isram-10q093008.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Check
One
x Quarterly report
under Section 13 or 15(d) of the Securities Exchange Act of 1934 for the
quarterly period ended September 30, 2008
or
o Transition
report under Section 13 or 15(d) of the Securities Exchange Act of
1934
Commission
File Number 0-12500
ISRAMCO,
INC
(Exact
Name of registrant as Specified in its Charter)
|
Delaware
|
|
13-3145265
|
|
(State
or other Jurisdiction of Incorporation
or Organization)
|
|
I.R.S.
Employer Number
|
4801
Woodway Drive, HOUSTON, TX 77056
(Address
of Principal Executive Offices)
713-621-5946
(Registrant’s
Telephone Number, Including Area Code)
Indicate
by check whether the registrant: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes x No o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definition of “large accelerated filer”, “accelerated filer” and “smaller
reporting company ”in Rule 12b-2 of the Exchange Act.
Large
accelerated filer o
Accelerated filer o
Non-accelerated filer o (Do not check if a
smaller reporting company) Smaller reporting company x
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o No x
The
number of shares outstanding of the registrant’s Common Stock as November 14,
2008 was 2,717,691.
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Page
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PART
I - FINANCIAL INFORMATION:
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Item
1.
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3
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4
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5
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6
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Item
2.
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11
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Item
4T.
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14
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PART
II. OTHER INFORMATION
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Item
1.
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15
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Item
1A.
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15
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Item
2.
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15
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Item
3.
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15
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Item
4.
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15
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Item
5.
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15
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Item
6.
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15
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16
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Forward
Looking Statements
CERTAIN
STATEMENTS MADE IN THIS QUARTERLY REPORT ON FORM 10-Q ARE “FORWARD-LOOKING
STATEMENTS” WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995. FORWARD-LOOKING STATEMENTS CAN BE IDENTIFIED BY TERMINOLOGY SUCH AS
“MAY”, “WILL”, “SHOULD”, “EXPECTS”, “INTENDS”, “ANTICIPATES”, “BELIEVES”,
“ESTIMATES”, “PREDICTS”, OR “CONTINUE” OR THE NEGATIVE OF THESE TERMS OR OTHER
COMPARABLE TERMINOLOGY AND INCLUDE, WITHOUT LIMITATION, STATEMENTS BELOW
REGARDING EXPLORATION AND DRILLING PLANS, FUTURE GENERAL AND ADMINISTRATIVE
EXPENSES, FUTURE GROWTH, FUTURE EXPLORATION, FUTURE GEOPHYSICAL AND GEOLOGICAL
DATA, GENERATION OF ADDITIONAL PROPERTIES, RESERVES, NEW PROSPECTS AND DRILLING
LOCATIONS, FUTURE CAPITAL EXPENDITURES, SUFFICIENCY OF WORKING CAPITAL, ABILITY
TO RAISE ADDITIONAL CAPITAL, PROJECTED CASH FLOWS FROM OPERATIONS, OUTCOME OF
ANY LEGAL PROCEEDINGS, DRILLING PLANS, THE NUMBER, TIMING OR RESULTS OF ANY
WELLS, INTERPRETATION AND RESULTS OF SEISMIC SURVEYS OR SEISMIC DATA, FUTURE
PRODUCTION OR RESERVES, LEASE OPTIONS OR RIGHTS, PARTICIPATION OF OPERATING
PARTNERS, CONTINUED RECEIPT OF ROYALTIES, AND ANY OTHER STATEMENTS REGARDING
FUTURE OPERATIONS, FINANCIAL RESULTS, OPPORTUNITIES, GROWTH, BUSINESS PLANS AND
STRATEGY. BECAUSE FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTIES,
THERE ARE IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY
FROM THOSE EXPRESSED OR IMPLIED BY THESE FORWARD-LOOKING STATEMENTS. ALTHOUGH
THE COMPANY BELIEVES THAT EXPECTATIONS REFLECTED IN THE FORWARD-LOOKING
STATEMENTS ARE REASONABLE, IT CANNOT GUARANTEE FUTURE RESULTS, PERFORMANCE OR
ACHIEVEMENTS. MOREOVER, NEITHER THE COMPANY NOR ANY OTHER PERSON ASSUMES
RESPONSIBILITY FOR THE ACCURACY AND COMPLETENESS OF THESE FORWARD-LOOKING
STATEMENTS. THE COMPANY IS UNDER NO DUTY TO UPDATE ANY FORWARD-LOOKING
STATEMENTS AFTER THE DATE OF THIS REPORT TO CONFORM SUCH STATEMENTS TO ACTUAL
RESULTS.
Isramco
Inc.
(In
thousands, except for share information)
(Unaudited)
|
As
of
|
|
September
30,
2008
|
|
|
December
31,
2007
|
|
|
Assets
|
|
Current
Assets:
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
6,215 |
|
|
$ |
1,212 |
|
|
Accounts
receivable
|
|
|
11,702 |
|
|
|
6,595 |
|
|
Restricted
and designated cash
|
|
|
1,740 |
|
|
|
1,501 |
|
|
Deferred
income taxes
|
|
|
1,807 |
|
|
|
1,047 |
|
|
Prepaid
expenses and other
|
|
|
292 |
|
|
|
748 |
|
|
Total
current assets
|
|
|
21,756 |
|
|
|
11,103 |
|
|
|
|
|
|
|
|
|
|
|
|
Oil
and gas properties, at cost - successful efforts method:
|
|
|
|
|
|
|
|
|
|
Proved
properties
|
|
|
197,512 |
|
|
|
93,626 |
|
|
Unproved
properties
|
|
|
15,314 |
|
|
|
15,314 |
|
|
Other
|
|
|
244 |
|
|
|
81 |
|
|
Total
oil and gas properties
|
|
|
213,070 |
|
|
|
109,021 |
|
|
Accumulated
depreciation, depletion, amortization and impairment
|
|
|
(26,758
|
) |
|
|
(16,338
|
) |
|
Net
oil and gas properties
|
|
|
186,312 |
|
|
|
92,683 |
|
|
|
|
|
|
|
|
|
|
|
|
Marketable
securities, at market
|
|
|
3,504 |
|
|
|
6,809 |
|
|
Deferred
income taxes
|
|
|
2,140 |
|
|
|
— |
|
|
Other
|
|
|
635 |
|
|
|
113 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
214,347 |
|
|
$ |
110,708 |
|
| |
|
Liabilities
and Shareholders’ Equity
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
$ |
9,702 |
|
|
$ |
4,259 |
|
|
Current
maturities of long-term debt and bank overdraft
|
|
|
19,720 |
|
|
|
3,706 |
|
|
Derivative
liability
|
|
|
5,315 |
|
|
|
3,308 |
|
|
Accrued
interest – related party
|
|
|
2,893 |
|
|
|
— |
|
|
Total
current liabilities
|
|
|
37,630 |
|
|
|
11,273 |
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
51,955 |
|
|
|
24,000 |
|
|
Long-term
debt - related party
|
|
|
85,480 |
|
|
|
40,014 |
|
|
|
|
|
|
|
|
|
|
|
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Other
Long-term Liabilities:
|
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|
|
|
|
|
|
|
|
Asset
retirement obligations
|
|
|
8,069 |
|
|
|
2,670 |
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|
Derivative
liability - non-current
|
|
|
13,405 |
|
|
|
6,325 |
|
|
Deferred
income taxes
|
|
|
— |
|
|
|
955 |
|
|
Total
other long-term liabilities
|
|
|
21,474 |
|
|
|
9,950 |
|
|
|
|
|
|
|
|
|
|
|
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Commitments
and contingencies
|
|
|
— |
|
|
|
— |
|
|
Shareholders’
equity:
|
|
|
|
|
|
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Common
stock $0.0l par value; authorized 7,500,000 shares; issued 2,746,958
shares; outstanding 2,717,691 shares
|
|
|
27 |
|
|
|
27 |
|
|
Additional
paid-in capital
|
|
|
23,194 |
|
|
|
23,194 |
|
|
Accumulated
deficit
|
|
|
(6,358
|
) |
|
|
(1,012
|
) |
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Accumulated
other comprehensive income
|
|
|
1,109 |
|
|
|
3,426 |
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|
Treasury
stock, 29,267 shares at cost
|
|
|
(164
|
) |
|
|
(164
|
) |
|
Total
shareholders’ equity
|
|
|
17,808 |
|
|
|
25,471 |
|
|
Total
liabilities and shareholders’ equity
|
|
$ |
214,347 |
|
|
$ |
110,708 |
|
See notes
to the consolidated financial statements.
Isramco
Inc.
(in
thousands, except for share information)
(Unaudited)
|
|
|
Three
Months Ended
September
30,
|
|
|
Nine
Months Ended
September
30,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil
and gas sales
|
|
$ |
17,855 |
|
|
$ |
5,877 |
|
|
$ |
44,203 |
|
|
$ |
13,528 |
|
|
Operator
fees from related party
|
|
|
— |
|
|
|
(16
|
) |
|
|
— |
|
|
|
19 |
|
|
Office
services to affiliate and other
|
|
|
11 |
|
|
|
165 |
|
|
|
132 |
|
|
|
547 |
|
|
Other
|
|
|
— |
|
|
|
— |
|
|
|
134 |
|
|
|
— |
|
|
Equity
in earnings of unconsolidated affiliates
|
|
|
— |
|
|
|
(671
|
) |
|
|
— |
|
|
|
1,598 |
|
|
Total
revenues
|
|
|
17,866 |
|
|
|
5,355 |
|
|
|
44,469 |
|
|
|
15,692 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease
operating expense, transportation and taxes
|
|
|
6,435 |
|
|
|
2,207 |
|
|
|
15,231 |
|
|
|
5,188 |
|
|
Depreciation,
depletion and amortization
|
|
|
3,263 |
|
|
|
1,699 |
|
|
|
7,283 |
|
|
|
4,384 |
|
|
Impairment
of oil and gas properties
|
|
|
3,088 |
|
|
|
— |
|
|
|
3,137 |
|
|
|
— |
|
|
Accretion
expense
|
|
|
145 |
|
|
|
38 |
|
|
|
300 |
|
|
|
82 |
|
|
Exploration
cost
|
|
|
— |
|
|
|
286 |
|
|
|
— |
|
|
|
321 |
|
|
General
and administrative
|
|
|
659 |
|
|
|
739 |
|
|
|
1,809 |
|
|
|
2,066 |
|
|
Total
operating expenses
|
|
|
13,590 |
|
|
|
4,969 |
|
|
|
27,760 |
|
|
|
12,041 |
|
|
Operating
Income
|
|
|
4,276 |
|
|
|
386 |
|
|
|
16,709 |
|
|
|
3,651 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Expenses (Income)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expenses, net
|
|
|
2,828 |
|
|
|
1,796 |
|
|
|
6,713 |
|
|
|
4,491 |
|
|
Unrealized
loss (gain) on marketable securities
|
|
|
— |
|
|
|
280 |
|
|
|
— |
|
|
|
(229
|
) |
|
Realized
gain on sale of investment and other
|
|
|
— |
|
|
|
(42
|
) |
|
|
— |
|
|
|
(1,689
|
) |
|
Net
loss (gain) on derivative contracts
|
|
|
(50,124
|
) |
|
|
(678
|
) |
|
|
17,917 |
|
|
|
2,919 |
|
|
Total
other expenses (Income)
|
|
|
(47,296
|
) |
|
|
1,356 |
|
|
|
24,630 |
|
|
|
5,492 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(Loss) Before Income Taxes
|
|
|
51,572 |
|
|
|
(970
|
) |
|
|
(7,921
|
) |
|
|
(1,841
|
) |
|
Income
Tax Benefit (expense)
|
|
|
(17,084
|
) |
|
|
323 |
|
|
|
2,575 |
|
|
|
626 |
|
|
Net
Income (Loss)
|
|
$ |
34,488 |
|
|
$ |
(647 |
) |
|
$ |
(5,346 |
) |
|
$ |
(1,215 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income (Loss) Per Share - Basic and Diluted
|
|
$ |
12.69 |
|
|
$ |
(0.24 |
) |
|
$ |
(1.97 |
) |
|
$ |
(0.45 |
) |
|
Weighted
average number of shares outstanding-basic and diluted
|
|
|
2,717,691 |
|
|
|
2,717,691 |
|
|
|
2,717,691 |
|
|
|
2,717,691 |
|
See notes
to the consolidated financial statements
Isramco
Inc.
(In
thousands)
(Unaudited)
|
|
|
Nine
Months Ended September 30,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(5,346 |
) |
|
$ |
(1,215 |
) |
|
|
|
|
|
|
|
|
|
|
|
Adjustments
to reconcile net loss to net cash provided by (used in)
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation,
depletion, amortization and impairment
|
|
|
10,420 |
|
|
|
4,384 |
|
|
Accretion
expense
|
|
|
300 |
|
|
|
82 |
|
|
Unrealized
gain on marketable securities
|
|
|
— |
|
|
|
(333
|
) |
|
Equity
in earnings of unconsolidated affiliates
|
|
|
— |
|
|
|
(1,189
|
) |
|
Changes
in deferred taxes
|
|
|
(2,618
|
) |
|
|
(1,069
|
) |
|
Realized
gain on sale of investment
|
|
|
— |
|
|
|
(1,664
|
) |
|
Net
unrealized loss on derivative contracts
|
|
|
8,950 |
|
|
|
5,740 |
|
|
|
|
|
|
|
|
|
|
|
|
Changes
in components of working capital and other assets and
liabilities
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(5,107
|
) |
|
|
(3,432
|
) |
|
Prepaid
expenses and other current assets
|
|
|
772 |
|
|
|
95 |
|
|
Accounts
payable and accrued liabilities
|
|
|
5,243 |
|
|
|
(1,577
|
) |
|
Net
cash provided by (used in) operating activities
|
|
|
12,614 |
|
|
|
(178
|
) |
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
Addition
to property and equipment, net
|
|
|
(98,750
|
) |
|
|
(87,082
|
) |
|
Payments
on restricted deposit, net
|
|
|
(238
|
) |
|
|
15,499 |
|
|
Proceeds
from sale of subsidiary - Magic
|
|
|
— |
|
|
|
2,150 |
|
|
Proceeds
from sale of gas properties and equipment
|
|
|
— |
|
|
|
36 |
|
|
Proceeds
from sale of other investment
|
|
|
— |
|
|
|
1,670 |
|
|
Purchase
of marketable securities
|
|
|
— |
|
|
|
2,880 |
|
|
Proceeds
from sale of marketable securities
|
|
|
— |
|
|
|
(740 |
) |
|
Net
cash used in investing activities
|
|
|
(98,988
|
) |
|
|
(65,587 |
) |
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows From Financing Activities:
|
|
|
|
|
|
|
|
|
|
Net
proceeds from loans - related parties
|
|
|
53,138 |
|
|
|
35,526 |
|
|
Payments
for financing cost
|
|
|
(952
|
) |
|
|
— |
|
|
Proceeds
from long-term debt
|
|
|
54,000 |
|
|
|
35,300 |
|
|
Repayment
of long-term loans – related party
|
|
|
(4,779
|
) |
|
|
— |
|
|
Repayment
of long-term debt
|
|
|
(10,800
|
) |
|
|
(5,533
|
) |
|
Borrowings
of short - term debt and bank overdraft
|
|
|
770 |
|
|
|
1,971 |
|
|
Net
cash provided by financing activities
|
|
|
91,377 |
|
|
|
67,264 |
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase in cash and cash equivalents
|
|
|
5,003 |
|
|
|
1,499 |
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at beginning of period
|
|
|
1,212 |
|
|
|
573 |
|
|
Cash
and cash equivalents at end of period
|
|
$ |
6,215 |
|
|
$ |
2,072 |
|
See notes
to the consolidated financial statements
Isramco
Inc.
(Unaudited)
Note
1 - Basis of Presentation
As used
in these financial statements, the terms “Company” and “Isramco” refer to
Isramco, Inc. and its subsidiaries, Jay Petroleum, L.L.C. (“Jay Petroleum”), Jay
Management L.L.C. (“Jay Management”), IsramTec Inc. (“IsramTec”), Isramco
Resources LLC and Isramco Energy LLC.
The
accompanying unaudited consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the SEC instructions to Form 10-Q. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting of only normal recurring
adjustments) considered necessary for a fair presentation have been included.
Results for the three-month period ended September 30, 2008 are not necessarily
indicative of the results that may be expected for the year ended December 31,
2008. For further information, refer to the consolidated financial statements
and footnotes thereto included in Isramco’s Annual Report on Form 10-K for the
fiscal year ended December 31, 2007.
Certain
re-classification of prior year amounts has been made to conform to current
presentation.
On March
27, 2008 (the “Acquisition Date”), we purchased certain oil and gas properties
located in Texas, Utah, Colorado, New Mexico and Oklahoma from GFB Acquisition -
I, L.P. (“GFB”) and Trans Republic Resources, Ltd. (“Trans Republic,” and,
together with GFB, the “Sellers”) for a preliminary purchase price
of approximately $102 million (before adjustments as defined in the
agreement). Although the acquisition was closed on March 27, 2008, the effective
date of the purchase was determined to be January 1, 2008 (the “Effective
Date”). Accordingly, we are entitled to the net revenues, less direct operating
expenses, of the acquired properties from the Effective Date through the
Acquisition Date. This resulted in an adjustment to the preliminary purchase
price. These financial statements reflect the assets acquired and
operations related to those assets from the Acquisition Date through September
30, 2008.
Note
2 - Consolidation
The
consolidated financial statements include the accounts of Isramco
and its wholly-owned subsidiaries: Jay Petroleum, L.L.C. (“Jay
Petroleum”), Jay Management L.L.C. (“Jay Management”), IsramTec Inc.
(“IsramTec”), Isramco Resources LLC and Isramco Energy LLC. Inter-company
balances and transactions have been eliminated in consolidation.
Note
3 - Derivative Instruments
As more
fully discussed in Note 7 to Consolidated Financial Statements included in
Isramco’s Annual Report on Form 10-K for the year ended December 31, 2007, We
follow SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities (SFAS 133), as amended by SFAS
No. 138, Accounting for
Certain Derivative Instruments and Certain Hedging Activities, an amendment of
FASB Statement No. 133, SFAS No. 149, Amendment of Statement No. 133
on Derivative Instruments and Hedging Activities and SFAS No. 155,
Accounting for Certain Hybrid
Financial Instruments. From time to time, we may hedge a portion of our
forecasted oil and natural gas production. Our derivative contracts
consists primarily swap transactions in which we hedge the variability of cash
flow related to a forecasted transaction. We elected to not designate any
of these positions for hedge accounting. Accordingly, we record the net change
in the mark-to-market valuation of these positions, as well as payments and
receipts on settled contracts, in net gain (loss) on derivative contracts on the
consolidated statements of operations.
During
the second quarter of 2008, we made the decision to mitigate a portion of our
interest rate risk with interest rate swaps. These swap instruments reduce our
exposure to market rate fluctuations by converting variable interest rates to
fixed interest rates. These interest rate swaps convert a portion of our
variable rate interest of our Scotia debt (as defined in Note 8, “Long-term Debt”) to a fixed
rate obligation, thereby reducing the exposure to market rate fluctuations. We
have elected to designate these positions for hedge accounting and therefore the
unrealized gains and losses are recorded in accumulated other comprehensive
loss. The Company measures hedge effectiveness by assessing the changes in the
fair value or expected future cash flows of the hedged item.
Note
4 - New Accounting Pronouncements
In May
2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted
Accounting Principles, (SFAS 162), which identifies a consistent framework for
selecting accounting principles to be used in preparing financial statements for
nongovernmental entities that are presented in conformity with United States
generally accepted accounting principles (GAAP). The current GAAP hierarchy was
criticized due to its complexity, ranking position of FASB Statements of
Financial Accounting Concepts and the fact that it is directed at auditors
rather than entities. SFAS 162 will be effective 60 days following the
United States Securities and Exchange Commission’s (SEC’s) approval of the
Public Company Accounting Oversight Board amendments to AU Section 411, The
Meaning of Present Fairly in Conformity with Generally Accepted Accounting
Principles. The FASB does not expect that SFAS 162 will have a change in
current practice, and the Company does not believe that SFAS 162 will have an
impact on operating results, financial position or cash flows.
In March
2008, the Financial Accounting Standards Board (the “FASB”) issued Statement of
Financial Accounting Standards (“SFAS”)
No. 161, Disclosures about Derivative Instruments and Hedging Activities—an
amendment of FASB Statement No. 133 (“SFAS
No. 161”). SFAS No. 161 is intended to improve financial reporting about
derivative instruments and hedging activities by requiring
enhanced disclosures to enable investors to better understand how and why an
entity uses derivative instruments and their effects
on an entity’s financial position, financial performance and cash flows. SFAS
No. 161 is effective for financial statements issued
for fiscal years and interim periods beginning after November 15, 2008 with
early application encouraged. We are currently evaluating the impact of adopting
SFAS No. 161 on its disclosures included within the notes to its consolidated
financial statements.
In
December 2007, the FASB issued SFAS No. 141(R), Business Combinations (“SFAS No.
141(R)”). SFAS No. 141(R) applies to all
transactions or other events in which an entity obtains control of one or more
businesses. SFAS No. 141(R) establishes how the acquirer
of a business should recognize, measure and disclose in its financial statements
the identifiable assets and goodwill acquired, the
liabilities assumed and any noncontrolling interest in the acquired business.
SFAS No. 141(R) is applied prospectively for all business
combinations with an acquisition date on or after the beginning of the first
annual reporting period beginning on or after December
15, 2008 with early application prohibited. SFAS No. 141(R) will not have an
impact on our historical Consolidated Financial Statements and will be applied
to business combinations completed, if any, on or after January 1,
2009.
In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements—an amendment of ARB
No. 51 (“SFAS No. 160”). SFAS No. 160 establishes accounting and reporting
standards for the noncontrolling interest in a subsidiary
and for the deconsolidation of a subsidiary. SFAS No. 160 requires entities to
report noncontrolling interests as a separate component
of shareholders’ equity in the consolidated financial statements. The amount of
earnings attributable to the parent and to the
noncontrolling interests should be clearly identified and presented on the face
of the consolidated statements of income. Additionally,
SFAS No. 160 requires any changes in a parent’s ownership interest of its
subsidiary, while retaining its control, to be accounted
for as equity transactions. SFAS No. 160 is effective for fiscal years beginning
on or after December 15, 2008 and interim periods
within those fiscal years. We are not anticipating any impact of adopting SFAS
No. 160 on our consolidated financial position
and results of operations.
In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities—including an
amendment to SFAS No. 115 (“SFAS No. 159”). SFAS No. 159 permits entities to
elect to measure many financial instruments and certain other items at fair
value. Upon adoption of SFAS No. 159, an entity may elect the fair value option
for eligible items that exist at the adoption date. Subsequent to the initial
adoption, the election of the fair value option should only be made at initial
recognition of the asset or liability or upon a remeasurement event, which gives
rise to new-basis accounting. The decision about whether to elect the fair value
option is applied on an instrument-by-instrument basis is irrevocable and is
applied only to an entire instrument and not only to specified risks, cash flows
or portions of that instrument. SFAS No. 159 does not affect any existing
accounting standards that require certain assets and liabilities to be carried
at fair value nor does it eliminate disclosure requirements included in other
accounting standards. We adopted SFAS No. 159 effective January 1, 2008 and did
not elect the fair value option for anyexisting eligible items.
In March
2006, the FASB issued SFAS No. 157, “Fair value measurements.” SFAS No. 157
provides a definition of fair value and provides a framework for measuring fair
value. The standard also requires additional disclosures on the use of fair
value in measuring assets and liabilities. SFAS No. 157 establishes a fair value
hierarchy and requires disclosure of fair value measurements within that
hierarchy. In February 2008, the FASB issued a Staff Position on SFAS No. 157,
FASB Staff Position No. FAS 157-2, “EFFECTIVE DATE OF FASB STATEMENT NO. 157,”
(FSP 157-2). FSP 157-2 delays the effective date of SFAS No. 157 for all
nonrecurring fair value measurements of nonfinancial assets and nonfinancial
liabilities until fiscal years beginning after November 15, 2008, except as
provided by FSP 157-2. SFAS No. 157 is effective for fiscal years beginning
after November 15, 2007 and interim periods within those years. FSP 157-2
requires an entity that does not adopt SFAS No. 157 in its entirety to disclose,
at each reporting date until fully adopted, that it has only partially adopted
SFAS No. 157 and the categories of assets and liabilities recorded or disclosed
at fair value to which SFAS No. 157 has not been applied. Effective
January 1, 2008, we adopted the provisions of SFAS No. 157 (see Note
10).
Note
5 - Supplemental Cash Flow Information
Cash paid
for interest and income taxes was as follows for the period ended September 30
(in thousands):
|
|
|
2008
|
|
|
2007
|
|
|
Interest
|
|
$ |
6,226 |
|
|
$ |
1,377 |
|
|
|
|
|
|
|
|
|
|
|
|
Income
taxes
|
|
$ |
80 |
|
|
$ |
— |
|
The
consolidated statements of cash flows exclude the following non-cash
transactions:
|
w
|
Asset
retirement obligation from acquired properties of $5,098 thousand included
in the oil and gas properties
|
|
w
|
Oil
and gas properties of $200 thousand included in accounts
payable
|
Note
6 - Transaction with GFB Acquisition 1, L.P.and Trans Republic Resources
Ltd
On March
27, 2008, we purchased certain oil and gas properties located in Texas, Oklahoma
and New Mexico from GFB Acquisition - I, L.P. (“GFB”) and Trans Republic
Resources, Ltd. (“Trans Republic,” and, together with GFB, the “Sellers”) for an
aggregate preliminary purchase price of $102 million. Based upon
on a reserve report as of January 1, 2008 prepared by a third party
consulting firm , total net proved developed producing reserves are
approximately 3.26 million barrels of oil and 18 BCF of natural
gas.
We funded
the purchase price from loans the Company obtained during 2008 in the total
principle amount of $102.9 million, in addition see Note 8 (“Long-term
Debt”).
The
following table summarizes the preliminary estimated fair values of assets that
we acquired and the liabilities assumed in connection with the acquisition of
these properties:
|
(In
thousands)
|
|
|
|
|
|
Oil
and gas properties (after adjustments)
|
|
$
|
102,241
|
|
|
Asset
retirement obligation
|
|
|
(4,739
|
)
|
|
Net
assets acquired
|
|
$
|
97,502
|
|
The
following unaudited pro forma information assumes that GFB and Trans Republic
acquisition and the Five States acquisition occurred as of January 1,
2007.
The pro
forma results are not necessarily indicative of what actually would have
occurred had the acquisition been in effect for the period
presented.
|
(In
thousands, except for share data)
|
|
AS
REPORTED
|
|
|
PRO
FORMA
|
|
|
Nine months ended September 30,
2008:
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
44,469 |
|
|
$ |
51,954 |
|
|
Net
loss
|
|
|
(5,346
|
) |
|
|
(3,980
|
) |
|
Loss
per share - basic and diluted
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
(1.97 |
) |
|
$ |
(1.46 |
) |
| |
|
|
|
|
|
|
|
|
|
Nine months ended September 30,
2007:
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
15,692 |
|
|
$ |
36,708 |
|
|
Net
Income (loss)
|
|
|
(1,215 |
) |
|
|
479 |
|
|
Income
(Loss) per share - basic and diluted
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
(0.45 |
) |
|
$ |
0.18 |
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
2007:
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
5,355 |
|
|
$ |
11,643 |
|
|
Net
loss
|
|
|
(647
|
) |
|
|
(825
|
) |
|
Loss
per share - basic and diluted
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
(0.24 |
) |
|
$ |
(0.30 |
) |
Note
7 - Derivative Contracts
We follow
SFAS No. 133, Accounting
for Derivative Instruments and Hedging Activities (SFAS 133), as
amended by SFAS No. 138, Accounting for Certain Derivative
Instruments and Certain Hedging Activities, an amendment of FASB Statement
No. 133, SFAS No. 149, Amendment of Statement No. 133
on Derivative Instruments and Hedging Activities and SFAS No. 155,
Accounting for Certain Hybrid
Financial Instruments. From time to time, we may hedge a portion of our
forecasted oil and natural gas production. Our derivative contracts
consists primarily swap transactions in which we hedge the variability of cash
flow related to a forecasted transaction. We elected to not designate any
of these positions for hedge accounting. Accordingly, we record the net change
in the mark-to-market valuation of these positions, as well as payments and
receipts on settled contracts, in net gain (loss) on derivative contracts on the
consolidated statements of operations.
As of
September 30, 2008, we had a $18.7 million derivative liability, $5.3 million of
which was classified as current. We recorded a net derivative loss of
$17.9 million ($8.9 million unrealized loss and a $9 million net loss for cash
paid on settled contracts) for the period ended September 30, 2008.
During
the second quarter of 2008, we made the decision to mitigate a portion of our
interest rate risk with interest rate swaps. These swap instruments reduce our
exposure to market rate fluctuations by converting variable interest rates to
fixed interest rates. These interest rate swaps convert a portion of our
variable rate interest of our Scotia debt (as defined in Note 8, “Long-term Debt”) to a fixed
rate obligation, thereby reducing the exposure to market rate fluctuations. We
have elected to designate these positions for hedge accounting and therefore the
unrealized gains and losses are recorded in accumulated other comprehensive
loss. The Company measures hedge effectiveness by assessing the changes in the
fair value or expected future cash flows of the hedged item. For the nine months
ended September 30, 2008, we have recorded changes in the fair value of our
interest rate swap contracts totaling $135 thousands in accumulative other
comprehensive income. At September 30, 2008, the derivative liability associated
with these interest rate contracts is $135 thousands.
The
following is the Company’s open swap contracts positions at September 30,
2008:
|
Swap
Contracts
|
|
|
Natural
Gas
|
|
Crude
Oil
|
|
|
|
Volume
(MMBTU)
|
Price
range
($/MMBTU)
|
|
Weighted
- Average
Price
($/MMBTU)
|
|
Volume
(Bbl)
|
Price
range
($/MMBTU)
|
|
Weighted
- Average
Price
($/Bbl)
|
|
|
2008
|
562,686
|
8.20-10.32
|
|
$
|
8.62
|
|
102,892
|
64.15-109.56
|
|
$
|
82.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
2,060,928
|
7.77-9.60
|
|
|
8.26
|
|
286,596
|
63.90-104.25
|
|
|
80.45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
1,785,648
|
7.49-8.32
|
|
|
7.88
|
|
254,868
|
63.31
-101.70
|
|
|
79.59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
764,820
|
8.22
|
|
|
8.22
|
|
210,31
7
|
82.10-88.55
|
|
|
87.53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
174,222
|
8.65
|
|
|
8.65
|
|
31,953
|
88.20
|
|
|
88.20
|
|
On April
28, 2008, we entered into an interest rate swap agreement to hedge our
LIBOR-based debt. The aggregate notional amount of the swap is
$32 million and the agreement expires on February 28, 2011. We
account for this hedging activity in accordance with SFAS 133 and have elected
to designate this derivate instrument as a cash flow hedge.
On
October 21, 2008, we entered into an interest rate swap agreement to hedge our
LIBOR-based debt. The aggregate notional amount of the swap is $6 million
and the agreement expires on February 28, 2011.
At
September 30, 2008 we do not except nonperformance by our counter
parties.
Note
8 - Long-Term Debt
In
connection with the acquisition of the GFB Acquisition - I, L.Pand Trans
Republic Resources, Ltd. properties (see Note 1), we obtained the following
financing:
In
February and March, 2008 we obtained loans from
JOEL, a related party, in the aggregate principal amount of $48.9 million,
repayable at the end of 4 months at an interest rate of LIBOR plus
1.25% per annum. Pursuant to a loan agreement signed in June 2008,
the maturity date of this loan was extended for an additional period of seven
years. Interest accrues at a per annum rate of LIBOR plus
6%. Principal and interest are due and payable in four equal annual
installments, commencing on June 30, 2012. At any time we can make prepayments
without premium or penalty. Mr. Jackob Maimon, Isramco’s president
and director is a director of JOEL and Mr. Haim Tsuff, Isramco’s Chief Executive
Officer and Chairman, is a controlling shareholder of JOEL.
Pursuant
to a Credit Agreement dated as of March 27, 2008 (the “Credit Agreement”)
between Isramco Resources and the Bank of Nova Scotia (“Scotia”), as
administrative agent, we obtained a $54 million line of credit. The Credit
Agreement was subsequently amended and restated, effective April 28, 2008, to
add Capital One, N.A. as Syndication Agent. Amounts outstanding under the credit
line are payable by March 27, 2012 and are secured by a first lien and security
interest on the real and personal property of Isramco Resources. Interest
on amounts outstanding accrues at a per annum rate equal to LIBOR plus
2%.
As of
September 30, 2008, we were in compliance with all debt
covenants.
Note
9 - Comprehensive Income (Loss)
Our
comprehensive income (loss) for the three and nine month period ended September
30, 2008 and 2007 was as follows:
|
|
|
Three
Months Ended
September
30
|
|
|
Nine
Months Ended
September
30
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Net
gain (loss)
|
|
$ |
34,488 |
|
|
$ |
(647 |
) |
|
$ |
(5,346 |
) |
|
$ |
(1,215 |
) |
|
Other
comprehensive gain (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale
securities, net of tax
|
|
|
(1,039 |
) |
|
|
(135 |
) |
|
|
(2,182 |
) |
|
|
617 |
|
|
Change
in unrealized gains on hedging instruments, net of tax
|
|
|
(167 |
) |
|
|
— |
|
|
|
(135 |
) |
|
|
— |
|
|
Foreign
currency translation adjustments, net of tax
|
|
|
— |
|
|
|
669 |
|
|
|
— |
|
|
|
577 |
|
|
Comprehensive
gain (loss)
|
|
$ |
33,282 |
|
|
$ |
(113 |
) |
|
$ |
(7,663 |
) |
|
$ |
(21 |
) |
Note
10 - Fair Value of Financial Instruments
Effective
January 1, 2008, we adopted the provisions of SFAS No. 157, Fair Value
measurements, for all financial instruments. SFAS 157 establishes a three-level
valuation hierarchy for disclosure of fair value measurements. The valuation
hierarchy is based upon the transparency of inputs to the valuation of an asset
or liability as of the measurement date. The three levels are defined as
follows:
|
w
|
Level
1 — Quoted prices (unadjusted) for identical assets or liabilities in
active markets.
|
|
w
|
Level
2 — Quoted prices for similar assets or liabilities in active markets;
quoted prices for identical or similar assets or liabilities in markets
that are not active; and model-derived valuations whose inputs or
significant value drivers are
observable.
|
|
w
|
Level
3 — Significant inputs to the valuation model are
unobservable.
|
The
following table presents Isramco’s assets and liabilities recognized in the
Consolidated Balance Sheet and measured at fair value on
a recurring basis as of September 30, 2008 (in thousands):
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Marketable
securities: |
|
$ |
3,504 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
3,504 |
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
from derivatives contracts
|
|
$ |
— |
|
|
$ |
18,720 |
|
|
$ |
— |
|
|
$ |
18,720 |
|
Note
11 - Impairment
In
September 2008, we identified a significant decrease in the volume of gas
produced from certain of our oil and gas properties located in Barnett Shale
formation in Parker County, Texas. In addition, we’ve experienced an increase in
lease operating expenses and transportation costs associated with these wells.
As a result of these events, we analyzed these properties for impairment and
recorded a $3,088,000 impairment charge for the three months ended September 30,
2008.
THE
FOLLOWING COMMENTARY SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED
FINANCIAL STATEMENTS AND RELATED NOTES CONTAINED ELSEWHERE IN THIS REPORT ON
FORM 10-Q. THE DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS
AND UNCERTAINTIES. THESE STATEMENTS RELATE TO FUTURE EVENTS OR OUR FUTURE
FINANCIAL PERFORMANCE. IN SOME CASES, YOU CAN IDENTIFY THESE FORWARD-LOOKING
STATEMENTS BY TERMINOLOGY SUCH AS “MAY,” “WILL,” “SHOULD,” “EXPECT,” “PLAN,”
“ANTICIPATE,” “BELIEVE,” “ESTIMATE,” “PREDICT,” “POTENTIAL,” “INTEND,” OR
“CONTINUE,” AND SIMILAR EXPRESSIONS. THESE STATEMENTS ARE ONLY PREDICTIONS. OUR
ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE
FORWARD-LOOKING STATEMENTS AS A RESULT OF A VARIETY OF FACTORS, INCLUDING, BUT
NOT LIMITED TO, THOSE SET FORTH UNDER “RISK FACTORS” AND ELSEWHERE IN THIS
REPORT ON FORM 10-Q. ISRAMCO INC. DISCLAIMS ANY OBLIGATION TO UPDATE SUCH
FORWARD LOOKING STATEMENTS.
Overview
Isramco,
Inc., a Delaware corporation incorporated in 1982, together with its
wholly-owned subsidiaries, Isramco Energy LLC (“IEN”), Jay Petroleum LLC (“Jay
Petroleum”), Isramco Resources LLC (“ISR”) and Jay Management LLC (“Jay
Management”) (collectively “Isramco” or the “Company”), explores for, develops
and produces natural gas and crude oil in the United States of America (United
States).
On March
27, 2008 (the “Acquisition Date”), we purchased certain oil and gas properties
located in Texas, New Mexico, Utah, Colorado and Oklahoma from GFB Acquisition -
I, L.P. (“GFB”) and Trans Republic Resources, Ltd. (“Trans Republic,” and,
together with GFB, the “Sellers”) for a preliminary purchase price
of approximately $102 million (before adjustments as defined in the
agreement). Although the acquisition was closed on March 27, 2008, the effective
dated of the purchase was determined to be January 1, 2008 (the “Effective
Date”). Accordingly, we are entitled to the net revenues, less direct
operating expenses, of the acquired properties from the Effective Date through
the Acquisition Date. This will result in an adjustment to the preliminary
purchase price. These financial statements reflect the assets
acquired and operations related to those assets from the Acquisition Date
through September 30, 2008.
Critical
Accounting Policies
In
response to the Release No. 33-8040 of the Securities and Exchange Commission,
“Cautionary Advice Regarding Disclosure and Critical Accounting Policies”, we
identified the accounting principles which we believe are most critical to the
reported financial status by considering accounting policies that involve the
most complex of subjective decisions or assessments.
We
maintain allowances for doubtful accounts for estimated losses resulting from
the inability of customers to make required payments. If the financial condition
of customers were to deteriorate, resulting in an impairment of their ability to
make payments, additional allowances may be required.
We record
an investment impairment charge when we believe an investment has experienced a
decline in value that is other than is temporary. Future adverse changes in
market conditions or poor operating results of underlying investments could
result in losses or an inability to recover the carrying value of the investment
that may not be reflected in an investment’s current carrying value, thereby
possibly requiring an impairment charge in the future.
We record
a valuation allowance to reduce our deferred tax assets to the amount that is
more likely than not to be realized. While we have considered future taxable
income and ongoing prudent and feasible tax planning strategies in assessing the
need for the valuation allowance, in the event that we were to determine that it
would be able to realize our deferred tax assets in the future in excess of our
net recorded amount, an adjustment to the deferred tax asset would increase net
income in the period such determination was made.
We do not
participate in, nor have we created, any off-balance sheet special purpose
entities or other off-balance sheet financing.
We record
a liability for asset retirement obligation at fair value in the period in which
it is incurred and a corresponding increase in the carrying amount of the
related long live assets.
Liquidity
and Capital Resources
We
finance our operations primarily from cash generated by
operations. During the nine months ended September 30, 2008, our
consolidated cash and cash equivalents increased by $5,003,000, from $1,212,000
at December 31, 2007 to $6,215,000 at September 30, 2008.
Net cash
provided by operating activities was $12,614,000 for the nine months ended
September 30, 2008 compared to ($178,000) used in operating activities for the
same period in 2007. The increase is primarily attributable to the GFB and Trans
Republic Acquisition, discussed herein, along with an increase in oil and gas
prices, which in turn was partially offset by the commodity hedging agreements
in effect.
Net cash
used in investing activities for the nine months ended September 30, 2008 was
$98,988,000 compared to $65,587,000 for the same period in 2007. The
cash used in the 2008 period is primarily attributable to the GFB and Trans
Republic Acquisition.
Net cash
provided by financing activities was $91,377,000 for the nine months ended
September 30, 2008 compared to net cash provided by financing activities of
$67,264,000 for the same period in 2007. Our financing activities in
2008 primarily relate to borrowings in connection with the GFB and Trans
Republic Acquisition.
We
believe that existing cash balances and cash flows from operating activities
will be sufficient to meet our financing needs. The Company intends to finance
its ongoing oil and gas exploration activities from working
capital.
Summary
of Exploration, Development and Production efforts in the United
States
Isramco,
through its wholly owned subsidiaries, IEN, Jay Petroleum, ISR and Jay
Management, is involved in oil and gas exploration, development production and
operation of wells in the United States. Through its subsidiaries, Isramco owns
varying working interests in oil and gas wells in Louisiana, Texas, Oklahoma,
New Mexico, Colorado, Utah and Wyoming and currently serves as operator of
approximately 270 wells located in Texas and New Mexico. On October 1, we
assumed operations on an additional 364 wells located in Texas, New Mexico and
Oklahoma.
Transaction with GFB Acquisition – 1,
L.P. and Trans Republic Resources Ltd. On February 15, 2008, we entered
into Purchase and Sale Agreements (the “Agreements”) with GFB Acquisition - I,
L.P. (“GFB”) and Trans Republic Resources, Ltd. (“Trans Republic,” and, together
with GFB, the “Sellers”) pursuant to which we agreed to purchase the Sellers’
interests in certain oil and gas properties located in Texas, New Mexico, Utah,,
Colorado and Oklahoma for an aggregate purchase price of approximately $102
million. The transaction includes mainly operated oil and gas properties in
approximately 40 fields (approximately 490 Leases) in East Texas, Texas Gulf
Coast, Permian, Anadarko and San Juan Basins. Significant fields are
the Alabama Ferry Field in East Texas, the Bagley Field in West Texas and New
Mexico, and the Esperson Dome Field on the Texas Gulf Coast. Net daily
production from the properties is approximately 600 Barrels of oil and 3.6 MMCF
of gas. Based upon a reserve report prepared by a third party
consulting firm as of January 1, 2008, total net proved reserves are
approximately 3.26 million barrels of oil and 18 BCF of natural gas. The closing
of the transaction was on March 27, 2008.
The
acquisition from GFB and Trans Republic was funded, during 2008, through loans
in the total principle amount of $102 million, consisting of $54 million from a
commercial bank) and $48.9 million from related parties..
Contemporaneously
with signing the agreement, we signed swap contracts with a commercial bank
for an aggregate volume of 605,016 barrels of crude oil during 48 months and
3,433,348 MMBTU of natural gas during 48 months commencing April 1, 2008, which
constitutes approximately 74% of the forecast production for
2008-2011and 18% of the forecasted production for 2012.
The
following pro forma information assumes the acquisition of the GFB and Trans
Republic properties occurred as of January 1, 2007
|
December
31, 2007
|
|
Isramco
Inc
|
|
GFB
Acquisition
|
Isramco
Inc Combined
With
GFB
|
|
RESERVES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PROVED
(MMCFE)
|
|
|
50,353
|
|
|
|
37,694
|
|
|
|
88,047
|
|
|
Oil
(BBls)
|
|
|
2,003,081
|
|
|
|
3,258,447
|
|
|
|
5,261,528
|
|
|
Plant
Product (BBls)
|
|
|
2,163,661
|
|
|
|
—
|
|
|
|
2,163,661
|
|
|
Gas
(Mcf)
|
|
|
25,352,566
|
|
|
|
18,143,838
|
|
|
|
43,496,404
|
|
|
VOLUME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil
(BBls)
|
|
|
96,793
|
|
|
|
220,487
|
|
|
|
317,280
|
|
|
Plant
Product (BBls)
|
|
|
100,534
|
|
|
|
—
|
|
|
|
100,534
|
|
|
Gas
(Mcf)
|
|
|
1,550,789
|
|
|
|
1,338,926
|
|
|
|
2,889,715
|
|
|
TOTAL PRODUCTION
(MMCFE)
|
|
|
2,735
|
|
|
|
2,662
|
|
|
|
5,397
|
|
|
Daily production
(MMfce/d)
|
|
|
7.5
|
|
|
|
7.3
|
|
|
|
14.8
|
|
On
October 19, 2006, Jay Petroleum and Delek Energy US Inc. (“Delek”) each
purchased a 50% working interest in the rights below the Marble Falls formation
in 2,800 acres acreage in Wise County, Texas from McCommons Oil
Company (“McCommons”). The interests purchased are held by production from
McCommons in the shallower formations. Jay Petroleum and Delek each
paid $1.2 million for these rights. In addition, Jay Management LLC
and Delek entered into a joint operating agreement as of October 19, 2006 for
Jay Management to serve as operator of the acreages. A 3D seismic survey of the
area has been conducted and one exploratory well to the Barnett Shale formation
is currently planned. Drilling is currently anticipated before the close of
2008. Based on the results, additional drilling will be
considered.
Results
of Operations
Three
Months Ended September 30, 2008 Compared to Three Months Ended September 30,
2007:
We
reported a net income of $34,488,000 or $12.69 per share for the three months
ended September 30, 2008 compared to net loss of $647,000 or ($0.24) per share
for the same period in 2007. The increase in the income recorded during the
three months ended September 30, 2008 as compared to the net loss recorded
for the same period in 2007 is primarily attributable to an aggregate
$53,336,000 increase in gain on swap transactions and operating income.
This was partially offset by an $18,439,000 increase in interest expenses and
income tax expenses.
Oil & Gas Revenues -
During the 2008 period, we recorded $17,855,000 in oil and gas revenues compared
to $5,877,000 during the corresponding period in 2007. This increase is
primarily attributable to the oil and gas properties that we purchased from GFB
and Trans Republic and, increases in oil and gas prices, and partially offset by
a natural decline in production from our older oil and gas
properties.
Lease Operating Expenses,
Transportation and Severance Taxes - During the 2008 period, we recorded
$6,435,000 in lease operating expenses, transportation and severance taxes
compared to $2,207,000 in 2007. This increase in lease operating expenses,
transportation and severance taxes is primarily due to the GFB Acquisition,
along with the increase in oil and gas prices, which caused an increase in
severance tax obligations.
Depreciation, Depletion, Amortization
(DD&A) and Impairment – Depreciation, depletion, amortization and
impairment expenses are connected to the producing wells in the United States.
During the 2008 period, we recorded $3,263,000 in depreciation, depletion and
amortization compared to $1,699,000 in 2007. This depreciation, depletion and
amortization increase is primarily due to the GFB Acquisition. In the
three months ended September 30, 2008 we recorded $3,088,000 impairment due to
the low volume of gas produced and high Lease Operating Expenses and
Transportation costs for the wells in which the Company participated which were
completed in the Barnett Shale formation in Parker County, Texas.
General and Administrative -
During the 2008 period, we recorded $659,000 in general and administrative
compared to $739,000 in 2007. This decrease in general and administrative
expenses is primarily due to the closure of the Israeli Branch Office. This was
partially offset by an increase in general and administrative expenses due to
the GFB Acquisition and the assumption of operations on an additional 614
wells
Interest Expense - During the
2008 period, we recorded $2,828,000 in interest expense compared to $1,796,000
in 2007. This increase in interest expense is primarily due to the increasing of
our long - term loans related to the GFB Acquisition, partially offset by
decreases in the interest rate paid as well as the decrease in the principal
amount of indebtedness outstanding for the acquisition of oil and gas properties
Five States Energy Company (the “Five States acquisition”).
Equity in Earnings of Unconsolidated
Affiliates –. As of December 31, 2007, we closed the Israeli branch
offices and sold our holdings in two limited partnerships, Isramco Negev 2 and
I.O.C. Dead Sea LP. Accordingly, during the 2008 period we did not record any
equity in earnings of unconsolidated affiliates compared to loss of $671, 000 in
2007.
Net Gain on Derivative Contracts -
From time to time, we enter into derivative commodity instruments to
hedge our exposure to price fluctuations on anticipated oil and natural gas
production. Under price swaps, we are required to make payments to, or receive
payments from, the counterparties based upon the differential between a
specified fixed price and a price related to those quoted on the New York
Mercantile Exchange for each respective period. We elected not to designate any
positions as cash flow hedges for accounting purposes for the period ended
September 30, 2008 and 2007. Accordingly, we record the net change in the
mark-to-market valuation of these derivative contracts in the consolidated
statement of operations as a component of other income and expenses on the
consolidated statements of operations.
We
recorded a net derivative gain of $50.1 million ($54.5 million unrealized gain
and a $4.4 million net loss for cash paid on settled contracts) for the three
months ended September 30, 2008.
Nine
Months Ended September 30, 2008 Compared to Nine Months Ended September 30,
2007:
We
reported a net loss of $5,346,000 or ($1.97) per share for the nine months ended
September 30, 2008 compared to net loss of $1,215,000 or ($0.45) per share for
the same period in 2007. The increase in the loss recorded during the nine
months ended September 30, 2008 as compared to the net loss recorded for the
same period in 2007 is primarily attributable to an aggregate $17,220,000
increase in loss on swap transactions as well as the increased in interest
expense . This was partially offset by a $15,007,000 increase in operating
income and income tax benefit.
Oil
& Gas Revenues -
During the 2008 period, we recorded $44,203,000 in oil and gas revenues compared
to $13,528,000 during the corresponding period in 2007. This increase is
primarily attributable to the oil and gas properties that we purchased from GFB
and Five States Acquisition, and increase in oil and gas prices and these
increases were partially offset by a natural decline in production from our
older oil and gas properties.
Lease Operating Expenses,
Transportation and Severance Taxes - During the 2008 period, we recorded
$15,231,000 in lease operating expenses, transportation and severance taxes
compared to $5,188,000 in 2007. This increase in lease operating expenses,
transportation and severance taxes is primarily due to the GFB and Five States
Acquisition, along with the increase in oil and gas prices, which caused an
increase in severance tax obligations and a onetime amortization of $1,000,000
in inventory related to the GFB acquisition.
Depreciation, Depletion, Amortization
(DD&A) and Impairment – Depreciation, depletion, amortization
expenses are connected to the producing wells in the United
States. During the 2008 period, we recorded $7, 283,000 in
depreciation, depletion, amortization and impairment compared to $4,384,000 in
2007. This increased depreciation, depletion and amortization is primarily due
to the GFB and Five States Acquisitions. In the nine months ended September 30,
2008 we recorded $3,137,000 impairment mainly due to the low volume of gas
produced and high lease operating expenses and transportation costs associated
with in wells in which the Company participated which were completed
in the Barnett Shale formation in Parker County, Texas
General and Administrative -
During the 2008 period, we recorded $1,809,000 in general and administrative
expenses compared to $2,066,000 in 2007. This decrease in general and
administrative expenses is primarily due to the closure of the Israeli Branch
Office. This was partially offset by an increase in general and administrative
expenses due to GFB and Five States acquisitions and the assumption of
operations on an additional 614 wells
Interest Expense - During the
2008 period, we recorded $6,713,000 in interest expense compared to $4,491,000
in 2007. This increase in interest expense is primarily due to the increasing of
our long - term loans related to the GFB and Five States Acquisition, partially
offset by decreases in the interest rate paid as well as the decrease
in the principal amount of indebtedness outstanding for the acquisition of oil
and gas properties Five States Energy Company (the “Five States
acquisition”).
Equity in Earnings of Unconsolidated
Affiliates –. As of December 31, 2007, we closed the Israeli branch
offices and sold our holdings in two limited partnerships, Isramco Negev 2 and
I.O.C. Dead Sea LP. Accordingly, during the 2008 period we did not record any
equity in earnings of unconsolidated affiliates compared to $1,598, 000 in
2007.
Net Loss on Derivative Contracts -
From time to time, we enter into derivative commodity instruments to
hedge our exposure to price fluctuations on anticipated oil and natural gas
production. Under price swaps, we are required to make payments to, or receive
payments from, the counterparties based upon the differential between a
specified fixed price and a price related to those quoted on the New York
Mercantile Exchange for each respective period. We elected not to designate any
positions as cash flow hedges for accounting purposes for the period ended
September 30, 2008 and 2007. Accordingly, we record the net change in the
mark-to-market valuation of these derivative contracts in the consolidated
statement of operations as a component of other income and expenses on the
consolidated statements of operations.
We
recorded a net derivative loss of $17.9 million ($8.9 million unrealized loss
and a $9 million net loss for cash paid on settled contracts) for the nine
months ended September 30, 2008.
Evaluation
of Disclosure Controls and Procedures.
Disclosure
controls and procedures are controls and other procedures of a registrant
designed to ensure that information required to be disclosed by the registrant
in the reports that it files or submits under the Exchange Act is properly
recorded, processed, summarized, and reported, within the time periods specified
in the Securities and Exchange Commission’s (“SEC”) rules and forms. Disclosure
controls and procedures include processes to accumulate and evaluate relevant
information and communicate such information to a registrant’s management,
including its Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow for timely decisions regarding required
disclosures.
We
evaluated the effectiveness of the design and operation of our disclosure
controls and procedures as of September 30, 2008, as required by Rule 13a-15 of
the Exchange Act. As described in our Annual Report on Form 10-K for the year
ended December 31, 2007, under “Management’s Report on Internal Control Over
Financial Reporting,” material weaknesses were have been identified in our
internal control over financial reporting as of September 30, 2008, relating
primarily to the shortage of support and resources in our accounting. Based on
the evaluation described above, our Chief Executive Officer and Chief Financial
Officer have concluded that, as of September 30, 2008, our disclosure controls
and procedures were not effective to ensure (i) that information required to be
disclosed by us in the reports we file or submit under the Exchange Act is
recorded, processed, summarized, and reported, within the time periods specified
in the SEC’s rules and forms, and (ii) information required to be disclosed by
us in our reports that we file or submit under the Exchange Act is accumulated
and communicated to our management, including our Chief Executive Officer and
Chief Financial Officer, as appropriate, to allow timely decisions regarding
required disclosure.
Changes
in Internal Controls Over Financial Reporting
Other
than as described above, no material change in our internal control over
financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange
Act of 1934) occurred during the third quarter of fiscal 2008 that has
materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting. Management and the Audit Committee of the
Company’s Board of Directors have begun to develop remedial measures to address
the internal control deficiencies identified in our Annual Report on Form 10-K
for the year ended December 31, 2007. The Company will monitor the effectiveness
of planned actions and will make any other changes and take such other actions
as management or the Audit Committee determines to be appropriate.
|
PART
II - Other Information
|
|
|
|
|
|
Legal
Proceedings
|
|
|
|
|
|
None |
|
|
|
|
|
Risk
Factors
|
The Risk
Factors included in the Company’s Annual Report on Form 10-K for the fiscal year
ended December 31, 2007 have not materially
changed.
|
|
Change
in Securities & Use of Proceeds
|
|
|
|
|
|
None
|
|
|
|
|
|
Default
Upon Senior Securities
|
|
|
|
|
|
None
|
|
|
|
|
|
Submission
of Matters to a Vote of Security Holders
|
|
|
|
|
|
None
|
|
|
Other
Information
|
|
|
|
|
|
None
|
|
|
|
|
|
Exhibits
|
|
Exhibits
|
|
|
31.1
|
|
|
|
|
|
31.1
|
|
|
|
|
|
32.1
|
|
|
|
|
|
32.1
|
|
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. .
Isramco,
Inc.
| |
ISRAMCO, INC |
|
| |
|
|
|
|
Date:
NOVEMBER 14, 2008
|
By:
|
/s/ HAIM
TSUFF
|
|
| |
|
HAIM
TSUFF |
|
| |
|
CHIEF
EXECUTIVE OFFICER |
|
| |
|
(PRINCIPAL
EXECUTIVE OFFICER) |
|
| |
|
|
| |
|
|
|
|
Date:
NOVEMBER 14, 2008
|
By:
|
/s/ EDY
FRANCIS
|
|
| |
|
EDY
FRANCIS |
|
| |
|
CHIEF
FINANCIAL OFFICER |
|
| |
|
(PRINCIPAL
FINANCIAL AND ACCOUNTING OFFICER) |
|