U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2006
Commission File No. 000-25386
FX ENERGY, INC.
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(Exact name of registrant as specified in its charter)
Nevada 87-0504461
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
3006 Highland Drive, Suite 206
Salt Lake City, Utah 84106
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(Address of principal executive offices)
(801) 486-5555
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(Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 of 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 [ ]
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer. See definition of
accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ]
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Act). Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date. The number of shares
of $0.001 par value common stock outstanding as of November 3, 2006, was
35,162,029.
FX ENERGY, INC. AND SUBSIDIARIES
Form 10-Q for the Quarterly Period Ended September 30, 2006
TABLE OF CONTENTS
Item Page
---- ----
Part I. Financial Information
1 Financial Statements
Consolidated Balance Sheets................................... 3
Consolidated Statements of Operations and Comprehensive Loss.. 5
Consolidated Statements of Cash Flows......................... 6
Notes to the Consolidated Financial Statements................ 7
2 Management's Discussion and Analysis of Financial
Condition and Results of Operations............................. 11
3 Quantitative and Qualitative Disclosures about Market Risk........ 17
4 Controls and Procedures........................................... 17
Part II. Other Information
1A Risk Factors...................................................... 18
6 Exhibits.......................................................... 18
-- Signatures........................................................ 19
2
ITEM 1. FINANCIAL STATEMENTS
FX ENERGY, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands)
September 30, December 31,
2006 2005
(Unaudited)
------------------ -----------------
ASSETS
Current assets:
Cash and cash equivalents........................................... $ 4,402 $ 2,390
Marketable securities............................................... 12,443 26,479
Accounts receivable:
Accrued oil & gas sales........................................... 756 411
Joint interest and other receivables.............................. 1,120 1,664
Input VAT receivable.............................................. 994 1,965
Inventory........................................................... 95 96
Other current assets................................................ 346 270
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Total current assets.............................................. 20,156 33,275
------------------ -----------------
Property and equipment, at cost:
Oil and gas properties (successful efforts method):
Proved............................................................ 21,638 15,918
Unproved.......................................................... 449 304
Other property and equipment...................................... 4,510 4,262
------------------ -----------------
Gross property and equipment...................................... 26,597 20,484
Less accumulated depreciation, depletion and amortization......... (6,675) (5,844)
------------------ -----------------
Net property and equipment.................................... 19,922 14,640
------------------ -----------------
Other assets:
Certificates of deposit............................................. 458 356
------------------ -----------------
Total assets.......................................................... $ 40,536 $ 48,271
================== =================
-- Continued --
The accompanying notes are an integral part of the consolidated financial statements.
3
FX ENERGY, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands, except share data)
-- Continued --
September 30, December 31,
2006 2005
(Unaudited)
------------------ -----------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................... $ 2,731 $ 4,110
Accrued liabilities................................................. 378 1,450
----------------- ------------------
Total current liabilities......................................... 3,109 5,560
----------------- ------------------
Long-term liabilities:
Asset retirement obligation ....................................... 466 431
----------------- ------------------
Total liabilities................................................. 3,575 5,991
----------------- ------------------
Stockholders' equity:
Preferred stock, $0.001 par value, 5,000,000 shares
authorized, no shares issued as of September 30, 2006 and
December 31, 2005................................................. -- --
Common stock, $0.001 par value, 100,000,000 shares
authorized, 35,162,029 and 35,097,279 issued and
outstanding as of September 30, 2006 and
December 31,
2005, respectively................................................ 35 35
Additional paid-in capital.......................................... 124,872 125,216
Deferred compensation............................................... -- (2,975)
Accumulated other comprehensive loss................................ (36) (58)
Accumulated deficit................................................. (87,910) (79,938)
----------------- ------------------
Total stockholders' equity........................................ 36,961 42,280
----------------- ------------------
Total liabilities and stockholders' equity ........................... $ 40,536 $ 48,271
================= ==================
The accompanying notes are an integral part of the consolidated financial statements.
4
FX ENERGY, INC. AND SUBSIDIARIES
Consolidated Statements of Operations and Comprehensive Loss
(Unaudited)
(in thousands, except per share amounts)
For the three months For the nine months
ended September 30, ended September 30,
--------------------------------- --------------------------------
2006 2005 2006 2005
---------------- ---------------- --------------- ----------------
Revenues:
Oil and gas sales................................. $ 1,411 $ 1,063 $ 3,701 $ 2,800
Oilfield services................................ 431 1,428 1,362 1,582
---------------- ---------------- --------------- ----------------
Total revenues.................................. 1,842 2,491 5,063 4,382
---------------- ---------------- --------------- ----------------
Operating costs and expenses:
Lease operating costs............................. 596 613 1,881 1,842
Exploration costs................................. 780 760 3,843 1,975
Oilfield services costs........................... 251 874 964 1,062
Depreciation, depletion and amortization (DD&A)... 330 175 831 515
Accretion expense................................. 12 11 35 33
Stock compensation (G&A).......................... 712 242 2,115 279
General and administrative (G&A).................. 1,080 1,294 3,919 4,075
---------------- ---------------- --------------- ----------------
Total operating costs and expenses.............. 3,761 3,969 13,588 9,781
---------------- ---------------- --------------- ----------------
Operating loss...................................... (1,919) (1,478) (8,525) (5,399)
---------------- ---------------- --------------- ----------------
Other income:
Interest and other income, net.................... 191 92 553 552
---------------- ---------------- --------------- ----------------
Total other income.............................. 191 92 553 552
---------------- ---------------- --------------- ----------------
Net loss (1,728) (1,386) (7,972) (4,847)
Other comprehensive loss
Increase in market value of available for sale
marketable securities............................ 8 243 22 257
---------------- ---------------- --------------- ----------------
Comprehensive loss $ (1,720) $ (1,143) $ (7,950) $ (4,590)
================ ================ =============== ================
Basic and diluted net loss per common share......... $ (0.05) $ (0.04) $ (0.23) $ (0.13)
================ ================ =============== ================
Basic and diluted weighted average number of shares
outstanding....................................... 35,162 34,719 35,139 34,629
================ ================ =============== ================
The accompanying notes are an integral part of the consolidated financial statements.
5
FX ENERGY, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
For the nine months
ended September 30,
-------------------------------------
2006 2005
------------------ -----------------
Cash flows from operating activities:
Net loss............................................................... $ (7,972) $ (4,847)
Adjustments to reconcile net loss to net
cash used in operating activities:
Accretion expense.................................................. 35 33
Depreciation, depletion and amortization........................... 831 515
Loss on asset disposition.......................................... -- 18
Stock compensation (G&A)........................................... 2,115 279
Common stock issued for services................................... 516 326
Increase (decrease) from changes in working capital items:
Accounts receivable.................................................. 1,170 (1,102)
Inventory............................................................ 1 (3)
Other current assets................................................. (76) (195)
Other assets......................................................... (102) --
Accounts payable and accrued liabilities............................. (1,653) (159)
------------------ -----------------
Net cash used in operating activities.............................. (5,135) (5,135)
------------------ -----------------
Cash flows from investing activities:
Additions to oil and gas properties.................................... (6,663) (4,358)
Additions to other property and equipment.............................. (248) (379)
Additions to marketable securities..................................... (542) (489)
Proceeds from maturities of marketable securities...................... 14,600 8,000
------------------ -----------------
Net cash provided by investing activities.......................... 7,147 2,774
------------------ -----------------
Cash flows from financing activities:
Proceeds from common stock offering, net............................... -- --
Proceeds from stock option and warrant exercises....................... -- 2,237
------------------ -----------------
Net cash provided by financing activities.......................... -- 2,237
------------------ -----------------
Increase (decrease) in cash and cash equivalents......................... 2,012 (124)
Cash and cash equivalents at beginning of period......................... 2,390 3,784
------------------ -----------------
Cash and cash equivalents at end of period............................... $ 4,402 $ 3,660
================== =================
The accompanying notes are an integral part of the consolidated financial statements.
6
FX ENERGY, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Unaudited)
Note 1: Basis of Presentation
The interim financial data are unaudited; however, in the opinion of
the management of FX Energy, Inc. and subsidiaries ("FX Energy" or the
"Company"), the interim data includes all adjustments, consisting only of normal
recurring adjustments, necessary for a fair statement of the results for the
interim periods. The interim financial statements should be read in conjunction
with FX Energy's annual report on Form 10-K for the year ended December 31,
2005, and quarterly reports on Form 10-Q for the quarters ended March 31 and
June 30, 2006, including the financial statements and notes thereto.
The consolidated financial statements include the accounts of FX Energy
and its wholly-owned subsidiaries and FX Energy's undivided interests in Poland.
All significant intercompany accounts and transactions have been eliminated in
consolidation. At September 30, 2006, FX Energy owned 100% of the voting stock
of all of its subsidiaries.
Note 2: Net Income (Loss) Per Share
Basic earnings per share is computed by dividing net income (loss) by
the weighted average number of common shares outstanding. Diluted earnings per
share is computed by dividing net income (loss) by the sum of the weighted
average number of common shares and the effect of dilutive unexercised stock
options (including restricted stock purchase rights) and warrants. Options to
purchase 3,471,083 and 3,465,666 shares of common stock at prices ranging from
$0.00 to $10.65 per share with a weighted average exercise price of $4.71 per
share and $5.42 per share were outstanding at September 30, 2006 and 2005,
respectively. Warrants to purchase 3,505,373 shares of common stock at prices
ranging from $3.60 to $3.75 per share with a weighted average exercise price of
$3.65 per share were outstanding at both September 30, 2006 and 2005,
respectively. No options or warrants were included in the computation of diluted
net loss per share for the periods ended September 30, 2006 and 2005, because
the effect would have been antidilutive.
Note 3: Income Taxes
FX Energy recognized no income tax benefit from the net loss generated
in the first nine months of 2006 and 2005. Statement of Financial Accounting
Standards ("SFAS") No. 109, "Accounting for Income Taxes," requires that a
valuation allowance be provided if it is more likely than not that some portion
or all of a deferred tax asset will not be realized. The Company's ability to
realize the benefit of its deferred tax asset will depend on the generation of
future taxable income through profitable operations and the expansion of
exploration and development activities. The market and capital risks associated
with achieving the above requirement are considerable, resulting in the
Company's conclusion that a full valuation allowance be provided.
Note 4: Business Segments
FX Energy operates within two segments of the oil and gas industry: the
exploration and production segment ("E&P") in the United States and Poland and
the oilfield services segment in the United States. Identifiable net property
and equipment are reported by business segment for management reporting and
reportable business segment disclosure purposes. Current assets, other assets,
current liabilities, long-term debt, and general and administrative expenses are
not allocated to business segments for management reporting or business segment
7
disclosure purposes. Reportable business segment information for the three
months ended September 30, 2006, the nine months ended September 30, 2006, and
as of September 30, 2006, is as follows (in thousands):
Reportable Segments
-----------------------------------
Exploration &
Production
------------------------
Oilfield Non-
U.S. Poland Services Segmented Total
------------ ----------- ---------- ------------ -------------
Three months ended September 30, 2006:
Revenues $ 1,187 $ 224 $ 431 $ -- $ 1,842
Net income (loss)(1) 296 (517) 139 (1,646) (1,728)
Nine months ended September 30, 2006:
Revenues 3,344 357 1,362 -- 5,063
Net income (loss)(1) 679 (3,326) 288 (5,613) (7,972)
As of September 30, 2006:
Identifiable net property and equipment(2) 3,397 15,787 479 259 19,922
- -------------------
(1) Non-segmented reconciling items for the third quarter include $1,080 of
general and administrative costs, $712 of noncash stock compensation
expense, $192 of other income, and $46 of corporate DD&A. Non-segmented
reconciling items for the nine months include $3,919 of general and
administrative costs, $2,115 of noncash stock compensation expense, $553 of
other income, and $132 of corporate DD&A.
(2) Identifiable net property and equipment not associated with a segment
consists of $259 of corporate office equipment, hardware and software.
Reportable business segment information for the three months ended
September 30, 2005, the nine months ended September 30, 2005, and as of
September 30, 2005, is as follows (in thousands):
Reportable Segments
-----------------------------------
Exploration &
Production
------------------------
Oilfield Non-
U.S. Poland Services Segmented Total
------------ ----------- ---------- ------------ -------------
Three months ended September 30, 2005:
Revenues $ 1,063 $ -- $ 1,428 $ -- $ 2,491
Net income (loss)(1) (1) (394) 494 (1,485) (1,386)
Nine months ended September 30, 2005:
Revenues 2,800 -- 1,582 -- 4,382
Net income (loss)(1) 315 (1,602) 349 (3,909) (4,847)
As of September 30, 2005:
Identifiable net property and equipment(2) 3,393 12,413 453 337 16,596
- --------------------
(1) Non-segmented reconciling items for the third quarter include $1,516 of
general and administrative costs, $20 of noncash stock compensation expense,
$92 of other income, and $41 of corporate DD&A. Non-segmented reconciling
items for the nine months include $4,297 of general and administrative
costs, $57 of noncash stock compensation expense, $552 of other income, and
$107 of corporate DD&A.
(2) Identifiable net property and equipment not associated with a segment
consists of $337 of corporate office equipment, hardware and software.
8
Note 5: Stock-Based Compensation
The Company maintains several share-based incentive plans. Under these
plans, the Company may issue options, restricted stock or restricted stock
purchase rights. Options are granted at an option price equal to the market
value of the stock at the date of grant, have terms ranging from five to seven
years and vest over periods ranging from the date of grant to three years.
Restricted stock awards and restricted stock purchase rights have similar terms
and vesting requirements.
Effective January 1, 2006, the Company adopted the provisions of SFAS
No. 123R, "Share-Based Payment" ("SFAS No. 123R"). Under SFAS No. 123R,
share-based compensation cost is measured at the grant date, based on the
estimated fair value of the award, and is recognized as expense over the
employee's requisite service period. The Company adopted SFAS No. 123R using the
modified prospective transition method. Under this method, prior periods are not
revised for comparative purposes. The provisions of SFAS No. 123R apply to new
awards and to awards that are outstanding on the effective date that are
subsequently modified or cancelled. Compensation expense for unvested awards at
the effective date will be recognized over the remaining requisite service
period using the compensation cost calculated for pro forma disclosure purposes
under SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123").
The following table summarizes option (including restricted stock
purchase rights) activity for the first nine months of 2006:
Weighted
Average
Remaining
Weighted Contractual Aggregate
Number of Average Life (in Intrinsic
Options Exercise Price years) Value
------------------------------------------------------------
Fixed Options outstanding:
Beginning of year................................ 3,492,283 $4.72
Cancelled........................................ (1,200) 0.00
Expired.......................................... (20,000) 6.96
---------------
End of period.................................... 3,471,083 $4.71 3.67 $4,851,936
===============
Exercisable at End of period..................... 1,607,674 $3.21 3.29 $3,038,504
===============
The aggregate intrinsic value in the table above represents the total
pretax intrinsic value, based on the Company's stock price of $5.10 as of
September 30, 2006, which would have been received by the restricted stock
purchase right and stock option holders had all in-the-money restricted stock
purchase rights and options been exercised as of that date.
Prior to the adoption of SFAS No. 123R, the Company recorded
compensation expense for employee stock options based on their intrinsic value
on the date of grant pursuant to Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB No. 25"), and related
interpretations and provided the pro forma disclosures required by SFAS No. 123.
The pro forma effects of recognizing compensation expense under the fair value
9
method required by SFAS No. 123 on net loss and net loss per common share were
as follows (in thousands, except per share data):
2005
------------------------------
Quarter Nine Months
Ended Ended
Sept 30 Sept 30
-------------- --------------
Net loss:
Net loss, as reported................................... $ (1,386) $ (4,847)
Less: Total stock-based employee compensation expense
determined under the fair value based method for all
awards, net of related tax effects...................... (485) (1,476)
-------------- --------------
Pro forma net loss................................. $ (1,871) $ (6,323)
============== ==============
Basic and diluted net loss per share:
As reported........................................ $ (0.04) $ (0.13)
Pro forma.......................................... $ (0.05) (0.18)
As a result of adopting SFAS No. 123R, for the three- and nine-month
periods ended September 30, 2006, the Company recognized $453,000 and
$1,333,000, respectively, of stock compensation expense, equal to $0.01 and
$0.04 per basic and diluted share, related to the amortization of unvested
options as of January 1, 2006. In addition, for the three- and nine-month
periods ended September 30, 2006, the Company recognized $259,000 and $782,000,
respectively, of stock compensation expense related to the amortization of
restricted stock purchase rights granted in November 2005. Effective January 1,
2006, the Company reclassified $2,975,000 of deferred compensation related to
the restricted stock purchase rights to additional paid-in capital. As of
September 30, 2006, deferred compensation to be amortized in future periods
totaled $3,429,000, including $2,193,000 related to restricted stock purchase
rights.
Note 6: Stockholders' Equity
During the first nine months of 2005, warrant holders exercised
warrants to purchase 48,000 shares of common stock, resulting in proceeds to the
Company of $180,000. In addition, during the first nine months of 2005, option
holders exercised options to purchase 404,400 shares, resulting in additional
proceeds of $2,057,000. There were no warrant or option exercises during the
first nine months of 2006. During the first nine months of 2006, the Company
issued 64,750 shares for its 2005 contribution to the Company's employee benefit
plan. During the first nine months of 2005, the Company issued 58,091 shares
primarily to Polish consultants for services.
Note 7: Investments
The cost and estimated market value of marketable securities at
September 30, 2006, are as follows (in thousands):
Gross Estimated
Unrealized Market
Cost Losses Value
---------- ------------- -----------
Marketable securities....... $12,479 $ (36) $ 12,443
The investments consist primarily of U.S. government agency bonds and
notes, whose value fluctuates with changes in interest rates. The Company
believes the gross unrealized losses are temporary. The investments have been
classified as available-for-sale and are reported at fair value with unrealized
gains and losses, if any, recorded as a component of other comprehensive income
(loss).
10
Note 8: Subsequent Event
At December 31, 2005, the Company had recorded a net receivable from
the Polish Oil and Gas Company of approximately $1.0 million related to the
settlement of various transactions related to the Company's Fences I exploration
program and gas sales from the Kleka 11 well which was retained by the Company.
In October, 2006, the Company collected this receivable, a portion of which was
paid to the Polish government in the form of value-added tax.
Note 9: Reclassification
Certain amounts in the Consolidated Financial Statements for December
31, 2005, have been reclassified to conform to the 2006 presentation. These
reclassifications had no impact on the Company's net loss or cash flows.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations by Business Segment
We operate within two segments of the oil and gas industry: the
exploration and production segment, or E&P, and the oilfield services segment.
Depreciation, depletion and amortization costs, or DD&A, and general and
administrative costs, or G&A, directly associated with their respective segments
are detailed within the following discussion. G&A, interest income, other income
and other costs that are not allocated to individual operating segments for
management or segment reporting purposes are discussed in their entirety
following the segment discussion. A comparison of the results of operations by
business segment and the information regarding nonsegmented items for the three
and nine months ended September 30, 2006 and 2005, follows.
Comparison of the Third Quarter of 2006 to the Third Quarter of 2005
Exploration and Production
Gas Revenues. Gas revenues are becoming an increasingly significant
part of our revenue mix. Revenues from gas sales were $197,000 during the third
quarter of 2006. Our Wilga-2 well commenced production on September 19, 2006.
This well has three separate productive zones and produces both gas and light
crude oil. During the start-up period, we plan to produce each zone separately
for a few weeks, following which two zones will be produced at the same time,
switching one out every six months, so that each zone will be on for twelve
months and off for six months. Net gas production from the Wilga-2 well during
September 2006 was 23,300 mcf, resulting in gas revenues of $137,000 at an
average price of $5.88 per mcf. Production at the Kleka well was 32,400 mcf,
resulting in gas revenues of $60,000 at an average price of $1.85 per mcf. No
gas revenues were recognized during the same period of 2005.
In addition to production from the Wilga-2 and Kleka wells, gas
production began at our Zaniemysl-3 well, located in western Poland, on October
12, 2006.
11
Oil Revenues. Our oil revenues are comprised of oil production in the
United States in 2006 and 2005 and light crude oil in Poland in 2006. A summary
of the percentage change in oil revenues, average price and production volumes
for the third quarter of 2006 and 2005 is set forth in the following table:
Quarter Ended September 30,
------------------------------------
2006 2005
------------------ -----------------
Revenues............................................. $ 1,214,000 $ 1,063,000
Percent change versus prior year's quarter....... +14% +22%
Average price (per barrel of oil).................... $ 60.38 $ 55.54
Percent change versus prior year's quarter....... +9% +43%
Production volumes (barrels of oil).................. 19,655 19,142
Percent change versus prior year's quarter....... +3% -14%
Oil revenues were $1,214,000 during the third quarter of 2006, a 14%
increase compared to the same period of 2005. During the third quarter of 2006,
our average oil prices rose 9%, from $55.54 per barrel in 2005 to $60.38 per
barrel in 2006, while oil production quantities increased by 3%. Oil revenues in
2006 increased from 2005 levels by approximately $95,000 due to higher oil
prices and increased by approximately $56,000 related to production increases.
Production volumes in the third quarter of 2006 include 511 barrels of light
crude oil produced at the Wilga-2 well in Poland which generated $27,000 of
revenue.
Lease Operating Costs. Lease operating costs were $596,000 during the
third quarter of 2006, a decrease of $17,000, or 3%, compared to the same period
of 2005. Operating costs in Montana were $107,000 lower due to reduced workover
costs in the 2006 quarter. Operating costs increased in Poland by $90,000 due to
production from both the Kleka and Wilga-2 wells.
Exploration Costs. Our exploration costs consist of geological and
geophysical costs and the costs of exploratory dry holes. Exploration costs were
$780,000 during the third quarter of 2006, compared to $760,000 during the same
period of 2005, an increase of 3%.
DD&A Expense - E&P. DD&A expense for producing properties was $245,000
during the third quarter of 2006, an increase of 231% compared to $74,000 during
the same period of 2005. The increase in DD&A is due primarily to new property
costs incurred in late 2005 at our Montana producing properties, in addition to
DD&A associated with 2006 production in Poland.
Accretion Expense. Accretion expense for both years reflects the
increase in our asset retirement obligation and was essentially flat from 2005
to 2006.
Oilfield Services
Oilfield Services Revenues. Oilfield services revenues were $431,000
during the third quarter of 2006, a decrease of $997,000 compared to $1,428,000
for the same quarter of 2005. We drilled two and five wells for third parties
during the 2006 and 2005 quarters, respectively. These revenues will continue to
fluctuate from period to period based on market demand, weather, the number of
wells drilled, downtime for equipment repairs, the degree of emphasis on
utilizing our oilfield servicing equipment on our Company-owned properties, and
other factors.
12
Oilfield Services Costs. Oilfield services costs were $251,000 during
the third quarter of 2006, down significantly from the $874,000 incurred in the
same period of 2005, reflecting the slower pace of third-party drilling.
Oilfield services costs will also continue to fluctuate year to year based on
revenues generated, market demand, weather, the number of wells drilled,
downtime for equipment repairs, and other factors.
DD&A Expense - Oilfield Services. DD&A expense for oilfield services
was $40,000 during the third quarter of 2006 compared to the $57,000 recorded
during the same period of 2005. The year-to-year decrease was primarily due to
capital additions from prior years being fully depreciated during 2005.
Nonsegmented Information
G&A Costs. G&A costs were $1,080,000 during the third quarter of 2006,
compared to $1,294,000 during the third quarter of 2005, a decrease of 17%. The
decrease was primarily due to reductions in legal and consulting fees.
Stock Compensation (G&A). As discussed above, we adopted the provisions
of SFAS No. 123R on January 1, 2006, using the modified prospective method.
Under this method, prior periods are not revised for comparative purposes.
Stock-based awards that were granted prior to the effective date continue to be
accounted for in accordance with SFAS No. 123, except that stock option expense
for unvested options must be recognized in the consolidated statement of
operations. Stock compensation expense recorded for the third quarter of 2006
represents $259,000 of amortization related to restricted stock purchase rights
granted in November 2005 and $453,000 of amortization of unvested stock options
granted prior to 2005, using the compensation cost calculated for pro forma
disclosure purposes under SFAS No. 123. Stock compensation expense recorded in
2005 represents the amortization of stock and options issued to consultants.
Interest and Other Income. Interest and other income during the third
quarter of 2006 was $191,000, compared to $92,000 during the same quarter of
2005, reflecting higher interest rates on funds available for investment.
Comparison of the First Nine Months of 2006 to the First Nine Months of
2005
Exploration and Production
Gas Revenues. As discussed above, gas revenues are becoming an
increasingly significant part of our revenue mix. Revenues from gas sales were
$330,000 during the first nine months of 2006. Our Wilga-2 well commenced
production on September 19, 2006. Net gas production from the Wilga-2 well
during 2006 was 23,300 mcf, resulting in gas revenues of $137,000 at an average
price of $5.88 per mcf. Production at the Kleka well was 104,400 mcf, resulting
in gas revenues of $193,000 at an average price of $1.85 per mcf. No gas
revenues were recognized during the same period of 2005.
Oil Revenues. Our oil revenues are comprised of oil production in the
United States during 2006 and 2005 and light crude oil production in Poland
during 2006. A summary of the percentage change in oil revenues, average price
13
and production volumes for the first nine months of 2006 and 2005 is set forth
in the following table:
Nine Months Ended September 30,
----------------------------------
2006 2005
---------------- ----------------
Revenues............................................. $ 3,371,000 $ 2,800,000
Percent change versus prior year's quarter....... +20% +27%
Average price (per barrel of oil).................... $ 58.08 $ 47.48
Percent change versus prior year's quarter....... +22% +38%
Production volumes (barrels of)...................... 58,080 58,966
Percent change versus prior year's quarter....... -2% -8%
Oil revenues were $3,371,000 during the first nine months of 2006, a
20% increase compared to the same period of 2005. During the first nine months
of 2006, our average oil prices were 22% higher than in the same period of the
prior year, while oil production decreased by 2%. Oil revenues in 2006 increased
from 2005 levels by approximately $656,000 due to higher oil prices, offset by
approximately $85,000 related to production declines. Production volumes in the
nine months of 2006 include 511 barrels of light oil produced at the Wilga-2
well in Poland, which generated $27,000 of revenue.
Lease Operating Costs. Lease operating costs were $1,881,000 during the
first nine months of 2006, an increase of 2% compared to $1,842,000 during the
same period of 2005. Operating costs in Montana were $112,000 lower due to
reduced workover costs in the 2006 nine months. Operating costs increased to
$151,000 in Poland as the Wilga-2 well began production in September 2006.
Exploration Costs. Our exploration costs consist of geological and
geophysical costs and the costs of exploratory dry holes. Exploration costs were
$3,843,000 during the first nine months of 2006, compared to $1,975,000 during
the same period of 2005, an increase of 95%. Nine month 2006 exploration costs
include approximately $1,151,000 associated with the Drozdowice-1, Montana and
Nevada dry holes, and approximately $2,692,000 for new two-dimensional seismic
and other geological and geophysical costs in Poland.
DD&A Expense - E&P. DD&A expense for producing properties was $590,000
during the first nine months of 2006, an increase of $418,000 compared to
$172,000 during the same period of 2005. The increase in DD&A is due primarily
to new property costs incurred in late 2005 at our Montana producing properties,
in addition to DD&A associated with 2006 production in Poland.
Accretion Expense. Accretion expense for both years reflects the
increase in our asset retirement obligation and was essentially flat from 2005
to 2006.
Oilfield Services
Oilfield Services Revenues. Oilfield services revenues were $1,362,000
during the first nine months of 2006, a decrease of $220,000 compared to
$1,582,000 for the same period of 2005. We drilled fewer wells for third parties
in 2006 compared to 2005. These revenues will continue to fluctuate from period
to period based on market demand, weather, the number of wells drilled, downtime
for equipment repairs, the degree of emphasis on utilizing our oilfield
servicing equipment on our Company-owned properties, and other factors.
Oilfield Services Costs. Oilfield services costs were $964,000 during
the first nine months of 2006, down from the $1,062,000 incurred in the same
period of 2005, reflecting the slower pace of drilling activities this year.
Oilfield services costs will also continue to fluctuate from period to period
based on revenues generated, market demand, weather, the number of wells
drilled, downtime for equipment repairs, the degree of emphasis on utilizing our
oilfield servicing equipment on our Company-owned properties, and other factors.
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DD&A Expense - Oilfield Services. DD&A expense for oilfield services
was $110,000 during the first nine months of 2006, compared to $172,000 during
the same period of 2005. The year-to-year decrease was primarily due to capital
additions from prior years being fully depreciated during 2005.
Nonsegmented Information
G&A Costs. G&A costs were $3,919,000 during the first nine months of
2006, compared to $4,075,000 during the same period of 2005, a decrease of 4%.
Reductions in legal and consulting fees were offset by higher investor relations
and personnel costs.
Stock Compensation (G&A). As discussed above, we adopted the provisions
of SFAS No. 123R on January 1, 2006, using the modified prospective method.
Under this method, prior periods are not revised for comparative purposes.
Stock-based awards that are granted prior to the effective date continue to be
accounted for in accordance with SFAS No. 123, except that stock option expense
for unvested options must be recognized in the consolidated statement of
operations. Stock compensation expense recorded for the first nine months of
2006 represents $782,000 of amortization related to restricted stock purchase
rights granted in November 2005 and $1,333,000 of amortization of unvested stock
options granted prior to 2005, using the compensation cost calculated for pro
forma disclosure purposes under SFAS No. 123. Stock compensation expense
recorded in 2005 represents the amortization of stock and options issued to
consultants.
Interest and Other Income. We recorded $553,000 in interest and other
income during the first nine months of 2006, compared to $552,000 during the
same period of 2005.
Liquidity and Capital Resources
To date, we have financed our operations principally through the sale
of equity securities, issuance of debt securities, and agreements with industry
participants that funded our share of costs in certain exploratory activities in
return for an interest in our properties. Our cash resources and marketable
securities at September 30, 2006, together with anticipated revenues in 2006,
are sufficient to cover our planned exploration program in the United States and
Poland for the next twelve months.
We may seek to obtain additional funds for future capital investments
from the sale of additional securities, project financing to help finance the
completion of successful wells, sale of partial property interests, or other
arrangements, all of which may dilute the interest of our existing stockholders
or our interest in the specific project financed. We will allocate our existing
capital as well as funds we may obtain in the future among our various projects
at our discretion. We may change the allocation of capital among the categories
of anticipated expenditures depending upon future events. For example, we may
change the allocation of our expenditures based on the actual results and costs
of future exploration, appraisal, development, production, property acquisition
and other activities. In addition, we may have to change our anticipated
expenditures if costs of placing any particular discovery into production are
higher, if the field is smaller, or if the commencement of production takes
longer than expected.
Working Capital (current assets less current liabilities). Our working
capital was $17,047,000 as of September 30, 2006, a decrease of $10,668,000 from
our working capital at December 31, 2005, of $27,715,000. As of September 30,
2006, our cash and cash equivalents and marketable securities totaled
approximately $16.8 million. We have no outstanding long-term debt or long-term
contractual commitments.
Operating Activities. Net cash used in operating activities was
$5,135,000 during the first nine months of 2006, unchanged from $5,135,000 in
net cash used during the same period of 2005.
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Investing Activities. During the first nine months of 2006, $7,147,000
was provided by investing activities. We received proceeds of $14,600,000 from
the maturities of marketable securities, purchased marketable securities of
$542,000, used $798,000 to pay accounts payable related to prior-year capital
costs, used $5,175,000 for current year capital additions in Poland and $546,000
related to our proved properties in the United States, $140,000 for Polish
concession costs, $248,000 for office and drilling equipment, and $4,000 for
undeveloped leasehold costs in the United States. During the first nine months
of 2005, $2,774,000 was provided by investing activities. We received proceeds
of $8,000,000 from the maturities of marketable securities, purchased marketable
securities of $489,000, used $1,076,000 to pay accounts payable related to
prior-year capital costs, used $2,968,000 for current year capital additions in
Poland and $216,000 related to our proved properties in the United States,
$16,000 for Polish concession costs, $350,000 for office and drilling equipment,
and $111,000 for undeveloped leasehold costs in the United States.
Financing Activities. During the first nine months of 2005, option and
warrant holders exercised options and warrants to purchase 452,400 shares,
resulting in proceeds of $2,237,000. There were no options or warrants exercised
during the first nine months of 2006.
New Accounting Pronouncements
We have reviewed all recently issued, but not yet adopted, accounting
standards in order to determine their effects, if any, on our results of
operations or financial position. Based on that review, we believe that none of
these pronouncements will have a significant effect on our current or future
financial position or results of operations.
Critical Accounting Policies
A summary of our significant accounting policies is included in Note 1
to our Consolidated Financial Statements contained in our annual report on Form
10-K for the year ended December 31, 2005. We believe the application of these
accounting policies on a consistent basis enables us to provide financial
statement users with useful, reliable and timely information about our earnings
results, financial condition and cash flows.
The preparation of financial statements in accordance with accounting
principles generally accepted in the United States of America requires our
management to make judgments, estimates and assumptions regarding uncertainties
that affect the reported amounts presented and disclosed in the financial
statements. Our management reviews these estimates and assumptions based on
historical experience, changes in business conditions and other relevant factors
that it believes to be reasonable under the circumstances. In any given
reporting period, actual results could differ from the estimates and assumptions
used in preparing our financial statements.
Critical accounting policies are those that may have a material impact
on our financial statements and also require management to exercise significant
judgment due to a high degree of uncertainty at the time the estimate is made.
Our senior management has discussed the development and selection of our
accounting policies, related accounting estimates and the disclosures set forth
in our Annual Report on Form 10-K with the Audit Committee of our Board of
Directors. We believe our critical accounting policies include those addressing
the recoverability and useful lives of assets, the retirement obligations
associated with those assets, and the estimates of oil and gas reserves.
Forward-Looking Statements
This report contains statements about the future, sometimes referred to
as "forward-looking" statements. Forward-looking statements are typically
identified by the use of the words "believe," "may," "could," "should,"
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"expect," "anticipate," "estimate," "project," "propose," "plan," "intend" and
similar words and expressions. We intend that the forward-looking statements
will be covered by the safe harbor provisions for forward-looking statements
contained in Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Statements that describe our future strategic
plans, goals or objectives are also forward-looking statements.
Readers of this report are cautioned that any forward-looking
statements, including those regarding us or our management's current beliefs,
expectations, anticipations, estimations, projections, proposals, plans or
intentions, are not guarantees of future performance or results of events and
involve risks and uncertainties, such as the future timing and results of
drilling individual wells and other exploration and development activities;
future variations in well performance as compared to initial test data; future
events that may result in the need for additional capital; the prices at which
we may be able to sell oil or gas; fluctuations in prevailing prices for oil and
gas; uncertainties of certain terms to be determined in the future relating to
our oil and gas interests, including exploitation fees, royalty rates and other
matters; future drilling and other exploration schedules and sequences for
various wells and other activities; uncertainties regarding future political,
economic, regulatory, fiscal, taxation and other policies in Poland; the cost of
additional capital that we may require and possible related restrictions on our
future operating or financing flexibility; our future ability to attract
strategic participants to share the costs of exploration, exploitation,
development and acquisition activities; and future plans and the financial and
technical resources of strategic participants.
The forward-looking information is based on present circumstances and
on our predictions respecting events that have not occurred, that may not occur
or that may occur with different consequences from those now assumed or
anticipated. Actual events or results may differ materially from those discussed
in the forward-looking statements as a result of various factors. The
forward-looking statements included in this report are made only as of the date
of this report. We disclaim any obligation to update any forward-looking
statements whether as a result of new information, future events or otherwise.
ITEM 3. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
Price Risk
Realized pricing for our oil production in both the United States and
Poland is primarily driven by the prevailing worldwide price of oil, subject to
gravity and other adjustments for the actual oil sold. Historically, oil prices
have been volatile and unpredictable. Price volatility relating to our oil
production in the United States is expected to continue in the foreseeable
future.
The limited volume and sources of our gas production in Poland mean we
cannot assure uninterruptible production or production in amounts that would be
meaningful to industrial users, which may depress the price we may be able to
obtain. The Polish Oil and Gas Company is the primary purchaser of domestic gas
in Poland. We expect that the prices we receive for the gas we produce will be
lower than would be the case in a more competitive setting and may be lower than
prevailing western European prices, at least until a fully competitive market
develops in Poland. All of our gas production in Poland is currently sold under
long-term contracts. Gas from the Kleka-11 well is sold at a fixed price of
$1.85 per mcf. Wilga-2 and Zaniemysl-3 gas is sold as a percentage of published
Polish gas tariffs, adjusted for energy content.
We currently do not engage in any hedging activities or have any
derivative financial instruments to protect ourselves against market risks
associated with oil and gas price fluctuations, although we may elect to do so
if we achieve a significant amount of production in Poland.
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Foreign Currency Risk
We have entered into various agreements in Poland denominated in the
Polish zloty. The Polish zloty is subject to exchange rate fluctuations that are
beyond our control. We do not currently engage in hedging transactions to
protect ourselves against foreign currency risks, nor do we intend to do so in
the foreseeable future; however, we have decided to reduce currency risk by
transferring dollars to zlotys on or about the occasion of making any
significant commitment payable in Polish currency.
ITEM 4. CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures that are designed to
ensure that information required to be disclosed by us in the reports that we
file or submit to the Securities and Exchange Commission under the Securities
Exchange Act of 1934, as amended, is recorded, processed, summarized and
reported within the time periods specified by the Securities and Exchange
Commission's rules and forms, and that information is accumulated and
communicated to our management, including our principal executive and principal
financial officers (whom we refer to in this periodic report as our Certifying
Officers), as appropriate to allow timely decisions regarding required
disclosure. Our management evaluated, with the participation of our Certifying
Officers, the effectiveness of our disclosure controls and procedures as of
September 30, 2006, pursuant to Rule 13a-15(b) under the Securities Exchange
Act. Based upon that evaluation, our Certifying Officers concluded that, as of
September 30, 2006, our disclosure controls and procedures were effective.
There were no changes in our internal control over financial reporting
that occurred during our most recently completed fiscal quarter that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
PART II--OTHER INFORMATION
ITEM 1A. RISK FACTORS
Information regarding risk factors appears in "Management's Discussion
and Analysis of Financial Condition and Results of Operations --Forward-Looking
Statements," in Part I -- Item 2 of this Form 10-Q and in Part I -- Item 1A of
our Annual Report on Form 10-K for the year ended December 31, 2005. There have
been no material changes from the risk factors previously disclosed in our
Annual Report on Form 10-K. The risks described in our Annual Report on Form
10-K for the year ended December 31, 2005, are not the only risks we face.
Additional risks and uncertainties not currently known to us or that we
currently deem to be immaterial also may materially and adversely affect our
business, financial condition, or operating results.
ITEM 6. EXHIBITS
The following exhibits are filed as a part of this report:
Exhibit
Number Title of Document Location
- ------------------- -------------------------------------------- ---------------
Item 31 Rule 13a-14(a)/15d-14(a) Certifications
- ------------------------------------------------------------------------------
31.01 Certification of Chief Executive Officer Attached
Pursuant to Rule 13a-14
18
Exhibit
Number Title of Document Location
- ------------------- -------------------------------------------- ---------------
31.02 Certification of Chief Financial Officer Attached
Pursuant to Rule 13a-14
Item 32 Section 1350 Certifications
- ------------------------------------------------------------------------------
32.01 Certification of Chief Executive Officer Attached
Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
32.02 Certification of Chief Financial Officer Attached
Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
- --------------------
* All exhibits are numbered with the number preceding the decimal indicating
the applicable SEC reference number in Item 601 and the number following
the decimal indicating the sequence of the particular document.
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.
FX ENERGY, INC.
(Registrant)
Date: November 7, 2006 By /s/ David N. Pierce
David N. Pierce, President,
Chief Executive Officer
Date: November 7, 2006 By /s/ Thomas B. Lovejoy
Thomas B. Lovejoy, Chief
Financial Officer
19