EARTHSTONE ENERGY INC - Quarter Report: 2011 June (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

 

Delaware		84-0592823
(State of Incorporation or Organization)		(I.R.S. Employer Identification No.)
633 17th Street, Suite 1645, Denver, Colorado		80202-3625
(Address of principal executive office)		(Zip Code)

 

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

Check whether the issuer is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o No þ

 

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	PART I. FINANCIAL INFORMATION		Page
Item 1.	Financial Statements			5
	Condensed Consolidated Balance Sheets: June 30, 2011 (Unaudited) and March 31, 2011			5
	Condensed Consolidated Statements of Operations: Three Months Ended June 30, 2011 and 2010 (Unaudited)			7
	Condensed Consolidated Statements of Cash Flows: Three Months Ended June 30, 2011 and 2010 (Unaudited)			8
	Notes to Unaudited Condensed Consolidated Financial Statements: June 30, 2011 (Unaudited)			9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations			13
Item 3.	Quantitative and Qualitative Disclosures About Market Risk			18
Item 4.	Controls and Procedures			18
	PART II. OTHER INFORMATION
Item 1.	Legal Proceedings			19
Item 1A.	Risk Factors			19
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds			19
Item 3.	Defaults Upon Senior Securities			19
Item 4.	Submission of Matters to a Vote of Security Holders			19
Item 5.	Other Information			19
Item 6.	Exhibits			19
	Signatures			20

 

 

●	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;
●	acquisitions and other business opportunities;
●	operating costs and other expenses;
●	wells expected to be drilled, other anticipated exploration efforts and the expenses associated therewith;
●	our asset retirement obligation;
●	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 arising from acquisition opportunities;
●	other estimates and assumptions we use in our accounting policies; and
●	future share repurchases.
Factors that could cause actual results to differ materially from our expectations include, among others, such things as:
●	oil and natural gas prices;
●	our ability to replace oil and natural gas reserves;
●	loss of senior management or technical personnel;
●	inaccuracy in reserve estimates and expected production rates;
●	exploitation, development and exploration results;
●	mechanical failure;
●	the actual costs related to asset retirement obligation, and whether or not those retirements actually occur in the future;
●	the potential unavailability of drilling rigs and other field equipment and services;
●	the existence of unanticipated liabilities or problems relating to acquired properties;
●	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;
●	environmental liabilities;
●	acquisitions and other business opportunities (or the lack thereof) that may be pursued by us;
●	competition for available properties and the effect of such competition on the price of those properties;
●	general economic, market or business conditions;
●	weather;
●	any change in interest rates or inflation;
●	a 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; and
●	other factors, many of which are beyond our control.

 

 

		June 30,				March 31,
		2011				2011
		(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	3,549,000			$	4,051,000
Accounts receivable:
Oil and gas sales			1,810,000				1,674,000
Joint interest and other receivables, net of allowance of $93,000			329,000				329,000
Other current assets			1,073,000				539,000
Total current assets			6,761,000				6,593,000
Oil and gas property, full cost method:
Proved property			35,674,000				35,379,000
Unproved property			3,931,000				3,112,000
Accumulated depletion and impairment			(24,898,000	)			(24,713,000	)
Net oil and gas property			14,707,000				13,778,000
Support equipment and other non-current assets, net of accumulated depreciation of $384,000 and $377,000, respectively			502,000				471,000
Total non-current assets			15,209,000				14,249,000
Total assets		$	21,970,000			$	20,842,000

		June 30,				March 31,
		2011				2011
		(Unaudited)
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	378,000			$	496,000
Accrued liabilities			1,504,000				1,167,000
Total current liabilities			1,882,000				1,663,000
Long-term liabilities:
Deferred tax liability			2,502,000				2,319,000
Asset retirement obligation			1,834,000				1,795,000
Total long-term liabilities			4,336,000				4,114,000
Total liabilities			6,218,000				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			23,042,000				23,020,000
Treasury stock, at cost, 76,000 shares			(373,000	)			(373,000	)
Accumulated deficit			(6,935,000	)			(7,600,000	)
Total shareholders’ equity			15,752,000				15,065,000
Total liabilities and shareholders’ equity		$	21,970,000			$	20,842,000

			Three Months Ended
			June 30,
			2011				2010
Revenues:
Oil and gas sales		$	2,480,000			$	1,763,000
Well service and water disposal revenue			45,000				1,000
Total revenues			2,525,000				1,764,000
Expenses:
Oil and gas production			795,000				506,000
Production tax			138,000				126,000
Well service and water disposal			6,000				3,000
Depletion and depreciation			196,000				259,000
Accretion of asset retirement obligation			41,000				40,000
General and administrative			442,000				386,000
Total expenses			1,618,000				1,320,000
Income from operations			907,000				444,000
Other income (expense):
Interest and other income			7,000				3,000
Interest and other expenses			(3,000	)			―
Total other income (expense)			4,000				3,000
Income before income tax			911,000				447,000
Current income tax expense			63,000				68,000
Deferred income tax expense			183,000				1,000
Total income tax expense			246,000				69,000
Net income		$	665,000			$	378,000
Per share amounts:
Basic		$	0.39			$	0.22
Diluted		$	0.39			$	0.22
Weighted average common shares outstanding:
Basic			1,712,744				1,686,767
Diluted			1,712,744				1,686,767

			Three Months Ended
			June 30,
			2011				2010
Cash flows from operating activities:
Net income		$	665,000			$	378,000
Adjustments to reconcile net income to net cash provided by operating activities:
Depletion and depreciation			196,000				259,000
Deferred tax expense			183,000				1,000
Accretion of asset retirement obligation			41,000				40,000
Payments on asset retirement obligation			―				170,000
Share-based compensation			22,000				20,000
Change in:
Accounts receivable, net			(136,000	)			181,000
Other current assets			2,000				139,000
Accounts payable, accrued and other liabilities			(96,000	)			345,000
Net cash provided by operating activities			877,000				1,193,000
Cash flows from investing activities:
Oil and gas property			(1,337,000	)			(1,074,000	)
Support equipment and other non-current assets			(42,000	)			(1,000	)
Net cash used in investing activities			(1,379,000	)			(1,075,000	)
Cash flows from financing activities:
Purchase of treasury shares			―				(51,000	)
Net cash used in financing activities			―				(51,000	)
Cash and cash equivalents:
Net (decrease) increase in cash and cash equivalents			(502,000	)			67,000
Cash and cash equivalents, beginning of year			4,051,000				4,905,000
Cash and cash equivalents, end of period		$	3,549,000			$	4,972,000
Supplemental disclosure of cash flow information:
Cash paid for interest		$	―			$	―
Cash paid for income tax		$	―			$	90,000
Non-cash:
Increase in oil and gas property due to asset retirement obligation		$	―			$	202,000
Accrued capital expenditures		$	439,000			$	633,000

 

 

		June 30, 2011				March 31, 2011
		(Unaudited)
Lease and well equipment inventory		$	399,000			$	399,000
Drilling and completion cost prepayments			552,000				24,000
Prepaid insurance premiums			37,000				16,000
Prepaid income taxes			18,000				81,000
Other current assets			67,000				19,000
Total other current assets		$	1,073,000			$	539,000

		June 30,				March 31,
		2011				2011
		(Unaudited)
Revenue and production taxes payable		$	395,000			$	340,000
Accrued compensation			283,000				223,000
Accrued operations payable			526,000				239,000
Accrued income tax payable and other			171,000				238,000
Short term asset retirement obligation			129,000				127,000
Total accrued liabilities		$	1,504,000			$	1,167,000

 

		Three Months Ended June 30,
		2011				2010
		(Unaudited)				(Unaudited)
Current:
Federal		$	56,000			$	61,000
State			7,000				7,000
Total current income tax expense			63,000				68,000
Deferred:
Federal			170,000				1,000
State			13,000				—
Total deferred income tax expense			183,000				1,000
Income tax expense		$	246,000			$	69,000

 

		Three Months Ended June 30,
		2011				2010
		(Unaudited)				(Unaudited)
Federal tax at statutory rate		$	310,000			$	152,000
State taxes, net of federal benefit			17,000				7,000
Excess percentage depletion			(83,000	)			(59,000	)
Other adjustments, net			2,000				(31,000	)
Income tax expense		$	246,000			$	69,000
Effective tax rate expressed as a percentage of income before income tax			27.0	%			15.4	%

 

		June 30,				March 31,
		2011				2011
		(Unaudited)
Deferred tax assets:
Allowance for doubtful accounts		$	34,000			$	34,000
Asset retirement obligation			718,000				703,000
Statutory depletion carry-forward			1,091,000				1,110,000
Gross deferred tax assets			1,843,000				1,847,000
Other accruals			86,000				69,000
Depletion, depreciation and intangible drilling costs			(4,430,000	)			(4,235,000	)
Gross deferred tax liabilities			(4,344,000	)			(4,166,000	)
Deferred tax liabilities, net		$	(2,501,000	)		$	(2,319,000	)

 

 

The following discussion and analysis should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in our Annual Report on Form 10-K for the year ended March 31, 2011, as well as the unaudited condensed consolidated financial statements and related notes and other information appearing in Item 1 of this report.

 

 

 

 

 

 

 

			Three Months Ended
			June 30,
			2011				2010
Revenue
Oil		$	2,187,000			$	1,577,000
Gas			293,000				186,000
Total revenue 1			2,480,000				1,763,000
Total production expense 2			933,000				632,000
Gross profit		$	1,547,000			$	1,131,000
Depletion expense		$	185,000			$	250,000
Sales volume
Oil (Bbls)			22,562				23,222
Gas (Mcfs) 3			31,403				23,964
Average sales price 4
Oil (per Bbl)		$	96.93			$	67.91
Gas (per Mcf)		$	9.33			$	7.76
Average per BOE 5
Production expense 3, 4		$	33.57			$	23.22
Gross profit 4		$	55.66			$	41.56
Depletion expense 4		$	6.66			$	9.19

1		Amount does not include water service and disposal revenue.  For the three months ended June 30, 2011, this revenue amount is net of $45,000 in well service and water disposal revenue, which would otherwise total $2,525,000 in revenue, compared to $1,000 in 2010 to total $1,764,000 for the comparable three month period in 2010.
2		Overall lifting cost (oil and gas production costs, including production taxes and the cost of workovers)
3		Estimates of volumes are inherent in reported volumes to coincide with revenue accruals as a result of the timing of sales information reporting by third party operators.
4		Averages calculated based upon non-rounded figures
5		Per equivalent barrel (6 thousand cubic feet, “Mcf”, of gas is equivalent to 1 barrel, “Bbl”, of oil)

 

		Three Months Ended June 30,
			2011				2010
Lease operating costs		$	496,000			$	409,000
Workover costs			230,000				56,000
Production taxes			138,000				126,000
Transportation and other costs			69,000				41,000
Total production expense		$	933,000			$	632,000

 

 

We have no significant off balance sheet transactions, arrangements or obligations.

Exhibit No.		Document
31.1		Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Ray Singleton, President and Chief Executive Officer).
31.2		Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Jim Poage, Interim Chief Financial Officer).
32.1		Certification Pursuant to 18 U.S.C. §1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Ray Singleton, President and Chief Executive Officer).
32.2		Certification Pursuant to 18 U.S.C. §1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Jim Poage, Interim Chief Financial Officer).