SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
CHECK ONE
|X| Quarterly report under Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended March 31, 2007
or
|_| 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 I.R.S. Employer Number
Incorporation or Organization)
11767 KATY FREEWAY, HOUSTON, TX 77079
(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 |_|
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer.
Large accelerated filer |_| Accelerated filer |_| Non-accelerated filer |X|
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes |_| No |_|
The number of shares outstanding of the registrant's Common Stock as May
15, 2007 was 2,717,691.
INDEX
Page
PART I - FINANCIAL INFORMATION:
Item 1. Financial Statements
Consolidated Balance Sheets at March 31, 2007 and
December 31, 2006 (unaudited) 1
Consolidated Statements of Operations for the three months ended
March 31, 2007 and 2006 (unaudited) 2
Consolidated Statements of Cash Flows for the three months ended
March 31, 2007 and 2006 (unaudited) 3
Notes to Consolidated Financial Statements (unaudited) 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operation 11
Item 3. Quantitative and Qualitative Disclosures about Market Risk 14
Item 4. Controls and Procedures 14
PART II. OTHER INFORMATION 16
Item 1. Legal Proceedings 16
Item 2. Changes in Securities 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits 16
Signatures 18
i
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.
ii
ISRAMCO INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands except for share information)
(Unaudited)
March 31, December 31,
2007 2006
--------- ---------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 2,792 $ ,573
Restricted cash deposit 1,000 17,000
Marketable securities, at market 2,195 3,130
Accounts receivable 153 403
Prepaid expenses and other current 4,549 5,057
Accounts receivable - sale of Magic 1 - 2,150
--------- ---------
TOTAL CURRENT ASSETS 10,689 28,313
--------- ---------
Property and equipment, net (successful efforts method
for oil and gas properties) 101,739 12,537
Marketable securities, at market 6,708 5,759
Investment in affiliates 16,335 15,302
Other 162 162
--------- ---------
TOTAL ASSETS $ 135,633 $ 62,073
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 9,116 $ 5,214
Credit from banks 2,304 347
Short term loan from related party - 17,000
--------- ---------
TOTAL CURRENT LIABILITIES 11,420 22,561
--------- ---------
LONG-TERM LIABILITIES
Bank loan 35,300 -
Long-term loans from related parties 49,903 -
Asset retirement obligations 1,692 356
Deferred income taxes 3,536 4,412
--------- ---------
TOTAL LONG-TERM LIABILITIES 90,431 4,768
--------- ---------
TOTAL LIABILITIES 101,851 27,329
--------- ---------
SHAREHOLDERS' EQUITY
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 26,240 26,240
Retained earnings 3,632 5,399
Accumulated other comprehensive income 4,047 3,242
Treasury stock, 29,267 shares at cost (164) (164)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY 33,782 34,744
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 135,633 $ 62,073
========= =========
See notes to the consolidated financial statements.
1
ISRAMCO INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except for share information)
(Unaudited)
Three Months Ended March 31,
----------------------------
2007 2006
----------- -----------
REVENUES:
Operator fees from related party $ 17 $ 21
Oil and gas sales 2,164 664
Interest income 438 254
Office services to affiliate and other 178 185
Gain on marketable securities 276 285
Equity in net income of investees 763 706
Net gain on legal settlements - 2,565
Other income 162 565
----------- -----------
Total revenues 3,998 5,245
----------- -----------
COSTS AND EXPENSES:
Interest expense 1,034 56
Depreciation, depletion and amortization and impairment 891 201
Accretion expenses 41 -
Lease operating expenses and severance taxes 798 221
General and administrative 639 584
Loss from swap transactions 3,402 -
----------- -----------
Total expenses 6,805 1,062
----------- -----------
Income (loss) before income taxes (2,807) 4,183
Income taxes (expense) 1,041 (356)
----------- -----------
Income (loss) from continuing operations (1,766) 3,827
Loss from discontinued operation - (3,434)
----------- -----------
Net income (loss) $ (1,766) $ 393
=========== ===========
Earnings (loss) per common share - basic and diluted:
Continuuing operations $ (0.65) $ 1.40
Discontinued operations - (1.26)
----------- -----------
Total $ (0.65) $ 0.14
=========== ===========
Weighted average number of shares outstanding - basic and diluted 2,717,691 2,717,691
=========== ===========
See notes to the consolidated financial statements.
2
ISRAMCO INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
Three Months Ended March 31,
----------------------------
2007 2006
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (1,766) $ 393
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation, depletion and amortization 970 216
Accretion expenses 59 -
Gain on marketable securities (275) (285)
Equity in net income of investees (763) (706)
Loss from swap transactions 3,402 -
Deferred taxes (1,291) 247
Changes in assets and liabilities:
Accounts receivable (1,374) (88)
Prepaid expenses and other current assets 2,658 (66)
Accounts payable and accrued liabilities (722) (532)
----------- -----------
Continuing operations 898 (821)
Discontinued operations - 3,125
----------- -----------
Net cash provided by operating activities 898 2,304
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of Magic 2,150 -
Net proceeds on swap transactions 2,121 -
Addition to property and equipment (90,156) (344)
Purchase of marketable securities - (785)
Restricted deposit (1,000) -
Proceeds from sale of marketable securities 1,210 903
----------- -----------
Net cash used in investing activities (85,675) (226)
----------- -----------
NET CASH FROM FINANCING ACTIVITIES:
Repayment of loans - (250)
Proceeds from bank loans 35,300 -
Proceeds from loans from related parties 32,739 -
Change in short-term credit from bank 1,957 223
----------- -----------
Net cash provided by (used in) financing activities 69,996 (27)
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (14,781) 2,051
Cash and cash equivalents-beginning of period 17,573 1,249
----------- -----------
Cash and cash equivalents-end of period $ 2,792 $ 3,300
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 294 $ 123
Cash paid during the period for income taxes - -
Non-cash investing and financing activities
Asset retirement obligation from acquired properties $ 1,292 $ -
See notes to the consolidated financial statements.
3
ISRAMCO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
As used in these financial statements, the terms "Company" and "Isramco" refer
to Isramco, Inc. and subsidiaries.
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the 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 March 31, 2007 are not necessarily indicative of the
results that may be expected for the year ended December 31, 2007. 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, 2006. Certain reclassifications of prior year amounts have
been made to conform to current presentation. At December 31, 2006, cash of $17
million was restricted in connection with the swap contracts. At March 31, 2007,
Isramco had $1 million restricted cash.
NOTE 2 - CONSOLIDATION
The consolidated financial statements include the accounts of Isramco, its
direct and indirect non U.S. based wholly-owned subsidiaries Isramco Oil and Gas
Ltd. ("Oil and Gas") and its U.S. based wholly-owned subsidiaries: Jay
Petroleum, L.L.C. ("Jay Petroleum"), Jay Management L.L.C. ("Jay Management"),
IsramTec Inc. ("IsramTec") and Isramco Energy LLC. Inter company balances and
transactions have been eliminated in consolidation.
NOTE 3 - OIL AND GAS PROPERTIES
Isramco follows the "successful efforts" method of accounting for its oil and
gas properties. Under this method of accounting, all property acquisition costs
and costs of exploratory and development wells are capitalized when incurred,
pending determination of whether the well has found proved reserves. If an
exploratory well has not found proved reserves, the costs of the well are
charged to expense. The costs of development wells are capitalized whether
successful or unsuccessful. Geological and geophysical costs and the costs of
carrying and retaining undeveloped properties are expensed as incurred.
Management estimates that the salvage value of lease and well equipment will
approximately offset the future liability for plugging and abandonment of the
related wells. Accordingly, no accrual for such costs has been recorded.
NOTE 4 - TRANSACTION WITH FIVE STATES
Isramco and Five States Energy Company, L.L.C. ("Five States") entered into a
certain Purchase and Sale Agreement (the "Purchase Agreement") pursuant to
which Isramco agreed to purchase from Five States, through Isramco Energy LLC, a
Texas limited liability company that is wholly owned by Isramco ("Isramco
Energy"), certain oil and gas properties (including 650 oil and gas wells)
located in Texas and New Mexico.
The closing of the transactions contemplated in the Purchase Agreement was
completed on March 2, 2007 for an aggregate purchase price of $92 million (the
"Purchase Price"). According to an engineering report prepared by an independent
consulting company relating to the properties purchased under the Purchase
Agreement, the estimated proved developed producing reserves are 1,447,161 net
barrels of oil and 20,078,174 net MMCF's of natural gas and 1,305,705 net of
liquid products. Isramco funded $7.7 million of the Purchase Price from working
capital and the balance from a combination of commercial bank loans and loans
from related parties. The loans are discussed below.
Isramco obtained loans in the total principle amount of $42 million from Naphtha
Israel Petroleum Corp. Ltd., the parent company (including through its wholly
owned subsidiary IOC-Israel Oil Company Ltd) ("Naphtha") with terms and
conditions as below:
4
Pursuant to a Loan Agreement dated as of February 27, 2007 (the "Loan
Agreement"), Isramco obtained a loan in the aggregate principal amount of $18.5
million. The outstanding principal amount of the loan accrues interest at per
annum rate equal to the London Inter-bank Offered Rate (LIBOR) plus 5.5%, not to
exceed 11% per annum. Interest is payable at the end of each loan year.
Principal plus any accrued and unpaid interest are due and payable on February
26, 2014. Interest after the maturity date accrues at the per annum rate of
LIBOR plus 12% until paid in full. At any time, Isramco is entitled to prepay
the outstanding amount of the loan without penalty or prepayment. To secure its
obligations that may be incurred under the Loan Agreement, Isramco agreed to
grant to Naphtha a security interest in certain specified properties held by Jay
Petroleum, its wholly owned subsidiary. Naphtha can accelerate the loan and
exercise its rights under the collateral upon the occurrence of certain events
of default. Mr. Jackob Maimon, Isramco's president and director is a director of
Naphtha and Mr. Haim Tsuff, Isramco's Chief Executive Officer and Chairman is a
controlling shareholder of Naphtha.
Pursuant to a Loan Agreement dated as of February 27, 2007 (the "Second Loan
Agreement") Isramco obtained a loan from Naphtha, in the principal amount of
$11.5 million, repayable at the end of seven years. Interest accrues at a per
annum rate of LIBOR plus 6%. The Second Loan is not secured. The other terms of
the Second Loan Agreement are identical to the terms of the Loan Agreement.
Pursuant to a Loan Agreement dated as of February 27, 2007 (the "Third Loan
Agreement ") Isramco obtained a loan from Naphtha, in the principal amount of
$12 million, repayable at the end of five years. Interest accrues at a per annum
rate of LIBOR plus 6%. The Third Loan is not secured. The other terms of the
Third Loan Agreement are identical to the terms of the Loan Agreement.
Pursuant to a Loan Agreement dated as of February 26, 2007 Isramco obtained a
loan from J.O.E.L Jerusalem Oil Exploration Ltd, a related party ("JOEL"), in
the principal amount of $7 million, repayable at the end of three months.
Interest accrues at a per annum rate of 5.36%. 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.
On March 2, 2007, Isramco obtained a $35.3 million credit line from Wells Fargo
Bank. Amounts outstanding under the credit line are payable by March 1, 2011.
Interest on amounts outstanding accrue at a per annum rate equal to LIBOR plus
2%. Isramco is required to maintain several financial covenants in connection
with this credit line. Amounts outstanding under the credit line are secured by
a guarantee from Isramco and a pledge by Isramco of the shares of Isramco
Energy. Additionally, pursuant to an agreement between Sigma Energy Corporation
("Sigma"), an unrelated party that originated the transaction with Five States,
Isramco and Isramco Energy, Isramco Energy paid to Sigma on March 2, 2007, the
amount of $300,000 and after Payout (as defined in the agreement with Sigma),
Isramco Energy will assign to Sigma a direct ownership interests equal
to 3.75% of the interests acquired by Isramco Energy under the Purchase
Agreement.
The following table summarizes the allocation of the purchase price, net of
approximately $2.8 million of net activity for the properties from the effective
date of the Purchase Agreement to the closing date, to assets that Isramco
acquired and the liabilities assumed in connection with the acquisition of the
Five States properties:
(in thousands)
Oil and gas properties $ 90,790
Asset retirement obligation (1,290)
----------------
Net assets acquired $ 89,500
================
5
The following unaudited pro forma information assumes the acquisition of the
Five States properties occurred as of January 1, 2006 and 2005, respectively.
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
------------ ------------
Three Months Ended March 31, 2007
---------------------------------
Revenues $ 3,998 $ 7,375
Net loss (1,766) (2,887)
Loss per share - basic and diluted
Continuing operations $ (0.65) $ (0.88)
Discontinued operations - -
------------ ------------
Total (0.65) (0.88)
============ ============
Three Months Ended March 31, 2006
---------------------------------
Revenues $ 5,245 $ 10,942
Net income 393 757
Income (loss) per share - basic and diluted
Continuing operations $ 1.40 $ 1.54
Discontinued operations (1.26) (1.26)
------------ ------------
Total 0.14 0.28
============ ============
NOTE 5 - SWAP TRANSACTIONS
In connection with the Five States transaction, Isramco entered into the
following swap contracts:
1. As of December 31, 2006 Isramco had 24 swap contracts to sell 264,084
barrels of crude oil during 24 months commencing January 2007 for a total
consideration of $17.7 million, and 24 swap contracts to sell 2,853,156 MMBTU of
natural gas during 24 months commencing January 2007 for a total consideration
of $23.1 million.
In January 2007, Isramco executed reverse contracts for most of the
abovementioned contracts and remained with open swap contracts for 23,000
barrels of crude oil for a total consideration of $1.5 million and 376,000 MMBTU
of natural gas for a total consideration of $3 million.
The above mentioned reverse of swap contracts generated to Isramco a profit of
$2.1 million.
2. Following the closing of Five States transaction as stated above,
Isramco signed additional swap agreements with Wells Fargo Bank to secure its
future oil and gas prices as follows:
Swap contracts to sell 443,577 barrels of crude oil during 46 months commencing
March 2007 for a total consideration of $28.5 million.
Swap contracts to sell 4,618,395 MMBTU of natural gas during 46 months
commencing March 2007 for a total consideration of $36.7 million.
6
The following tables reflect the open swap contract positions as of March 31,
2007:
OIL
================================================================================
MONTHLY AVERAGE NUMBER TOTAL
QUANTITY FUTURE OF QUANTITY
BARRELS PRICE YEAR MONTHS BARRELS TOTAL AMOUNT
--------------------------------------------------------------------------------
4,000 $ 62.90 2007 9 36,000 $ 2,264,400
4,000 65.08 2008 12 48,000 3,123,840
3,700 64.97 2009 12 44,400 2,884,680
2,700 63.30 2010 12 32,400 2,050,920
6,341 62.47 2007 9 57,069 3,565,100
5,516 64.70 2008 12 66,192 4,282,622
6,096 64.55 2009 12 73,152 4,721,962
5,447 63.80 2010 12 65,364 4,170,223
1,000 66.05 2007 9 9,000 594,450
1,000 68.46 2008 12 12,000 821,520
----------------------------
Total 443,577 $ 28,479,717
============================
GAS
================================================================================
MONTHLY AVERAGE NUMBER TOTAL
QUANTITY FUTURE OF QUANTITY
MMBTU PRICE YEAR MONTHS MMBTU TOTAL AMOUNT
--------------------------------------------------------------------------------
101,107 $ 8.08 2007 9 909,963 $ 7,348,403
100,876 8.29 2008 12 1,210,512 10,036,598
100,874 7.85 2009 12 1,210,488 9,496,392
79,286 7.49 2010 12 951,432 7,126,226
20,000 7.87 2007 9 180,000 1,415,700
13,000 8.37 2008 12 156,000 1,304,940
----------------------------
Total 4,618,395 $ 36,728,259
============================
NOTE 6 - DISCONTINUED OPERATION
In March 2004, Isramco purchased a luxury cruise liner for aggregate
consideration of $8,050,000. The vessel, a Bahamas registered ship, contains 270
passenger cabins on nine decks. Isramco leased the vessel to a tour operator for
the period from April 4, 2005 through October 31, 2005 and from April 6 2006
through November 5 2006 at a daily rate of $8,000. Under the lease all
maintenance and operating costs associated with the vessel were borne by the
operator.
Title to the Vessel was in Magic 1 Cruise Line Corp., a British Virgin Islands
corporation and a wholly owned subsidiary of Isramco ("Magic"). Isramco expended
approximately $1.4 million and $1 million in the years 2006 and 2005,
respectively, for the maintenance, repairs, renovation and upkeep of the vessel.
In addition, following management's assessment conducted in April and May 2006
as part of the preparation of the financial statements for the first quarter of
2006, management determined that there has been a decrease in the fair market
value of Isramco's investment in the Magic 1 cruise vessel and, that as a
consequence thereof, Isramco believed the investment had been impaired.
Accordingly, Isramco recorded as impairment charge in March 2006 in the amount
of $2,200,000.
On December 31, 2006, Isramco and Chesny Estates Ltd., a British Virgin Islands
corporation, entered into a Share Purchase and Sale Agreement, dated as of
December 31, 2006, pursuant to which Isramco sold to Chesny all of the
outstanding share capital of Magic for a purchase price of $2.15 million. The
purchase included the assumption by Chesny of a loan in the principal amount of
$3.3 million incurred by Isramco in connection with the purchase of Magic.
7
Isramco's decision to sell its holdings in Magic was primarily attributable to
Isramco's decision to focus principally on the oil and gas business. Following
the sale of Magic, Isramco is no longer engaged in the cruise line business.
NOTE 6 - EARNINGS PER SHARE COMPUTATION
SFAS No. 128 requires a reconciliation of the numerator (income) and denominator
(shares) of the basic earnings per share ("EPS") computation to the numerator
and denominator of the diluted EPS computation. The reconciliation is as follows
(dollars in thousands):
FOR THE THREE MONTHS ENDED MARCH 31,
------------------------------------
2007 2006
------ ------
LOSS SHARES INCOME SHARES
--------- --------- --------- ---------
Basic $ (1,766) 2,717,691 $ 393 2,717,691
Effect of dilutive securities of stock
options - - - -
--------- --------- --------- ---------
Diluted $ (1,766) 2,717,691 $ 393 2,717,691
========= ========= ========= =========
NOTE 7 - GEOGRAPHICAL SEGMENT INFORMATION
Isramco's operations for 2007 involve one industry segment - the exploration,
development production and transportation of oil and natural gas. Prior to 2007
Isramco operated in two operating segment - oil and gas activities and holding
and leasing its cruise line vessel. Its current oil and gas activities are
concentrated in the United States and Israel. Operating outside the United
States subjects the company to inherent risks such as a loss of revenues,
property and equipment from such hazards as exploration. Nationalization, war
and other political risks, risks of increase of takes and governmental
royalties, renegotiation of contracts with governmental royalties, renegotiation
of contracts with government entities and change in laws and policies governing
operations of foreign-based companies.
Isramco's oil and gas business is subject to operating risks associated with the
exploration, and production of oil and gas, including blowouts, pollution and
acts of nature that could result in damage to oil and gas wells, production
facilities of formations. In addition, oil and gas prices have fluctuated
substantially in recent years as a result of events outside of Isramco's
control. Isramco does not directly operator the operators. This segment of
Isramco's business is subject to many risks all of which cannot be presently
anticipated, including losses resulting from unexpected repairs and maintenance
and competition.
8
GEOGRAPHIC SEGMENTS
UNITED CONSOLIDATED
STATES ISRAEL TOTAL
--------- --------- ---------
Identifiable assets at March 31, 2007 $ 99,794 $ 57 $ 99,851
Cash and corporate assets 36,782
---------
Total assets at March 31, 2007 $ 136,633
=========
Identifiable assets at December 31, 2006 $ 12,471 $ 66 $ 12,537
Cash and corporate assets 51,447
---------
Total Assets at December 31, 2006 $ 62,073
=========
Three Months Ended March 31, 2007
---------------------------------
Sales and other operating revenue $ 2,164 $ 17 2,181
Costs and operating expenses 1,726 13 1,739
--------- ---------
Operating profit 438 4 442
========= =========
Interest Income 438
Interest expense 1,035
General corporate expenses 631
Gain on marketable securities and
equity in net Income of investees 1,039
Loss from swap transactions 3,402
Other Income 342
Tax benefit (1,041)
---------
Net Loss $ (1,766)
=========
Three Months Ended March 31, 2006
---------------------------------
Sales and other operating revenue $ 699 $ 171 $ 870
Costs and operating expenses (416) (5) (422)
--------- --------- ---------
Operating profit $ 283 $ 166 448
========= =========
Interest Income 254
Interest expense (56)
General corporate expenses (584)
Gain on marketable securities and
equity in net Income of investees 991
Other income 3,130
Income taxes (356)
---------
Income from continuing operations 3,827
Loss from discontinued operation (3,434)
---------
Net Income $ 393
=========
9
NOTE 8 - COMPREHENSIVE INCOME
Isramco's comprehensive income for the three months ended March 31, 2007 and
2006 was as follows:
Three months ended March 31,
----------------------------
2007 2006
------- -------
Net income (loss) $(1,766) $ 394
Other comprehensive income (loss), net of tax:
-Unrealized gain (loss) on available-for-sale securities 304 104
-Foreign currency translation adjustments of the Israeli Branch and the
limited partnerships 500 (104)
------- -------
Total comprehensive income (loss) $ (962) $ 394
======= =======
NOTE 9 - CONTINGENCIES
Isramco is involved in various other legal proceedings arising in the normal
course of business. In the opinion of management, Isramco's ultimate liability,
if any, in these pending actions would not have a material adverse effect on the
financial position, operating results or liquidity of Isramco.
NOTE 10 - SUBSEQUENT EVENT
In April 2007, IsramTec Inc. a wholly owned subsidiary of the Company, sold part
of its equity interests in a high-tech company, for aggregate consideration of
approximately $2.3 million. As a result of the transaction, the Company
anticipates to record a net gain of approximately $1.65 million (after payment
of a commission) during the second quarter of 2007.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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.
OVERVIEW
Isramco, Inc., a Delaware company, is active in the exploration of oil
and gas in Israel and the United States. The Company acts as an operator of
certain leases and licenses and also holds participation interests in certain
other interests. The Company also holds certain non-oil and gas properties.
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", the Company identified the accounting principles which it believes
are most critical to the reported financial status by considering accounting
policies that involve the most complex of subjective decisions or assessments.
The Company maintains 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.
The Company records an investment impairment charge when it believes 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.
The Company records a valuation allowance to reduce its deferred tax
assets to the amount that is more likely than not to be realized. While the
Company has considered future taxable income and ongoing prudent and feasible
tax planning strategies in assessing the need for the valuation allowance, in
the event that the Company were to determine that it would be able to realize
its deferred tax assets in the future in excess of its net recorded amount, an
adjustment to the deferred tax asset would increase net income in the period
such determination was made.
The Company does not participate in, nor has it created, any off-balance
sheet special purpose entities or other off-balance sheet financing. In
addition, the Company does not enter into any derivative financial instruments,
other than the swap contracts.
The Company records 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
Until acquisition of oil and gas properties in the frame of the Five
States transaction, the Company had financed its operations primarily from cash
generated by operations.
During the three months ended March 31, 2007, the Company's consolidated
cash and cash equivalents decreased by $14,781,000 from $17,573,000 at December
31, 2006 to $2,792,000 at March 31, 2007. The decrease in the Company's
consolidated cash and cash equivalents is
11
primarily attributable to the usage of cash reserves to the acquisition of oil
and gas properties in the frame of the Five States transaction.
Net cash used in investing activities for the three-month period ended
March 31, 2007 was $89,946,000 as compared to $494,000 provided during the
three-month period ended March 31, 2006. The net cash used during the three
month period ended March 31, 2007 is primarily attributable to investment in oil
and gas properties in connection with the Five States transaction.
The Company believes that existing cash balances and cash flows from
activities will be sufficient to meet its financing needs. The Company intends
to finance its ongoing oil and gas exploration activities form working capital.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2007 COMPARED TO THE THREE MONTHS ENDED
MARCH 31, 2006.
The Company reported net loss of $1,766,000 ($0.65 per share) for the
three-month period ended March 31, 2007 compared to net income of $394,000
($0.15 per share) for the corresponding three-month period in 2006. The decrease
in net income during the three month period ended March 31, 2007 is primarily
attributable to recording of losses from swap transactions of approximately $3.4
million versus an income of $0.6 million in the three month period ended March
31, 2006, offset by increase of earnings from oil and gas operation due to the
acquisitions of oil and gas wells in the Five States transaction and the new
drillings of wells. Furthermore, the net income of the three months ended in
March 31, 2006 included a non-recurring one time receipt of $2,565,000 for the
settlement of certain lawsuits that were initiated by the Company.
Set forth below is a break-down of these results.
United States
Oil and Gas Revenues (in thousands)
Three Months ended March 31,
2007 2006
---- ----
Oil Volume Sold (Bbl) 16.7 3.5
Gas Volume Sold (MCF) 186.0 61.5
Oil Sales ($) 974 209
Gas Sales ($) 1,190 449
Average Unit Price
Oil ($/Bbl) * $ 58.35 $ 58.90
Gas ($/MCF) ** $ 6.40 $ 7.30
* Bbl - Stock Market Barrel Equivalent to 42 U.S. Gallons
** MCF - 1,000 Cubic Feet
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SUMMARY OF ACTIVITIES IN THE UNITED STATES
The Company, through its wholly-owned subsidiaries, Isramco Energy
LLC("Isramco Energy"), Jay Petroleum LLC ("Jay Petroleum") and Jay Management
LLC ("Jay Management"), is involved in oil and gas production in the United
States. Isramco Energy and Jay Petroleum owns varying working interests in oil
and gas wells in Louisiana, Texas, New Mexico, Oklahoma and Wyoming. Independent
estimates of the reserves held by Isramco Energy and Jay Petroleum as of
December 31, 2006 are approximately1,495,215 net barrels of proved developed
producing oil and 20,764,086 net MMCFs of proved developed producing natural gas
and 1,280,800 of plant products. Jay Management acts as the operator of certain
of the producing oil and gas interests owned or acquired by Jay Petroleum.
During the three months ended March 31, 2007 the Company continued to
invest in drilling activities in the Barnett Shale in North Central Texas
(Parker County) in which the Company holds 15% working interests. To date 21 gas
wells have been drilled and completed for production.
OPERATOR'S FEES FROM RELATED PARTY
During the three months ended March 31, 2007, the Company earned $17,000
in operator fees compared to $21,000 respect of the corresponding period in
2005.
OIL & GAS REVENUES
For the three months ended March 31, 2007, the Company had oil and gas
revenues of $2,164,400 compared to $664,000 for the corresponding period in
2006. The increase in the 2007 period as compared to the same period in 2006 is
primarily attributable to the acquisitions of oil and gas wells in the Five
States transaction as well as the new drillings of wells in North Central Texas
offset by a decline of production in the company's older oil and gas wells and
shutdown of the production caused by unanticipated pipeline maintenance in one
of the fields.
LEASE OPERATING EXPENSES AND SEVERANCE TAXES
Lease operating expenses and severance taxes were primarily in
connection with oil and gas fields in the United States. Oil and gas lease
operating expenses and severance taxes for the three months ended on March 31,
2007 were $798,000 compared to $221,000 for the same period in 2006. The
increase is primarily attributable to the acquisitions of oil and gas wells in
the Five States transaction.
INTEREST INCOME
Interest income during the three months ended March 31, 2007 was
$438,000 compared to $254,000 for the same period in 2006. The decrease in
interest income earned by the company during the three months ended March 31,
2007 compared to the comparable period in 2006 is primarily attributable to
interest earned on marketable securities.
GAIN (LOSS) ON MARKETABLE SECURITIES
During the three months ended March 31, 2007, the Company recognized net
realized and unrealized gain on trading securities of $281,000 compared to net
realized and unrealized gain of $285,000 for the same period in 2006.
Increases or decreases in the gains and losses from marketable
securities are dependent on the market prices in general and the composition of
the portfolio of the Company.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses for the three month period ended
March 31, 2007 were $639,000 as compared to $584,000 for the corresponding three
months in 2006.
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DEPRECIATION, DEPLETION AND AMORTIZATION
Depreciation depletion and amortization expenses are connected to the
producing wells in the United States.
During the three month ended March 31, 2007, the Company recorded $891,000
compared to $502,000 in the first quarter of 2006. The increase is primarily
attributable to the acquisitions of oil and gas wells in the Five States
transaction.
EQUITY NET INCOME OF INVESTEE
The Company's equity in the net income of investee for the first quarter
of 2007 was $763,000 compared to its net income of investee of $706,000 for the
first quarter of 2006. The net income is primarily attributable to the gain of
marketable securities held by the limited partnerships Isramco Negev 2 and
I.O.C. Dead Sea LP, affiliates of the Company.
NET GAIN ON LEGAL SETTLEMENTS
Net Gain on Legal Settlements in 2006 is attributable to the receipt of
approximately $3,050,000 million from the settlement by the Company in February
2006 of certain lawsuits that it initiated. According to the agreements with the
defendants settling these lawsuits, the Company recorded a net gain of
$2,565,000.
OTHER INCOME
Other income in the three months ended March 31, 2007 was $162,000
compared to $565,000 during the corresponding period in 2006. Other income in
2006 is primarily attributable to $560,000 related to the mark to market of swap
contracts on oil and gas prices.
OTHER EXPENSES
Other expenses in the three months ended March 31,2007 was 3,474,000
compare to none during the corresponding period in 2006.Other expenses in 2007
is attributable to the mark to market of swap contracts on oil and gas prices as
related to the transaction of Five States.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risks relating to changes in interest rates and foreign currency
exchanges rates were reported in Item 7A of the Company's Annual Report on Form
10-K for the year ended December 31, 2006. There has been no material change in
these market risks since the end of the fiscal year 2006.
ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. The Company maintains
disclosure controls and procedures that are designed to ensure that information
required to be disclosed in the Company's Exchange Act reports is recoded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms, and that such information is accumulated and communicated
to management, including our Chief Executive Officer (and Principal Financial
Officer), as appropriate, to allow timely decisions regarding required
disclosure based closely on the definition of "disclosure controls and
procedures" in Rule 13 a- 14 c.
As of the end of the period covered by this report, we carried out an
evaluation, under the supervision and with participation of management,
including our Chief Executive Officer (and our Principal Financial Officer), of
the effectiveness of the design and operation of our disclosure controls and
procedures. Based of the foregoing, our Chief Executive Officer (and Principal
Financial Officer) concluded that our disclosure controls and procedures were
effective.
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CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING. During the
quarter ended March 31, 2007, there have been no changes in our internal
controls over financial reporting that have materially affected, or are
reasonably likely to materially affect, these controls.
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PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 1A. RISK FACTORS
The Risk Factors included in the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 2006 have not materially changed.
ITEM 2. CHANGE IN SECURITIES & USE OF PROCEEDS
None
ITEM 3. DEFAULT UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS
4.1 Promissory Note dated as of February 27, 2007, issued to NAPHTHA ISRAEL
PETROLEUM CORP., LTD. in the principal amount of $18,500,000.
4.2 Promissory Note dated as of February 27, 2007, issued to NAPHTHA ISRAEL
PETROLEUM CORP., LTD. in the principal amount of $11,500,000.
4.3 Promissory Note dated as of February 27, 2007, issued to and I.O.C.
ISRAEL OIL COMPANY, LTD. in the principal amount of $12,000,000.
4.4 Promissory Note dated as of February 27, 2007, issued to and J.O.E.L
JERUSALEM OIL EXPLORATION, LTD. in the principal amount of $7,000,000
10.1 Purchase and Sale Agreement, dated as of February 16, 2007, among Five
States Energy Company, L.L.C. and each of the other parties listed as a
party "Seller" on the signature pages thereof and ISRAMCO, Inc.
10.2 LOAN AGREEMENT, dated as of February 27, 2007, between ISRAMCO, INC.,
and NAPHTHA ISRAEL PETROLEUM CORP., LTD.
10.3 LOAN AGREEMENT, dated as of February 27, 2007, between ISRAMCO, INC.,
and NAPHTHA ISRAEL PETROLEUM CORP., LTD.
10.4 LOAN AGREEMENT, dated as of February 27, 2007, Between ISRAMCO, INC.,
and I.O.C. ISRAEL OIL COMPANY, LTD.
16
10.5 LOAN AGREEMENT, dated as of February 26, 2007, between ISRAMCO, INC.,
and J.O.E.L JERUSALEM OIL EXPLORATION, LTD.
10.6 CREDIT AGREEMENT dated as of March 2, 2007 among ISRAMCO ENERGY,
L.L.C.,; each of the lenders that is a signatory hereto or which becomes
a signatory hereto; and WELLS FARGO BANK, N. A., a national banking
association, as agent for the Lenders.
10.7 GUARANTY AGREEMENT, dated as of March 2, 2007 by ISRAMCO, Inc. in favor
of Wells Fargo Bank, N.A., as administrative agent (the "ADMINISTRATIVE
AGENT") for the lenders that are or become parties to the Credit
Agreement referred to in Item 10.6.
10.8 PLEDGE AGREEMENT, dated as of March 2, 2007 by Isramco, Inc. in favor of
Wells Fargo Bank, N.A., as administrative agent for itself and the
lenders (the "LENDERS") which are parties to the Credit Agreement
referred to in Item 10.6.
31 Certification of Chief Executive and Principal Financial Officer
pursuant to Section 302 of Sarbanes-Oxley Act
32 Certification of Chief Executive and Principal Financial Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley act of 2002
17
SIGNATURES
In accordance with 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.
DATE: MAY 18, 2007 BY /S/ HAIM TSUFF
CHAIRMAN OF THE BOARD,
CHIEF EXECUTIVE
AND PRINCIPAL
FINANCIAL OFFICER
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