EARTHSTONE ENERGY INC - Quarter Report: 2011 December (Form 10-Q)

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QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

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TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Large accelerated filer	o	Accelerated filer	o
Non-accelerated filer	o	Smaller reporting company	þ
(Do not check if a smaller reporting company)

 

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PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements			4
	Condensed Consolidated Balance Sheets:
	December 31, 2011 (Unaudited) and March 31, 2011			4
	Condensed Consolidated Statements of Operations:
	Three and Nine months Ended December 31, 2011 and 2010 (Unaudited)			6
	Condensed Consolidated Statements of Cash Flows:
	Nine months Ended December 31, 2011 and 2010 (Unaudited)			7
	Notes to Unaudited Condensed Consolidated Financial Statements:
	December 31, 2011			8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations			11
Item 3.	Quantitative and Qualitative Disclosures About Market Risk			15
Item 4.	Controls and Procedures			15
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings			16
Item 1A.	Risk Factors			16
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds			16
Item 3.	Defaults Upon Senior Securities			16
Item 4.	Submission of Matters to a Vote of Security Holders			16
Item 5.	Other Information			16
Item 6.	Exhibits			17
	Signatures			18

•	our strategies, either existing or anticipated;

•	our future financial position, including anticipated liquidity;

•	our ability to satisfy obligations from cash generated from operations;

•	amounts and nature of future capital expenditures, including future share repurchases;

•	acquisitions and other business opportunities;

•	operating costs and other expenses, including asset retirement obligation expenses;

•	wells expected to be drilled, other anticipated exploration efforts and associated expenses;

•	estimates of proved oil and natural gas reserves, deferred tax assets, and depletion rates;

•	our ability to meet additional acreage, seismic and/or drilling cost requirements;

•	other estimates and assumptions we use in our accounting policies.

 

•	loss of senior management or technical personnel;
•	oil and natural gas prices and production costs;
•	our ability to replace oil and natural gas reserves, including changes in reserve estimates resulting from expected oil and gas prices, production rates, tax rates and production costs;
•	exploitation, development, production and exploration results, including mechanical failure;
•	the estimated costs of asset retirement obligations, including whether or not those retirement costs, in whole or in part, are ever actually incurred in the future;
•	the potential unavailability of drilling rigs and other field equipment and services;
•	the existence of unanticipated liabilities relating to existing properties or those acquired in the future, including environmental liabilities;
•	factors affecting the nature and timing of our capital expenditures, including the availability of service contractors and equipment;
•	the willingness and ability of third parties to honor their contractual commitments;
•	permitting issues;
•	the nature, extent and duration of workovers;
•	the impact and costs related to compliance with or changes in laws governing our operations;
•	acquisitions and other business opportunities (or the lack thereof) that may be pursued by us;
•	competition for properties and the effect of such competition on the price of those properties;
•	economic, market or business conditions, including any change in interest rates or inflation;
•	the lack of available capital and financing;
•	risk factors consistent with comparable companies within our industry, especially companies  with similar market capitalization and/or employee census;
•	weather and other factors, many of which are beyond our control.

 

		December 31,				March 31,
		2011				2011
		(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	2,292,000			$	4,051,000
Accounts receivable:
Oil and gas sales			2,851,000				1,674,000
Joint interest and other receivables, net of allowance of $37,000                and $86,000 in allowance, respectively			90,000				329,000
Other current assets			499,000				539,000
Total current assets			5,732,000				6,593,000
Oil and gas property, full cost method:
Proved property			37,324,000				35,379,000
Unproved property			6,463,000				3,112,000
Accumulated depletion and impairment			(25,465,000	)			(24,713,000	)
Net oil and gas property			18,322,000				13,778,000
Support equipment and other non-current assets, net of accumulated    depreciation of $402,000 and $377,000, respectively			531,000				471,000
Total non-current assets			18,853,000				14,249,000
Total assets		$	24,585,000			$	20,842,000

 

		December 31,				March 31,
		2011				2011
		(Unaudited)
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	409,000			$	496,000
Accrued liabilities			1,827,000				1,167,000
Total current liabilities			2,236,000				1,663,000
Long-term liabilities:
Deferred tax liability			3,013,000				2,319,000
Asset retirement obligation			1,744,000				1,795,000
Total long-term liabilities			4,757,000				4,114,000
Commitments
Total liabilities			6,993,000				5,777,000
Shareholders’ Equity:
Preferred shares, $0.001 par value, 600,000 authorized and      none issued or outstanding			—				—
Common shares, $0.001 par value, 6,400,000 shares authorized and      1,788,000 and 1,782,000 shares issued, respectively			18,000				18,000
Additional paid-in capital			23,086,000				23,020,000
Treasury stock, at cost, 82,000 and 76,000 shares, respectively			(457,000	)			(373,000	)
Accumulated deficit			(5,055,000	)			(7,600,000	)
Total shareholders’ equity			17,592,000				15,065,000
Total liabilities and shareholders’ equity		$	24,585,000			$	20,842,000

		Three Months Ended								Nine months Ended
		December 31,								December 31,
		2011				2010				2011				2010
Revenues:
Oil and gas sales		$	3,830,000			$	1,946,000			$	8,815,000			$	5,679,000
Well service and water disposal revenue			36,000				41,000				121,000				69,000
Total revenues			3,866,000				1,987,000				8,936,000				5,748,000
Expenses:
Oil and gas production			983,000				747,000				2,610,000				1,868,000
Production tax			350,000				130,000				688,000				403,000
Depletion and depreciation			363,000				274,000				788,000				842,000
Accretion of asset retirement obligation			43,000				43,000				125,000				124,000
General and administrative			473,000				392,000				1,422,000				1,113,000
Total expenses			2,212,000				1,586,000				5,633,000				4,350,000
Income from operations			1,654,000				401,000				3,303,000				1,398,000
Other income (expense):
Interest and other income			1,000				3,000				68,000				11,000
Interest and other expenses			―				(33,000	)			(3,000	)			(33,000	)
Total other income (expense)			1,000				(30,000	)			65,000				(22,000	)
Income before income tax			1,655,000				371,000				3,368,000				1,376,000
Current income tax expense (benefit)			34,000				(11,000	)			129,000				88,000
Deferred income tax expense			469,000				308,000				694,000				112,000
Total income tax expense			503,000				297,000				823,000				200,000
Net income		$	1,152,000			$	74,000			$	2,545,000			$	1,176,000
Per share amounts:
Basic		$	0.68			$	0.04			$	1.49			$	0.69
Diluted		$	0.68			$	0.04			$	1.49			$	0.69
Weighted average common shares outstanding:
Basic			1,706,588				1,697,097				1,710,035				1,699,877
Diluted			1,706,588				1,697,097				1,710,035				1,699,877

			Nine months Ended
			December 31,
			2011				2010
Cash flows from operating activities:
Net income		$	2,545,000			$	1,176,000
Adjustments to reconcile net income to net cash provided by operating activities:
Depletion and depreciation			788,000				842,000
Deferred income tax expense			694,000				112,000
Accretion of asset retirement obligation			125,000				124,000
Payments on asset retirement obligation			―				(264,000	)
Share-based compensation			66,000				57,000
Change in:
Accounts receivable, net			(938,000	)			29,000
Other current assets			62,000				128,000
Accounts payable, accrued and other liabilities			122,000				208,000
Net cash provided by operating activities			(258,000	)			2,412,000
Cash flows from investing activities:
Oil and gas property			(4,663,000	)			(3,114,000	)
Purchases of support equipment and other non-current assets			(96,000	)			(49,000	)
Net cash used in investing activities			(4,759,000	)			(3,163,000	)
Cash flows from financing activities:
Purchase of treasury shares			(84,000	)			(107,000	)
Net cash used in financing activities			(84,000	)			(107,000	)
Cash and cash equivalents:
Net decrease in cash and cash equivalents			(1,759,000	)			(858,000	)
Cash and cash equivalents, beginning of year			4,051,000				4,905,000
Cash and cash equivalents, end of period		$	2,292,000			$	4,047,000
Supplemental disclosure of cash flow information:
Cash paid for interest		$	―			$	―
Cash paid for income tax		$	1,000			$	214,000
Non-cash:
Increase in oil and gas property due to asset retirement         obligation		$	10,000			$	261,000
Accrued capital expenditures		$	957,000			$	296,000

 

		December 31, 2011				March 31, 2011
		(Unaudited)
Revenue and production taxes payable		$	184,000			$	340,000
Accrued compensation			238,000				223,000
Accrued operations payable			1,094,000				239,000
Accrued income tax payable and other			180,000				238,000
Short term asset retirement obligation			131,000				127,000
Total accrued liabilities		$	1,827,000			$	1,167,000

		Three Months Ended December 31,								Nine months Ended December 31,
		2011			2010					2011				2010
		(Unaudited)			(Unaudited)					(Unaudited)				(Unaudited)
Current:
Federal		$	29,000			$	1,000			$	114,000			$	92,000
State			5,000				(12,000	)			15,000				(4,000	)
Total current income tax			34,000				(11,000	)			129,000				88,000
Deferred:
Federal			438,000				90,000				648,000				77,000
State			31,000				218,000				46,000				35,000
Total deferred income tax			469,000				308,000				694,000				112,000
Income tax expense		$	503,000			$	297,000			$	823,000			$	200,000

		Three Months Ended December 31,								Nine months Ended December 31,
		2011				2010				2011				2010
		(Unaudited)				(Unaudited)				(Unaudited)				(Unaudited)
Federal tax at statutory rate		$	562,000			$	278,000			$	1,145,000			$	468,000
State taxes, net of federal benefit			27,000				(1,000	)			55,000				17,000
Excess percentage depletion			(163,000	)			(48,000	)			(371,000	)			(170,000	)
Other adjustments, net			77,000				68,000				(6,000	)			(115,000	)
Income tax expense		$	503,000			$	297,000			$	823,000			$	200,000
Effective rate expressed as a percentage of income before income tax			30.4	%			80.1	%			24.4	%			14.5	%

		December 31,				March 31,
		2011				2011
		(Unaudited)
Deferred tax assets:
Allowance for doubtful accounts		$	14,000			$	34,000
Asset retirement obligation			683,000				703,000
Statutory depletion carry-forward			1,348,000				1,110,000
Gross deferred tax assets			2,045,000				1,847,000
Other accruals			68,000				69,000
Depletion, depreciation and intangible drilling costs			(5,126,000	)			(4,235,000	)
Gross deferred tax liabilities			(5,058,000	)			(4,166,000	)
Deferred tax liabilities, net		$	(3,013,000	)		$	(2,319,000	)