isramco10q063012.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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Check One
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x
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Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended June 30, 2012
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or
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o
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Transition report under Section 13 or 15(d) of the Securities Exchange Act of 1934
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Commission File Number 0-12500
ISRAMCO, INC
(Exact Name of registrant as Specified in its Charter)
Delaware
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13-3145265
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(State or other Jurisdiction of Incorporation or Organization)
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I.R.S. Employer Number
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2425 West Loop South, Suite 810, HOUSTON, TX 77027
(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 Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the 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 x Non-accelerated filer o (Do not check if a smaller reporting company) Smaller reporting company o
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 August 9, 2012 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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Item 2.
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Item 3.
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Item 4.
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PART II. OTHER INFORMATION
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Item 1.
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Item 1A.
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Item 2
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Item 3.
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Item 4
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Item 5.
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Item 6.
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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.
PART I - Financial Information
ITEM 1. Financial Statements
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
(Unaudited)
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As of
June 30, 2012
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As of
December 31, 2011
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ASSETS
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Current Assets:
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Cash and cash equivalents
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Restricted and designated cash
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Prepaid expenses and other
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Property and Equipment, at cost – successful efforts method:
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Advanced payment for equipment
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Service Equipment and other
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Total Property and Equipment
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Accumulated depreciation, depletion and amortization
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Net Property and Equipment
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Marketable securities, at market
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Deferred tax assets and other
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LIABILITIES AND SHAREHOLDERS’ EQUITY
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Accounts payable and accrued expenses
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Current maturities of long-term debt
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Due to related party and accrued interest
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Total current liabilities
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Due to related party and accrued interest
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Other Long-term Liabilities:
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Asset retirement obligations
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Commitments and contingencies
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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
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Additional paid-in capital
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Accumulated other comprehensive income
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Treasury stock, 29,267 shares at cost
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Total Isramco, Inc. shareholders’ equity
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Total liabilities and shareholders’ equity
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See notes to the unaudited condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share amounts)
(Unaudited)
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Three Months Ended June 30
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Six Months Ended June 30
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2012
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2011
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2012
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2011
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Revenues
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Lease operating expense, transportation and taxes
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Depreciation, depletion and amortization
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Loss from plug and abandonment
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General and administrative
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Realized gain on marketable securities
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Net (gain) loss on derivative contracts
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Currency exchange rate differences
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Total other expenses (income)
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Income (Loss) before income taxes
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Income tax (expense) benefit
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Net income attributable to non-controlling interests
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Net Income (loss) attributable to Isramco
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Earnings (loss) per share – basic:
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Earnings (loss) per share – diluted:
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Weighted average number of shares outstanding basic:
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Weighted average number of shares outstanding diluted:
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See notes to the unaudited condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
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Six Months Ended June 30
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2012
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2011
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Cash Flows From Operating Activities:
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Adjustments to reconcile net income (loss) to net cash provided by operating activities:
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Depreciation, depletion, amortization and impairment
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Realized gain on marketable securities
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Changes in deferred taxes
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Net unrealized gain on derivative contracts
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Amortization of debt cost
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Changes in components of working capital and other assets and liabilities
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Prepaid expenses and other current assets
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Accounts payable and accrued liabilities
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Net cash provided by operating activities
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Cash flows from investing activities:
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Addition to property and equipment, net
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Proceeds from sale of marketable securities
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Restricted cash and deposit, net
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Net cash used in investing activities
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Cash flows from financing activities:
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Repayment on loans – related parties, net
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Proceeds on loans – related parties, net
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Repayment of long-term debt
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Borrowings (repayment) of short - term debt, net
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Net cash used in financing activities
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Net decrease in cash and cash equivalents
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Cash and cash equivalents at beginning of period
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Cash and cash equivalents at end of period
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See notes to the unaudited condensed consolidated financial statements.
Isramco Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 1 - Financial Statement Presentation
Isramco, Inc. and its subsidiaries and affiliated companies ( together referred to as “We”, “Our”, “Isramco” or the “Company") is predominately an independent oil and natural gas company engaged in the exploration, development and production of oil and natural gas properties located onshore in the United States and ownership of various royalty interests in oil and gas concessions located offshore Israel. The Company also operates a well service company that provides well maintenance and workover services, well completion and recompletion services.
The accompanying unaudited financial statements and notes of Isramco have been prepared pursuant to the rules and regulations of the United States Securities and Exchange Commission. Pursuant to such rules and regulations, certain disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted. The accompanying financial statements and notes should be read in conjunction with the accompanying financial statements and notes included in Isramco’s 2011 Annual Report on Form 10-K.
The accompanying unaudited interim financial statements furnished in this report reflect all adjustments that are, in the opinion of management, necessary to a fair statement of Isramco’s results of operations and cash flows for the three-month and six-month periods ended June 30, 2012 and 2011 and Isramco’s financial position as of June 30, 2012.
Use of Estimates
The preparation of the Company’s condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States requires the Company’s management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities, if any, at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the respective reporting periods. The Company bases its estimates and judgments on historical experience and on various other assumptions and information that are believed to be reasonable under the circumstances. Estimates and assumptions about future events and their effects cannot be perceived with certainty and, accordingly, these estimates may change as new events occur, as more experience is acquired, as additional information is obtained and as the Company’s operating environment changes. Actual results may differ from the estimates and assumptions used in the preparation of the Company’s condensed consolidated financial statements.
Consolidated interim period results are not necessarily indicative of results of operations or cash flows for the full year and accordingly, certain information normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States has been condensed or omitted. The Company has evaluated events or transactions through the date of issuance of these condensed consolidated financial statements.
Risk Management Activities
The Company follows Accounting Standards Codification (ASC) 815, Derivatives and Hedging. From time to time, the Company may hedge a portion of its forecasted oil and natural gas production. Derivative contracts entered into by the Company have consisted of transactions in which the Company hedges the variability of cash flow related to a forecasted transaction. The Company has elected to not designate any of its positions for hedge accounting. Accordingly, the Company records the net change in the mark-to-market valuation of these positions, as well as payments and receipts on settled contracts, in “Net loss (gain) on derivative contracts” in the consolidated statements of operations.
Consolidation
The condensed consolidated financial statements include the accounts of Isramco and its subsidiaries. Inter-company balances and transactions have been eliminated in consolidation.
Non Controlling Interests
Non controlling interests represent third-party ownership in the net assets of the Company’s consolidated well service subsidiary and are presented as a component of equity.
Recently Issued Accounting Pronouncements
There were no new accounting pronouncements that had a significant impact on the Company’s operating results or financial position.
Note 2 - Supplemental Cash Flow Information
Cash paid for interest and income taxes was as follows for the six months ended June 30 (in thousands):
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Six Months Ended June 30
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2012
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2011
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The consolidated statements of cash flows for the period ended June 30, 2012 exclude the following non-cash transactions:
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Property and equipment of $1,624,000 included in accounts payable
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Note 3 - Derivative Contracts
At June 30, 2012, the Company had a $3.37 million commodity derivative asset, of which $1.6 million was classified as current. For the six months ended June 30, 2012, the Company recorded a net derivative gain of $1.56 million ($0.99 million unrealized gain and a $0.57 million gain from net cash received on settled contracts).
At June 30, 2011, the Company had a $2.2 million commodity derivative asset, of which $1.7 million was classified as current. For the six months ended June 30, 2011, the Company recorded a net derivative loss of $3.2 million ($3.2 million unrealized gain and a $6.4 million loss from net cash paid on settled contracts).
Crude Oil
At June 30, 2012, the Company had the following crude oil swap positions:
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Swaps |
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Period
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Volume in
Bbls
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Price /
Price Range
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Weighted
Average Price
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July 2012 – December 2012
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January 2013 – December 2013
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January 2014 – December 2014
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Note 4 - Long-Term Debt and Interest Expense
Long-Term Debt as of June 30, 2012 and December 31, 2011 consisted of the following (in thousands):
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As of
June 30, 2012
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As of
December 31, 2011
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Libor + 2% Bank Revolving Credit Facility due 2012
|
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|
|
|
|
|
|
|
Libor + 6% Related party Debt
|
|
|
|
|
|
|
|
|
Libor + 5.5% Related party Debt
|
|
|
|
|
|
|
|
|
Libor + 5.5% Related party Debt
|
|
|
|
|
|
|
|
|
Libor + 6% Related party Debt
|
|
|
|
|
|
|
|
|
Libor + 6% Related party Debt
|
|
|
|
|
|
|
|
|
Libor + 6% Related party Debt
|
|
|
|
|
|
|
|
|
Libor + 5.5% Related party Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Current Portion of Long-Term Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Revolving Credit Agreements
The Company entered into a Senior Secured Revolving Credit Agreement, dated as of March 27, 2008 and Amended and Restated as of December 19, 2008 (such Agreement as amended, “Senior Credit Agreement”), with each of the lenders from time to time party thereto (the “Lenders”). The Bank of Nova Scotia is the administrative agent for the Lenders. The Senior Credit Agreement originally provided for a $150 million facility due in 2012 with a borrowing base of $54 million that was redetermined from time to time and adjusted based on the Company’s oil and gas properties, reserves, other indebtedness and other relevant factors (such credit facility, as redetermined, the “Senior Credit Facility”). During the fourth quarter of 2011 the Lenders reduced the borrowing base to zero.
On April 27, 2012, the Company entered into the Fourth Amendment to the Credit Agreement with The Bank of Nova Scotia, formalizing the election to pay the $20,000,000 borrowing base deficiency in six monthly installments of $3,333,333.33.
The amendment also changed the termination date of credit agreement to June 29, 2012.
As of June 29, 2012 the Company has fully paid all amounts owed and terminated the Senior Credit Facility with the Lenders
Related Party Debt
On March 29, 2012, the Company entered into a Loan Agreement with I.O.C. Israel Oil Company, Ltd., a related party (“IOC”) pursuant to which it borrowed $3,500,000. The loan bears interest at a rate of Libor + 5.5% per annum and matures on March 29, 2013, when all accrued interest and principal is due and payable. The loan may be prepaid at any time without penalty or premium. The loan is unsecured. The purpose of the loan was to provide funds to Isramco for the payment of amounts were due to the Lenders under the Senior Credit Facility.
On April 29, 2012, the Company entered into another Loan Agreement with IOC, pursuant to which it borrowed an amount of $10,000,000. The loan bears interest of Libor+5.5% per annum and payable on April 30, 2013, when all accrued interest and principal is due and payable. The loan may be prepaid at any time without penalty or premium. The loan was funded by the Lender in three monthly installments starting April 2012. The loan is unsecured. The purpose of the loan was to provide funds to Isramco for the payment of the amounts that were due to the Lenders under the Senior Credit Facility during the remainder of 2012.
Interest expense
The following table summarizes the amounts included in interest expense for the six month ended June 30, 2012 and 2011 (in thousands):
|
|
Six Months Ended
June 30
|
|
|
|
2012
|
|
|
2011
|
|
Current debt, long-term debt and other - banks corporation
|
|
|
|
|
|
|
|
|
Long-term debt – related parties
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 5 - Sale of Marketable Securities
During February 2012 the Company has sold all of its investment in shares of Jerusalem Oil Exploration Ltd. (“JOEL”) to Equital Ltd. Both JOEL and Equital Ltd. are related parties of Isramco Inc. JOEL is also a subsidiary of Equital Ltd. The Company received net proceeds of $4,737,000 and recorded a net gain of $3,650,000.
Note 6 - Comprehensive Income
|
|
Three Months Ended June 30
|
|
|
Six Months Ended June 30
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized gains on hedging instruments, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 7 - Fair Value of Financial Instruments
Pursuant to ASC 820, Fair Value Measurements and Disclosures (ASC 820) the Company's determination of fair value incorporates not only the credit standing of the counterparties involved in transactions with the Company resulting in receivables on the Company's consolidated balance sheets, but also the impact of the Company's nonperformance risk on its own liabilities. ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The Company utilizes market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable. The Company classifies fair value balances based on the observability of those inputs.
The following tables set forth by level within the fair value hierarchy the Company's financial assets and liabilities that were accounted for at fair value as of June 30, 2012 and December 31, 2011. As required by ASC 820, a financial instrument's level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The Company's assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels. There were no transfers between fair value hierarchy levels for the six months ended June 30, 2012.
|
|
June 30, 2012
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable securities listed above are carried at fair value. The Company is able to value its marketable securities based on quoted fair values for identical instruments, which resulted in the Company reporting its marketable securities as Level 1.
Derivatives listed above include swaps that are carried at fair value. The Company records the net change in the fair value of these positions in “Net gain on derivative contracts” in the Company’s consolidated statements of operations, in case of commodity derivatives, and in “Other comprehensive income”, in case of interest rate derivatives. The Company is able to value these assets and liabilities based on observable market data for similar instruments, which resulted in the Company reporting its derivatives as Level 2. This observable data includes the forward curve for commodity prices based on quoted market prices and prospective volatility factors related to changes in the forward curves.
As of June 30, 2012 and December 31, 2011, the Company’s derivative contracts were with major financial institutions with investment grade credit ratings which are believed to have a minimal credit risk. As such, the Company is exposed to credit risk to the extent of nonperformance by the counterparties in the derivative contracts discussed above; however, the Company does not anticipate such nonperformance. Each of the counterparties to the Company’s derivative contracts is a lender in the Company’s Senior Credit Agreement. The Company did not post collateral under any of these contracts as they are secured under the Senior Credit Agreements.
Note 8 – Segment information
Isramco’s primary business segments are vertically integrated within the oil and gas industry. These segments are separately managed due to distinct operational differences, and unique technology, distribution and marketing requirements. The Company’s two reporting segments are oil and gas exploration and production and well service. The oil and gas exploration and production segment explores for and produces natural gas, crude oil, condensate, and NGLs. The well service segment is engaged in rig-based and workover services, well completion and recompletion services, plugging and abandonment of wells and other ancillary oilfield services.
Oil and Gas Exploration and Production Segment
Oil and Gas segment is engaged in the exploration, development and production of oil and natural gas properties located onshore in the United States and ownership of various royalty interests in oil and gas concessions located offshore Israel. We own varying working interests in oil and gas wells in Louisiana, Texas, New Mexico, Oklahoma, Wyoming, Utah and Colorado and currently serve as operator of approximately 589 wells located mainly in Texas in New Mexico.
Well Service Segment
Our rig-based services include the completion of newly drilled wells, workover and recompletion of existing oil and natural gas wells, well maintenance, and the plugging and abandonment of wells at the end of their useful lives.
The completion and recompletion services provided by our rigs prepare a newly drilled well, or a well that was recently extended through a workover, for production. The completion process may involve selectively perforating the well casing to access production zones, stimulating and testing these zones, and installing tubular and downhole equipment. We typically provide a well service rig and may also provide other equipment to assist in the completion process. The completion process usually takes a few days to several weeks, depending on the nature of the completion.
The workover services that we provide are designed to enhance the production of existing wells and generally are more complex and time consuming than normal maintenance services. Workover services can include deepening or extending wellbores into new formations by drilling horizontal or lateral wellbores, sealing off depleted production zones and accessing previously bypassed production zones, converting former production wells into injection wells for enhanced recovery operations and conducting major subsurface repairs due to equipment failures. Workover services may last from a few days to several weeks, depending on the complexity of the workover.
The maintenance services that we provide with our rig fleet are generally required throughout the life cycle of an oil or natural gas well. Examples of these maintenance services include routine mechanical repairs to the pumps, tubing and other equipment, removing debris and formation material from wellbores, and pulling the rods and other downhole equipment from wellbores to identify and resolve production problems. Maintenance services generally take less than 48 hours to complete. Our rig fleet is also used in the process of permanently shutting-in oil or natural gas wells that are at the end of their productive lives. These plugging and abandonment services generally require auxiliary equipment in addition to a well servicing rig. The demand for plugging and abandonment services is not significantly impacted by the demand for oil and natural gas because well operators are required by state and federal regulations to plug wells that are no longer productive.
Note 8 – Segment information (Continuing)
thousands
|
|
Oil and Gas
Exploration
& Production
|
|
|
Well Service
|
|
|
Eliminations
|
|
|
Total
|
|
Three Months Ended June 30, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Office services and other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net gains on derivatives, contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized gain on marketable securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to noncontrolling interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income attributable to Isramco
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
- |
|
|
|
|
|
thousands |
|
Oil and Gas
|
|
|
Well Service |
|
|
Eliminations |
|
|
Total |
|
Three Months Ended June 30, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales revenues
|
|
$ |
11,571 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
11,571 |
|
Intersegment revenues
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Office services and other
|
|
|
176 |
|
|
|
- |
|
|
|
- |
|
|
|
176 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues and other
|
|
|
11,747 |
|
|
|
- |
|
|
|
- |
|
|
|
11,747 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses
|
|
|
10,727 |
|
|
|
- |
|
|
|
- |
|
|
|
10,727 |
|
Net gains on derivatives, contracts
|
|
|
(2,931 |
) |
|
|
- |
|
|
|
- |
|
|
|
(2,931 |
) |
Realized gain on marketable securities
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Interest expenses, net
|
|
|
1,950 |
|
|
|
- |
|
|
|
- |
|
|
|
1,950 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses and other
|
|
|
9,746 |
|
|
|
- |
|
|
|
- |
|
|
|
9,746 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
$ |
2,001 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
2,001 |
|
Net Income
|
|
|
1,301 |
|
|
|
- |
|
|
|
- |
|
|
|
1,301 |
|
Net income attributable to noncontrolling interests
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Net Income attributable to Isramco
|
|
|
1,301 |
|
|
|
- |
|
|
|
- |
|
|
|
1,301 |
|
Total Assets
|
|
$ |
169,433
|
|
|
$ |
- |
|
|
$
|
- |
|
|
$ |
169,433
|
|
thousands
|
|
Oil and Gas
Exploration
& Production
|
|
|
Well Service
|
|
|
Eliminations
|
|
|
Total
|
|
Six Months Ended June 30, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Office services and other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net gains on derivatives, contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized gain on marketable securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to noncontrolling interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income attributable to Isramco
|
|
|
|
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
- |
|
|
|
|
|
thousands
|
|
Oil and Gas
Exploration
& Production
|
|
|
Well Service
|
|
|
Eliminations
|
|
|
Total
|
|
Six Months Ended June 30, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Office services and other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net losses on derivatives, contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized gain on marketable securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to noncontrolling interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income attributable to Isramco
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
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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. ISRAMCO INC. DISCLAIMS ANY OBLIGATION TO UPDATE SUCH FORWARD LOOKING STATEMENTS.
Overview
Isramco is predominately independent oil and natural gas Company engaged in the exploration, development and production of oil and natural gas properties located onshore in the United States and ownership of various royalty interests in oil and gas concessions located offshore Israel. The Company also operates a well service company that provides well maintenance, workover services, well completion and recompletion services. Our properties are primarily located in Texas, New Mexico and Oklahoma. We also act as the operator of certain of these properties. Historically, we have grown through acquisitions, with a focus on properties within our core operating areas that we believe have significant development and exploration opportunities and where we can apply our technical experience and economies of scale to increase production and proved reserves, while lowering lease operating costs.
Our financial results depend upon many factors, but are largely driven by the volume of our oil and natural gas production and the price that we receive for that production. Our production volumes will decline as reserves are depleted unless we expend capital in successful development and exploration activities or acquire additional properties with existing production. The amount we realize for our production depends predominantly upon commodity prices, which are affected by changes in market demand and supply, as impacted by overall economic activity, weather, pipeline capacity constraints, inventory storage levels, basis differentials and other factors, and secondarily upon our commodity price hedging activities. Accordingly, finding and developing oil and natural gas reserves at economical costs is critical to our long-term success. Our future drilling plans are subject to change based upon various factors, some of which are beyond our control, including drilling results, oil and natural gas prices, the availability and cost of capital, drilling and production costs, availability of drilling services and equipment, gathering system and pipeline transportation constraints and regulatory approvals. To the extent these factors lead to reductions in our drilling plans and associated capital budgets in future periods, our financial position, cash flows and operating results could be adversely impacted.
Liquidity and Capital Resources
Our primary source of cash during the six months ended June 30, 2012 was cash flow from operating activities, loans from related party lender (“Related Party Loans”) and net proceeds from sale of our investment in shares of JOEL Jerusalem Oil Exploration Ltd, (“JOEL”) a related party. We continuously monitor our liquidity and evaluate our development plans in light of a variety of factors, including, but not limited to, our cash flows, capital resources and drilling success.
In February 2012 the Company sold all of its shares of an investment in a company called JOEL. The net proceeds of $4,737,000 from sale were used to reduce principal amounts owed under our Senior Credit Agreement.
Our future capital resources and liquidity may depend, in part, on our success in developing the leasehold interests that we have acquired. Cash is required to fund capital expenditures necessary to offset inherent declines in production and proven reserves, which is typical in the capital-intensive oil and gas industry. Future success in growing reserves and production will be highly dependent on the capital resources available and our success in finding and acquiring additional reserves. Our oil well service subsidiary also requires capital resources to acquire and maintain equipment and continue growth. We expect to fund our future capital requirements through internally generated cash flows, borrowings under loans, and a future credit facility. Long-term cash flows are subject to a number of variables, including the level of production, prices, amount of work orders received, and our commodity price hedging activities, as well as various economic conditions that have historically affected the oil and natural gas industry.
Debt
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Long – term debt – related party
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Current maturities of long-term debt, short-term debt and bank overdraft
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As of June 30, 2012, our total debt was $91,317,000, compared to total debt of $98,676,000 at December 31, 2011. During the six month ended June 30, 2012 the Company repaid all outstanding balance under its Senior Credit Facility.
On March 29, 2012, the Company entered into a Loan Agreement with I.O.C, pursuant to which it borrowed the sum of $3,500,000. The loan bears interest at a rate of Libor + 5.5% per annum and matures on March 29, 2013, when all accrued interest and principal is due and payable. The loan may be prepaid at any time without penalty or premium. The loan is unsecured. The purpose of the loan was to provide funds to Isramco for the payment of certain of the amounts were due under the Senior Credit Facility at maturity, which was extended to June, 2012.
On April 29, 2012 the Company entered into a Loan Agreement with I.O.C, pursuant to which it borrowed an additional $10,000,000. The loan bears interest of Libor+5.5% per annum and payable on April 30, 2013, when all accrued interest and principal is due and payable. The loan may be prepaid at any time without penalty or premium. The loan was funded by Lender in three monthly installments starting April 2012. The loan is unsecured. The purpose of the loan was to provide funds to Isramco for the payment of amounts due under the Senior Credit Facility through June, 2012.
Cash Flow
Our primary source of cash during the six months ended June 30, 2012 was cash flow from operating activities, loans from related party and proceeds from sale of marketable securities. In 2012 cash received from operations, sale of marketable securities, proceeds from loan of related party was used primarily to repay borrowings under our Senior Credit Facility and investing in equipment for well service subsidiary. In 2011 our primary source of cash during the six month ended June 30, 2011 was cash flow from operating activities and loans from related parties. In 2011 cash received from operations and from related party was offset by repayments of borrowings under our Senior Credit Agreements and payments made on settled derivatives contracts.
Operating cash flow fluctuations were substantially driven by changes in commodity prices and changes in our production volumes. Working capital was substantially influenced by these variables. Fluctuation in commodity prices and our overall cash flow may result in an increase or decrease in our future capital expenditures. Prices for oil and natural gas have historically been subject to seasonal fluctuations characterized by peak demand and higher prices in the winter heating season; however, the impact of other risks and uncertainties have influenced prices throughout recent years. See Results of Operations below for a review of the impact of prices and volumes on sales.
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Six months Ended June 30,
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2011
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Cash flows provided by operating activities
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Cash flows used in investing activities
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Cash flows used in financing activities
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Operating Activities, During the first six months of 2012, compared to the first six months of 2011, net cash flow provided by operating activities increased by $8,685,000 to $9,377,000 This increase was primarily attributable to a net cash onetime payment in 2011 on settled derivatives contracts of $7,007,000, lower lease operating expenses which were partially offset by decrease in natural gas and natural gas liquids (“NGLs) revenues. The decrease in natural gas and NGLs revenues was caused by both decrease in natural gas and NGLs prices and as well as decrease in production volumes of natural gas and NGLs. The decrease in revenues was primarily attributable to lower average gas prices for the quarter ended June 30, 2012 of $3.51/Mcf, compared to $4.93/Mcf and natural gas liquids average prices for the six month ended June 30, 2012 of $40.03/Bbl, compared to $45.41/ Bbl to the corresponding period in 2011.
Investing Activities, Net cash flows used in investing activities for the six months ended June 30, 2012 and 2011 were $2,703,000 and $3,655,000, respectively. During the first six month of 2012 the Company invested in equipment for its well service subsidiary and oil and gas properties in the amount of $7,669,000 which were partially offset by proceeds from sale of investment in marketable securities in the amount of $4,373,000.
Financing Activities, Net cash flows used in financing activities were $7,323,000 and $987,000 for the six months ended June 30, 2012 and 2011, respectively. The Company has fully repaid the outstanding debt under Senior Credit Facility in the amount of $20,000,000 which was partially offset by new borrowings of $13,500,000 from a related party.
Results of Operations
Three Months Ended June 30, 2012 Compared to Three Months Ended June 30, 2011
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Three Months Ended June 30,
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2012
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2011
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(In thousands except per share
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Financial Results
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Net income attributable to common shareholders
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Net income attributable to common non-controlling interests
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Net income attributable to Isramco
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Earnings per common share – basic
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Earnings per common share – diluted
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Weighted average number of shares outstanding- basic
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Weighted average number of shares outstanding- diluted
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Production (excluding transportation and taxes)
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General and administrative
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(1) See Adjusted EBITDAX for a description of Adjusted EBITDAX, which is not a Generally Accepted Accounting Principles (GAAP) measure, and a reconciliation of Adjusted EBITDAX to income from operations before income taxes, which is presented in accordance with GAAP.
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Financial Results
Net Income, in the second quarter of 2012, our net income was $2,490,000 or $0.92 per share. This compares to net income of $1,301,000 or $0.48 per share, for the second quarter of 2011.
This increase was primarily due to an increase in revenues from well service activities, a decrease in lease operating expenses and a decrease in interest expenses which were partially offset by a decrease of natural gas and natural gas liquids ("NGLs") sales compared to the second quarter of 2011
Revenues, Volumes and Average Prices
Sales Revenues
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Three Months Ended June 30,
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In thousands except percentages
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2012
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2011
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D vs. 2011
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Our sales revenues for the second quarter of 2012 decreased by 11% when compared to same period in 2011, due to lower prices received for oil, gas, and NGLs and decrease in volume produced for natural gas and NGLs. That was partially offset by increase in crude oil production volume.
Volumes and Average Prices
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Three Months Ended June 30,
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D vs. 2011
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Natural Gas
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Average Price per Mcf (1)
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Total gas sales revenues (thousands)
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Average Price per Bbl (1)
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(10
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Total oil sales revenues (thousands)
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Average Price per Bbl (1)
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Total natural gas liquids sales revenues (thousands)
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(1) Amounts exclude the impact of cash paid/received on settled contracts as we did not elect to apply hedge accounting
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The company’s natural gas sales volumes decreased by 2%, crude oil sales volumes increased by 18% and natural gas liquids sales volumes decreased by 14% for the second quarter of 2012 compared to the same period of 2011.
Our average natural gas price received for the second quarter of 2011 decreased by 37%, or $1.98 per Mcf, when compared to the same period of 2011. Our average crude oil price for the second quarter of 2011 decreased by 10%, or $9.78 per Bbl, when compared to the same period of 2011. Our average natural gas liquids price for the second quarter of 2012 decreased by 26%, or $11.36 per Bbl, when compared to the same period of 2011.
Analysis of Oil and Gas Operations Sales Revenues
The following table provides a summary of the effects of changes in volumes and prices on Isramco’s sales revenues for the three months ended June 30, 2012 compared to the same period of 2011.
In thousands
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Natural Gas
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Oil
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Natural gas liquids
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Changes associated with sales volumes
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Operating Expenses
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Three Months Ended June 30,
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Lease operating expense, transportation and taxes
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Depreciation, depletion and amortization
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Loss from plugging and abandonment of wells
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General and administrative
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During three months ended June 30, 2012, our operating expenses decreased by 15% when compared to the same period of 2011 due to the following factors:
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Lease operating expense, transportation cost and taxes decreased by 27%, or $1,769,000, in 2012 when compared to 2011. This decrease was the result of lower number of workovers performed on our operated properties than in the first half of 2011. On a per unit basis, lease operating expenses (excluding transportation and taxes) decreased by $7.68 per MBOE to $18.78 per MBOE in 2012 from $26.46 per MBOE in 2011.
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Depreciation, Depletion & Amortization (“DD&A”) of the cost of proved oil and gas properties is calculated using the unit-of-production method. Our DD&A rate and expense are the composite of numerous individual field calculations. There are several factors that can impact our composite DD&A rate and expense, including but not limited to field production profiles, drilling or acquisition of new wells, disposition of existing wells, and reserve revisions (upward or downward) primarily related to well performance, commodity prices, and impairments. Changes in these factors may cause our composite DD&A rate and expense to fluctuate from period to period. DD&A increased by 2%, or $58,000 in 2012 when compared to 2011, primarily due to higher production (MBOE) which was partially offset by higher prices in 2011 (per MBOE) that impacted our estimated total reserves, which are the basis for the depletion calculation, and the impact of a 2011 impairment of $4,034,000 on the depletable base used to calculate DD&A. On a per unit basis, depletion expense decreased by $(0.09) per MBOE to $14.51 per MBOE in 2012 from $14.60 per MBOE in 2011.
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Accretion expense for asset retirement obligations slightly increased by 3%, or $7,000, in 2012 when compared to 2011.
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Loss from plugging and abandonment expenses increased by 161%, or $92,000 in 2012 when compared to 2011 primarily due to work resulting from plugging operations in compliance with requirements of state and federal regulations governing our wells.
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General and administrative expenses decreased by 4%, or $35,000 in 2012 when compared to 2011.
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Other expenses
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Three Months Ended June 30,
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Net gain on derivative contracts
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Interest expense. Isramco’s interest expense decreased by 20%, or $397,000, for the three months ended June 30, 2012 compared to the same period of 2011. This decrease was primarily due to lower average outstanding loans balance during the second quarter of 2012 comparing to 2011.
Net gain on derivative contracts. We enter into derivative commodity instruments to economically hedge our exposure to price fluctuations on our anticipated oil and natural gas production. Consistent with the prior year, we have elected not to designate any positions as cash flow hedges for accounting purposes. Accordingly, we recorded the net change in the mark-to-market value of these derivative contracts in our consolidated statement of operations.
At June 30, 2012, the Company had a $3.37 million commodity derivative asset, of which $1.6 million was classified as current. For the three months ended June 30, 2012, the Company recorded a net derivative gain of $3.22 million ($3.35 million unrealized gain and a $0.13 million loss from net cash paid on settled contracts).
At June 30, 2011, the Company had a $2.2 million commodity derivative asset, of which $1.7 million was classified as current. For the three months ended June 30, 2011, the Company recorded a net derivative gain of $2.9 million ($2.8 million unrealized gain and a $0.1 million gain from net cash received on settled contracts).
Adjusted EBITDAX.
To assess the operating results of Isramco, management analyzes income from operations before income taxes, interest expense, exploration expense, unrealized gain (loss) on derivative contracts and DD&A expense and impairments (“Adjusted EBITDAX”). Adjusted EBITDAX is not a GAAP measure. Isramco’s definition of Adjusted EBITDAX excludes exploration expense because exploration expense is not an indicator of operating efficiency for a given reporting period, but rather is monitored by management as a part of the costs incurred in exploration and development activities. Similarly, Isramco excludes DD&A expense and impairments from Adjusted EBITDAX as a measure of segment operating performance because capital expenditures are evaluated at the time capital costs are incurred. The Company’s definition of Adjusted EBITDAX also excludes interest expense to allow for assessment of segment operating results without regard to Isramco’s financing methods or capital structure. Adjusted EBITDAX is a widely accepted financial indicator of a company’s ability to incur and service debt, fund capital expenditures and make payments on its long term loans. Management believes that the presentation of Adjusted EBITDAX provides information useful in assessing the Company’s financial condition and results of operations.
However, Adjusted EBITDAX, as defined by Isramco, may not be comparable to similarly titled measures used by other companies. Therefore, Isramco’s consolidated Adjusted EBITDAX should be considered in conjunction with income (loss) from operations and other performance measures prepared in accordance with GAAP, such as operating income or cash flow from operating activities. Adjusted EBITDAX has important limitations as an analytical tool because it excludes certain items that affect income from continuing operations and net cash provided by operating activities. Adjusted EBITDAX should not be considered in isolation or as a substitute for an analysis of Isramco’s results as reported under GAAP. Below is a reconciliation of consolidated Adjusted EBITDAX to income (loss) from operations before income taxes.
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Three Months Ended June 30,
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2012
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Income from operations before income taxes
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Depreciation, depletion and amortization expense
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Unrealized loss (gain) on derivative contract
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Consolidated Adjusted EBITDAX
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Six Months Ended June 30, 2012 Compared to Six Months Ended June 30, 2011
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June 30,
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2012
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2011
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(In thousands except per share
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Financial Results
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Income tax expense (benefit)
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Net income (loss) attributable to common shareholders
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Net income attributable to non-controlling interests
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Net income (loss) attributable to Isramco
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Earnings (loss) per common share - basic
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Earnings (loss) per common share - diluted
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Weighted average number of shares outstanding-basic
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Weighted average number of shares outstanding- diluted
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Production (excluding transportation and taxes)
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General and administrative
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(1) See Adjusted EBITDAX for a description of Adjusted EBITDAX, which is not a Generally Accepted Accounting Principles (GAAP) measure, and a reconciliation of Adjusted EBITDAX to income from operations before income taxes, which is presented in accordance with GAAP.
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Financial Results
Net income, in the six months ended June 30, 2012, our net income was $4,032,000 or $1.48 per share. This compares to net loss of $3,005,000, or $(1.11) per share, for the same period of 2011.
This increase was primarily due to the impact of a loss on derivatives of ($3,158,000) in 2011, compared to a gain on derivatives of $1,560,000 in 2012, realized gain on sale of marketable securities of $3,650,000, a decrease in lease operating expenses and a decrease in interest expenses in 2012. In addition, results of operations from well service subsidiary add to the increase. The increase was partially offset by lower natural gas and NGLs sales revenues as a result of a decrease in natural gas and NGLs prices and a decrease in natural gas and NGLs production.
Revenues, Volumes and Average Prices
Sales Revenues
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Six Months Ended June 30,
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In thousands except percentages
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2012
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2011
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D vs. 2011
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Our sales revenues for the six months ended June 30, 2012 decreased by 9% when compared to same period of 2011 due to lower prices received for oil, natural gas and condensate and NGLs and decreased production volumes for natural gas and NGLs.
Volumes and Average Prices
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Six Months Ended June 30,
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2012
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2011
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D vs. 2011
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Natural Gas
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Average Price per Mcf (1)
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Total gas sales revenues (thousands)
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Average Price per Bbl (1)
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Total oil sales revenues (thousands)
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Average Price per Bbl (1)
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Total natural gas liquids sales revenues (thousands)
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(1) Amounts exclude the impact of cash paid/received on settled contracts as we did not elect to apply hedge accounting
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The company’s natural gas sales volumes decreased by 7%, natural gas liquids sales volumes by 19% and crude oil sales volumes increased by 6% for the six months ended June 30, 2012 compared to the same period of 2011.
Our average natural gas price for the six months ended June 30, 2012 decreased by 29%, or $1.42 per Mcf, when compared to the same period of 2011. Our average crude oil price for the six months ended June 30, 2012 decreased by 0.5% or $0.46 per Bbl, when compared to the same period of 2011. Our average natural gas liquids price for the six months ended June 30, 2012 decreased by 12%, or $5.38 per Bbl, when compared to the same period of 2011.
Analysis of Oil and Gas Operations Sales Revenues
The following table provides a summary of the effects of changes in volumes and prices on Isramco’s sales revenues for the six months ended June 30, 2012 compared to the same period of 2011.
In thousands
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Natural Gas
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Oil
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Natural gas liquids
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Changes associated with sales volumes
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Operating Expenses
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Six Months Ended June 30,
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In thousands except percentages
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2012
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2011
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D vs. 2011
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Lease operating expense, transportation and taxes
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Depreciation, depletion and amortization
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Loss from plug and abandonment
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General and administrative
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During six months ended June 30, 2012, our operating expenses decreased by 12% when compared to the same period of 2011 due to the following factors:
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Lease operating expense, transportation cost and taxes decreased by 19%, or $2,280,000, in 2012 when compared to 2011. This decrease was the result of reduced number of workovers performed on our operated properties in the first half of 2011. On a per unit basis, lease operating expenses (excluding transportation and taxes) decreased by $3.79 per MBOE to $18.81 per MBOE in 2012 from $22.60 per MBOE in 2011.
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Depreciation, Depletion & Amortization (“DD&A”) of the cost of proved oil and gas properties is calculated using the unit-of-production method. Our DD&A rate and expense are the composite of numerous individual field calculations. There are several factors that can impact our composite DD&A rate and expense, including but not limited to field production profiles, drilling or acquisition of new wells, disposition of existing wells, and reserve revisions (upward or downward) primarily related to well performance and commodity prices, and impairments. Changes in these factors may cause our composite DD&A rate and expense to fluctuate from period to period. DD&A decreased by 8%, or $(446,000), in 2012 when compared to 2011, primarily due to higher prices (per MBOE) that impacted our estimated total reserves, which are the basis for the depletion calculation, and the impact of a 2011 impairment of $4,034,000 on the depletable base used to calculate DD&A. On a per unit basis, depletion expense decreased by $(0.48) per MBOE to $14.17 per MBOE in 2012 from $14.65 per MBOE in 2011.
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Accretion expense for asset retirement obligations increased by 4%, or $16,000, in 2012 when compared to 2011.
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Loss from plugging and abandonment expenses increased by 91%, or $154,000 in 2012 when compared to 2011, primarily due to plugging operations required by state and federal regulations applicable to our wells.
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General and administrative expenses increased by 3%, or $70,000 in 2012 when compared to 2011 primarily due to higher professional services expenses.
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Other expenses (income)
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Six Months Ended June 30,
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In thousands except percentages
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2012
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2011
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D vs. 2011
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Realized gain on marketable securities
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Net loss (gain) on derivative contracts
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Currency exchange rate differences
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Interest expense. Isramco’s interest expense decreased by 24%, or $991,000, for the six months ended June 30, 2012 compared to the same period of 2011. This decrease was primarily due to onetime expense paid to Macquarie Bank, N.A in 2011 in connection with assignment and transfer of Wells Fargo Senior Credit Facility and the lower average outstanding balance of the loans during the six month ended June 30, 2012.
Net loss (gain) on derivative contracts. We enter into derivative commodity instruments to economically hedge our exposure to price fluctuations on our anticipated oil and natural gas production. Consistent with the prior year, we have elected not to designate any positions as cash flow hedges for accounting purposes. Accordingly, we recorded the net change in the mark-to-market value of these derivative contracts in our consolidated statement of operations.
At June 30, 2012, the Company had a $3.37 million commodity derivative asset, of which $1.6 million was classified as current. For the six months ended June 30, 2012, the Company recorded a net derivative gain of $1.56 million ($0.99 million unrealized gain and a $0.57 million gain from net cash received on settled contracts).
At June 30, 2011, the Company had a $2.2 million commodity derivative asset, of which $1.7 million was classified as current. For the six months ended June 30, 2011, the Company recorded a net derivative loss of $3.2 million ($3.2 million unrealized gain and a $6.4 million loss from net cash paid on settled contracts).
Adjusted EBITDAX.
To assess the operating results of Isramco, management analyzes income from operations before income taxes, interest expense, exploration expense, unrealized gain (loss) on derivative contracts and DD&A expense and impairments (“Adjusted EBITDAX”). EBITDAX is not a GAAP measure. Isramco’s definition of Adjusted EBITDAX excludes exploration expense because exploration expense is not an indicator of operating efficiency for a given reporting period, but rather is monitored by management as a part of the costs incurred in exploration and development activities. Similarly, Isramco excludes DD&A expense and impairments from Adjusted EBITDAX as a measure of segment operating performance because capital expenditures are evaluated at the time capital costs are incurred. The Company’s definition of Adjusted EBITDAX also excludes interest expense to allow for assessment of segment operating results without regard to Isramco’s financing methods or capital structure. Adjusted EBITDAX is a widely accepted financial indicator of a company’s ability to incur and service debt and fund capital expenditures and make payments on its long term loans and Management believes that the presentation of Adjusted EBITDAX provides information useful in assessing the Company’s financial condition and results of operations.
However, Adjusted EBITDAX, as defined by Isramco, may not be comparable to similarly titled measures used by other companies. Therefore, Isramco’s consolidated Adjusted EBITDAX should be considered in conjunction with income (loss) from operations and other performance measures prepared in accordance with GAAP, such as operating income or cash flow from operating activities. Adjusted EBITDAX has important limitations as an analytical tool because it excludes certain items that affect income from continuing operations and net cash provided by operating activities. Adjusted EBITDAX should not be considered in isolation or as a substitute for an analysis of Isramco’s results as reported under GAAP. Below is a reconciliation of consolidated Adjusted EBITDAX to income (loss) from operations before income taxes.
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Six Months Ended June 30,
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In thousands
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2012
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2011
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Income (loss) from operations before income taxes
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Depreciation, depletion and amortization expense
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Unrealized gain on derivative contract
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Consolidated Adjusted EBITDAX
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The Consolidated Adjusted EBITDAX increased due to settlement of oil and gas hedging positions in the approximate amount of $7,000,000 in 2011 and a realized gain on sale of marketable securities of $3,650,000 in 2012.
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
Derivative Instruments and Hedging Activity
We are exposed to various risks, including energy commodity price risk. If oil and natural gas prices decline significantly our ability to finance our capital budget and operations could be adversely impacted. We expect energy prices to remain volatile and unpredictable, therefore we have adopted a risk management policy which provides for the use of derivative instruments to provide partial protection against declines in oil and natural gas prices by reducing the risk of price volatility and the affect it could have on our operations. The type of derivative instrument that we typically utilize is swaps. The total volumes which we hedge through the use of our derivative instruments vary from period to period.
We are exposed to market risk on our open derivative contracts of non-performance by our counterparties. However, we do not expect such non-performance because our contracts are with major financial institutions with investment grade credit ratings. Each of the counterparties to our derivative contracts is a lender in our Senior Credit Agreement. We did not post collateral under any of these contracts as they are secured under the Senior Credit Agreement.
We are also exposed to interest rate risk on our variable interest rate debt. If interest rates increase, our interest expense would increase and our available cash flow would decrease. We continue to monitor our risk exposure as we incur future indebtedness at variable interest rates and will look to continue our risk management policy as situations present themselves. Periodically, we look to utilize interest rate swaps to reduce the exposure to market rate fluctuations by converting variable interest rates to fixed interest rates.
We account for our derivative activities under the provisions of ASC 815, Derivatives and Hedging (ASC 815). ASC 815 establishes accounting and reporting that every derivative instrument be recorded on the balance sheet as either an asset or liability measured at fair value. See Item 1. Consolidated Financial Statements—Note 3, “Derivative contracts” for more details.
ITEM 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures.
In accordance with Exchange Act Rule 13a-15 and 15d-15, we carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of June 30, 2012 to provide reasonable assurance that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Our disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed in reports filed or submitted 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.
There were no changes in the Company’s internal control over financial reporting that occurred during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II - Other Information
ITEM 1. Legal Proceedings
We disclosed information in our quarterly report on Form 10-Q for the three months ended September 30, 2011 relating to two putative shareholder derivative petitions that were filed by individual shareholders of the Company in the District Court of Harris County, Texas. These petitions each named certain of our officers and directors as defendants. Each of these suits claims that the corporation was damaged as a result of various breaches of fiduciary duty, self dealing and other wrongdoing in connection with the Restated Agreement between the Company and Goodrich Global, Ltd. (an affiliate of the Company) (the “Restated Agreement”), primarily on the part of the Company’s Chairman and Chief Executive Officer, Haim Tsuff, and Jackob Maimon. On or about April 6, 2011, a third complaint was filed in the 295th District Court of Harris County, Texas by Yuval Ran, who claimed to be a shareholder, against certain of our officers and directors and several corporate parties controlled by Haim Tsuff. As with the prior suits, this complaint alleged various breaches of duty, self dealing and other wrongdoing in connection with the Restated Agreement, primarily on the part of the Haim Tsuff and Jackob Maimon. In addition, this suit alleged claims relating to other transactions between the Company and entities controlled by Haim Tsuff, including but not limited to the loan transactions between the Company and related parties, the lease and sale of a cruise ship, and the closure of the Company’s Israel branch office. The third complaint was transferred to the 55th Judicial District Court of Harris County, Texas, by order signed April 20, 2011, and consolidated with the above-described first and second complaints by order signed May 21, 2011, into a single case, called “Lead Cause No. 2010-34535; In Re Isramco, Inc. Shareholder Derivative Litigation; In the 55th Judicial District Court of Harris County, Texas (the “Derivative Litigation”).
We also disclosed information in our quarterly report on Form 10-Q for the three months ended September 30, 2011 relating to an additional putative shareholder derivative complaint that was filed by an individual shareholder, Yuval Lapiner, on July 7, 2011 in the Delaware Chancery Court in Wilmington, Delaware, naming certain of our officers and directors as defendants. The claims asserted in this case are essentially the same damage claims as asserted in the lawsuit filed in April 2011 and described above. The Company filed motions in the Chancery Court to Dismiss or Stay the lawsuit and, by order dated October 20, 2011, the case was dismissed. The plaintiff did not appeal. Yuval Lapiner then filed a motion to intervene in the Derivative Litigation and that motion was denied. Mr. Lapiner then filed a motion for attorney’s fees that was also denied. On December 12, 2011 the court approved the terms of the mediated settlement and entered final order and judgment in the case. The Company paid plaintiff attorney’s fees in the amount of $1,000,000 and made the amendments to its bylaws, committee charters and other corporate governance changes that were agreed to in connection with the settlement.
After the judgment was rendered in the Derivative Litigation, Mr. Lapiner filed a motion for new trial and on February 12, 2012 filed a Notice of Appeal to the Fourteenth Court of Appeals in Houston, Texas. A Motion To Dismiss the appeal has been filed by the Company (as well as other appellees) stating, among other things, that the court of appeals does not have jurisdiction to hear the appeal because Yuval Lapiner did not have standing to bring the derivative action and, therefore, does not have standing to appeal from the approval of the settlement and because on procedural grounds the February 12, 2012, Notice of Appeal was untimely. The case remains on appeal.
None
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
None
ITEM 3. Default Upon Senior Securities
None
ITEM 4. Removed and Reserved
None
ITEM 5. Other Information
None
Exhibits
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31.1
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31.2
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32.1
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32.2
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33.1
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101.INS*
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XBRL Instance Document
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101.SCH*
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XBRL Taxonomy Extension Schema
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101.CAL*
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XBRL Taxonomy Extension Calculation Linkbase
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101.DEF*
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XBRL Taxonomy Extension Definition Linkbase
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101.LAB*
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XBRL Taxonomy Extension Label Linkbase
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101.PRE*
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XBRL Taxonomy Extension Presentation Linkbase
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* Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934 and otherwise are not subject to liability.
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.
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ISRAMCO, INC
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Date: AUGUST 9, 2012
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By:
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/s/ HAIM TSUFF
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HAIM TSUFF
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CHIEF EXECUTIVE OFFICER
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(PRINCIPAL EXECUTIVE OFFICER)
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Date: AUGUST 9, 2012
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By:
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/s/ EDY FRANCIS
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EDY FRANCIS
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CHIEF FINANCIAL OFFICER
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(PRINCIPAL FINANCIAL AND PRINCIPAL ACCOUNTING OFFICER)
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