BATL

Business Context and Reporting Period

Company: RAM Energy Resources, Inc. (formerly Tremisis Energy Acquisition Corporation, operating as RAM Energy post-merger).
Reporting Period: First Quarter ended March 31, 2007.
Business Overview: Independent oil and natural gas company engaged in acquisition, exploration, and production primarily in Texas, Louisiana, Oklahoma, and New Mexico. The company operates under a reverse acquisition structure where RAM Energy is the continuing entity.

Key Financial Metrics

Note: Working Capital calculated as Current Assets ($36,882) minus Current Liabilities ($42,713).

Material Changes vs. Prior Period

• Revenue Decline: Total revenues decreased 23% to $14.3 million, driven by a 10% drop in oil and gas sales due to lower production volumes (1.6% decrease) and lower realized prices (8.4% decrease per Boe).
• Derivative Losses: The company recorded a $1.1 million loss on derivatives in Q1 2007, compared to a $1.4 million gain in Q1 2006. This swing of approximately $2.5 million significantly impacted operating income.
• Net Loss: The company reported a net loss of $580,000, a reversal from the $2.8 million net income in the prior year quarter.
• Liquidity Improvement: Cash and cash equivalents increased from $6.7 million to $29.3 million, primarily due to a $27.4 million net proceeds from a common stock offering in February 2007.
• Expense Increases: Interest expense rose 9% to $3.8 million due to higher rates and indebtedness. General and administrative expenses increased 20% due to higher salaries and headcount.

Guidance, Outlook, and Risks

Management Commentary and Outlook

• Capital Expenditures: Q1 2007 capital expenditures were $4.5 million. The 2007 non-acquisition capital budget was increased by $6.0 million to $36.3 million to fund additional drilling on Barnett Shale acreage.
• Acquisition Activity: On May 10, 2007, the company executed an agreement to acquire 120 wells in the Permian Basin for $18.5 million, closing May 15, 2007.
• Liquidity Position: Management believes available borrowings ($37.0 million under the revolving credit facility) and cash flows are sufficient for foreseeable obligations, though future financing needs may arise.

Risks and Contingencies

• Legal Proceedings: A class-action lawsuit filed in 2002 regarding royalty payments and measurement issues remains pending. Management cannot estimate potential loss, though former stockholders have indemnified the company with 3.2 million shares held in escrow.
• Debt Covenants: The company obtained a waiver for non-compliance with the EBITDA to interest expense ratio covenant under its Guggenheim credit facility as of March 31, 2007.
• Market Risk: Revenue is highly sensitive to oil and natural gas prices. The company utilizes derivative collars to manage price exposure but remains subject to market fluctuations.
• Going Concern: While management asserts the company is a going concern, the financial statements reflect a stockholders' deficit of $2.2 million and a working capital deficit of $5.8 million.

Investor Verification Checklist

• Derivative Exposure: Verify the specific terms and mark-to-market valuation of the derivative collars (floors and ceilings) for 2007-2009, as unrealized losses significantly impacted Q1 results.
• Debt Covenant Compliance: Confirm the status of the EBITDA/Interest expense covenant waiver and the company's ability to maintain compliance in subsequent quarters.
• Legal Indemnification: Review the escrow agreement details regarding the 3.2 million shares held by former stockholders to secure indemnification against the pending royalty lawsuit.
• Capital Budget Execution: Monitor the execution of the increased $36.3 million capital budget and the impact of the $18.5 million Permian Basin acquisition on leverage ratios.
• Production Trends: Analyze the sustainability of production volumes in the Barnett Shale and Electra/Burkburnett areas given the reported price declines.