Sabine Oil & Gas LLC Announces Second Quarter 2014 Financial and Operational Results

HOUSTON, Aug. 11, 2014 /PRNewswire/ -- Sabine Oil & Gas LLC ("Sabine" or the "Company") today reported its second quarter 2014 financial and operational results.

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Key Second Quarter Results:

• Increased average daily production by 26% to 206 MMcfe/d in the second quarter of 2014, from 164 MMcfe/d in the same period of 2013. Excluding the effects of the North Texas property divestiture in late 2013, the average daily production in the second quarter of 2014 increased by 45% compared to the same period in 2013 on a pro forma basis.  Oil production increased by 56% to 5,200 Bbl/d over the same period in 2013. Average daily production increased by 11% compared to the first quarter of 2014.
• Oil and natural gas liquids (collectively, "liquids") production volumes comprised 51% of revenues and 32% of total production.
• Liquids revenues and production for the quarter increased by 58% and 45%, respectively over the same period in 2013.
• Adjusted EBITDA for the second quarter of 2014 was $83.6 million, representing a 29% increase over the same period in 2013 and an 8% increase over first quarter 2014.
• In East Texas, completed two Cotton Valley horizontal wells in Harrison County, Texas which had an average rate per well for a 30-day period ("IP30") of over 5.2 MMcfe/d, with 37% liquids.
• Also in East Texas, completed the remaining four of the fifteen wells in the Haynesville Shale covered under a joint development agreement which averaged an IP30 of over 6.7 MMcf/d.
• In the Eagle Ford Shale, completed ten wells in the Shiner Area in northern DeWitt County and southern Lavaca County, which averaged an IP30 of over 960 BOEPD, with 40% oil and 72% liquids.
• In North Texas, completed three Granite Wash wells which averaged an IP 30 of over 1,300 BOEPD, with 60% oil and 81% liquids.
• The Company closed the acquisition of certain oil and natural gas properties in North Texas for $19.1 million, net of purchase price adjustments.

Commenting on the quarter's results, Sabine's Chief Executive Officer David Sambrooks stated, "The quarter overall was within our range of expectations, and close, or favorable, to budget across all metrics. In East Texas, our Cotton Valley wells tested areas of Harrison County where we have significant inventories, but limited data. These results were encouraging, but not up to expectations. However, subsequent to the end of the second quarter, we tested an additional Harrison County Cotton Valley well with a modified completion design and early results are significantly improved. We will report further on these results when we collect more production data. Following the completion of this Harrison County Cotton Valley test well, we moved our East Texas drilling activities back to Rusk County for the rest of 2014 and the beginning of 2015. Also in East Texas, our final Haynesville completions of previously drilled wells under our carry joint development agreement were slightly disappointing. However, we are planning to drill and test a small number of new Haynesville wells with a new well architecture and completion design."

"Eagle Ford and Granite Wash well results were overall within our range of expectations, and continue to provide economic liquids driven growth to our bottom line," Sambrooks added with respect to the Company's South and North Texas operations.  "For the remainder of the year, we plan to reduce capital expenditures by approximately $30 - $40 million, mostly due to reducing land and seismic expenditures as well as reducing activity in the Eagle Ford and shifting some of that activity to the Cotton Valley. In our Sugarkane field in the Eagle Ford, all of our acreage is held by production or operations and we currently have a back log of wells drilled but not completed.  We expect to complete these wells this year once the required infrastructure is completed. As a result, we moved our rig from the field until sometime in 2015."

"Because of our capital reduction and the aforementioned delays in completions, we expect production to come in at the lower end of guidance. However, even with production at the lower end of guidance, we are achieving expense per unit of production results at the lower end of our guidance range as well."  

Sabine and Forest Oil Corporation Revised Business Combination Transaction

Commenting on the transaction with Forest Oil Corporation ("Forest"), Sambrooks stated, "Following the end of the second quarter, we revised the previously announced business combination transaction with Forest.  Once completed, the combined company will form one of the industry's largest East Texas players with significant inventory in the Eagle Ford and Granite Wash as well. We expect a fourth quarter closing of the transaction pending necessary approvals."

For information regarding the previously announced revised business combination of Sabine and Forest, please refer to the joint press release issued by Forest dated July 10, 2014, Amendment No. 1 to the preliminary proxy statement filed on Schedule 14A by Forest on August 7, 2014 and other documents filed with the SEC.

Results of the Second Quarter 2014

Production volumes during the three months ended June 30, 2014 were 18.7 Bcfe, an increase of 3.8 Bcfe or approximately 26% from second quarter 2013 production. The increase in production is primarily due to an increase in production in South Texas through an active and successful development program in this region. These increases were partially offset by the December 2013 sale of our interests in certain oil and natural gas properties in the Texas Panhandle and surrounding Oklahoma area.

Revenues from production of oil, natural gas liquids and natural gas increased from $81.4 million in the second quarter of 2013 to $121.0 million in the second quarter of 2014, an increase of 49%. This increase of $39.6 million was a result of an increase in production of 26%, coupled with an increase in average prices per Mcfe of 18%.

During the second quarter of 2014, the Company's realized average price for natural gas including hedges was $4.33 per Mcf, or $0.31 per Mcf lower than the Company's unhedged realized average price of $4.64 per Mcf. The Company's realized average price of oil including hedges was $88.70 per Bbl, or $7.14 per Bbl lower than the Company's unhedged realized average price of $95.84 per Bbl. In the second quarter of 2014, our hedged volumes were approximately 77% and 79% of both our natural gas and oil volumes, respectively. The Company realized a loss on settlements of such derivative instruments for the second quarter of 2014 of $7.6 million. In the second quarter of 2013, our hedged volumes were approximately 85% and 60% of our natural gas and oil volumes, respectively, which resulted in a realized gain on settlements of such derivative instruments of $7.9 million.

Lease operating expenses increased from $10.0 million in the second quarter of 2013 to $11.6 million in the second quarter of 2014, an increase of 16%. The increase in lease operating expense of $1.6 million is primarily due to an increase in production in South Texas partially offset by the December 2013 sale of our interests in certain oil and natural gas properties in the Texas Panhandle and surrounding Oklahoma area. Lease operating expenses decreased from $0.67 per Mcfe in the second quarter of 2013 to $0.62 per Mcfe in the second quarter of 2014. The decrease of $0.05 per Mcfe is primarily due to higher production volumes associated with increased completion activity in the last twelve months.

Marketing, gathering, transportation and other expenses increased from $3.7 million in the second quarter of 2013 to $6.2 million in the second quarter of 2014. Marketing, gathering, transportation and other expenses increased on a per unit basis from $0.25 per Mcfe in the second quarter of 2013 to $0.33 per Mcfe in the second quarter of 2014. The per unit basis increase is primarily due to our increasing gas volume associated with our South Texas and East Texas development activities, which were subject to higher fees due to a lack of pipeline infrastructure in the areas.

Production and ad valorem taxes increased from $4.1 million in the second quarter of 2013 to $4.8 million in the second quarter of 2014, an increase of 19%. The increase is primarily related to increased production in our South Texas region which is incurring higher production taxes on oil and natural gas liquids production, which was offset by a slight decrease in our North Texas production due to the December 2013 sale of our interests in certain oil and natural gas properties in the Texas Panhandle and surrounding Oklahoma area. Production and ad valorem taxes decreased on a per unit basis from $0.27 per Mcfe in the second quarter of 2013 to $0.26 per Mcfe in the second quarter of 2014. The Company also expects to experience continued variability in its production taxes as a result of timing of approval for high cost gas tax exemptions. Production taxes as a percentage of oil and natural gas revenues were 4% and 5% for the second quarter of 2014 and 2013, respectively.

General and administrative expenses increased from $6.8 million in the second quarter of 2013 to $7.6 million in the second quarter of 2014, an increase of $0.8 million, or 13%, primarily as a result of higher overhead associated with our growing business. General and administrative expenses decreased from $0.45 per Mcfe in the second quarter of 2013 to $0.41 per Mcfe in the second quarter of 2014 reflecting efficiencies gained due to increased production without a proportionate increase in general and administrative expenses.

DD&A increased from $31.7 million in the second quarter of 2013 to $50.3 million in the second quarter of 2014, an increase of $18.6 million. Depletion, depreciation, and amortization increased from $2.13 per Mcfe in the second quarter of 2013 to $2.69 per Mcfe in the second quarter of 2014, or an increase of 26%. Increase in the DD&A rate is primarily driven by reductions to proved reserves due to the sale of certain oil and natural gas properties in North Texas during the fourth quarter of 2013.

Other operating expenses in the second quarter of 2014 relate primarily to the write-off of previously deferred public offering costs of $2.0 million related to offerings which were aborted prior to the Company's decision to commence the merger  with Forest Oil Corporation and $3.3 million of transaction costs related to the merger.

Interest expense increased from $25.0 million in the second quarter of 2013 to $26.8 million in the second quarter of 2014, an increase of $1.8 million, or 7%, primarily as a result of lower capitalized interest. We capitalized $1.6 million and $3.0 million of interest expense for the three months ended June 30, 2014 and 2013, respectively.

The Company recognized a loss on derivative contracts of $16.9 million and a gain on derivative contracts of $28.3 million for the second quarter of 2014 and 2013, respectively. The amount of future gain or loss recognized on derivative instruments is dependent upon future commodity prices.

Results of the six months ended June 30, 2014

Production volumes during the six months ended June 30, 2014 were 35.3 Bcfe, an increase of 7.9 Bcfe or approximately 29% from the first six months of 2013 production. The increase in production is primarily due to an increase in production in South Texas through an active and successful development program in this region. These increases were partially offset by the December 2013 sale of our interests in certain oil and natural gas properties in the Texas Panhandle and surrounding Oklahoma area.

Revenues from production of oil, natural gas liquids and natural gas increased from $148.9 million in the first six months of 2013 to $233.3 million in the first six months of 2014, an increase of 57%. This increase of $84.4 million was a result of an increase in production of 29%, coupled with an increase in average prices per Mcfe of 22%.

During the first six months of 2014, the Company's realized average price for natural gas including hedges was $4.48 per Mcf, or $0.36 per Mcf lower than the Company's unhedged realized average price of $4.84 per Mcf. The Company's realized average price of oil including hedges was $89.20 per Bbl, or $5.47 per Bbl lower than the Company's unhedged realized average price of $94.67 per Bbl. In the first six months of 2014, our hedged volumes were approximately 82% and 80% of both our natural gas and oil volumes, respectively. The Company realized a loss on settlements of such derivative instruments for the first six months of 2014 of $15.0 million. In the first six months of 2013, our hedged volumes were approximately 89% and 61% of our natural gas and oil volumes, respectively, which resulted in a realized gain on settlements of such derivative instruments of $22.7 million.

Lease operating expenses increased from $19.6 million in the first six months of 2013 to $22.8 million in the first six months of 2014, an increase of 16%. The increase in lease operating expense of $3.1 million is primarily due to an increase in production in South Texas partially offset by the December 2013 sale of our interests in certain oil and natural gas properties in the Texas Panhandle and surrounding Oklahoma area. Lease operating expenses decreased from $0.72 per Mcfe in the first six months of 2013 to $0.64 per Mcfe in the first six months of 2014. The decrease of $0.08 per Mcfe is primarily due to higher production volumes associated with increased completion activity in the last twelve months.

Marketing, gathering, transportation and other expenses increased from $8.2 million in the first six months of 2013 to $10.5 million in the first six months of 2014. Marketing, gathering, transportation and other expenses remained consistent on a per unit basis at $0.30 per Mcfe in the first six months of 2013 and 2014. Offsetting factors on a per unit basis include increases primarily due to our increasing gas volume associated with our South Texas and East Texas development activities which were subject to higher fees due to a lack of pipeline infrastructure in the areas, and decreases due to our increasing oil volumes associated with our development activities in North Texas and South Texas regions which are not subject to gathering and transportation charges.

Production and ad valorem taxes increased from $7.6 million in the first six months of 2013 to $10.4 million in the first six months of 2014, an increase of 38%. Production and ad valorem taxes increased on a per unit basis from $0.28 per Mcfe in the first six months of 2013 to $0.30 per Mcfe in the first six months of 2014. The increase is primarily related to increased production in our South Texas region which is incurring higher production taxes on oil and natural gas liquids production, which was offset by a slight decrease in our North Texas production due to the December 2013 sale of our interests in certain oil and natural gas properties in the Texas Panhandle and surrounding Oklahoma area. The Company expects to experience continued variability in its production taxes as a result of timing of approval for high cost gas tax exemptions. Production taxes as a percentage of oil and natural gas revenues were 4% and 5% for the first six months of 2014 and 2013, respectively.

General and administrative expenses increased from $12.9 million in the first six months of 2013 to $14.0 million in the first six months of 2014, an increase of $1.1 million, or 8%, primarily as a result of higher overhead associated with our growing business. General and administrative expenses decreased from $0.47 per Mcfe in the first six months of 2013 to $0.40 per Mcfe in the first six months of 2014 reflecting efficiencies gained due to increased production without a proportionate increase in general and administrative expenses.

DD&A increased from $57.9 million in the first six months of 2013 to $90.2 million in the first six months of 2014, an increase of $32.3 million. Depletion, depreciation, and amortization increased from $2.11 per Mcfe in the first six months of 2013 to $2.55 per Mcfe in the first six months of 2014, or an increase of 21%. Increase in the DD&A rate is primarily driven by reductions to proved reserves due to the sale of certain oil and natural gas properties in North Texas during the fourth quarter of 2013.

Other operating expenses in the first six months of 2014 relate primarily to the write-off of previously deferred public offering costs of $3.3 million related to offerings which were aborted prior to the Company's decision to commence the merger with Forest Oil Corporation and $2.0 million of transaction costs related to the merger, partially offset by the gain on sale of other assets of $1.5 million.

Interest expense increased from $48.3 million in the first six months of 2013 to $52.7 million in the first six months of 2014, an increase of $4.4 million, or 9%, primarily as a result of lower capitalized interest. We capitalized $3.5 million and $6.9 million of interest expense for the six months ended June 30, 2014 and 2013, respectively.

The Company recognized a loss on derivative contracts of $39.0 million and a gain on derivative contracts of $8.7 million for the first six months of 2014 and 2013, respectively. The amount of future gain or loss recognized on derivative instruments is dependent upon future commodity prices.

Debt/Liquidity

As of June 30, 2014, our borrowing base under our First Lien Credit Facility was $700 million, and we had an outstanding balance of approximately $463.6 million, net of cash on hand. As of August 11, 2014, the Company has drawn an additional $49 million and had an outstanding balance of $524 million.

Hedging

For the remainder of 2014 (July-December), the Company has NYMEX hedges in place for the calendar year of 2014 on approximately 135,000 MMbtu/d of its projected natural gas production, at a weighted average price of $4.24/ MMbtu, and 4,400 Bbl/day of oil production at a weighted average price of $92.81/Bbl.  For the calendar year of 2015, the Company has hedge contracts in place for 115,000 MMbtu/d of its projected natural gas production at a weighted average price of $4.18/MMbtu, and 4,375 Bbl/day of oil production at a weighted average price of $90.38/Bbl.

Sabine Oil & Gas LLC is an independent energy company engaged in the acquisition, production, exploration and development of onshore oil and natural gas properties in the United States. Our current operations are principally located in the Cotton Valley and Haynesville Shale in East Texas, the Eagle Ford Shale in South Texas, and the Granite Wash in the Texas Panhandle.

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.  For a detailed list of the Company's risk factors, please consult the Company's Annual Report, subsequent quarterly reports and other press releases posted at www.sabineoil.com.

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.

SOURCE Sabine Oil & Gas LLC