaid insurance and other | 695,109 | 631,472 | ||||||
Fair value of interest rate derivatives | 22,489 | — | ||||||
Total current assets | 11,575,760 | 14,385,970 | ||||||
PROPERTY AND EQUIPMENT | ||||||||
Oil and gas properties (successful efforts method) | 210,860,934 | 159,903,454 | ||||||
Furniture, fixtures and equipment | 951,324 | 821,236 | ||||||
211,812,258 | 160,724,690 | |||||||
Less accumulated depletion, depreciation and amortization | (58,388,882 | ) | (51,319,998 | ) | ||||
Net property and equipment | 153,423,376 | 109,404,692 | ||||||
OTHER ASSETS | ||||||||
Restricted cash and investments | 2,039,000 | 2,039,000 | ||||||
Deferred taxes | 6,650,000 | 2,070,000 | ||||||
Other | 355,661 | 77,418 | ||||||
Total other assets | 9,044,661 | 4,186,418 | ||||||
TOTAL ASSETS | $ | 174,043,797 | $ | 127,977,080 | ||||
See notes to consolidated financial statements.
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GOODRICH PETROLEUM CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets (Continued)
June 30, 2005 | December 31, 2004 | |||||||
(unaudited) | ||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
CURRENT LIABILITIES | ||||||||
Accounts payable | $ | 30,039,429 | $ | 23,352,051 | ||||
Accrued liabilities | 10,456,630 | 3,214,103 | ||||||
Fair value of oil and gas derivatives | 10,401,670 | 1,834,195 | ||||||
Fair value of interest rate derivatives | — | 144,042 | ||||||
Current portion of other non-current liabilities | 91,605 | 91,605 | ||||||
Total current liabilities | 50,989,334 | 28,635,996 | ||||||
LONG TERM DEBT | — | 27,000,000 | ||||||
OTHER NON-CURRENT LIABILITIES | ||||||||
Accrued abandonment costs | 7,176,327 | 6,718,895 | ||||||
Production payment payable and other | 58,469 | 296,960 | ||||||
Fair value of oil and gas derivatives | 4,933,003 | — | ||||||
Fair value of interest rate derivatives | 10,990 | 17,925 | ||||||
Total liabilities | 63,168,123 | 62,669,776 | ||||||
STOCKHOLDERS’ EQUITY | ||||||||
Preferred stock; authorized 10,000,000 shares: | ||||||||
Series A convertible preferred stock, par value $1.00 per share; issued and outstanding 791,968 shares (liquidation preference $10 per share, aggregating to $7,919,680) | 791,968 | 791,968 | ||||||
Common stock, par value $0.20 per share; authorized 50,000,000 shares; issued and outstanding, 24,778,662 and 20,587,074 shares | 4,955,731 | 4,117,414 | ||||||
Additional paid-in capital | 109,686,255 | 55,408,587 | ||||||
Retained earnings | 2,644,095 | 9,555,977 | ||||||
Unamortized restricted stock awards | (2,479,900 | ) | (1,762,001 | ) | ||||
Accumulated other comprehensive income (loss) | (4,722,475 | ) | (2,804,641 | ) | ||||
Total stockholders’ equity | 110,875,674 | 65,307,304 | ||||||
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 174,043,797 | $ | 127,977,080 | ||||
See notes to consolidated financial statements.
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GOODRICH PETROLEUM CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
Three Months Ended June 30, | ||||||||
2005 | 2004 | |||||||
REVENUES | ||||||||
Oil and gas revenues | $ | 13,279,805 | $ | 9,175,255 | ||||
Other | 33,171 | 15,579 | ||||||
Total revenues | 13,312,976 | 9,190,834 | ||||||
OPERATING EXPENSES | ||||||||
Lease operating expense | 2,287,983 | 1,613,198 | ||||||
Production taxes | 970,527 | 585,241 | ||||||
Depletion, depreciation and amortization | 5,744,995 | 2,433,732 | ||||||
Exploration | 2,418,162 | 1,079,978 | ||||||
General and administrative | 1,836,911 | 1,327,377 | ||||||
Total operating expenses | 13,258,578 | 7,039,526 | ||||||
OPERATING INCOME | 54,398 | 2,151,308 | ||||||
OTHER INCOME (EXPENSE) | ||||||||
Interest expense | (488,134 | ) | (254,211 | ) | ||||
Loss on derivatives not qualifying for hedge accounting | (268,490 | ) | — | |||||
Gain (loss) on sale of assets | 18,000 | (58,845 | ) | |||||
Total other income (expense) | (738,624 | ) | (313,056 | ) | ||||
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES | (684,226 | ) | 1,838,252 | |||||
Income taxes | (239,219 | ) | (992,681 | ) | ||||
NET INCOME (LOSS) FROM CONTINUING OPERATIONS | (445,007 | ) | 2,830,933 | |||||
DISCONTINUED OPERATIONS INCLUDING GAIN ON SALE, NET OF INCOME TAXES | — | 59,121 | ||||||
NET INCOME (LOSS) | (445,007 | ) | 2,890,054 | |||||
Preferred stock dividends | 158,201 | 158,203 | ||||||
NET INCOME (LOSS) APPLICABLE TO COMMON STOCK | $ | (603,208 | ) | $ | 2,731,851 | |||
NET INCOME (LOSS) PER COMMON SHARE - BASIC | ||||||||
NET INCOME (LOSS) FROM CONTINUING OPERATIONS | $ | (0.02 | ) | $ | 0.15 | |||
DISCONTINUED OPERATIONS | — | — | ||||||
NET INCOME (LOSS) | $ | (0.02 | ) | $ | 0.15 | |||
NET INCOME (LOSS) APPLICABLE TO COMMON STOCK | $ | (0.03 | ) | $ | 0.14 | |||
NET INCOME (LOSS) PER COMMON SHARE - DILUTED | ||||||||
NET INCOME (LOSS) FROM CONTINUING OPERATIONS | $ | (0.02 | ) | $ | 0.13 | |||
DISCONTINUED OPERATIONS | — | — | ||||||
NET INCOME (LOSS) | $ | (0.02 | ) | $ | 0.13 | |||
NET INCOME (LOSS) APPLICABLE TO COMMON STOCK | $ | (0.03 | ) | $ | 0.13 | |||
AVERAGE COMMON SHARES OUTSTANDING - BASIC | 23,460,920 | 19,040,347 | ||||||
AVERAGE COMMON SHARES OUTSTANDING - DILUTED | 23,460,920 | 21,038,770 |
See notes to consolidated financial statements.
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GOODRICH PETROLEUM CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
Six Months Ended June 30, | ||||||||
2005 | 2004 | |||||||
REVENUES | ||||||||
Oil and gas revenues | $ | 25,711,134 | $ | 19,841,008 | ||||
Other | 162,390 | 114,318 | ||||||
Total revenues | 25,873,524 | 19,955,326 | ||||||
OPERATING EXPENSES | ||||||||
Lease operating expense | 4,531,671 | 3,128,066 | ||||||
Production taxes | 1,756,894 | 1,272,640 | ||||||
Depletion, depreciation and amortization | 11,591,095 | 5,140,961 | ||||||
Exploration | 3,942,369 | 2,016,803 | ||||||
General and administrative | 3,456,450 | 2,832,783 | ||||||
Total operating expenses | 25,278,479 | 14,391,253 | ||||||
OPERATING INCOME | 595,045 | 5,564,073 | ||||||
OTHER INCOME (EXPENSE) | ||||||||
Interest expense | (795,212 | ) | (471,142 | ) | ||||
Loss on derivatives not qualifying for hedge accounting | (10,111,829 | ) | — | |||||
Gain (loss) on sale of assets | 169,196 | (58,845 | ) | |||||
Total other income (expense) | (10,737,845 | ) | (529,987 | ) | ||||
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES | (10,142,800 | ) | 5,034,086 | |||||
Income taxes | (3,547,320 | ) | 125,861 | |||||
NET INCOME (LOSS) FROM CONTINUING OPERATIONS | (6,595,480 | ) | 4,908,225 | |||||
DISCONTINUED OPERATIONS INCLUDING GAIN ON SALE, NET OF INCOME TAXES | — | 106,267 | ||||||
NET INCOME (LOSS) | (6,595,480 | ) | 5,014,492 | |||||
Preferred stock dividends | 316,402 | 316,568 | ||||||
NET INCOME (LOSS) APPLICABLE TO COMMON STOCK | $ | (6,911,882 | ) | $ | 4,697,924 | |||
NET INCOME (LOSS) PER COMMON SHARE - BASIC | ||||||||
NET INCOME (LOSS) FROM CONTINUING OPERATIONS | $ | (0.30 | ) | $ | 0.26 | |||
DISCONTINUED OPERATIONS | — | 0.01 | ||||||
NET INCOME (LOSS) | $ | (0.30 | ) | $ | 0.27 | |||
NET INCOME (LOSS) APPLICABLE TO COMMON STOCK | $ | (0.31 | ) | $ | 0.25 | |||
NET INCOME (LOSS) PER COMMON SHARE - DILUTED | ||||||||
NET INCOME (LOSS) FROM CONTINUING OPERATIONS | $ | (0.30 | ) | $ | 0.24 | |||
DISCONTINUED OPERATIONS | — | — | ||||||
NET INCOME (LOSS) | $ | (0.30 | ) | $ | 0.24 | |||
NET INCOME (LOSS) APPLICABLE TO COMMON STOCK | $ | (0.31 | ) | $ | 0.23 | |||
AVERAGE COMMON SHARES OUTSTANDING - BASIC | 22,128,950 | 18,726,959 | ||||||
AVERAGE COMMON SHARES OUTSTANDING - DILUTED | 22,128,950 | 20,695,895 |
See notes to consolidated financial statements.
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GOODRICH PETROLEUM CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended June 30, | ||||||||
2005 | 2004 | |||||||
OPERATING ACTIVITIES | ||||||||
Net income (loss) | $ | (6,595,480 | ) | $ | 5,014,491 | |||
Adjustments to reconcile net income to cash provided by operating activities | ||||||||
Depletion, depreciation and amortization | 11,591,095 | 5,140,961 | ||||||
Deferred income taxes | (3,547,320 | ) | 183,081 | |||||
Unrealized loss on derivatives not qualifying for hedge accounting | 10,332,685 | — | ||||||
Amortization of leasehold costs | 1,198,981 | 537,808 | ||||||
Dry hole expense | 1,887,986 | — | ||||||
(Gain) loss on sale of assets | (169,196 | ) | 58,845 | |||||
Non-cash effect of discontinued operations | — | 93,236 | ||||||
Other non-cash items | 554,407 | 89,005 | ||||||
Net change in: | ||||||||
Accounts receivable | 402,726 | (2,529,098 | ) | |||||
Prepaid insurance and other | (63,637 | ) | (118,167 | ) | ||||
Accounts payable | 6,687,378 | 5,144,064 | ||||||
Accrued liabilities | 7,242,527 | 36,588 | ||||||
Net cash provided by operating activities | 29,522,152 | 13,650,814 | ||||||
INVESTING ACTIVITIES | ||||||||
Capital expenditures | (58,111,039 | ) | (16,387,300 | ) | ||||
Proceeds from sale of assets | 148,086 | — | ||||||
Net cash used in investing activities | (57,962,953 | ) | (16,387,300 | ) | ||||
FINANCING ACTIVITIES | ||||||||
Principal payments of bank borrowings | (45,000,000 | ) | (1,000,000 | ) | ||||
Net proceeds from bank borrowings | 17,850,019 | 4,000,000 | ||||||
Net proceeds of public equity offering | 53,175,000 | — | ||||||
Exercise of stock warrants and options | 477,065 | 122,897 | ||||||
Production payments | (238,491 | ) | (163,355 | ) | ||||
Preferred stock dividends | (316,402 | ) | (316,569 | ) | ||||
Net cash provided by financing activities | 25,947,191 | 2,642,973 | ||||||
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | (2,493,610 | ) | (93,513 | ) | ||||
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD | 3,449,210 | 1,488,852 | ||||||
CASH AND CASH EQUIVALENTS AT END OF PERIOD | $ | 955,600 | $ | 1,395,339 | ||||
See notes to consolidated financial statements.
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GOODRICH PETROLEUM CORPORATION AND SUBSIDIARIES
Consolidated Statements of Stockholders’ Equity and Comprehensive Income
Six Months Ended June 30, 2005 and 2004
(Unaudited)
Series A Preferred Stock | Common Stock | Additional Paid – In Capital | Retained Earnings (Deficit) | Unamortized Restricted Stock Awards | Accumulated Other Comprehensive Income (Loss) | Total Stockholders’ Equity | ||||||||||||||||||||||||
Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||
Balance at December 31, 2003 | 791,968 | $ | 791,968 | 18,130,011 | $ | 3,626,002 | $ | 53,359,023 | $ | (8,338,403 | ) | $ | (381,598 | ) | $ | (997,998 | ) | $ | 48,058,994 | |||||||||||
Net Income | — | — | — | — | — | 5,014,491 | — | — | 5,014,491 | |||||||||||||||||||||
Other Comprehensive Income (Loss); Net of Tax | ||||||||||||||||||||||||||||||
Net Derivative (Loss), net of tax of $1,400,092 | — | — | — | — | — | — | — | (2,600,172 | ) | (2,600,172 | ) | |||||||||||||||||||
Reclassification Adjustment, net of tax of $1,012,548 | — | — | — | — | — | — | — | 1,880,446 | 1,880,446 | |||||||||||||||||||||
Total Comprehensive Income | 4,294,765 | |||||||||||||||||||||||||||||
Issuance and Amortization of Restricted Stock | — | — | 4,331 | 866 | 1,010,250 | — | (743,356 | ) | — | 267,760 | ||||||||||||||||||||
Exercise of Stock Warrants | — | — | 997,279 | 199,456 | (76,559 | ) | — | — | — | 122,897 | ||||||||||||||||||||
Preferred Stock Dividends | — | — | — | — | — | (316,569 | ) | — | — | (316,569 | ) | |||||||||||||||||||
Balance at June 30, 2004 | 791,968 | $ | 791,968 | 19,131,621 | $ | 3,826,324 | $ | 54,292,714 | $ | (3,640,481 | ) | $ | (1,124,954 | ) | $ | (1,717,724 | ) | $ | 52,427,847 | |||||||||||
Balance at December 31, 2004 | 791,968 | $ | 791,968 | 20,587,074 | $ | 4,117,414 | $ | 55,408,587 | $ | 9,555,977 | $ | (1,762,001 | ) | $ | (2,804,641 | ) | $ | 65,307,304 | ||||||||||||
Net Loss | — | — | — | — | — | (6,595,480 | ) | — | — | (6,595,480 | ) | |||||||||||||||||||
Other Comprehensive Income (Loss); Net of Tax | ||||||||||||||||||||||||||||||
Net Derivative (Loss), net of tax of $2,358,974 | — | — | — | — | — | — | — | (4,380,952 | ) | (4,380,952 | ) | |||||||||||||||||||
Reclassification Adjustment, net of tax of $1,326,295 | — | — | — | — | — | — | — | 2,463,118 | 2,463,118 | |||||||||||||||||||||
Total Comprehensive Loss | (8,513,314 | ) | ||||||||||||||||||||||||||||
Public Equity Offering | — | — | 3,710,000 | 742,000 | 52,433,000 | — | — | 53,175,000 | ||||||||||||||||||||||
Issuance and Amortization of Restricted Stock | — | — | 96,356 | 19,271 | 1,204,649 | — | (717,899 | ) | — | 506,021 | ||||||||||||||||||||
Exercise of Stock Warrants and Options | — | — | 371,000 | 74,200 | 402,865 | — | — | — | 477,065 | |||||||||||||||||||||
Director Stock Grants | — | — | 14,232 | 2,846 | 237,154 | — | — | — | 240,000 | |||||||||||||||||||||
Preferred Stock Dividends | — | — | — | — | — | (316,402 | ) | — | — | (316,402 | ) | |||||||||||||||||||
Balance at June 30, 2005 | 791,968 | $ | 791,968 | 24,778,662 | $ | 4,955,731 | $ | 109,686,255 | $ | 2,644,095 | $ | (2,479,900 | ) | $ | (4,722,475 | ) | $ | 110,875,674 | ||||||||||||
See notes to consolidated financial statements.
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GOODRICH PETROLEUM CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2005 and 2004
(Unaudited)
NOTE A - Basis of Presentation
The consolidated financial statements of Goodrich Petroleum Corporation (“Goodrich” or “the Company”) included in this Form 10-Q have been prepared, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission 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.
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 for the year ended December 31, 2004. Since the issuance of its Form 10-K for the year ended December 31, 2004, the Company has changed the presentation of its Statement of Operations by creating a new subtotal called Operating Income, defined as Revenues minus Operating Expenses, and adding a new section following Operating Income called Other Income (Expense). Included in Other Income (Expense) are interest expense, gain (loss) on derivatives not qualifying for hedge accounting, and gain (loss) on asset sales. Where appropriate, reclassifications have been made to the 2004 amounts to conform to the 2005 presentation.
The results of operations for the six-month period ended June 30, 2005 are not necessarily indicative of the results to be expected for the full year.
Abandonment Obligations
Effective January 1, 2003, the Company adopted SFAS No. 143,Accounting for Asset Retirement Obligations.SFAS No. 143 requires the Company to record a liability equal to the fair value of the estimated cost to retire an asset. The asset retirement liability must be recorded in the periods in which the obligation meets the definition of a liability, which is generally when the asset is placed in service. Prior to the adoption of SFAS No. 143, the Company recorded liabilities for the abandonment of oil and gas properties only in its two largest fields, with such liabilities amounting to $4,881,000 as of December 31, 2002. In accordance with the transition provisions of SFAS No. 143, the Company recorded an adjustment to recognize additional estimated liabilities for the abandonment of oil and gas properties, as of January 1, 2003, in the amount of $1,408,000, and additional oil and gas properties, net of accumulated depletion, depreciation and amortization, in the amount of $1,092,000. Any subsequent difference between costs incurred upon settlement of an asset retirement obligation and the recorded liability will be recognized as a gain or loss in the Company’s earnings. To recognize the cumulative effect of this change in accounting principle, the Company recorded a charge to earnings as of January 1, 2003 in the amount of $205,000, reflecting the $316,000 difference between the adjustments to the liability and asset accounts, net of the related income tax effect. For the six months ended June 30, 2005 and 2004, the Company recorded the following activity in the abandonment liability:
Six Months Ended June 30, | ||||||||
2005 | 2004 | |||||||
Beginning Balance | $ | 6,810,500 | $ | 6,601,186 | ||||
Accretion of liability | 162,632 | 155,752 | ||||||
Liability of newly added wells | 294,800 | 230,925 | ||||||
Abandonment costs incurred | — | — | ||||||
Ending balance | 7,267,932 | 6,987,863 | ||||||
Less current portion | (91,605 | ) | (91,605 | ) | ||||
$ | 7,176,327 | $ | 6,896,258 | |||||
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Discontinued Operations
In October 2004, the Company sold its operated interests in the Marholl and Sean Andrew fields, along with its non-operated interests in the Ackerly field, all of which were located in West Texas, for gross proceeds of approximately $2,100,000. The Company realized a pre-tax gain of $877,000 on the sale of these non-core properties. Prior period results of operations of these sold properties have been presented as discontinued operations in the accompanying consolidated statement of operations. Results for these properties reported as discontinued operations for the three months and six months ended June 30, 2004 were as follows:
Three Months Ended June 30, 2004 | Six Months Ended June 30, 2004 | |||||||
Oil and gas sales | $ | 175,623 | $ | 336,396 | ||||
Operating expenses | (84,668 | ) | (172,909 | ) | ||||
Gain on sale | — | — | ||||||
Income before taxes | 90,955 | 163,487 | ||||||
Income tax expense | 31,834 | 57,220 | ||||||
Income from discontinued operations | $ | 59,121 | $ | 106,267 | ||||
NOTE B – New Accounting Pronouncements
In December 2004, the FASB issued SFAS No. 123R,Share-Based Payment, a revision of SFAS No. 123,Accounting for Stock-Based Compensation. The revised statement requires the expensing of new, modified or repurchased stock-based compensation awards issued after June 15, 2005. Previously issued stock-based compensation awards, which are unvested as of that date, must also be accounted for in accordance with the revised statement. The revised statement provides for the use of either a closed-form model or open-form lattice model for the valuation of stock option awards. The Company plans to follow the “modified prospective application” to the adoption of the revised statement and is currently evaluating the potential impact that the adoption of the revised statement will have on its financial statements. In April 2005, the SEC adopted a rule permitting registrants to delay the expensing of options, pursuant to SFAS No. 123R, to the first annual period beginning after June 15, 2005. Accordingly, the Company will implement the provisions of SFAS No. 123R in its financial statements, effective January 1, 2006.
In April 2005, the FASB issued FASB Staff Position (FSP) 19-1 to provide guidance on the accounting for exploratory well costs and to amend SFAS No. 19,Financial Accounting and Reporting by Oil and Gas Producing Companies. The guidance in FSP 19-1 applies to companies that use the
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successful efforts method of accounting as described in SFAS No. 19. This FSP clarifies that exploratory well costs should continue to be capitalized when the well has found a sufficient quantity of reserves to justify its completion as a producing well and the Company is making sufficient progress assessing the reserves and the economic and operating viability of the project. The Company adopted the guidance in this FSP prospectively in April 2005 and the adoption had no impact on its financial statements.
NOTE C – Public Equity Offering
In May 2005, the Company completed a public offering of 3,710,000 shares of its common stock at an offering price of $15.40 per share resulting in net proceeds of $53,175,000, after underwriting discount and offering costs. The Company used the proceeds to repay all outstanding indebtedness to BNP Paribas under its senior credit facility in the amount of $39,500,000 (see Note D) with the balance being added to working capital to be used primarily to fund an accelerated drilling program in the Cotton Valley Trend of East Texas and Northwest Louisiana.
NOTE D – Senior Credit Facility
The Company has a senior credit facility with BNP Paribas in the amount of $65,000,000, which matures on February 25, 2008, and provides for Tranche A borrowings of up to $50,000,000 and Tranche B borrowings of up to $15,000,000.
Borrowings under Tranche A are subject to periodic redeterminations of the borrowing base which was established at $44,000,000 in February 2005. Interest on Tranche A borrowings accrues at a rate calculated, at the option of the Company, at either the BNP Paribas base rate plus 0.00% to 0.50%, or LIBOR plus 1.50%—2.50%, depending on borrowing base utilization. Prior to maturity, no principal payments are required so long as the maximum borrowing base amount exceeds the amounts outstanding under the Tranche A credit facility. Borrowings under Tranche B can be made at the option of the Company and with the approval of BNP Paribas to finance development of the Company’s acreage in the Cotton Valley Trend of East Texas and Northwest Louisiana. Interest on borrowings under the Tranche B accrues at a quarterly rate of LIBOR plus 5.0% and principal will be due on February 25, 2008.
The credit facility precludes the payment of dividends on the Company’s common stock and requires the Company to maintain a working capital ratio (as defined) of not less than 1.0:1.0, an interest coverage ratio for the trailing four quarters of at least 3.0 times, and a tangible net worth of not less than the sum of $53,392,838, plus 50% of the Company’s cumulative net income after September 30, 2004, plus 100% of the net proceeds of any equity issuance by the Company after September 30, 2004. As of June 30, 2005, the Company was in compliance with all such requirements. Substantially all the Company’s assets are pledged to secure the senior credit facility.
In April 2005, the credit agreement was amended to allow the Company to redraw the $7,500,000 initially advanced under Tranche B in the event that it was repaid within 30 days of a public equity offering. In May 2005, the Company completed a public equity offering (see Note C) and used the proceeds to repay all outstanding indebtedness under the senior credit facility in the amount of $39,500,000, including $7,500,000 initially advanced under Tranche B.
As of June 30, 2005, the Company had no outstanding borrowings under the senior credit facility and had total unutilized borrowing capacity at that date of $59,000,000. Subsequent to June 30, 2005, the Company made new borrowings under Tranche A of the senior credit facility, primarily to fund an accelerated drilling program in the Cotton Valley Trend of East Texas and Northwest Louisiana. As of August 12, 2005, the Company had outstanding borrowings of $15,500,000 and total unutilized borrowing capacity of $43,500,000. The next borrowing base redetermination is expected to be made in the third quarter of 2005.
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In February 2003, the Company entered into three separate interest rate swaps with BNP Paribas covering a three year period, as further described below, and in February 2004, entered into another interest rate swap with BNP Paribas for an additional one year period (see “Quantitative and Qualitative Disclosures About Market Risk—Debt and debt-related derivatives”).
NOTE E – Hedging Activities
Commodity Hedging Activity
The Company enters into swap contracts or other hedging agreements from time to time to manage the commodity price risk for a portion of its production. The Company considers these to be hedging activities and, as such, monthly settlements on these contracts are reflected in its crude oil and natural gas sales. The Company’s strategy, which is administered by the Hedging Committee of the Board of Directors, and reviewed periodically by the entire Board of Directors, has been to hedge between 30% and 70% of its production. As of June 30, 2005, all of the commodity hedges utilized by the Company were in the form of fixed price swaps, where the Company receives a fixed price and pays a floating price based on NYMEX quoted prices. Hedge ineffectiveness results from differences in the NYMEX contract terms and the physical location, grade and quality of the Company’s oil and gas production. As of June 30, 2005, the Company’s open forward position on its outstanding commodity hedging contracts, all of which were with BNP Paribas, was as follows:
Natural Gas | Crude Oil | |||||||||
Quantity (MMBtu/d) | Average Price | Quantity (Barrels/d) | Average Price | |||||||
Third Quarter 2005 | 15,000 | $ | 6.53 | 1,000 | $ | 35.42 | ||||
Fourth Quarter 2005 | 15,000 | 6.61 | 1,000 | 36.85 | ||||||
First Quarter 2006 | 14,000 | $ | 7.05 | 700 | $ | 49.75 | ||||
Second Quarter 2006 | 15,000 | 6.95 | 800 | 50.80 | ||||||
Third Quarter 2006 | 15,000 | 6.95 | 800 | 50.80 | ||||||
Fourth Quarter 2006 | 15,000 | 6.95 | 800 | 50.80 | ||||||
First Quarter 2007 | 10,000 | $ | 7.77 | 400 | $ | 53.35 | ||||
Second Quarter 2007 | — | — | 400 | 53.35 | ||||||
Third Quarter 2007 | — | — | 400 | 53.35 | ||||||
Fourth Quarter 2007 | — | — | 400 | 53.35 |
The hedging contracts summarized above are based on floating NYMEX contract prices and fall within the Company’s targeted range of estimated net oil and gas production volumes for the applicable periods of 2005. The fair value of the crude oil and natural gas hedging contracts in place at June 30, 2005 resulted in a net liability of $15,335,000. As of June 30, 2005, $3,601,000 (net of $1,939,000 in income taxes) of deferred losses on derivative instruments accumulated in other comprehensive income are expected to be reclassified into earnings during the next twelve months. In the six months ended June 30, 2005, $1,833,000 of previously deferred losses (net of $987,000 in income taxes) was reclassified from
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accumulated other comprehensive income to oil and gas sales as the cash flow of the hedged items was recognized. In the six months ended June 30, 2005, the Company recognized in earnings a loss on derivatives not qualifying for hedge accounting in the amount of $10,112,000. This loss was recognized primarily because the Company’s natural gas hedges were deemed to be ineffective for the first and second quarters of 2005, accordingly, the changes in fair value of such hedges could no longer be reflected in other comprehensive income (also included in this loss amount are settlement payments on ineffective gas hedges). For the six months ended June 30, 2004, the Company’s earnings were not significantly affected by cash flow hedging ineffectiveness arising from the crude oil and gas hedging contracts.
Interest Rate Swaps
The Company has a variable-rate debt obligation that exposes the Company to the effects of changes in interest rates. To partially reduce its exposure to interest rate risk, the Company entered into three separate interest rate swaps with BNP Paribas in February 2003 covering a three year period which are designated as cash flow hedges (two of the interest rate swaps have now expired). The unexpired interest rate swap, which has an effective date of November 8, 2004 and a maturity date of February 26, 2006, is for $18,000,000 with a LIBOR swap rate of 3.46%. In February 2004, the Company entered into another interest rate swap contract with BNP Paribas, which has an effective date of February 26, 2006 and a maturity date of February 26, 2007, for $23,000,000 with a LIBOR swap rate of 4.08%. The fair value of the interest rate swap contracts in place at June 30, 2005, resulted in an asset of $11,000. As of June 30, 2005, $7,000 (net of $4,000 in income taxes) of deferred gains on derivative instruments accumulated in other comprehensive income are expected to be reclassified into earnings during the next twelve months. In the six months ended June 30, 2005, $28,000 of previously deferred losses (net of $15,000 in income taxes) was reclassified from accumulated other comprehensive income to interest expense as the cash flow of the hedged items was recognized. For the six months ended June 30, 2005 and 2004, the Company’s earnings were not significantly affected by cash flow hedging ineffectiveness of interest rates.
NOTE F – Net Income Per Share
Net income (loss) was used as the numerator in computing basic and diluted income per common share for the three months and six months ended June 30, 2005 and 2004. The following table reconciles the weighted-average shares outstanding used for these computations.
Three Months Ended June 30, | Six Months Ended June 30, | |||||||
2005 | 2004 | 2005 | 2004 | |||||
Basic Method | 23,460,920 | 19,040,347 | 22,128,950 | 18,726,959 | ||||
Dilutive Stock Warrants | — | 1,705,576 | — | 1,691,086 | ||||
Dilutive Stock Options and Restricted Stock | — | 292,847 | — | 277,850 | ||||
Diluted Method | 23,460,920 | 21,038,770 | 22,128,950 | 20,695,895 | ||||
The computation of earnings per share for the three months and six months ended June 30, 2005 and 2004 considered exercisable stock warrants and stock options to the extent that the exercise of such securities would have been dilutive under the treasury stock method. The computation of earnings per share for the three months and six months ended June 30, 2005 and 2004 did not consider preferred stock which is convertible into shares of common stock because the effect of such conversion would have been antidilutive.
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In February 2003, the Company issued 125,157 shares of its common stock to the holders of 1,016,500 outstanding stock options in exchange for the cancellation of such options (at the time of cancellation, the options were antidilutive). Based on the value of the Company’s common stock at the time of the exchange, the Company recorded a non-cash charge to earnings in February 2003 in the amount of $403,000 related to the issuance of shares in lieu of cancelled options. At the same time, the Company commenced granting a series of restricted share awards, with three year vesting periods, to certain employees under a stockholder approved equity compensation plan. Based on the value of the Company’s common stock at the time of the grants, those awards resulted in charges to a contra equity account and credits to additional paid-in capital in the following amounts:
• | $483,000 for 150,000 restricted share awards granted in February 2003; |
• | $54,000 for 11,500 restricted share awards granted in July and October 2003; |
• | $1,147,000 for 166,300 restricted share awards granted in February 2004; |
• | $209,100 for 19,500 restricted share awards granted in July through September 2004; |
• | $762,500 for 52,950 restricted share awards granted in December 2004; |
• | $1,086,500 for 54,500 restricted share awards granted in March 2005; and |
• | $130,000 for 7,250 restricted share awards granted in April and May 2005 |
The charges to the contra equity account are being amortized to earnings as non-cash charges to general and administrative expenses over the three year vesting period of each restricted share award and resulted in non-cash charges to earnings of $506,000 and $268,000 in the six months ended June 30, 2005 and 2004, respectively. In the year ended December 31, 2004, the Company recorded a credit to the contra equity account and a charge to additional paid-in capital in the amount of $157,000 for the value of 28,918 non-vested restricted share awards that were forfeited by terminated employees. The amortization to earnings of restricted share awards has been adjusted to reflect such forfeitures. Assuming no additional restricted share awards or forfeitures, the Company will be required to record recurring non-cash charges to earnings of approximately $300,000 per quarter, related to the periodic vesting of the restricted share awards that have been issued to date.
The Company applies APB Opinion No. 25 in accounting for its stock compensation plans and, accordingly, no compensation cost has been recognized for its stock options in the financial statements. Had the Company determined compensation cost based on the fair value at the grant date for its stock options under SFAS No. 123, net income for the three months and six months ended June 30, 2005 and 2004 would have been reduced to the pro forma amounts indicated below.
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Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2005 | 2004 | 2005 | 2004 | |||||||||||||
Net income (loss) | ||||||||||||||||
As reported | $ | (445,007 | ) | $ | 2,890,054 | $ | (6,595,480 | ) | $ | 5,014,491 | ||||||
Restricted stock compensation expense included in net income, net of tax | 170,744 | 130,122 | 328,914 | 267,760 | ||||||||||||
Stock based compensation expense at fair value, net of tax | (277,553 | ) | (131,857 | ) | (542,532 | ) | (271,229 | ) | ||||||||
Pro forma | $ | (551,816 | ) | $ | 2,888,319 | $ | (6,809,098 | ) | $ | 5,011,022 | ||||||
Net income (loss) applicable to common stock | ||||||||||||||||
As reported | $ | (603,208 | ) | $ | 2,731,851 | $ | (6,911,882 | ) | $ | 4,697,922 | ||||||
Restricted stock compensation expense included in net income, net of tax | 170,744 | 130,122 | 328,914 | 267,760 | ||||||||||||
Stock based compensation expense at fair value, net of tax | (277,553 | ) | (131,857 | ) | (542,532 | ) | (271,229 | ) | ||||||||
Pro forma | $ | (710,017 | ) | $ | 2,730,116 | $ | (7,125,500 | ) | $ | 4,694,453 | ||||||
Net income (loss) per share | ||||||||||||||||
As reported, basic | $ | (0.02 | ) | $ | 0.14 | $ | (0.30 | ) | $ | 0.25 | ||||||
Pro forma, basic | (0.02 | ) | 0.14 | (0.31 | ) | 0.25 | ||||||||||
As reported, diluted | (0.03 | ) | 0.13 | (0.31 | ) | 0.23 | ||||||||||
Pro forma, diluted | (0.03 | ) | 0.13 | (0.32 | ) | 0.23 |
NOTE G - Commitments and Contingencies
In July 2005, the Company received a Notice of Proposed Tax Due from the State of Louisiana asserting that the Company underpaid its Louisiana franchise taxes for the years 1998 through 2004 in the amount of $501,000. The Notice of Proposed Tax Due includes additional assessments of penalties and interest in the amount of $352,000 for a total asserted liability of $853,000. The Company believes that it has adequately paid its Louisiana franchise taxes for the years in question, therefore, it intends to vigorously contest the Notice of Proposed Tax Due. The Company has commenced its analysis of this contingency and has not recorded any provision for possible payment of additional Louisiana franchise taxes nor any related penalties and interest.
In connection with the acquisition of its Burrwood and West Delta fields, the Company secured a performance bond and established an escrow account to be used for the payment of obligations associated with the plugging and abandonment of the wells, salvage and removal of platforms and related equipment, and the site restoration of the fields. Required escrowed outlays included an initial cash payment of $750,000 and monthly cash payments of $70,000 beginning June 1, 2000 and continuing until June 1, 2005. The escrow agreement was amended in the fourth quarter of 2001 to suspend monthly cash payments and cap the escrow account at its current balance of $2,039,000.
On February 8, 2000, the Company commenced a suit against the operator and joint owner of the Lafitte field, alleging certain items of misconduct and violations of the agreements associated primarily with the joint acquisition of and unfettered access to a license to 3-D seismic data over the field. The operator counter-claimed against Goodrich on the grounds that Goodrich was obligated to post a bond to secure the plugging and abandonment obligations in the field. On November 1, 2002, the 125th Judicial District Court of Harris County, Texas, ruled in favor of the Company stating (1) The Sale and Assignment between the Company and the operator assigned the same rights to the 3-D seismic data that
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the operator had pursuant to the operator’s data use license agreement from Texaco Exploration and Production, Inc. (“TEPI”); and (2) Also pursuant to the terms of the Sale and Assignment, Goodrich is required to post 49% of the bond liability to TEPI at such time that TEPI requests it. A jury trial commenced in September 2003. On October 29, 2003, the jury found the operator and joint owner to be in breach of the Sale and Assignment and awarded a wholly-owned subsidiary of the Company monetary damages as well as recovery of attorneys’ fees. On May 28, 2004, the trial court ordered a final judgment which awarded the Company a net sum of approximately $2,065,000 as follows:
1. | $538,000 in damages; |
2. | $1,515,000 in recovery of plaintiff’s attorneys’ fees; and |
3. | Pre-judgment interest of approximately $115,000, which was calculated on the damages at a rate of 5%, per annum, compounded annually, from the date of the filing of the lawsuit on February 8, 2000 through May 27, 2004, the day preceding the date of the final judgment. |
The trial court also ordered the Company to pay $103,000 to the operator in recovery of defendant’s attorneys’ fees and provided for post-judgment interest to accrue on the awarded damages and both parties’ attorneys’ fees through the date of ultimate payment. Either party could have appealed the final judgment or filed a motion for a new trial within ninety days from the date of the final judgment. In September 2004, the time period for either party to appeal the judgment elapsed, therefore, the Company accrued a non-recurring gain in the quarter ended September 30, 2004 in the amount of $2,050,000, reflecting the anticipated payment of the final judgment by the operator less the Company’s estimated expenses of the final judgment. In October 2004, the operator remitted a total of $2,118,000 to the Company in full satisfaction of the judgment, including the net amount of post-judgment interest.
The Company is party to additional lawsuits arising in the normal course of business. The Company intends to defend these actions vigorously and believes, based on currently available information, that adverse results or judgments from such actions, if any, will not be material to its financial position or results of operations.
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Management’s Discussion and Analysis of Financial
Condition and Results of Operations
The following discussion is intended to assist in understanding the Company’s financial position, results of operations and cash flows for each of the periods presented. The Company’s Annual Report on Form 10-K for the year ended December 31, 2004 includes a description of the Company’s critical accounting policies and certain other detailed information that should be referred to in conjunction with the following discussion.
Changes in Results of Operations
Three months ended June 30, 2005 versus three months ended June 30, 2004 —Total revenues from continuing operations for the three months ended June 30, 2005 amounted to $13,313,000 compared to $9,191,000 for the three months ended June 30, 2004. Oil and gas sales for the three months ended June 30, 2005 were $13,280,000 compared to $9,175,000 for the three months ended June 30, 2004. This increase resulted from a 17% increase in oil and gas production volumes, due to an increase in Cotton Valley Trend production partially offset by a decline in South Louisiana production, as well as higher average prices for oil and gas. The following table presents the production volumes and pricing information for the comparative periods, with the average oil and gas prices including realized gains and losses on the effective portion of the Company’s commodity hedging program as further described under “Quantitative and Qualitative Disclosures about Market Risk – Commodity Hedging Activity.”
Three months ended June 30, 2005 | Three months ended June 30, 2004 | |||||||||
Production | Average Price | Production | Average Price | |||||||
Gas (Mcf) | 1,194,263 | $ | 7.12 | 1,020,746 | $ | 5.88 | ||||
Oil (Bbls) | 127,964 | 37.35 | 109,360 | 25.07 |
Other revenues for the three months ended June 30, 2005 were $33,000 compared to $16,000 for the three months ended June 30, 2004.
Lease operating expense from continuing operations was $2,288,000 for the three months ended June 30, 2005 versus $1,613,000 for the three months ended June 30, 2004, with the increase due to an increase in production volumes as well as an increase in operating expenses in South Louisiana. Production taxes from continuing operations were $971,000 in the three months ended June 30, 2005 compared to $585,000 in the second quarter of 2004, with the increase due to higher production volumes and rates. Depletion, depreciation and amortization expense from continuing operations was $5,745,000 for the three months ended June 30, 2005 versus $2,434,000 for the three months ended June 30, 2004, with the increase due to higher equivalent units of production, and higher depletion rates resulting from an increase in net capitalized development costs and a reduction in proved developed reserves. Exploration expense in the three months ended June 30, 2005 was $2,418,000 compared to $1,080,000 in the three months ended June 30, 2004, with the increase mainly due to dry hole costs in the amount of $1,246,000 applicable to an exploratory well drilled in East Baton Rouge Parish, Louisiana, which was plugged and abandoned in May 2005.
General and administrative expenses amounted to $1,837,000 in the three months ended June 30, 2005 versus $1,327,000 in the second quarter of 2004. The most significant factor in this variance resulted from an increase in the Company’s payroll and employee benefits expense to $1,304,000 in the three months ended June 30, 2005 from $819,000 in the three months ended June 30, 2004, primarily due to an increase in the number of employees. Net changes in other general and administrative expenses were essentially offsetting.
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Interest expense was $488,000 in the three months ended June 30, 2005 compared to $254,000 in the three months ended June 30, 2004, with the increase attributable to an increase in rates and an increase in the level of average borrowings outstanding during the quarter.
Loss on derivatives not qualifying for hedge accounting amounted to $268,000 in the three months ended June 30, 2005, compared to zero in the three months ended June 30, 2004. The 2005 amount arose primarily because the Company’s natural gas hedges have been deemed to be ineffective since the fourth quarter of 2004, which has resulted in the changes in fair value of such hedges since that time being reflected in earnings rather than in other comprehensive income, a component of stockholders’ equity (also included in this loss amount are settlement payments on ineffective gas hedges). As applied to the Company’s hedging program, there must be a high degree of correlation between the actual prices received and the hedge prices in order to justify treatment as cash flow hedges pursuant to SFAS 133. In the fourth quarter of 2004, the Company initially determined that its gas hedges fell short of the effectiveness guidelines to be accounted for as cash flow hedges and, likewise, made the same determination in the first and second quarters of 2005. To the extent that the Company’s hedges are not deemed to be effective in the future, the Company will likewise be exposed to volatility in earnings resulting from changes in the fair value of its hedges.
Net gains on asset sales were $18,000 in the three months ended June 30, 2005 compared to a loss of $59,000 in the three months ended June 30, 2004 and resulted from minor dispositions in both periods.
Income taxes were a benefit of $239,000 in the three months ended June 30, 2005 representing 35% of the pre-tax loss. Income taxes from continuing operations were a benefit of $993,000 in the three months ended June 30, 2004 reflecting a revision in the deferred tax valuation allowance of $1,636,000, based on the anticipated reversal of temporary differences.
Six months ended June 30, 2005 versus six months ended June 30, 2004 —Total revenues from continuing operations for the six months ended June 30, 2005 amounted to $25,874,000 compared to $19,955,000 for the six months ended June 30, 2004. Oil and gas sales for the six months ended June 30, 2005 were $25,711,000 compared to $19,841,000 for the six months ended June 30, 2004. This increase resulted from an 11% increase in oil and gas production volumes, due to an increase in Cotton Valley Trend production partially offset by a decline in South Louisiana production, as well as higher average prices for oil and gas. The following table presents the production volumes and pricing information for the comparative periods, with the average oil and gas prices including realized gains and losses on the effective portion of the Company’s commodity hedging program as further described under “Quantitative and Qualitative Disclosures about Market Risk – Commodity Hedging Activity.”
Six months ended June 30, 2005 | Six months ended June 30, 2004 | |||||||||
Production | Average Price | Production | Average Price | |||||||
Gas (Mcf) | 2,520,607 | $ | 6.79 | 2,018,188 | $ | 5.87 | ||||
Oil (Bbls) | 226,057 | 38.00 | 245,391 | 30.55 |
Other revenues for the six months ended June 30, 2005 were $162,000 compared to $114,000 for the six months ended June 30, 2004.
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Lease operating expense from continuing operations was $4,532,000 for the six months ended June 30, 2005 versus $3,128,000 for the six months ended June 30, 2004, with the increase due to an increase in production volumes as well as an increase in operating expenses in South Louisiana. Production taxes from continuing operations were $1,757,000 in the six months ended June 30, 2005 compared to $1,273,000 in the six months ended June 30, 2004, with the increase due to higher production volumes and rates. Depletion, depreciation and amortization expense from continuing operations was $11,591,000 for the six months ended June 30, 2005 versus $5,141,000 for the six months ended June 30, 2004, with the increase due to higher equivalent units of production, and higher depletion rates resulting from an increase in net capitalized development costs and a reduction in proved developed reserves. Exploration expense in the six months ended June 30, 2005 was $3,942,000 compared to $2,017,000 in the six months ended June 30, 2004, with the increase mainly due to dry hole costs in the amount of $1,888,000 applicable to an exploratory well drilled in East Baton Rouge Parish, Louisiana, which was plugged and abandoned in May 2005.
General and administrative expenses amounted to $3,456,000 in the six months ended June 30, 2005 versus $2,833,000 in the six months ended June 30, 2004. The most significant factor in this variance resulted from an increase in the Company’s payroll and employee benefits expense to $2,366,000 in the six months ended June 30, 2005 from $1,602,000 in the six months ended June 30, 2004, primarily due to an increase in the number of employees. Partially offsetting this increase was a net decrease in other administrative expenses, primarily legal fees.
Interest expense was $795,000 in the six months ended June 30, 2005 compared to $471,000 in the six months ended June 30, 2004, with the increase attributable to an increase in rates and an increase in the level of average borrowings outstanding during the period.
Loss on derivatives not qualifying for hedge accounting amounted to $10,112,000 in the six months ended June 30, 2005, compared to zero in the six months ended June 30, 2004. The 2005 amount arose primarily because the Company’s natural gas hedges have been deemed to be ineffective since the fourth quarter of 2004, which has resulted in the changes in fair value of such hedges since that time being reflected in earnings rather than in other comprehensive income, a component of stockholders’ equity (also included in this loss amount are settlement payments on ineffective gas hedges). As applied to the Company’s hedging program, there must be a high degree of correlation between the actual prices received and the hedge prices in order to justify treatment as cash flow hedges pursuant to SFAS 133. In the fourth quarter of 2004, the Company initially determined that its gas hedges fell short of the effectiveness guidelines to be accounted for as cash flow hedges and, likewise, made the same determination in the first and second quarters of 2005. To the extent that the Company’s hedges are not deemed to be effective in the future, the Company will likewise be exposed to volatility in earnings resulting from changes in the fair value of its hedges.
Net gains on asset sales were $169,000 in the six months ended June 30, 2005 compared to a loss of $59,000 in the six months ended June 30, 2004 and resulted from minor dispositions in both periods.
Income taxes were a benefit of $3,547,000 in the six months ended June 30, 2005 representing 35% of the pre-tax loss. Income taxes from continuing operations were an expense of $126,000 in the six months ended June 30, 2004 reflecting a revision in the deferred tax valuation allowance of $1,636,000, based on the anticipated reversal of temporary differences.
Liquidity and Capital Resources
Net cash provided by operating activities was $29,522,000 in the six months ended June 30, 2005 compared to $13,651,000 in the six months ended June 30, 2004. The increase in the 2005 period reflects
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higher oil and gas revenues, partially offset by increases in lease operating and exploration expenses. The operating cash flow amounts are net of changes in current assets and current liabilities, which resulted in an increase in operating cash flow of $14,269,000 in the six months ended June 30, 2005, compared to an increase of $2,533,000 in the six months ended June 30, 2004.
Net cash used in investing activities was $57,963,000 in the six months ended June 30, 2005, compared to $16,387,000 in the six months ended June 30, 2004. In the first two quarters of 2005, capital expenditures totaled $58,111,000, as the Company incurred substantial drilling costs in East Texas and Northwest Louisiana (see “Cotton Valley Drilling Program”) as well as in South Louisiana. In the first two quarters of 2004, capital expenditures totaled $16,387,000, as the Company participated in the drilling of two successful exploratory wells in the Burrwood/West Delta 83 field in South Louisiana and commenced its Cotton Valley Drilling Program.
Net cash provided by financing activities was $25,947,000 in the six months ended June 30, 2005 compared to $2,643,000 in the six months ended June 30, 2004. In May 2005, the Company completed a public offering of 3,710,000 shares of its common stock resulting in net proceeds of $53,175,000 which was used to repay all outstanding indebtedness to BNP Paribas under a senior credit facility in the amount of $39,500,000, including net borrowings of $12,350,000 that were made in the six months ended June 30, 2005 prior to the offering. Also in the six months ended June 30, 2005, exercises of stock warrants and options provided cash of $477,000, while preferred stock dividends and production payments used cash of $555,000. In the six months ended June 30, 2004, net borrowings under the senior credit facility provided cash of $3,000,000 and exercises of stock warrants and options provided cash of $123,000, while preferred stock dividends and production payments used cash of $480,000.
In April 2005, the Company announced that its Board of Directors had authorized an increase in its 2005 capital expenditure budget to approximately $95 million, subject to quarterly approval. Approximately two-thirds of the 2005 capital expenditure budget is expected to be focused on a relatively low risk development drilling program in the Cotton Valley Trend of East Texas and Northwest Louisiana (see “Cotton Valley Drilling Program”) and the remainder on the Company’s existing properties and new exploration programs. With the completion of the public equity offering in May 2005, the Company expects to finance its remaining 2005 capital expenditures through a combination of cash flow from operations and borrowings under its senior credit facility (see “Senior Credit Facility”).
Cotton Valley Drilling Program
In the first quarter of 2004, the Company commenced what it believes is a relatively low risk drilling program which is focused on the Cotton Valley Trend in the East Texas Basin in and around Rusk and Panola Counties, Texas, and DeSoto and Caddo Parishes, Louisiana. As of August 12, 2005, the Company had acquired or farmed in leases totaling approximately 69,000 gross acres (49,800 net acres), and is attempting to acquire additional acreage in the area. As of June 30, 2005, the Company had successfully drilled and completed 27 operated wells in the Cotton Valley formation. For the wells drilled and completed through June 30, 2005, the Company estimates that the average initial gross production rate per well is approximately 1,500 Mcfe of gas per day. Taking into account the expected decline following the initial production period, the Company’s net production volumes from its Cotton Valley Trend wells aggregated approximately 7,900 Mcfe of gas per day in the second quarter of 2005, or approximately 36% of its total oil and gas production in the period, compared to less than 1% of its total oil and gas production in the second quarter of 2004.
In East Texas, the Company began leasing acreage in the first quarter of 2004 and commenced a drilling program in April 2004. As of June 30, 2005, the Company had drilled and completed a total of 23 successful wells in East Texas on its operated acreage targeting the Cotton Valley formation. The Company has a 100% working interest in 14 of the completed wells and an 86% working interest in 9 of the completed wells.
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In Northwest Louisiana, the Company commenced a drilling program targeting the Cotton Valley formation in the first quarter of 2004 and has currently completed four Cotton Valley wells. The Company’s initiative in this area began in the third quarter of 2003, when it obtained, via farmout, exploration rights to approximately 18,000 gross acres in the Bethany-Longstreet field. The Company retains continuous drilling rights to the entire block so long as it drills at least one well within 120 days from previous operations. For each productive well drilled under the agreement, the Company earns an assignment to 160 acres. The Company began exploration and development drilling activities in the field and completed three successful wells in a shallower formation in the fourth quarter of 2003. The Company has a 70% working interest in the Bethany-Longstreet field.
South Louisiana Operations
Burrwood/West Delta 83 Fields— During the first quarter of 2005, the initial well on the Company’s Tunney prospect in the Burrwood/West Delta 83 field went off production from the initial zone due to reservoir depletion. This well, in which the Company owns an approximate 40% working interest, was successfully recompleted in two sands in a dual completion in April 2005. In the second quarter of 2005, the Company commenced drilling of its Leonard and Frazier prospect wells, with the Leonard well being successful and the Frazier well being unsuccessful.
Plumb Bob Field— In the third quarter of 2003, the Company obtained certain rights in the Plumb Bob field located in St. Martin Parish, Louisiana. The rights include a 70% working interest in oil and gas leases covering approximately 450 acres, 3-D seismic permits with oil and gas lease options covering approximately 17,000 acres. In the fourth quarter of 2003, the Company began workover drilling activities in the field and restored production capability in three wells, one of which is currently producing. In the fourth quarter of 2003, the Company also commenced a 30 square mile 3-D seismic survey which was completed in the second quarter of 2004. Processing of the seismic data was completed in late 2004 and evaluation of the data is ongoing.
St. Gabriel Field— In July 2004, the Company announced that it had acquired a 70% working interest in 3-D seismic permits and oil and gas lease options enabling it to acquire an approximate 30 square mile 3-D seismic survey over the St. Gabriel field in Ascension and Iberville Parishes, Louisiana. The Company commenced shooting the 3-D seismic survey in July 2004 and data acquisition was completed in September 2004. Processing of the data was completed in November 2004 and drilling of a well on the initial seismic prospect is expected to begin in the fourth quarter of 2005.
Senior Credit Facility
The Company has a senior credit facility with BNP Paribas in the amount of $65,000,000, which matures on February 25, 2008, and provides for Tranche A borrowings of up to $50,000,000 and Tranche B borrowings of up to $15,000,000.
Borrowings under Tranche A are subject to periodic redeterminations of the borrowing base which was established at $44,000,000 in February 2005. Interest on Tranche A borrowings accrues at a rate calculated, at the option of the Company, at either the BNP Paribas base rate plus 0.00% to 0.50%, or LIBOR plus 1.50%—2.50%, depending on borrowing base utilization. Prior to maturity, no principal payments are required so long as the maximum borrowing base amount exceeds the amounts outstanding under the Tranche A credit facility. Borrowings under Tranche B can be made at the option of the Company and with the approval of BNP Paribas to finance development of the Company’s acreage in the Cotton Valley Trend of East Texas and Northwest Louisiana. Interest on borrowings under the Tranche B accrues at a quarterly rate of LIBOR plus 5.0% and principal will be due on February 25, 2008.
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The credit facility precludes the payment of dividends on the Company’s common stock and requires the Company to maintain a working capital ratio (as defined) of not less than 1.0:1.0, an interest coverage ratio for the trailing four quarters of at least 3.0 times, and a tangible net worth of not less than the sum of $53,392,838, plus 50% of the Company’s cumulative net income after September 30, 2004, plus 100% of the net proceeds of any equity issuance by the Company after September 30, 2004. As of June 30, 2005, the Company was in compliance with all such requirements. Substantially all the Company’s assets are pledged to secure the senior credit facility.
In April 2005, the credit agreement was amended to allow the Company to redraw the $7,500,000 initially advanced under Tranche B in the event that it was repaid within 30 days of a public equity offering. In May 2005, the Company completed a public equity offering (see “Liquidity and Capital Resources”) and used the proceeds to repay all outstanding indebtedness under the senior credit facility in the amount of $39,500,000, including $7,500,000 initially advanced under Tranche B.
As of June 30, 2005, the Company had no outstanding borrowings under the senior credit facility and had total unutilized borrowing capacity at that date of $59,000,000. Subsequent to June 30, 2005, the Company made new borrowings under Tranche A of the senior credit facility, primarily to fund its Cotton Valley Drilling Program. As of August 12, 2005, the Company had outstanding borrowings of $15,500,000 and total unutilized borrowing capacity of $43,500,000. The next borrowing base redetermination is expected to be made in the third quarter of 2005.
In February 2003, the Company entered into three separate interest rate swaps with BNP Paribas covering a three year period, as further described below, and in February 2004, entered into another interest rate swap with BNP Paribas for an additional one year period (see “Quantitative and Qualitative Disclosures About Market Risk—Debt and debt-related derivatives”).
New Accounting Pronouncements
In December 2004, the FASB issued SFAS No. 123R,Share-Based Payment, a revision of SFAS No. 123,Accounting for Stock-Based Compensation. The revised statement requires the expensing of new, modified or repurchased stock-based compensation awards issued after June 15, 2005. Previously issued stock-based compensation awards, which are unvested as of that date, must also be accounted for in accordance with the revised statement. The revised statement provides for the use of either a closed-form model or open-form lattice model for the valuation of stock option awards. The Company plans to follow the “modified prospective application” to the adoption of the revised statement and is currently evaluating the potential impact that the adoption of the revised statement will have on its financial statements. In April 2005, the SEC adopted a rule permitting registrants to delay the expensing of options, pursuant to SFAS No. 123R, to the first annual period beginning after June 15, 2005. Accordingly, the Company will implement the provisions of SFAS No. 123R in its financial statements, effective January 1, 2006.
In April 2005, the FASB issued FASB Staff Position (FSP) 19-1 to provide guidance on the accounting for exploratory well costs and to amend SFAS No. 19,Financial Accounting and Reporting by Oil and Gas Producing Companies. The guidance in FSP 19-1 applies to companies that use the successful efforts method of accounting as described in SFAS No. 19. This FSP clarifies that exploratory well costs should continue to be capitalized when the well has found a sufficient quantity of reserves to justify its completion as a producing well and the Company is making sufficient progress assessing the reserves and the economic and operating viability of the project. The Company adopted the guidance in this FSP prospectively in April 2005 and the adoption had no impact on its financial statements.
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Quantitative and Qualitative Disclosures About Market Risk
Commodity Hedging Activity
The Company enters into futures contracts or other hedging agreements from time to time to manage the commodity price risk for a portion of its production. The Company considers these to be hedging activities and, as such, monthly settlements on these contracts are reflected in its crude oil and natural gas sales. The Company’s strategy, which is administered by the Hedging Committee of the Board of Directors, and reviewed periodically by the entire Board of Directors, has been to hedge between 30% and 70% of its production. As of June 30, 2005, all of the commodity hedges utilized by the Company were in the form of fixed price swaps, where the Company receives a fixed price and pays a floating price based on NYMEX quoted prices. As of June 30, 2005, the Company’s open forward position on its outstanding commodity hedging contracts, all of which were with BNP Paribas, was as follows:
Natural Gas | Crude Oil | |||||||||
Quantity (MMBtu/d) | Average Price | Quantity (Barrels/d) | Average Price | |||||||
Third Quarter 2005 | 15,000 | $ | 6.53 | 1,000 | $ | 35.42 | ||||
Fourth Quarter 2005 | 15,000 | 6.61 | 1,000 | 36.85 | ||||||
First Quarter 2006 | 14,000 | $ | 7.05 | 700 | $ | 49.75 | ||||
Second Quarter 2006 | 15,000 | 6.95 | 800 | 50.80 | ||||||
Third Quarter 2006 | 15,000 | 6.95 | 800 | 50.80 | ||||||
Fourth Quarter 2006 | 15,000 | 6.95 | 800 | 50.80 | ||||||
First Quarter 2007 | 10,000 | $ | 7.77 | 400 | $ | 53.35 | ||||
Second Quarter 2007 | — | — | 400 | 53.35 | ||||||
Third Quarter 2007 | — | — | 400 | 53.35 | ||||||
Fourth Quarter 2007 | — | — | 400 | 53.35 |
The hedging contracts summarized above fall within the Company’s targeted range of its estimated net oil and gas production volumes for the applicable periods of 2005. The fair value of the crude oil and natural gas hedging contracts in place at June 30, 2005 resulted in a liability of $15,335,000. Based on oil and gas pricing in effect at June 30, 2005, a hypothetical 10% increase in oil and gas prices would have increased the liability to $26,185,000 while a hypothetical 10% decrease in oil and gas prices would have decreased the liability to $4,793,000.
Debt and debt-related derivatives
In February 2003, the Company entered into three separate interest rate swaps with BNP Paribas covering a three year period (one of the interest rate swaps has now expired). The unexpired interest rate swap, which has an effective date of November 8, 2004 and a maturity date of February 26, 2006, is for $18,000,000 with a LIBOR swap rate of 3.46%. In February 2004, the Company entered into another interest rate swap contract with BNP Paribas, which has an effective date of February 26, 2006 and a maturity date of February 26, 2007, for $23,000,000 with a LIBOR swap rate of 4.08%. The fair value of the interest rate swap contracts in place at June 30, 2005, resulted in an asset of $11,000. Based on interest rates at June 30, 2005, a hypothetical 10% increase or decrease in interest rates would not have a material effect on the liability.
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Price fluctuations and the volatile nature of markets
Despite the measures taken by the Company to attempt to control price risk, the Company remains subject to price fluctuations for natural gas and 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 the Company’s control. Domestic oil and gas prices could have a material adverse effect on the Company’s financial position, results of operations and quantities of reserves recoverable on an economic basis.
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 the Company’s Annual Report on Form 10-K and other filings with the Securities and Exchange Commission. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to be correct.
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The Company, under the direction of its chief executive officer and chief financial officer, has established controls and procedures to ensure that material information relating to the Company and its consolidated subsidiaries is made known to the officers who certify the company’s financial reports and to other members of senior management and the Board of Directors.
Based on their evaluation as of June 30, 2005, the chief executive officer and chief financial officer of Goodrich Petroleum Corporation have concluded that the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) were effective as of June 30, 2005 to ensure that the information required to be disclosed by Goodrich Petroleum Corporation in reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms.
There were no changes in the Company’s internal controls or in other factors that have materially affected, or are reasonably likely to materially affect the Company’s internal controls over financial reporting.
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For a description of the Company’s legal proceedings, see Note G to the Consolidated Financial Statements included in Part I, Item 1 of this quarterly report on Form 10-Q, and Part I, Item 3 of the Company’s Form 10-K filed on March 25, 2005.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
The Annual Meeting of Stockholders of the Company was held on May 24, 2005. 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.
Election of Class I Directors
FOR | WITHHELD | |||
Josiah T. Austin | 20,284,302 | 167,501 | ||
Geraldine A. Ferraro | 20,312,170 | 139,633 | ||
Gene Washington | 20,356,177 | 95,626 |
Ratification of the appointment of KPMG LLP as the Company’s independent registered public accounting firm for 2005
FOR | AGAINST | WITHHELD | ||||
20,190,031 | 240,180 | 21,592 |
Not applicable.
31.1 | Certification by 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 by 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 by 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 by Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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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 thereunto duly authorized.
GOODRICH PETROLEUM CORPORATION | ||
(Registrant) | ||
August 15, 2005 Date | /s/ Walter G. Goodrich | |
Walter G. Goodrich, | ||
Vice Chairman & Chief Executive Officer | ||
August 15, 2005 Date | /s/ D. Hughes Watler, Jr. | |
D. Hughes Watler, Jr., | ||
Senior Vice President & Chief Financial Officer |
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