2014

NFR Energy LLC Announces 2012 Second Quarter Financial and Operational Results

HOUSTON, Aug. 16, 2012 /PRNewswire/ -- NFR Energy LLC today reported its unaudited second quarter 2012 financial and operating results.

Key Second Quarter Results:

  • Drilled and completed Sustr #1 – First well in the Eagle ford Shale in South Texas
  • Built position up to 62,000 acres in DK prospect, the new liquid position in East Texas, and spud the first well
  • Completed sale of Uinta assets for approximately $17 million
  • Subsequent to June 30, the Company agreed to terms to divest its Bear Paw assets in Montana to complete exit of the Rockies
  • Executed additional hedges in 2014 for approximately 26.5 Bcfe

Results of the Second Quarter 2012

Production volumes during the three months ended June 30, 2012 were 12.5 Bcfe, an increase of 2.8 Bcfe or 29% from second quarter 2011 production. The increase in production is attributed to positive results from the Company's drilling program and continued success of its recent acquisitions.

Revenues from production of oil and natural gas decreased from $48.2 million in the second quarter of 2011 to $39.6 million in the second quarter of 2012, a decrease of 18%. The net decrease in oil and natural gas revenues of $8.6 million in the second quarter of 2012 compared to the second quarter of 2011 resulted from a decrease in average prices per Mcfe of 37% offset by an increase in production due to acquisitions and drilling success of 29%.

During the second quarter of 2012, the Company's hedged realized average price for natural gas was $5.20 per Mcf. This is $2.96 per Mcf more than the Company's unhedged realized average price of $2.24 per Mcf. In the second quarter of 2012, approximately 66% of our natural gas volumes and 43% of our oil volumes were hedged, which resulted in a realized gain on such derivative instruments of approximately $31.7 million. In the second quarter of 2011, approximately 90% of our natural gas volumes were hedged, which resulted in a realized gain on such derivative instruments of $17.8 million.

Lease operating expenses increased from $5.3 million in the second quarter of 2011 to $11.3 million in the second quarter of 2012, an increase of 112%. The increase in lease operating expense is due to an increase in production associated with our two recent producing property acquisitions in East Texas. Lease operating expenses increased from $0.55 per Mcfe in the second quarter of 2011 to $0.91 per Mcfe in the second quarter of 2012. The increase of $0.36 per Mcfe is primarily due to acquisition related transition services costs, one-time costs for compliance improvements and operating efficiency efforts of approximately $2.9 million and an increase in production volumes associated with vertical wells acquired in the second half of 2011 with higher operating costs compared to the second quarter of 2011.

Marketing, gathering, transportation and other expenses increased from $4.5 million in the second quarter of 2011 to $5.2 million in the second quarter of 2012, an increase of 15%. The increase is due to an increase in production volumes by 29%. Marketing, gathering, transportation and other expenses decreased on a per unit basis from $0.46 per Mcfe in the second quarter of 2011 to $0.41 per Mcfe in the second quarter of 2012.  The decrease is due primarily to the Company's ability to secure favorable marketing and transportation contract terms with respect to the property acquisitions completed in 2011.

Production and ad valorem taxes decreased from $2.3 million in the second quarter of 2011 to $1.3 million in the second quarter of 2012, a decrease of 45%, primarily as a result of the timing of the approval of high cost gas tax exemptions that we are currently receiving on all of our horizontal gas wells. This decrease is offset by an increase in production and ad valorem taxes as a result of a 29% increase in production. The Company expects future volatility with production taxes as a result of timing of approval for the aforementioned exemptions. Production taxes as a percentage of natural gas and oil revenues before the effects of hedging were 3% and 5% for the second quarter of 2012 and 2011, respectively.

General and administrative expenses decreased from $5.5 million in the second quarter of 2011 to $4.5 million in the second quarter of 2012, a decrease of $1.0 million, or 17%, primarily as a result of lower due diligence and other acquisition costs in 2012, coupled with lower payroll net of overhead adjustments. General and administrative expenses decreased from $0.57 per Mcfe in the second quarter of 2011 to $0.36 per Mcfe in the second quarter of 2012 primarily as a result of an increase in production volumes without a proportionate increase in general and administrative expenses.

Depletion, depreciation and amortization increased from $17.1 million in the second quarter of 2011 to $24.3 million in the second quarter of 2012, an increase of $7.2 million, or 42% as a result of the impact of the increased production. Depletion, depreciation, and amortization increased from $1.77 per Mcfe in the second quarter of 2011 to $1.95 per Mcfe in the second quarter of 2012 due to higher depletion and amortization base resulting from acquired assets and capital expenditures.

A non-cash impairment charge of $289.1 million, primarily related to the Company's oil and natural gas properties, was recorded in the second quarter of 2012. In the second quarter of 2011, we did not record an impairment charge as a result of the full cost ceiling limitation or for other assets. The 2012 impairment charge is due to the carrying value of proved oil and gas properties in excess of the ceiling limitation and attributed to the decline in the average of the historical unweighted first-day-of-the-month natural gas prices from the prior twelve month periods ended March 31, 2012 to June 30, 2012 of $3.73 to $3.15, respectively

Interest expense, excluding capitalized interest of $1.1 million and $1.6 million, respectively, increased from $9.4 million for the second quarter of 2011 to $11.4 million for the second quarter of 2012, an increase of $2.0 million, primarily as a result of additional borrowings on our senior secured revolving credit facility that were used to fund capital expenditures (including acquisitions) in the second half of 2011.

Certain of the Company's derivative contracts are not eligible for hedge accounting, and as a result, are required to be marked-to-market each period, with all gains or losses on such contracts (realized or unrealized), being recognized in our results of operations. During the three months ended June 30, 2012 and 2011, the company recognized a $4.5 million loss and a $6.3 million loss on derivative instruments, respectively. The amount of future gain or loss recognized on derivative instruments is dependent upon future natural gas prices, which will affect the value of the contracts, and the eligibility of the contract for hedge accounting treatment.

Results of the six months ended June 30, 2012

Production volumes during the six months ended June 30, 2012 were 26.18 Bcfe, an increase of 6.54 Bcfe or 33% from six months ended June 30, 2011 production. The increase in production is attributed to positive results from the Company's drilling program and continued success of its recent acquisitions.

Revenues from production of oil and natural gas decreased from $94.7 million for the six months ended June 30, 2011 to $89.4 million for the six months ended June 30, 2012, a decrease of 6%. The net decrease in oil and natural gas revenues of $5.3 million for the six months ended June 30, 2012 compared to the six months ended June 30, 2011, resulted from a decrease in average prices per Mcfe of 29% offset by an increase in production due to acquisitions and drilling success of 33%.

During the six months ended June 30, 2012, the Company's hedged realized average price for natural gas was $5.01 per Mcf. This is $2.59 per Mcf more than the Company's unhedged realized average price of $2.42 per Mcf. In the first six months of 2012, approximately 63% of our natural gas volumes and 44% of our oil volumes were hedged, which resulted in a realized gain on such derivative instruments of approximately $58.1 million. In the first six months of 2011, approximately 71% of our natural gas volumes were hedged, which resulted in a realized gain on such derivative instruments of $29.8 million.

Lease operating expenses increased from $11.2 million in the first six months of 2011 to $23.3 million in the first six months of 2012, an increase of 108%. The increase in lease operating expense is due to an increase in production associated with our two recent producing property acquisitions in East Texas. Lease operating expenses increased from $0.57 per Mcfe in the first six months of 2011 to $0.89 per Mcfe in the first six months of 2012. The increase of $0.32 per Mcfe is primarily due to acquisition related transition services costs, one-time costs for compliance improvements and operating efficiency efforts of approximately $3.1 million and an increase in production volumes associated with vertical wells acquired in the second half of 2011 with higher operating costs compared to the six months ended June 30, 2011.

Marketing, gathering, transportation and other expenses increased from $9.1 million in the first six months of 2011 to $10.7 million in the first six months of 2012, an increase of 17%. The increase is due to an increase in production volumes by 33%. Marketing, gathering, transportation and other expenses decreased on a per unit basis from $0.47 per Mcfe in the first six months of 2011 to $0.41 per Mcfe in the first six months of 2012.  The decrease is due primarily to the Company's ability to secure favorable marketing and transportation contract terms with respect to the property acquisitions completed in 2011.

Production and ad valorem taxes decreased from $3.6 million in the first six months of 2011 to $3.1 million in the first six months of 2012, a decrease of 14%, primarily as a result of the timing of the approval of high cost gas tax exemptions that we are currently receiving on all of our horizontal gas wells. This decrease is offset by an increase in production and ad valorem taxes as a result of a 33% increase in production. The Company expects future volatility with production taxes as a result of timing of approval for the aforementioned exemptions. Production taxes as a percentage of natural gas and oil revenues before the effects of hedging were 3% and 4% for the first six months of 2012 and 2011, respectively

General and administrative expenses decreased from $11.9 million in the first six months of 2011 to $10.2 million in the first six months of 2012, a decrease of $1.7 million, or 14%, primarily as a result of lower due diligence and other acquisition costs in 2012. General and administrative expenses decreased from $0.61 per Mcfe in the first six months of 2011 to $0.39 per Mcfe in the first six months of 2012 primarily as a result of an increase in production volumes without a proportionate increase in general and administrative expenses.

DD&A increased from $34.9 million in the first six months of 2011 to $51.3 million in the first six months of 2012, an increase of $16.4 million, or 47% as a result of the impact of the increased production. Depletion, depreciation, and amortization increased from $1.78 per Mcfe in the first six months of 2011 to $1.96 per Mcfe in the first six months of 2012 due to higher depletion and amortization base resulting from acquired assets and capital expenditures.

A non-cash impairment charge of $420.5 million,  primarily related to the Company's oil and natural gas properties, was recorded in the first six months of 2012 . In the first six months of 2011, we did not record an impairment charge as a result of the full cost ceiling limitation. The 2012 impairment charge is due to the carrying value of proved oil and gas properties in excess of the ceiling limitation and attributed to the decline in the average of the historical unweighted first-day-of-the-month natural gas prices from the prior twelve month periods ended December 31, 2011 to June 30, 2012 of $4.12 to $3.15, respectively.

Interest expense, excluding capitalized interest of $2.2 million and $3.2 million, respectively, increased from $18.4 million for the first six months of 2011 to $23.1 million for the first six months of 2012, an increase of $4.7 million, primarily as a result of additional borrowings on our senior secured revolving credit facility that were used to fund our capital expenditures (including acquisitions).

Certain of our derivative contracts are not eligible for hedge accounting, and as a result, are required to be marked-to-market each period, with all gains or losses (realized or unrealized) on such contracts being recognized in our results of operations. During the six months ended June 30, 2012 and 2011, the company recognized a $5.1 million loss and a $15.5 million loss on derivative instruments, respectively. The amount of future gain or loss recognized on derivative instruments is dependent upon future natural gas prices, which will affect the value of the contracts, and the eligibility of the contract for hedge accounting treatment.

Debt/Liquidity

As of June 30, 2012, our borrowing base under our senior secured revolving credit facility was $600 million, and we had total outstanding indebtedness of approximately $408. As of August 15, 2012, the Company has drawn an additional $24.0 million, has repaid $11.0 million and had an outstanding balance of $421 million.

Hedging Update

The table below sets forth the company's consolidated natural gas and oil hedge contracts in place.





Weighted Average prices ($Mmbtu)/($/bbl)






Type


Remaining Term


Sub-Floor


Swap or

Floor


Cap


Mmbtu/d


BOPD


Total Volume

Remaining
















2012















Swap


6 Months (Jul-Dec)


-


$        6.19


-


70,489


-


12,969,976

Costless Collar


6 Months (Jul-Dec)


-


$        6.00


$        8.65


16,999


-


3,127,740

Three-Way Collar


6 Months (Jul-Dec)


$      70.00


$      85.00


$    110.00


-


350


64,400

Total 2012 Hedges










87,488


350



2013















Swap


12 Months (Jan-Dec)


-


$        5.23


-


88,325


-


32,238,731

Call Option 


12 Months (Jan-Dec)


-


-


$    110.00


-


350


127,750

Call Option 


12 Months (Jan-Dec)






$    100.00




200


73,000

Total 2013 Hedges










88,325


550



2014















Three-Way Collar


6 Months (Jan-Jun)


3.50


4.50


$        5.25


85,000


-


15,512,500

Three-Way Collar


6 Months (Jul-Dec)


3.50


4.50


$        5.25


60,000


-


10,950,000

Call Option 


12 Months (Jan-Dec)


-


-


$    110.00


-


350


127,750

Call Option 


12 Months (Jan-Dec)






$    100.00




200


73,000

Total 2014 Hedges










72,500


550



2015















Call Option 


12 Months (Jan-Dec)


-


-


$        5.25


60,000


-


21,900,000

Call Option 


12 Months (Jan-Dec)


-


-


$    110.00


-


350


127,750

Call Option 


12 Months (Jan-Dec)






$    100.00




200


73,000

Total 2015 Hedges










60,000


550



2016















Call Option 


12 Months (Jan-Dec)


-


-


$        5.00


60,000


-


21,960,000

Total 2016 Hedges










60,000


-


















NFR will host a conference call at 9:00 a.m. CDT on August 16, 2012. To participate in the call, dial 1-888-606-5934 and international participants should dial 1-517-308-9375.  The participant passcode is NFR2011. A replay of the conference call will be available through the Company's website at http://www.nfrenergy.comfor the three months ended June 30, 2012.

NFR Energy LLC is a privately-held natural gas and oil company based in Houston, Texas. The Company's current operations are principally located in East Texas, with production from the Haynesville Shale and Cotton Valley Sand formations.

This press release includes "forward-looking statements." All statements, other than statements of historical facts, included in this press release that address activities, events or developments that the Company expects, believes or anticipates will or may occur in the future are forward-looking statements. These statements include, but are not limited to forward-looking statements about plans, strategies, objectives and anticipated financial and operating results of the Company, including the Company's drilling program, production, hedging activities, capital expenditure levels and other guidance. These statements are based on certain assumptions made by the Company based on management's experience and perception of historical trends, current conditions, anticipated future developments and other factors believed to be appropriate. Such statements are subject to a number of assumptions, risks and uncertainties, many of which are beyond the control of the Company, which may cause actual results to differ materially from those implied or expressed by the forward-looking statements. These risks include, but are not limited to, commodity price volatility, inflation, lack of availability of drilling and production equipment and services, environmental risks, drilling and other operating risks, regulatory changes, the uncertainty inherent in estimating natural gas and oil reserves and in projecting future rates of production, cash flow, access to capital and the timing of development expenditures.  See "Risk Factors" in the Company's Annual Report posted at www.nfrenergy.com and other public filings and press releases.

Any forward-looking statement speaks only as of the date on which such statement is made and the Company undertakes no obligation to correct or update any forward-looking statement, whether as a result of new information, future events or otherwise.

 

NFR ENERGY LLC









Operational and Financial Statistics




















Three Months Ended


Six Months Ended



June 30, 


June 30, 



2012


2011


2012


2011

Oil, natural gas and NGL sales by product (in thousands):









Natural gas


$ 24,000


$ 35,786


$     54,156


$  71,933

Oil


6,970


4,095


14,125


7,775

NGL


8,584


8,326


21,089


14,957

Total


$ 39,554


$ 48,207


$     89,370


$  94,665










Production data:









Natural gas (Bcf)


10.70


8.47


22.38


17.32

Oil (MBbl)


74.66


41.80


144.51


85.62

NGL (MBbl)


227.21


157.92


489.07


301.54

Combined (Bcfe)(1)


12.51


9.67


26.18


19.64










Average prices before effects of hedges (2):









Natural gas (per Mcf)


$     2.24


$     4.22


$         2.42


$      4.15

Oil (per Bbl)


$   93.35


$   97.97


$       97.74


$    90.81

NGL (per Bbl)


$   37.78


$   52.73


$       43.12


$    49.60

Combined (per Mcfe)(1)


$     3.16


$     4.99


$         3.41


$      4.82










Average realized prices after effects of hedges (2):









Natural gas (per Mcf)


$     5.20


$     6.33


$         5.01


$      5.87

Oil (per Bbl)


$   93.35


$   97.97


$       97.74


$    90.81

NGL (per Bbl)


$   37.78


$   52.73


$       43.12


$    49.60

Combined (per Mcfe)(1)


$     5.69


$     6.83


$         5.63


$      6.34










Average costs (per Mcfe)(1):









Lease operating expenses


$     0.90


$     0.55


$         0.89


$      0.57

Workover expenses


$     0.04


$     0.08


$         0.05


$      0.08

Marketing, gathering, transportation and other


$     0.41


$     0.46


$         0.41


$      0.47

Production and ad valorem taxes


$     0.10


$     0.24


$         0.12


$      0.18

General and administrative expenses


$     0.36


$     0.57


$         0.39


$      0.61

Depletion, depreciation and amortization


$     1.94


$     1.77


$         1.96


$      1.78










(1) Oil production was converted at six Mcf per Bbl to calculate combined production and per Mcfe amounts.
(2) Average prices shown in the table reflect prices both before and after the effects of our realized commodity hedging transactions. Our calculation of such effects includes realized gains or losses on cash settlements for commodity derivatives.

 

NFR ENERGY LLC









CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)



















Three Months Ended June 30,


Six Months Ended June 30,








2012


2011


2012


2011














(in thousands)


(in thousands)











Revenues










Oil, natural gas and natural gas liquids sales


$  39,554


$ 48,207


$  89,370


$ 94,665


Gain on derivative instruments


31,669


17,807


58,074


29,794


Other revenue


(12)


62


(101)


82

Total revenues


71,211


66,076


147,343


124,541

Operating expenses










Lease operating expenses


11,284


5,327


23,285


11,214


Workover expenses


489


813


1,259


1,568


Marketing, gathering, transportation and other


5,151


4,485


10,682


9,149


Production and ad valorem taxes


1,265


2,311


3,083


3,601


General and administrative expenses


4,528


5,475


10,234


11,923


Depletion, depreciation and amortization


24,267


17,086


51,296


34,878


Gain on bargain purchase


-


-


-


(26,723)


Accretion expense


237


140


481


278


Bad debt expense


-


3


-


3


Impairments


291,698


-


432,301


656

Total operating expenses


338,919


35,640


532,621


46,547

Other income (expenses)










Interest expense


(11,421)


(9,351)


(23,060)


(18,439)


Loss on derivative instruments


(4,488)


(6,268)


(5,127)


(15,470)


Other gain (loss)


23


(11)


(306)


(89)

Total other expenses


(15,886)


(15,630)


(28,493)


(33,998)

Net income (loss) including noncontrolling interests


(283,594)


14,806


(413,771)


43,996

Less:  Net income (loss) applicable to noncontrolling interests

3


(22)


30


(68)











Net income (loss) applicable to controlling interests


$(283,591)


$  14,784


$(413,741)


$  43,928












 

NFR ENERGY LLC









ADJUSTED EBITDA




















Three Months Ended


Six Months Ended



June 30, 


June 30, 



2012


2011


2012


2011



(in thousands)










Net income (loss) applicable to controlling interests


$ (283,591)


$    14,784


$ (413,741)


$    43,928










Reconciliation to derive Adjusted EBITDA (1):









Interest expense, net of capitalized interest


11,421


9,351


23,060


18,439

Depletion, depreciation and amortization


24,267


17,086


51,296


34,878

 Impairments


291,698


-


432,301


656

     Loss on derivative instruments


3,919


5,831


3,953


14,675

     Gain on bargain purchase


-


-


-


(26,723)

Other


90


44


520


253

Net income (loss) applicable to noncontrolling interests


(3)


22


(30)


68

Adjusted EBITDA (1)


$    47,801


$    47,118


$    97,359


$    86,174










(1)    Adjusted EBITDA are non-GAAP financial measures. We use Adjusted EBITDA as a supplemental financial measure. Adjusted EBITDA is calculated in a manner consistent with the indenture governing our 2017 Notes and our senior secured revolving credit facility as net income (loss) before interest, taxes, depreciation and amortization, as further adjusted to include other adjustments, such as impairment, accretion expense, unrealized hedge gains or losses and other non-cash charges and pro forma adjustments for acquisitions and divestitures that may not be comparable to similarly titled measures, employed by other companies. Adjusted EBITDA are measures of performance calculated in accordance with GAAP. Adjusted EBITDA should not be considered in isolation or as a substitute for operating income, net income or loss, cash flows provided by operating, investing and financing activities, or other income or cash flow statement data prepared in accordance with GAAP. Adjusted EBITDA provide no information regarding a company's capital structure, borrowings, interest costs, capital expenditures, and working capital movement or tax position. Adjusted EBITDA do not represent funds available for discretionary use because those funds are required for debt service, capital expenditures, working capital, and other commitments and obligations. However, our management team believes Adjusted EBITDA are useful to an investor in evaluating our company because these measures:

  • are widely used by investors in the natural gas and oil industry to measure a company's operating performance without regard to items excluded from the calculation of such term, which can vary substantially from company to company depending upon accounting methods and book value of assets, capital structure and the method by which assets were acquired, among other factors;
  • help investors to more meaningfully evaluate and compare the results of our operations from period to period by removing the effect of our capital structure from our operating structure; and
  • are used by our management team for various purposes, including strategic planning and forecasting. Adjusted EBITDA is also the basis for covenants under the indenture governing our 2017 Notes regulating future debt issuance and restricted payments and pursuant to maintenance covenants under our senior secured revolving credit facility.

 







NFR ENERGY LLC





Selected Balance Sheet Data








June 30,


December 31,




2012


2011




(in thousands)

Assets:






    Total current assets


$   100,849


$        125,665

    Total property plant and equipment, net


1,068,403


1,507,862

    Other noncurrent assets


43,836


51,589

Total assets


$ 1,213,088


$      1,685,116







Liabilities and member's capital:





    Total current liabilities


$     74,458


$        106,550

    Credit facility


408,000


418,000

    Senior notes


347,096


346,782

    Other noncurrent liabilities


38,996


33,611

Total Liabilities 


868,550


904,943







    Member's capital


344,538


780,173







Total Liabilities and member's capital


$ 1,213,088


$      1,685,116













Selected Cash Flow Data








Six Months Ended June 30,




2012


2011




(in thousands)

Net cash provided by operating activities


$     79,392


$          64,484

Net cash used in investing activities


(72,215)


(219,202)

Net cash provided by (used in) financing activities


(10,163)


156,834

Net increase (decrease) in cash and cash equivalents


(2,987)


2,116







Cash and cash equivalents, beginning of period


4,306


4,437

Cash and cash equivalents, end of period


$       1,319


$            6,553







 

SOURCE NFR Energy LLC



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