Business Context and Reporting Period
Company: RAM Energy Resources, Inc. (formerly Tremisis Energy Acquisition Corporation)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2006
Business Overview: An independent oil and natural gas company engaged in the acquisition, development, exploitation, exploration, and production of properties primarily in Texas, Louisiana, and Oklahoma. The company operates through its wholly-owned subsidiary, RAM Energy, Inc. Key operational areas include the Electra/Burkburnett area, Egan Field, Boonsville Area, and the Barnett Shale play. On May 8, 2006, the company consummated a reverse acquisition merger with RAM Energy, Inc.
Key Financial Metrics (Year Ended Dec 31, 2006)
| Metric | Value (in thousands) |
|---|---|
| Total Revenues | $70,244 |
| Oil and Natural Gas Sales | $68,015 |
| Net Income | $5,048 |
| EBITDA | $33,419 |
| Cash Flow from Operating Activities | $29,660 |
| Total Assets | $161,725 |
| Total Liabilities | $189,620 |
| Long-Term Debt (incl. current) | $132,237 |
| Cash and Cash Equivalents | $6,721 |
| Proved Reserves (Net) | 18.5 MMBoe |
| PV-10 Value of Reserves | $269.9 million |
Material Changes vs. Prior Period (2005)
- Revenue Growth: Total revenues increased by $14.8 million (27%) to $70.2 million. This was primarily driven by a $1.6 million gain from derivatives in 2006, compared to an $11.7 million loss in 2005.
- Production Decline: Total production volumes decreased by 8.2% (1,290 MBoe vs. 1,405 MBoe). Oil production fell 4.5%, NGLs fell 16.1%, and natural gas fell 11.8%.
- Price Increases: Average realized sales prices increased significantly. Oil prices rose 18.7% to $63.82/Bbl, and NGL prices rose 11.0% to $40.33/Bbl. Natural gas prices decreased 9.0% to $6.02/Mcf.
- Profitability: Net income surged to $5.0 million from $543,000 in 2005, largely due to higher product prices and the reversal of derivative losses.
- Expenses: Interest expense increased 35% to $17.1 million due to higher outstanding indebtedness and interest rates. Share-based compensation of $2.3 million was recorded in 2006 (none in 2005) following the merger and new incentive plans.
Guidance, Outlook, and Risks
Outlook and Strategy
- Capital Expenditures: Budgeted at $30.3 million for 2007, allocated to geological/geophysical costs ($2.9M), developmental drilling ($17.7M), and exploratory drilling ($9.7M).
- Barnett Shale: Plans to accelerate drilling in the North Texas Barnett Shale, with over 325 potential locations. Targeted drilling of 4 to 7 gross wells in 2007.
- Liquidity: Management believes available credit facility capacity ($37.0 million at year-end), cash, and operating cash flows are sufficient for foreseeable needs. A public offering in February 2007 raised an additional $28.1 million.
Risks and Contingencies
- Commodity Price Volatility: Profitability is highly dependent on oil and natural gas prices. The company utilizes derivative contracts (collars and floors) to hedge a portion of production, but this limits upside potential.
- Legal Proceedings: The company is a defendant in a pending class action suit (Sacket v. Great Plains Pipeline Company) alleging underpayment of royalties. Damages are unspecified, and the outcome is uncertain. 3.2 million shares are held in escrow to secure indemnity obligations.
- Debt Covenants: The credit facility requires maintenance of specific financial ratios and hedging requirements (50%-85% of projected production).
- Reserve Estimates: Reserve quantities are estimates and may vary materially from actual production.
Investor Verification Checklist
- Derivative Impact: Verify the extent to which the 2006 net income was driven by the $1.6 million derivative gain versus core operational performance.
- Production Trends: Confirm the reasons for the 8.2% decline in production volumes despite increased capital expenditures and drilling activity.
- Legal Exposure: Monitor the status of the Sacket class action lawsuit and the potential impact of the escrowed shares on shareholder value.
- Debt Structure: Review the terms of the Guggenheim credit facility and the 11.5% Senior Notes due 2008, specifically regarding maturity dates and covenant compliance.
- Reserve Replacement: Assess the success of the Barnett Shale development program in replacing produced reserves and maintaining the 17-year reserve life.