ADAMS RESOURCES & ENERGY, INC. - Quarter Report: 2008 September (Form 10-Q)
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D. C. 20549
FORM
10-Q
(Mark
One)
x
|
Quarterly
report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of
1934
|
For the
quarterly period ended September 30, 2008
o
|
Transition
report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of
1934
|
For the transition period from
______________to
Commission
File Number 1-7908
ADAMS RESOURCES &
ENERGY, INC.
(Exact
name of Registrant as specified in its charter)
Delaware
|
74-1753147
|
|
(State
or other jurisdiction of
incorporation
or organization)
|
(I.R.S.
Employer
Identification
No.)
|
4400 Post Oak Pkwy Ste 2700 , Houston,
Texas 77027
|
(Address
of principal executive office & Zip
Code)
|
Registrant's
telephone number, including area code (713)
881-3600
Indicate
by check mark whether the Registrant
(1) has filed all reports required to be
filed by Section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. 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 definition of “large accelerated filer” “accelerated
filer” and “smaller reporting company” in Rule 126-2 of the Exchange
Act. (Check one)
Large
accelerated filero
Accelerated filero
Non-accelerated filerx Smaller Reporting
Companyo
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
A total
of 4,217,596 shares of Common Stock were outstanding at November 1,
2008.
PART
1 – FINANCIAL INFORMATION
Item
1. Financial Statements
ADAMS
RESOURCES & ENERGY, INC. AND SUBSIDIARIES
UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In
thousands, except per share data)
Nine
Months Ended
|
Three
Months Ended
|
|||||||||||||||
September
30,
|
September
30,
|
|||||||||||||||
2008
|
2007
|
2008
|
2007
|
|||||||||||||
REVENUES:
|
||||||||||||||||
Marketing
|
$ | 3,466,429 | $ | 1,697,574 | $ | 1,264,609 | $ | 680,085 | ||||||||
Transportation
|
53,974 | 48,854 | 18,591 | 17,208 | ||||||||||||
Oil
and gas
|
14,259 | 9,981 | 5,122 | 3,002 | ||||||||||||
3,534,662 | 1,756,409 | 1,288,322 | 700,295 | |||||||||||||
COSTS
AND EXPENSES:
|
||||||||||||||||
Marketing
|
3,463,202 | 1,683,122 | 1,274,033 | 674,661 | ||||||||||||
Transportation
|
47,369 | 40,893 | 16,025 | 14,645 | ||||||||||||
Oil
and gas operations
|
7,386 | 7,708 | 3,185 | 2,597 | ||||||||||||
Oil
and gas property sale
|
- | (12,078 | ) | - | - | |||||||||||
General
and administrative
|
7,458 | 7,491 | 2,038 | 2,307 | ||||||||||||
Depreciation,
depletion and amortization
|
9,157 | 7,038 | 3,085 | 2,272 | ||||||||||||
3,534,572 | 1,734,174 | 1,298,366 | 696,482 | |||||||||||||
Operating
earnings (loss)
|
90 | 22,235 | (10,044 | ) | 3,813 | |||||||||||
Other
income (expense):
|
||||||||||||||||
Interest
income
|
879 | 1,266 | 308 | 443 | ||||||||||||
Interest
expense
|
(136 | ) | (75 | ) | (91 | ) | (12 | ) | ||||||||
Earnings
(loss) before income taxes
|
833 | 23,426 | (9,827 | ) | 4,244 | |||||||||||
Income
tax provision (benefit)
|
73 | 8,373 | (3,551 | ) | 1,389 | |||||||||||
Net
earnings (loss)
|
$ | 760 | $ | 15,053 | $ | (6,276 | ) | $ | 2,855 | |||||||
EARNINGS
PER SHARE:
|
||||||||||||||||
Basic
and diluted net earnings (loss)
|
||||||||||||||||
per
common share
|
$ | .18 | $ | 3.57 | $ | (1.49 | ) | $ | .68 | |||||||
DIVIDENDS
PER COMMON SHARE
|
$ | - | $ | - | $ | - | $ | - |
The
accompanying notes are an integral part of these financial
statements.
1
ADAMS
RESOURCES & ENERGY, INC. AND SUBSIDIARIES
UNAUDITED
CONDENSED CONSOLIDATED BALANCE SHEETS
(In
thousands)
September
30,
|
December
31,
|
|||||||
2008
|
2007
|
|||||||
ASSETS
|
||||||||
Current
assets:
|
||||||||
Cash
and cash equivalents
|
$ | 39,045 | $ | 23,697 | ||||
Accounts
receivable, net of allowance for doubtful
|
||||||||
accounts
of $1,050 and $192, respectively
|
234,906 | 261,710 | ||||||
Inventories
|
16,398 | 14,776 | ||||||
Fair
value contracts
|
4,287 | 5,388 | ||||||
Income
tax receivables
|
3,853 | 2,554 | ||||||
Prepayments
|
4,006 | 3,768 | ||||||
Total
current assets
|
302,495 | 311,893 | ||||||
Property
and equipment
|
120,138 | 110,526 | ||||||
Less
– accumulated depreciation,
|
||||||||
depletion
and amortization
|
(79,260 | ) | (70,828 | ) | ||||
40,878 | 39,698 | |||||||
Other
assets:
|
||||||||
Fair
value contracts
|
353 | 1,563 | ||||||
Cash
deposits and other
|
3,730 | 3,921 | ||||||
$ | 347,456 | $ | 357,075 | |||||
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
||||||||
Current
liabilities:
|
||||||||
Accounts
payable
|
$ | 243,498 | $ | 252,310 | ||||
Accounts
payable – related party
|
127 | 84 | ||||||
Fair
value contracts
|
2,580 | 4,116 | ||||||
Accrued
and other liabilities
|
6,194 | 3,707 | ||||||
Current
deferred income taxes
|
1,097 | 1,104 | ||||||
Total
current liabilities
|
253,496 | 261,321 | ||||||
Other
liabilities:
|
||||||||
Asset
retirement obligations
|
1,230 | 1,153 | ||||||
Deferred
income taxes and other
|
2,262 | 4,063 | ||||||
Fair
value contracts
|
266 | 1,096 | ||||||
257,254 | 267,633 | |||||||
Commitments
and contingencies (Note 5)
|
||||||||
Shareholders’
equity:
|
||||||||
Preferred
stock - $1.00 par value, 960,000 shares
|
||||||||
authorized,
none outstanding
|
- | - | ||||||
Common
stock - $.10 par value, 7,500,000 shares
|
||||||||
authorized,
4,217,596 shares outstanding
|
422 | 422 | ||||||
Contributed
capital
|
11,693 | 11,693 | ||||||
Retained
earnings
|
78,087 | 77,327 | ||||||
Total
shareholders’ equity
|
90,202 | 89,442 | ||||||
$ | 347,456 | $ | 357,075 |
The
accompanying notes are an integral part of these financial
statements.
2
ADAMS
RESOURCES & ENERGY, INC. AND SUBSIDIARIES
UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In
thousands)
Nine
Months Ended
|
||||||||
September
30,
|
||||||||
2008
|
2007
|
|||||||
CASH
PROVIDED BY OPERATIONS:
|
||||||||
Net
earnings
|
$ | 760 | $ | 15,053 | ||||
Adjustments
to reconcile net earnings to net cash
|
||||||||
provided
by operating activities -
|
||||||||
Depreciation,
depletion and amortization
|
9,157 | 7,038 | ||||||
Loss
(gain) on property disposals
|
383 | (12,034 | ) | |||||
Dry
hole costs incurred
|
1,860 | 2,847 | ||||||
Impairment
of oil and gas properties
|
1,293 | 633 | ||||||
Provision
for doubtful accounts
|
858 | 111 | ||||||
Other,
net
|
(37 | ) | 301 | |||||
Decrease
(increase) in accounts
receivable
|
25,946 | (11,760 | ) | |||||
Decrease
(increase) in inventories
|
(1,622 | ) | (5,581 | ) | ||||
Net
change in fair value contracts
|
(55 | ) | (6 | ) | ||||
Decrease
(increase) in tax receivable
|
(1,299 | ) | 904 | |||||
Decrease
(increase) in prepayments
|
(238 | ) | (2,382 | ) | ||||
Increase
(decrease) in accounts payable
|
(8,901 | ) | 13,757 | |||||
Increase
(decrease) in accrued liabilities
|
2,487 | (4,644 | ) | |||||
Deferred
income taxes
|
(1,793 | ) | 380 | |||||
Net
cash provided by operating activities
|
28,799 | 4,617 | ||||||
INVESTING
ACTIVITIES:
|
||||||||
Property
and equipment additions
|
(13,780 | ) | (12,104 | ) | ||||
Insurance
and tax refunds (deposits)
|
290 | (424 | ) | |||||
Proceeds
from property sales
|
39 | 15,319 | ||||||
Redemption
of short-term investments
|
10,000 | 15,000 | ||||||
Investment
in short-term investments
|
(10,000 | ) | (15,000 | ) | ||||
Net
cash (used in) investing activities
|
(13,451 | ) | 2,791 | |||||
FINANCING
ACTIVITIES:
|
||||||||
Net
repayments under credit agreements
|
- | (3,000 | ) | |||||
Net
cash used in financing activities
|
- | (3,000 | ) | |||||
Increase
in cash and cash equivalents
|
15,348 | 4,408 | ||||||
Cash
at beginning of period
|
23,697 | 20,668 | ||||||
Cash
at end of period
|
$ | 39,045 | $ | 25,076 | ||||
Supplemental
disclosure of cash flow information:
|
||||||||
Interest
paid during the period
|
$ | 136 | $ | 79 | ||||
Income
taxes paid during the period
|
$ | 2,319 | $ | 7,449 | ||||
Increase
(decrease) in liabilities associated with
|
||||||||
property additions
|
$ | (132 | ) | $ | (704 | ) |
The
accompanying notes are an integral part of these financial
statements
3
ADAMS
RESOURCES & ENERGY, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED
CONSOLIDATED
FINANCIAL STATEMENTS
Note 1 -
Basis of Presentation
The
accompanying condensed consolidated financial statements are unaudited but, in
the opinion of the Company's management, include all adjustments (consisting of
normal recurring accruals) necessary for the fair presentation of its financial
position at September 30, 2008, its results of operations and its cash flows for
the nine months ended September 30, 2008 and 2007. Certain information and note
disclosures normally included in annual financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to Securities and Exchange Commission rules and
regulations. Although the Company believes the disclosures made are
adequate to make the information presented not misleading, it is suggested that
these consolidated financial statements be read in conjunction with the
financial statements, and the notes thereto, included in the Company's latest
annual report on Form 10-K. The interim statement of operations is not
necessarily indicative of results to be expected for a full year.
Note 2 -
Summary of Significant Accounting Policies
Principles of
Consolidation
The
accompanying consolidated financial statements include the accounts of Adams
Resources & Energy, Inc., a Delaware corporation, and its wholly owned
subsidiaries (the "Company") after elimination of all significant intercompany
accounts and transactions. In order to conform to current year
presentations, certain reclassifications have been made to prior year amounts in
the Statement of Cashflows under “Provision for Doubtful Accounts”.
Nature of Operations
The
Company is engaged in the business of crude oil, natural gas and petroleum
products marketing, as well as tank truck transportation of liquid chemicals and
oil and gas exploration and production. Its primary area of operation
is within a 1,000 mile radius of Houston, Texas.
Cash
and Cash Equivalents
Cash and
cash equivalents include any Treasury bill, commercial paper, money market fund
or federal funds with maturity of 90 days or less. Depending on cash
availability, auction rate investments in municipal bonds and bond mutual funds
may also be made from time to time depending on market
conditions. The Company invests in tax-free municipal securities in
order to enhance the after-tax rate of return from short-term investments of
cash. The Company had no auction rate investments as of September 30,
2008 and December 31, 2007.
Allowance
for Doubtful Accounts
Accounts
receivable result from sales of crude oil, natural gas, and refined products as
well as from trucking services. Marketing segment wholesale level sales of crude
oil and natural gas comprise in excess of ninety percent of accounts receivable
and under industry practices, such items are “settled” and paid in cash on the
twentieth and twenty-fifth day, respectively, of the month following the
transaction date. For such receivables, an allowance for doubtful
accounts is determined based on specific account identification. The
balance of accounts receivable results from sales of refined petroleum products
and trucking services. For this component of receivables, the
allowance for doubtful accounts is determined based on a review of specific
accounts combined with a review of the general status of the aging of all
accounts.
4
Inventories
Crude oil
and petroleum product inventories are carried at the lower of cost or market.
Petroleum products inventory includes gasoline, lubricating oils and other
petroleum products purchased for resale. Petroleum products and crude oil
inventory is valued at average cost. Components of inventory are as
follows (in
thousands):
September
30,
|
December
31,
|
|||||||
2008
|
2007
|
|||||||
Crude
oil
|
$ | 13,706 | $ | 12,437 | ||||
Petroleum
products
|
2,692 | 2,339 | ||||||
$ | 16,398 | $ | 14,776 |
Property
and Equipment
Expenditures
for major renewals and betterments are capitalized, and expenditures for
maintenance and repairs are expensed as incurred. Interest costs
incurred in connection with major capital expenditures are capitalized and
amortized over the lives of the related assets. When properties are retired or
sold, the related cost and accumulated depreciation, depletion and amortization
("DD&A") is removed from the accounts and any gain or loss is reflected in
earnings.
Oil and
gas exploration and development expenditures are accounted for in accordance
with the successful efforts method of accounting. Direct costs of
acquiring developed or undeveloped leasehold acreage, including lease bonus,
brokerage and other fees, are capitalized. Exploratory drilling costs are
initially capitalized until the properties are evaluated and determined to be
either productive or nonproductive. Such evaluations are made on a
quarterly basis. If an exploratory well is determined to be
nonproductive, the capitalized costs of drilling the well are charged to
expense. Costs incurred to drill and complete development wells, including dry
holes, are capitalized. As of September 30, 2008, the Company had no
unevaluated or suspended exploratory drilling costs.
Producing
oil and gas leases, equipment and intangible drilling costs are depleted or
amortized over the estimated recoverable reserves using the units-of-production
method. Other property and equipment is depreciated using the
straight-line method over the estimated average useful lives of three to fifteen
years for marketing, three to fifteen years for transportation and ten to twenty
years for all others.
The
Company periodically reviews long-lived assets for impairment whenever there is
evidence that the carrying value of such assets may not be
recoverable. This consists of comparing the carrying value of the
asset with the asset’s expected future undiscounted cash flows without interest
costs. Estimates of expected future cash flows represent management’s
best estimate based on reasonable and supportable assumptions. Proved
oil and gas properties are reviewed for impairment on a field-by-field
basis. Any impairment recognized is permanent and may not be
restored. For the nine-month periods ended September 30, 2008 and
2007, there were impairment provisions totaling zero and $11,000, respectively,
on producing oil and gas properties. In addition, on a quarterly basis,
management evaluates the carrying value of non-producing properties and
unevaluated properties and may deem them impaired for lack of drilling
activity. Accordingly, impairment provisions on non-producing
properties totaling $1,293,000 and $622,000 were recorded for the nine-month
periods ended September 30, 2008 and 2007, respectively. Impairment
provisions on non-producing properties totaled $421,000 and $225,000 for the
three-month periods ended September 30, 2008 and 2007,
respectively.
5
Other
Assets
Other
assets primarily consist of cash deposits associated with the Company’s business
activities. The Company has established certain deposits to support
its participation in its liability insurance program and such deposits totaled
$2,751,000 and $3,040,000 as of September 30, 2008 and December 31, 2007,
respectively. In addition, the Company maintains certain deposits to
support the collection and remittance of state crude oil severance
taxes. Such deposits totaled $131,000 and $333,000 as of September
30, 2008 and December 31, 2007, respectively.
Revenue
Recognition
Commodity
purchases and sale contracts utilized by the Company’s marketing businesses
qualify as derivative instruments under Statement of Financial Accounting
Standards (“SFAS”) No. 133, “Accounting for Derivative Instruments and Hedging
Activities.”
All
natural gas, as well as certain specifically identified crude oil purchase and
sale contracts are designated as trading activities under the guidance provided
by SFAS No. 115, “Accounting for Certain Debt and Equity
Securities.” From the time of contract origination, such contracts
are marked-to-market under SFAS No. 133 and recorded on a net revenue basis in
the accompanying financial statements in accordance with Emerging Issues Task
Force (“EITF”) 02-03 “Issues Involved in Accounting for Derivative Contracts
Held for Trading Purposes and Contracts Involved in Energy Trading and Risk
Management Activities.”
Substantially
all crude oil and refined products purchase and sale contracts qualify and are
designated as non-trading activities and the Company accordingly elects the
normal purchases and sales exception under SFAS No. 133. For normal
purchase and sale activities, the Company’s customers are invoiced monthly based
upon contractually agreed upon terms and revenue is recognized in the month in
which the physical product is delivered to the customer. Such sales
are recorded gross in the financial statements based on the guidance provided by
EITF 99-19, “Reporting Revenue Gross as a Principal versus Net as an
Agent.”
Certain
crude oil contracts may be with a single counterparty to provide for similar
quantities of crude oil to be bought and sold at two different
locations. These contracts are entered into for a variety of reasons,
including effecting the transportation of the commodity, to minimize credit
exposure, and to meet the competitive demands of the
customer. Consistent with the requirements of EITF 04-13, “Accounting
for Purchases and Sales of Inventory with the Same Counterparty,” these buy/sell
arrangements are reflected on a net revenue basis in the accompanying financial
statements.
Transportation
customers are invoiced, and the related revenue is recognized as the service is
provided. Oil and gas revenue from the Company’s interests in
producing wells is recognized as title and physical possession of the oil and
gas passes to the purchaser.
Earnings
Per Share
The
Company computes and presents earnings per share in accordance with SFAS No.
128, “Earnings Per Share”, which requires the presentation of basic earnings per
share and diluted earnings per share for potentially dilutive securities.
Earnings per share are based on the weighted average number of shares of common
stock and potentially dilutive common stock shares outstanding during the
period. The weighted average number of shares outstanding was 4,217,596 for the
three-month and nine-month periods ended September 30, 2008 and
2007. There were no potentially dilutive securities during those
periods in 2008 and 2007.
6
Share-Based
Payments
During
the periods presented herein, the Company had no stock-based employee
compensation plans, nor any other share-based payment arrangements.
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ
from those estimates. Examples of significant estimates used in the accompanying
condensed consolidated financial statements include the accounting for
depreciation, depletion and amortization, revenue accruals, oil and gas property
impairments, the provision for bad debts, insurance related accruals, income
taxes, contingencies and valuation of fair value contracts.
Fair
Value Measurements
The
carrying amount reported in the balance sheet for cash and cash equivalents,
accounts receivable and accounts payable approximates fair value because of the
immediate or short-term maturity of these financial instruments.
Fair
value contracts consist of derivative financial instruments as defined under
SFAS No. 133 and such contracts are recorded as either an asset or liability
measured at its fair value. Changes in fair value are recognized immediately in
earnings unless the derivatives qualify for, and the Company elects, cash flow
hedge accounting. The Company had no contracts designated for hedge
accounting under SFAS No. 133 during any current reporting
periods.
SFAS No.
157, “Fair Value Measurements” defines fair value, establishes a framework for
measuring fair value and expands disclosures related to fair value
measurements. SFAS No. 157 clarifies that fair value should be based
on assumptions that market participants would use when pricing an asset or
liability and establishes a fair value hierarchy of three levels that
prioritizes the information used to develop those
assumptions. Currently, for all items presented herein, the Company
utilizes a market approach to valuing its contracts. On a contract by
contract, forward month by forward month basis, the Company obtains observable
market data for valuing its contracts. The data utilized falls into a
fair value hierarchy as defined by SFAS No. 157. The fair value
hierarchy gives the highest priority to quoted prices in active markets and the
lowest priority to unobservable data. The fair value hierarchy is
summarized as follows:
|
Level
1 – quoted prices in active markets for identical assets or liabilities
that may be accessed at the measurement date. Active markets
are those in which transactions for the asset or liability occur in
sufficient frequency and volume to provide pricing information on an
ongoing basis.
|
|
Level
2 – (a) quoted prices for similar assets or liabilities in active markets,
(b) quoted prices for identical assets or liabilities but in markets that
are not actively traded or in which little information is released to the
public, (c) observable inputs other than quoted prices and (d) inputs
derived from observable market
data.
|
|
Level
3 – Unobservable market data inputs for assets or
liabilities.
|
7
The
Company adopted SFAS No. 157 effective January 1, 2008 and such adoption did not
have a material impact on asset or liability values. As of September
30, 2008, the Company’s fair value assets and liabilities are summarized and
categorized as follows (in
thousands):
Market
Data Inputs
|
||||||||||||||||
Level
1
|
Level
2
|
Level
3
|
||||||||||||||
Quoted
Prices
|
Observable
|
Unobservable
|
Total
|
|||||||||||||
Derivatives
|
||||||||||||||||
-
Current assets
|
$ | 893 | $ | 3,394 | $ | - | $ | 4,287 | ||||||||
- Long-term
assets
|
47 | 306 | - | 353 | ||||||||||||
-
Current liabilities
|
(538 | ) | (2,042 | ) | - | (2,580 | ) | |||||||||
-
Long-term liabilities
|
- | (266 | ) | - | (266 | ) | ||||||||||
Net
Value
|
$ | 402 | $ | 1,392 | $ | - | $ | 1,794 |
The
Company’s fair value contracts give rise to market risk, which represents the
potential loss that may result from a change in the market value of a particular
commitment. The Company monitors and manages its exposure to market
risk to ensure compliance with the Company’s risk management policies. Such
policies are regularly assessed to ensure their appropriateness given
management’s objectives, strategies and current market conditions.
When
determining fair value measurements, the Company makes credit valuation
adjustments to reflect both its own nonperformance risk and its counterparty’s
nonperformance risk. When adjusting the fair value of derivative
contracts for the effect of nonperformance risk, the impact of netting and any
applicable credit enhancements, such as collateral postings, thresholds, and
guarantees are considered. Credit valuation adjustments utilizes
Level 3 inputs, such as credit scores to evaluate the likelihood of default by
the Company or its counterparties. As of September 30, 2008, credit
valuation adjustments were not significant to the overall valuation of the
Company’s fair value contracts. As a result, fair value assets and
liabilities in their entirety are classified in Levels 1 or 2 of the fair value
hierarchy.
Asset
Retirement Obligations
The
Company records a long-term liability for the estimated retirement costs
associated with certain tangible long-lived assets. The estimated
fair value of such asset retirement obligations are recorded in the period in
which they are incurred and the corresponding cost capitalized by increasing the
carrying amount of the related long-lived asset. The liability is accreted to
its then present value each period, and the capitalized cost is depreciated over
the useful life of the related asset. If the liability is settled for an amount
other than the recorded amount, a gain or loss is recognized.
In
addition to an accrual for asset retirement obligations, the Company maintains
$75,000 in escrow cash, which is legally restricted for the potential purpose of
settling asset retirement costs in accordance with certain state
regulations. Such cash deposits are included in other assets in the
accompanying balance sheet.
New
Accounting Pronouncements
In
February 2007, the Financial Accounting Standards Board “FASB” issued SFAS No.
159, “The Fair Value Option for Financial Assets and Financial Liabilities”. SFAS No. 159
provides an entity with the option to measure certain assets and liabilities and
other items at fair value, with changes in fair value recognized in earnings as
those changes occur. The provisions of SFAS No. 159 do not affect the
fair value measurement of derivative financial instruments under SFAS No. 133 as
shown above. The provisions of SFAS No. 159 became effective
beginning January 1, 2008. Management did not elect the fair value
option for any eligible financial assets or liabilities not already carried at
fair value.
8
In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities – an amendment of FASB Statement No. 133,” as amended and
interpreted. SFAS No. 161 changes the disclosure requirements
for derivative instruments and hedging activities. Entities are
required to provide enhanced disclosures about (a) how and why an entity uses
derivative instruments, (b) how derivative instruments and related hedged
items are accounted for under SFAS No. 133 and its related interpretations and
(c) how derivative instruments and related hedged items affect an entity’s
financial position, financial performance, and cash flows. SFAS No.
161 is effective for financial statements issued for fiscal years and interim
periods beginning after November 15, 2008. Early adoption is
permitted. The Company is currently evaluating the impact the
adoption of SFAS No. 161 will have on its financial statements.
In
February 2008, the FASB issued FASB Staff Position No. FAS 157-2, “Effective
Date of FASB Statement No. 157,” (“FSP FAS No. 157-2”). This Staff Position
amends SFAS No. 157 to delay the effective date of SFAS No. 157 for
non-financial assets and non-financial liabilities until fiscal years beginning
after November 15, 2008, except for items that are recognized or disclosed at
fair value in the financial statements on a recurring basis. The Company is
currently assessing the impact of applying FSP FAS No. 157-2 to its
non-financial assets and liabilities. Future financial statements are
expected to include enhanced disclosures with respect to fair value
measurements.
Note 3 –
Segment Reporting
The
Company is primarily engaged in the business of marketing crude oil, natural gas
and petroleum products; tank truck transportation of liquid chemicals; and oil
and gas exploration and production. Information concerning the
Company’s various business activities is summarized as follows (in thousands):
-
Nine Month Comparison
Segment
|
Depreciation
|
Property
and
|
||||||||||||||
Operating
|
Depletion
and
|
Equipment
|
||||||||||||||
Revenues
|
Earnings (loss)
|
Amortization
|
Additions
|
|||||||||||||
Period
Ended September 30, 2008
|
||||||||||||||||
Marketing
|
||||||||||||||||
-
Crude Oil
|
$ | 3,282,421 | $ | 224 | $ | 1,479 | $ | 4,660 | ||||||||
-
Natural gas
|
8,511 | 1,833 | 122 | 12 | ||||||||||||
-
Refined products
|
175,497 | (862 | ) | 431 | 114 | |||||||||||
Marketing
Total
|
3,466,429 | 1,195 | 2,032 | 4,786 | ||||||||||||
Transportation
|
53,974 | 3,746 | 2,859 | 508 | ||||||||||||
Oil
and gas
|
14,259 | 2,607 | 4,266 | 8,486 | ||||||||||||
$ | 3,534,662 | $ | 7,548 | $ | 9,157 | $ | 13,780 | |||||||||
Period
Ended September 30, 2007
|
||||||||||||||||
Marketing
|
||||||||||||||||
-
Crude Oil
|
$ | 1,565,456 | $ | 9,759 | $ | 473 | $ | 608 | ||||||||
-
Natural gas
|
9,051 | 3,020 | 120 | 105 | ||||||||||||
-
Refined products
|
123,067 | 755 | 325 | 411 | ||||||||||||
Marketing
Total
|
1,697,574 | 13,534 | 918 | 1,124 | ||||||||||||
Transportation
|
48,854 | 4,695 | 3,266 | 255 | ||||||||||||
Oil
and gas
|
9,981 | 11,497 | 2,854 | 7,878 | ||||||||||||
$ | 1,756,409 | $ | 29,726 | $ | 7,038 | $ | 9,257 |
9
-
Three Month Comparison
Segment
|
Depreciation
|
Property
and
|
||||||||||||||
Operating
|
Depletion
and
|
Equipment
|
||||||||||||||
Revenues
|
Earnings
(loss)
|
Amortization
|
Additions
|
|||||||||||||
Period
Ended September 30, 2008
|
||||||||||||||||
Marketing
|
||||||||||||||||
-
Crude Oil
|
$ | 1,198,779 | $ | (11,010 | ) | $ | 577 | $ | 33 | |||||||
-
Natural gas
|
2,507 | 551 | 41 | 12 | ||||||||||||
-
Refined products
|
63,323 | 280 | 137 | 35 | ||||||||||||
Marketing
Total
|
1,264,609 | (10,179 | ) | 755 | 80 | |||||||||||
Transportation
|
18,591 | 1,615 | 951 | 111 | ||||||||||||
Oil
and gas
|
5,122 | 558 | 1,379 | 4,005 | ||||||||||||
$ | 1,288,322 | $ | (8,006 | ) | $ | 3,085 | $ | 4,196 | ||||||||
Period
Ended September 30, 2007
|
||||||||||||||||
Marketing
|
||||||||||||||||
-
Crude Oil
|
$ | 632,729 | $ | 4,098 | $ | 166 | $ | 181 | ||||||||
-
Natural gas
|
2,383 | 528 | 50 | 53 | ||||||||||||
-
Refined products
|
44,973 | 469 | 113 | 143 | ||||||||||||
Marketing
Total
|
680,085 | 5,095 | 329 | 377 | ||||||||||||
Transportation
|
17,208 | 1,536 | 1,027 | 96 | ||||||||||||
Oil
and gas
|
3,002 | (511 | ) | 916 | 1,654 | |||||||||||
$ | 700,295 | $ | 6,120 | $ | 2,272 | $ | 2,127 |
Identifiable
assets by industry segment are as follows (in thousands):
September
30,
|
December
31,
|
|||||||
2008
|
2007
|
|||||||
Marketing
|
||||||||
-
Crude oil
|
$ | 191,739 | $ | 186,163 | ||||
-
Natural gas
|
41,165 | 74,585 | ||||||
-
Refined products
|
19,382 | 21,844 | ||||||
Marketing
Total
|
252,286 | 282,592 | ||||||
Transportation
|
19,155 | 18,282 | ||||||
Oil
and gas
|
27,430 | 25,267 | ||||||
Other
|
48,585 | 30,934 | ||||||
$ | 347,456 | $ | 357,075 |
Intersegment
sales are insignificant. Other identifiable assets are primarily
corporate cash, accounts receivable, and properties not identified with any
specific segment of the Company’s business. All sales by the Company
occurred in the United States.
Segment
operating earnings reflect revenues net of operating costs and depreciation,
depletion and amortization. Segment earnings reconcile to earnings
from continuing operations before income taxes as follows (in thousands):
Nine
Months ended
|
Three
months ended
|
|||||||||||||||
September
30,
|
September
30,
|
|||||||||||||||
2008
|
2007
|
2008
|
2007
|
|||||||||||||
Segment
operating earnings (loss)
|
$ | 7,548 | $ | 29,726 | $ | (8,006 | ) | $ | 6,120 | |||||||
-
General and administrative
|
(7,458 | ) | (7,491 | ) | (2,038 | ) | (2,307 | ) | ||||||||
Operating
earnings
|
90 | 22,235 | (10,044 | ) | 3,813 | |||||||||||
-
Interest income
|
879 | 1,266 | 308 | 443 | ||||||||||||
-
Interest expense
|
(136 | ) | (75 | ) | (91 | ) | (12 | ) | ||||||||
Earnings
(loss) before income taxes
|
$ | 833 | $ | 23,426 | $ | (9,827 | ) | $ | 4,244 |
10
Note 4 -
Transactions with Affiliates
Mr. K. S.
Adams, Jr., Chairman and Chief Executive Officer, and certain of his family
partnerships and affiliates have participated as working interest owners with
the Company’s subsidiary, Adams Resources Exploration
Corporation. Mr. Adams and such affiliates participate on terms
similar to those afforded other non-affiliated working interest owners. In
recent years, such related party transactions generally result after the Company
has first identified oil and gas prospects of interest. Typically the
available dollar commitment to participate in such transactions is greater than
the amount management is comfortable putting at risk. In such event,
the Company first determines the percentage of the transaction it wants to
obtain, which allows a related party to participate in the investment to the
extent there is excess available. In those instances where there was
no excess availability there has been no related party
participation. Similarly, related parties are not required to
participate, nor is the Company obligated to offer any such participation to a
related or other party. When such related party transactions occur,
they are individually reviewed and approved by the Audit Committee comprised of
the independent directors on the Company’s Board of Directors. For
the first nine months of 2008 and 2007, the Company’s investment commitments
totaled approximately $5.5 million and $5.9 million, respectively, in those oil
and gas projects where a related party was also participating in such
investments. As of September 30, 2008 and December 31, 2007, the
Company owed a combined net total of $127,000 and $84,000, respectively, to
these related parties. In connection with the operation of certain
oil and gas properties, the Company also charges such related parties for
administrative overhead primarily as prescribed by the Council of Petroleum
Accountants Society (“COPAS”) Bulletin 5. Such overhead recoveries
totaled $99,000 and $94,000 in the nine-month periods ended September 30, 2008
and 2007, respectively.
David B.
Hurst, Secretary of the Company, is a partner in the law firm of Chaffin &
Hurst. The Company has been represented by Chaffin & Hurst since
1974 and plans to use the services of that firm in the
future. Chaffin & Hurst currently leases office space from the
Company. Transactions with Chaffin & Hurst are on the same terms
as those prevailing at the time for comparable transactions with unrelated
entities.
The
Company also enters into certain transactions in the normal course of business
with other affiliated entities including direct cost reimbursement for shared
phone and secretarial services. For the nine-month period ended
September 30, 2008 and 2007, the affiliated entities charged the Company $42,000
and $74,000, respectively, of expense reimbursement and the Company charged the
affiliates $73,000 and $56,000, respectively, for such expense
reimbursements.
Note 5 -
Commitments and Contingencies
In March
2004, a suit styled Le Petit
Chateau De Luxe, et. al. vs Great Southern Oil & Gas Co., et. al. was filed in
the Civil District Court for Orleans Parish, Louisiana against the Company and
its subsidiary, Adams Resources Exploration Corporation, among other
defendants. The suit alleges that certain property in Acadia Parish,
Louisiana was environmentally contaminated by oil and gas exploration and
production activities during the 1970s and 1980s. An alleged amount
of damage has not been specified. Management believes the Company has
consistently conducted its oil and gas exploration and production activities in
accordance with all environmental rules and regulations in effect at the time of
operation. Management notified its insurance carrier about this
claim, and thus far the insurance carrier has declined to offer
coverage. The Company and its insurance carrier have entered in to a
tolling agreement to temporarily set aside the claims pending resolution of the
underlying matter. In any event, management does not believe the
outcome of this matter will have a material adverse effect on the Company’s
financial position or results of operations.
11
Under
certain of the Company’s automobile and workers compensation insurance policies,
the Company can either receive a return of premium paid or be assessed for
additional premiums up to pre-established limits. Additionally, in
certain instances under the policies, the risk of insured losses is shared with
a group of similarly situated entities. As of September 30, 2008,
management has appropriately recognized estimated expenses and liability related
to these policies.
From time
to time as incident to its operations, the Company becomes involved in various
lawsuits and/or disputes. Primarily as an operator of an extensive
trucking fleet, the Company may be a party to motor vehicle accidents, worker
compensation claims or other items of general liability as would be typical for
the industry. Except as disclosed herein, management of the Company
is presently unaware of any claims against the Company that are either outside
the scope of insurance coverage, or that may exceed the level of insurance
coverage, and could potentially represent a material adverse effect on the
Company’s financial position or results of operations.
Item
2. MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Results of
Operations
|
-
|
Marketing
|
Marketing
segment revenues, operating earnings and depreciation were as follows (in thousands):
Nine
Months Ended
|
Three
Months Ended
|
|||||||||||||||
September
30,
|
September
30,
|
|||||||||||||||
2008
|
2007
|
2008
|
2007
|
|||||||||||||
Revenues
|
||||||||||||||||
Crude
oil
|
$ | 3,282,421 | $ | 1,565,456 | $ | 1,198,779 | $ | 632,729 | ||||||||
Natural
gas
|
8,511 | 9,051 | 2,507 | 2,383 | ||||||||||||
Refined
products
|
175,497 | 123,067 | 63,323 | 44,973 | ||||||||||||
Total
|
$ | 3,466,429 | $ | 1,697,574 | $ | 1,264,609 | $ | 680,085 | ||||||||
Operating
Earnings (loss)
|
||||||||||||||||
Crude
oil
|
$ | 224 | $ | 9,759 | $ | (11,010 | ) | $ | 4,098 | |||||||
Natural
gas
|
1,833 | 3,020 | 551 | 528 | ||||||||||||
Refined
products
|
(862 | ) | 755 | 280 | 469 | |||||||||||
Total
|
$ | 1,195 | $ | 13,534 | $ | (10,179 | ) | $ | 5,095 | |||||||
Depreciation
|
||||||||||||||||
Crude
oil
|
$ | 1,479 | $ | 473 | $ | 577 | $ | 166 | ||||||||
Natural
gas
|
122 | 120 | 41 | 50 | ||||||||||||
Refined
products
|
431 | 325 | 137 | 113 | ||||||||||||
Total
|
$ | 2,032 | $ | 918 | $ | 755 | $ | 329 |
12
Supplemental
volume and price information is as follows:
Nine
Months Ended
|
Three
Months Ended
|
|||||||||||||||
September
30,
|
September
30,
|
|||||||||||||||
2008
|
2007
|
2008
|
2007
|
|||||||||||||
Field
Level Purchase Volumes – Per day (1)
|
||||||||||||||||
Crude
oil – barrels
|
66,900 | 60,950 | 70,900 | 60,750 | ||||||||||||
Natural
gas – mmbtu’s
|
429,800 | 418,450 | 395,900 | 380,650 | ||||||||||||
Average
Purchase Price
|
||||||||||||||||
Crude
oil – per barrel
|
$ | 115.14 | $ | 63.56 | $ | 116.88 | $ | 74.29 | ||||||||
Natural
Gas – per mmbtu’s
|
$ | 9.31 | $ | 6.79 | $ | 9.18 | $ | 6.05 |
_____________________________
(1) Reflects the volume
purchased from third parties at the oil and gas field level.
Crude oil
revenues approximately doubled in the current year due to significantly
increased commodity prices during major portions of the year. Crude
oil prices rose from the $90 per barrel level at year-end 2007 to the $140 per
barrel level in June 2008 with a subsequent steep decline during September and
October 2008 to the $70 per barrel range. The effect of fluctuating
prices was to cause inventory liquidation gains during the first half of 2008 as
prices rose, with inventory liquidation and valuation losses occurring during
the third quarter as the market price declined. Net inventory driven
losses for the full first nine months of 2008 were $3.1 million, with a $11.6
million loss occurring during the third quarter. Included in the
third quarter loss was a $4.8 million lower of cost or market write-down as of
September 30, 2008 when prices dropped $27 per barrel in October
2008. The Company’s inventory holdings result from shipments in
transit and as of September 30, 2008, the Company held 178,774 barrels of
inventory valued at $76.67 per barrel. Should the declining price
trend continue, additional inventory driven losses will be
incurred. The opposite pricing scenario occurred in 2007 as rising
crude oil prices produced inventory liquidation gains of $3.1 million and $1.5
million during the nine and three-month periods ending September 30, 2007,
respectively.
Excluding
the impact of inventory values as discussed above, crude oil operating earnings
for the nine months ended September 30, 2008 and 2007 would have been $3,324,000
and $6,659,000, respectively. For the three month periods ended
September 30, 2008 and 2007 crude oil operating earnings excluding the impact of
inventory values would have been $590,000 and $2,598,000,
respectively. Earnings from operations excluding inventory items were
reduced during 2008 relative to 2007 primarily as a result of escalated prices
for diesel fuel consumed in the trucking function of this
business. Diesel fuel expense for the nine and three-month periods
ended September 30, 2008 were $5.8 million and $2.4 million, respectively,
compared to $3.7 million and $1.1 million during the nine and three-month
periods ended September 30, 2007, respectively. Should crude oil
prices settle at lower levels, the Company will experience substantial savings
on future diesel fuel costs.
13
Natural
gas sales are reported net of underlying natural gas purchase costs and thus
reflect gross margin. As shown above, operating margins were reduced
through the first nine months of 2008 relative to 2007. During the
current year, the marketplace has not provided the normal level of opportunities
to enhance margins by meeting short-term day-to-day demand needs. The
current condition results, in part, from 2008 weather patterns not stimulating
localized demand spikes. Excluding temporary volume reductions caused
by third quarter 2008 hurricane activity in the Gulf of Mexico, the Company
continues to add purchase volumes while still attempting to enhance per unit
margins.
Refined
products revenues increased during 2008 consistent with increased commodity
prices partially offset by reduced volumes as the Company has reduced its sales
activity with less credit worthy accounts. Refined product driven
operating earnings are reduced during 2008 as the Company increased the
allowance for doubtful accounts receivable through a bad debt charge of
$750,000. The Company has a number of construction industry customers
experiencing significantly increased fuel costs coupled with a downturn in the
housing development market. Since there is an elevated likelihood of
this class of customer experiencing financial insolvency, the Company’s bad debt
provision was increased accordingly. Also, adversely impacting results was a
supplier’s failure to deliver biodiesel fuel as scheduled resulting in a direct
loss to the Company of approximately $400,000 during the first quarter of
2008. The product was contracted to the Company at a fixed price and
the Company had entered into an offsetting price protection agreement (a
swap). Although the underlying material did not ship as planned, the
Company honored its swap commitment producing the resulting loss.
Historically,
prices received for crude oil, natural gas and refined products have been
volatile and unpredictable with price volatility expected to
continue. See also discussion under Item 3 – Commodity Price
Risk.
- Transportation
Transportation
segment revenues, earnings and depreciation are as follows (in thousands):
Nine
Months Ended
|
Three
Months Ended
|
|||||||||||||||||||||||
September
30,
|
Increase
|
September
30,
|
Increase
|
|||||||||||||||||||||
2008
|
2007
|
(Decrease)
|
2008
|
2007
|
(Decrease)
|
|||||||||||||||||||
Revenues
|
$ | 53,974 | $ | 48,854 | 10.5 | % | $ | 18,591 | $ | 17,208 | 8.0 | % | ||||||||||||
Operating
earnings
|
$ | 3,746 | $ | 4,695 | (20.2 | )% | $ | 1,615 | $ | 1,536 | 5.1 | % | ||||||||||||
Depreciation
|
$ | 2,859 | $ | 3,266 | (12.5 | )% | $ | 951 | $ | 1,027 | (7.4 | )% |
Transportation
revenues include various component parts, the most significant being standard
line haul charges, fuel adjustment charges and demurrage. Line haul
revenues increased slightly during the first nine months of 2008 to $38.1
million versus $37.8 million in the 2007 period as demand for the Company’s
services generally remained strong. Fuel adjustment billings
increased to $10.5 million in the first nine months of 2008 compared to $5.5
million in the first nine months of 2007 for comparative additional 2008 revenue
of $5 million. However, actual fuel expense incurred increased by
$6.3 million during the first nine months of 2008 to $14.5 million. The
inability to fully pass along fuel increases during 2008 reduced operating
earnings.
14
|
- Oil and
Gas
|
Oil and
gas segment revenues and operating earnings are primarily a function of crude
oil and natural gas prices and volumes. Comparative amounts for
revenues, operating earnings and depreciation and depletion are as follows (in thousands):
Nine
Months Ended
|
Three
Months Ended
|
|||||||||||||||||||||||
September
30,
|
Increase
|
September
30,
|
Increase
|
|||||||||||||||||||||
2008
|
2007
|
(Decrease)
|
2008
|
2007
|
(Decrease)
|
|||||||||||||||||||
Revenues
|
$ | 14,259 | $ | 9,981 | 42.9 | % | $ | 5,122 | $ | 3,002 | 70.6 | % | ||||||||||||
Operating
earnings (loss)
|
||||||||||||||||||||||||
-
From production
|
$ | 2,607 | $ | (581 | ) | n/c | $ | 558 | $ | (511 | ) | n/c | ||||||||||||
-
From property sales
|
- | 12,078 | n/c | - | $ | - | n/c | |||||||||||||||||
Depreciation
and depletion
|
$ | 4,266 | $ | 2,854 | 49.5 | % | $ | 1,379 | $ | 916 | 50.5 | % |
Production
volumes and price information is as follows (in thousands):
Nine
Months Ended
|
Three
Months Ended
|
|||||||||||||||
September
30,
|
September
30,
|
|||||||||||||||
2008
|
2007
|
2008
|
2007
|
|||||||||||||
Crude
Oil
|
||||||||||||||||
Volume
– barrels
|
37,810 | 51,190 | 12,100 | 15,740 | ||||||||||||
Average
price per barrel
|
$ | 114.96 | $ | 65.53 | $ | 120.12 | $ | 76.22 | ||||||||
Natural
gas
|
||||||||||||||||
Volume
– mcf
|
913,800 | 890,000 | 325,100 | 248,000 | ||||||||||||
Average
price per mcf
|
$ | 10.85 | $ | 7.45 | $ | 11.26 | $ | 7.26 |
Increased
current year oil and gas segment revenues resulted from increased commodity
prices for both crude oil and natural gas. Improved revenues led to
improved operating earnings from production and more than offset the effect of
increased depreciation and depletion expense during 2008. Property
sales did not recur in 2008 to date. The current year increase in
depreciation and depletion is primarily attributable to newly established
production on certain fields where the current rate of production as well as
capitalized finding costs were elevated relative to estimated proved reserves
established for the property. Crude oil volumes are reduced in 2008 as a result
of normal production declines while natural gas volumes have increased with
favorable drilling results.
Comparative
exploration costs were as follows (in thousands):
Nine
Months Ended
|
Three
Months Ended
|
|||||||||||||||
September
30,
|
September
30,
|
|||||||||||||||
2008
|
2007
|
2008
|
2007
|
|||||||||||||
Dry
hole expense
|
$ | 1,860 | $ | 2,847 | $ | 1,191 | $ | 1,471 | ||||||||
Prospect
impairments
|
1,293 | 633 | 421 | 225 | ||||||||||||
Seismic
and geological
|
653 | 1,399 | 131 | 234 | ||||||||||||
Total
|
$ | 3,806 | $ | 4,879 | $ | 1,743 | $ | 1,930 |
15
During
the first nine months of 2008, the Company participated in the drilling of
twelve successful wells, six dry holes and has an interest in eight wells that
were in process on September 30, 2008. Evaluation on the in-process
wells is anticipated during the fourth quarter of 2008. Participation
in the drilling of approximately 25 wells is planned for the remainder of 2008
on the Company’s prospect acreage in Arkansas, Louisiana, Texas and Wyoming,
depending on rig availability.
In
February 2007, the Company, together with its joint interest partners, was
awarded a promote license in the United Kingdom North Sea Blocks 21-1b, 21-2b
and 21-3d. The Company holds a 30 percent equity interest in
these blocks located in the Central Sector of the North Sea. The
Company has two years to confirm an exploration prospect and identify a partner
to finance, on a promoted basis, the drilling of the first well on the
Block. The terms of the license do not include a well
commitment. The Company also acquired an approximate nine percent
equity interest in a promote licensing right to Block 42-27b, located in
the Southern Sector of the U.K. North Sea. To date, the Company’s
investment group has been unsuccessful in obtaining a partner to fund these two
projects.
- Outlook
Presently,
crude oil and natural gas commodity prices are continuing a downward trend for
the fourth quarter of 2008. Such a continued event has an adverse
effect on inventory carrying values and oil and gas segment operating
earnings. Within the marketing and transportation groups, however,
reduced diesel fuel costs would act to mitigate some of the impact of this price
trend. The diversified nature of the Company’s lines of business and
its avoidance of bank debt provides a degree of stability during uncertain
periods.
Liquidity
and Capital Resources
The
Company’s liquidity primarily derives from net cash generated from operations,
which was $28,799,000 and $4,617,000 for the nine months ended September 30,
2008 and 2007, respectively. Changes in cash from operations for
these periods were primarily driven by changes in working
capital. Generally, these working capital changes are timing
differences that occur in the ordinary course of business, and are not expected
to have a significant impact on overall liquidity. However, during
the third quarter of 2008, the Company expanded its requirements for certain
customers to prepay for product deliveries. This acted to increase
cash balances and reduced corresponding accounts receivable. As of
September 30, 2008 and December 31, 2007 the Company had no bank debt or other
forms of debenture obligations. Cash and cash equivalents totaled
$39,045,000 as of September 30, 2008, and are maintained in order to meet the
timing of day-to-day cash needs. Working capital, the excess of
current assets over current liabilities, totaled $48,999,000 as of September 30,
2008. Management believes current liquidity, together with expected
cash to be generated from operations, will be sufficient to meet Company’s
expected short-term and long-term liquidity needs.
The
Company utilizes cash from operations to make discretionary investments in its
oil and gas exploration and marketing and transportation businesses, which
comprise substantially all of the Company’s investing cash outflows for each of
the past three years. The Company does not look to proceeds from
property sales to fund its cash flow needs. However, during May 2007,
the Company did receive net proceeds of $14,954,000 related to the sale of oil
and gas properties. Such sale was made due to attractive
pricing. Currently, the Company does not plan to make significant
dispositions of its oil and gas properties in the future, but certain oil and
gas interests may be disposed of periodically as business conditions
warrant. Except for a total of $6.2 million in operating lease
commitments for transportation equipment (see Footnote 9 of the annual report on
Form 10-K for the year ended December 31, 2007) the Company’s investments can be
readily curtailed if operating cash flows contract.
16
Capital
expenditures during the first nine months of 2008 included $5,294,000 for
marketing and transportation equipment additions and $8,486,000 in property
additions associated with oil and gas exploration and production
activities. Included in marketing equipment additions was
approximately $4 million expended to acquire forty-four used truck-tractor
trailer combinations for use in the Company’s crude oil marketing business in
Michigan, West Texas and New Mexico. For the remainder of 2008, the
Company anticipates expending approximately $5 million on oil and gas
exploration projects to be funded from operating cash flow and available working
capital. In addition, approximately $1 million will be expended
toward additional equipment purchases within the Company’s marketing and
transportation businesses with funding from available cash flow.
Historically,
the Company has paid an annual dividend in the fourth quarter of each year, and
the Board of Directors has declared a $.50 per common share or $2,108,000
dividend to be payable to shareholders of record as of December 2,
2008. The most significant item affecting future increases or
decreases in liquidity is earnings from operations and such earnings are
dependent on the success of future operations (see Item 1A Risk Factors of the
annual report of Form 10-K for the year ended December 31,
2007). While the Company has available bank lines of credit (see
below) management has no current intention to utilize such lines of credit or
issue additional equity.
-
Banking Relationships
The
Company’s primary bank loan agreement with Bank of America provides for two
separate lines of credit with interest at the bank’s prime rate minus ¼ of one
percent. The working capital loan provides for borrowings up to $5
million based on 80 percent of eligible accounts receivable and 50 percent
of eligible inventories. Available capacity under the line is
calculated monthly and as of September 30, 2008 was established at $5
million. The oil and gas production loan provides for flexible
borrowings subject to a borrowing base established semi-annually by the
bank. The borrowing base was established at $5 million as of
September 30, 2008. The line of credit loans are scheduled to expire
on October 31, 2009, with the then present balance outstanding converting
to a term loan payable in eight equal quarterly installments. As of
September 30, 2008, there was no bank debt outstanding under the Company’s two
revolving credit facilities.
The Bank
of America loan agreement, among other things, places certain restrictions with
respect to additional borrowings and the purchase or sale of assets, as well as
requiring the Company to comply with certain financial covenants, including
maintaining a 1.0 to 1.0 ratio of consolidated current assets to consolidated
current liabilities, maintaining a 3.0 to 1.0 ratio of pre-tax net income to
interest expense, and consolidated net worth in excess of
$60,909,000. Should the Company’s net worth fall below this
threshold, the Company may be restricted from payment of additional cash
dividends on its common stock. The Company believes it is in compliance with
these restrictions.
The
Company’s Gulfmark subsidiary maintains a separate banking relationship with BNP
Paribas in order to support its crude oil purchasing activities. In
addition to providing up to $60 million in letters of credit, the facility also
finances up to $6 million of crude oil inventory and certain accounts receivable
associated with crude oil sales. Such financing is provided on a
demand note basis with interest at the bank’s prime rate plus one
percent. As of September 30, 2008, the Company had $6 million of
eligible borrowing capacity under this facility and no working capital advances
were outstanding. Letters of credit outstanding under this facility
totaled approximately $34.5 million as of September 30, 2008. The
letter of credit and demand note facilities are secured by substantially all of
Gulfmark’s and Adams Resources Marketing’s (“ARM”) assets. Under this facility,
BNP Paribas has the right to discontinue the issuance of letters of credit
without prior notification to the Company.
17
The
Company’s ARM subsidiary also maintains a separate banking relationship with BNP
Paribas in order to support its natural gas purchasing activities. In addition
to providing up to $30 million in letters of credit, the facility finances up to
$4 million of general working capital needs. Such financing is
provided on a demand note basis with interest at the bank’s prime rate plus one
percent. No working capital advances were outstanding under this
facility as of September 30, 2008. Letters of credit outstanding
under this facility totaled approximately $4.6 million as of September 30,
2008. The letter of credit and demand note facilities are secured by
substantially all of Gulfmark’s and ARM’s assets. Under this
facility, BNP Paribas has the right to discontinue the issuance of letters of
credit without prior notification to the Company.
Critical Accounting Policies
and Use of Estimates
|
-
|
Fair Value
Accounting
|
As an
integral part of its marketing operation, the Company enters into certain
forward commodity contracts that are required to be recorded at fair value in
accordance with Statement of Financial Accounting Standards No. 133, “Accounting
for Derivative Instruments and Hedging Activities” and related accounting
pronouncements. Management believes this required accounting, known
as mark-to-market accounting, creates variations in reported earnings and the
reported earnings trend. Under mark-to-market accounting, significant
levels of earnings are recognized in the period of contract initiation rather
than the period when the service is provided and title passes from supplier to
customer. As it affects the Company’s operation, management believes
mark-to-market accounting impacts reported earnings and the presentation of
financial condition in three important ways.
1.
|
Gross
margins, derived from certain aspects of the Company’s ongoing business,
are recorded in the period in which contracts are
executed. Meanwhile, personnel and other costs associated with
servicing accounts as well as substantially all risks associated with the
execution of contracts are expensed as incurred during the period of
physical product flow and title
passage.
|
2.
|
Mark-to-market
earnings are calculated based on stated contract volumes. A significant
risk associated with the Company’s business is the conversion of stated
contract or planned volumes into actual physical commodity movement
volumes without a loss of margin. Again the planned profit from
such commodity contracts is bunched and front-ended into the period of
contract execution while the risk of loss associated with the difference
between actual versus planned production or usage volumes falls in a
subsequent period.
|
3.
|
Cash
flows, by their nature, match physical movements and passage of title.
Mark-to-market accounting, on the other hand, creates a divergence between
reported earnings and cash flows. Management believes this
complicates and confuses the picture of stated financial conditions and
liquidity.
|
The
Company attempts to mitigate the identified risks by only entering into
contracts where current market quotes in actively traded, liquid markets are
available to determine the fair value of contracts. In addition,
substantially all of the Company’s forward contracts are less than 18 months in
duration. However, the reader is cautioned to develop a full
understanding of how fair value or mark-to-market accounting creates reported
results that differ from those presented under conventional accrual
accounting.
18
- Trade
Accounts
Accounts
receivable and accounts payable typically represent the single most significant
assets and liabilities of the Company. Particularly within the
Company’s energy marketing and oil and gas exploration and production
operations, there is a high degree of interdependence with and reliance upon
third parties (including transaction counterparties) to provide adequate
information for the proper recording of amounts receivable or
payable. Substantially all such third parties are larger firms
providing the Company with the source documents for recording trade
activity. It is commonplace for these entities to retroactively
adjust or correct such documents. This typically requires the Company
to absorb, benefit from, or pass along such corrections to another third
party.
Due to
the volume and the complexity of transactions and the high degree of
interdependence with third parties, this is a difficult area to control and
manage. The Company manages this process by participating in a
monthly settlement process with each of its counterparties. Ongoing
account balances are monitored monthly and the Company attempts to gain the
cooperation of such counterparties to reconcile outstanding
balances. The Company also places great emphasis on collecting cash
balances due and paying only bonafide properly supported claims. In
addition, the Company maintains and monitors its bad debt
allowance. Nevertheless a degree of risk always remains due to the
customs and practices of the industry.
- Oil
and Gas Reserve Estimate
The value
of capitalized costs of oil and gas exploration and production related assets
are dependent on underlying oil and gas reserve estimates. Reserve
estimates are based on many subjective factors. The accuracy of
reserve estimates depends on the quantity and quality of geological data,
production performance data and reservoir engineering data, changing prices, as
well as the skill and judgment of petroleum engineers in interpreting such
data. The process of estimating reserves requires frequent revision
of estimates (usually on an annual basis) as additional information becomes
available. Calculation of estimated future oil and gas revenues are also based
on estimates as to the timing of oil and gas production, and there is no
assurance that the actual timing of production will conform to or approximate
such estimates. Also, certain assumptions must be made with respect to pricing.
The Company’s estimates assume prices will remain constant from the date of the
engineer’s estimates, except for changes reflected under natural gas sales
contracts. There can be no assurance that actual future prices will
not vary as industry conditions, governmental regulation, political conditions,
economic conditions, weather conditions, market uncertainty and other factors
impact the market price for oil and gas.
The
Company follows the successful efforts method of accounting, so only costs
(including development dry hole costs) associated with producing oil and gas
wells are capitalized. Estimated oil and gas reserve quantities are
the basis for the rate of amortization under the Company’s units of production
method for depreciating, depleting and amortizing of oil and gas properties.
Estimated oil and gas reserve values also provide the standard for the Company’s
periodic review of oil and gas properties for impairment.
19
- Contingencies
In March
2004, a suit styled Le Petit
Chateau De Luxe, et. al. vs Great Southern Oil & Gas Co., et. al. was filed in
the Civil District Court for Orleans Parish, Louisiana against the Company and
its subsidiary, Adams Resources Exploration Corporation, among other
defendants. The suit alleges that certain property in Acadia Parish,
Louisiana was environmentally contaminated by oil and gas exploration and
production activities during the 1970s and 1980s. An alleged amount
of damage has not been specified. Management believes the Company has
consistently conducted its oil and gas exploration and production activities in
accordance with all environmental rules and regulations in effect at the time of
operation. Management notified its insurance carrier about this
claim, and thus far the insurance carrier has declined to offer
coverage. The Company and its insurance carrier have entered into a
tolling agreement to temporarily set aside the claim pending resolution of the
underlying matter. In any event, management does not believe the
outcome of this matter will have a material adverse effect on the Company’s
financial position or results of operations.
From time
to time, as incident to its operations, the Company becomes involved in various
accidents, lawsuits and/or disputes. Primarily as an operator of an
extensive trucking fleet, the Company may be a party to motor vehicle accidents,
worker compensation claims or other items of general liability as would be
typical for the industry. In addition, the Company has extensive
operations that must comply with a wide variety of tax laws, environmental laws
and labor laws, among others. Should an incident occur, management
would evaluate the claim based on its nature, the facts and circumstances and
the applicability of insurance coverage. To the extent management
believes that such event may impact the financial condition of the Company,
management will estimate the monetary value of the claim and make appropriate
accruals or disclosure as provided in the guidelines of Statement of Financial
Accounting Standards No. 5, “Accounting for Contingencies”.
Item
3. Quantitative and Qualitative Disclosures about Market
Risk
The
Company is exposed to market risk, including adverse changes in interest rates
and commodity prices.
|
-
|
Interest
Rate Risk
|
The
Company’s long-term debt facility constitutes floating rate debt. As
a result, the Company’s annual interest costs fluctuate based on interest rate
changes. Because the interest rate on the Company’s long-term debt is
a floating rate, the fair value approximates carrying value. The
Company had no long-term debt as of September 30, 2008. A
hypothetical 10 percent adverse change in the floating rate would not have had a
material effect on the Company’s results of operations for the three-month
period ended September 30, 2008.
|
-
|
Commodity
Price Risk
|
The
Company’s major market risk exposure is in the pricing applicable to its
marketing and production of crude oil and natural gas. Realized
pricing is primarily driven by the prevailing spot prices applicable to oil and
gas. Commodity price risk in the Company’s marketing operations represents the
potential loss that may result from a change in the market value of an asset or
a commitment. From time to time, the Company enters into forward
contracts to minimize or hedge the impact of market fluctuations on its
purchases of crude oil and natural gas. The Company may also enter into price
support contracts with certain customers to secure a floor price on the purchase
of certain supply. In each instance, the Company locks in a separate matching
price support contract with a third party in order to minimize the risk of these
financial instruments. Substantially all forward contracts fall
within a six-month to one-year term with no contracts extending longer than
three years in duration. The Company monitors all commitments, positions and
endeavors to maintain a balanced portfolio.
20
Certain
forward contracts are recorded at fair value, depending on management’s
assessments of numerous accounting standards and positions that comply with
generally accepted accounting principles. The fair value of such contracts is
reflected on the balance sheet as fair value assets and liabilities. The
revaluation of fair value contracts is recognized on a net basis in the
Company’s results of operations. See discussion under “Fair Value
Contracts” in Note 1 to the Unaudited Condensed Consolidated Financial
Statements.
Historically,
prices received for oil and gas sales have been volatile and unpredictable with
price volatility expected to continue. From January 1, 2008 through
September 30, 2008 average natural gas marketing segment sales price
realizations ranged from a monthly low of $7.14 per mmbtu to a monthly high of
$11.84 per mmbtu. Average crude oil prices ranged from a monthly low
of $93.29 per barrel to a monthly high of $135.00 per barrel during the same
period. During October 2008, average crude oil prices for the month
declined to approximately $70 per barrel. A hypothetical 10 percent
adverse change in average natural gas and crude oil prices, assuming no changes
in volume levels, would have reduced earnings before income taxes by
approximately $2,797,000 for the nine-month period ended
September 30, 2008.
Forward-Looking
Statements—Safe Harbor Provisions
This
report for the period ended September 30, 2008 contains certain forward-looking
statements intended to be covered by the safe harbors provided under Federal
securities law and regulation. To the extent such statements are not
recitations of historical fact, forward-looking statements involve risks and
uncertainties. In particular, statements under the captions (a)
Management’s Discussion and Analysis of Financial Condition and Results of
Operations, (b) Liquidity and Capital Resources, (c) Critical Accounting
Policies and Use of Estimates, (d) Quantitative and Qualitative Disclosures
about Market Risk, (e) Fair Value Measurements and (f) Commitments and
Contingencies among others, contain forward-looking statements. Where the
Company expresses an expectation or belief of future results or events, such
expression is made in good faith and believed to have a reasonable basis in
fact. However, there can be no assurance that such expectation or belief will
actually result or be achieved.
A number
of factors could cause actual results or events to differ materially from those
anticipated. Such factors include, among others, (a) general economic
conditions, (b) fluctuations in hydrocarbon prices and margins, (c) variations
between crude oil and natural gas contract volumes and actual delivery volumes,
(d) unanticipated environmental liabilities or regulatory changes, (e)
counterparty credit default, (f) inability to obtain bank and/or trade credit
support, (g) availability and cost of insurance, (h) changes in tax laws, (i)
the availability of capital, (j) changes in regulations, (k) results of current
items of litigation, (l) uninsured items of litigation or losses, (m)
uncertainty in reserve estimates and cash flows, (n) ability to replace oil and
gas reserves, (o) security issues related to drivers and terminal facilities,
(p) commodity price volatility, (q) demand for chemical based trucking
operations and (r) successful completion of drilling activity. For
more information, see the discussion under Forward-Looking Statements in the
annual report on Form 10-K for the year ended December 31, 2007.
Except for the discussion set
forth below, there have been no material changes to the risk factors disclosed
in Item 1A of Part I in the annual report on Form 10-K for the year ended
December 31, 2007. The risk factor set forth below has been updated
to provide additional information.
21
Worldwide
economic developments could damage operations and materially
reduce profitability and cash flows.
Recent
disruptions in the credit markets and concerns about global economic growth have
had a significant adverse impact on global financial markets and commodity
prices, both of which may have contributed to a decline in the Company’s stock
price and corresponding market capitalization. Further commodity
price decreases in the fourth quarter could result in reduced
earnings. Since the Company has no bank debt obligations nor
covenants tied to its stock price, recent declines in the Company’s stock price
do not affect the Company’s liquidity or overall financial
condition. Should the capital and credit markets continue to
experience volatility and the availability of funds remains limited, the
Company’s customers and suppliers may incur increased costs associated with
issuing commercial paper and/or other debt instruments and this, in turn, could
adversely affect the Company’s ability to secure supply and make profitable
sales.
Item
4. Disclosure Controls and Procedures
The
Company maintains “disclosure controls and procedures” (as defined in Rule
13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934, as
amended (the “Exchange Act”) that are designed to ensure that information
required to be disclosed in the reports that the Company files or submits under
the Exchange Act are recorded, processed, summarized and reported within the
time periods specified in the SEC’s rules and forms and is accumulated and
communicated to management, including the Company’s Chief Executive Officer and
Chief Financial Officer, as appropriate, to allow timely discussions regarding
required disclosure. As of the end of the period covered by this
quarterly report, an evaluation was carried out under the supervision and with
the participation of the Company's management, including the Company’s Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of the Company’s disclosure controls and procedures (as
defined in Exchange Act Rule 13a-15(e)). Based upon that evaluation,
the Chief Executive Officer and the Chief Financial Officer concluded that the
design and operation of these disclosure controls and procedures were
effective.
During
the three month period ended September 30, 2008, there have not been any changes
in the Company’s internal controls over financial reporting (as defined in Rules
13a-13(f) and 15d-15(f) of the Exchange Act) that have materially affected, or
are reasonably likely to materially affect, the Company’s internal control over
financial reporting.
22
PART
II. OTHER INFORMATION
Item
1.
In March
2004, a suit styled Le Petit
Chateau De Luxe, et. al. vs Great Southern Oil & Gas Co., et. al. was filed in
the Civil District Court for Orleans Parish, Louisiana against the Company and
its subsidiary, Adams Resources Exploration Corporation, among other
defendants. The suit alleges that certain property in Acadia Parish,
Louisiana was environmentally contaminated by oil and gas exploration and
production activities during the 1970s and 1980s. An alleged amount
of damage has not been specified. Management believes the Company has
consistently conducted its oil and gas exploration and production activities in
accordance with all environmental rules and regulations in effect at the time of
operation. Management notified its insurance carrier about this
claim, and thus far the insurance carrier has declined to offer
coverage. The Company and its insurance carrier have entered into a
tolling agreement to temporarily set aside the claim pending resolution of the
underlying matter. In any event, management does not believe the
outcome of this matter will have a material adverse effect on the Company’s
financial position or results of operations.
From time
to time as incident to its operations, the Company becomes involved in various
lawsuits and/or disputes. Primarily as an operator of an extensive
trucking fleet, the Company may be a party to motor vehicle accidents, worker
compensation claims or other items of general liability as would be typical for
the industry. Except as disclosed herein, management of the Company
is presently unaware of any claims against the Company that are either outside
the scope of insurance coverage, or that may exceed the level of insurance
coverage, and could potentially represent a material adverse effect on the
Company’s financial position or results of operations.
|
Item
1A. - There have been no material changes in the Company’s risk factors
from those disclosed in the 2007 Form 10-K except as
follows:
|
Worldwide
economic developments could damage operations and materially
reduce profitability and cash flows.
Recent
disruptions in the credit markets and concerns about global economic growth have
had a significant adverse impact on global financial markets and commodity
prices, both of which may have contributed to a decline in the Company’s stock
price and corresponding market capitalization. Further commodity
price decreases in the fourth quarter could result in reduced
earnings. Since the Company has no bank debt obligations nor
covenants tied to its stock price, recent declines in the Company’s stock price
do not affect the Company’s liquidity or overall financial
condition. Should the capital and credit markets continue to
experience volatility and the availability of funds remains limited, the
Company’s customers and suppliers may incur increased costs associated with
issuing commercial paper and/or other debt instruments and this, in turn, could
adversely affect the Company’s ability to secure supply and make profitable
sales.
|
|
Item 2. - None
Item 3. -
None
Item 4. -
None
Item 5. –
None
23
Item
6. Exhibits
31.1
|
Certification
of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
|
31.2
|
Certification
of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
|
32.1
|
Certification
of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
|
32.2
|
Certification
of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
|
24
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.
ADAMS
RESOURCES & ENERGY, INC
|
|
(Registrant)
|
|
Date: November
13, 2008
|
By /s/K. S. Adams, Jr.
|
K.
S. Adams, Jr.
|
|
Chief
Executive Officer
|
|
By
/s/Frank T.
Webster
|
|
Frank
T. Webster
|
|
President
& Chief Operating Officer
|
|
By
/s/Richard B.
Abshire
|
|
Richard
B. Abshire
|
|
Chief
Financial Officer
|
25
EXHIBIT
INDEX
Exhibit
|
|
Number
|
Description
|
31.1
|
Certificate
of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
|
31.2
|
Certificate
of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
|
32.1
|
Certificate
of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
|
32.2
|
Certificate
of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
|
26