RAM Energy Resources, Inc. — Q3 2011 Form 10-Q
Identity and period: The supplied filing identifies the registrant as RAM Energy Resources, Inc., not Battalion Oil Corp. It reports the quarter and nine months ended September 30, 2011; financial statements are unaudited. The company operated in upstream oil and gas, primarily in Texas, Oklahoma and Louisiana.
Financial results and liquidity
- Q3 revenue: Oil and gas sales were $24.1 million, down 9% year over year. Total revenues and other operating income were $47.0 million, including $22.7 million of unrealized derivative gains.
- Q3 earnings: Operating income was $28.6 million and net income was $11.8 million ($0.15 per share), versus $6.0 million operating income and $1.6 million net income ($0.02 per share) in Q3 2010. Excluding unrealized derivative gains, management reported pretax income of $2.2 million, compared with a $1.8 million pretax loss in the prior-year quarter.
- Nine-month results: Oil and gas sales were $78.0 million, down from $83.5 million. Net income was $10.8 million ($0.14 per share), versus $6.7 million ($0.09 per share). Operating income was $37.1 million, versus $22.6 million.
- Production and costs: Q3 production was 361 thousand Boe, down 33% year over year; excluding properties sold in December 2010, management said production declined 20%. Average realized price before derivative settlements rose 37% to $66.89/Boe. Q3 production expense was $20.77/Boe; nine-month expense was $21.32/Boe.
- Cash flow: Nine-month operating cash flow was $23.8 million, down from $29.3 million. Investing cash outflow was $19.6 million, principally capital spending; financing cash outflow was $4.2 million. Ending cash was $44,000 on the balance sheet.
- Debt and liquidity: Debt was $200.4 million, including $125 million drawn on the revolver and $75 million on the term loan. The $150 million revolver borrowing base left $25 million of nominal availability. Working capital was negative $6.0 million. The company said it complied with its credit covenants and expected available credit and operating cash flow to cover anticipated capital spending, working capital and debt service.
Changes versus prior period
- Commodity prices improved, but lower production—partly reflecting the 2010 asset sale, natural declines, and a Louisiana well shut-in for workover—more than offset the price benefit to reported oil and gas sales.
- Net income and operating income increased, with Q3 results materially affected by derivative mark-to-market gains. Nine-month results also included $2.7 million of debt extinguishment costs related to refinancing.
- Interest expense fell year over year; management attributed this to lower rates and lower average borrowings. The reported blended interest rate at September 30 was 6.2%, compared with 8.2% a year earlier.
- In March 2011, the company replaced its prior credit facility with a $250 million first-lien revolver and a $75 million second-lien term loan. The new facilities carried different, generally higher stated spreads on the term loan and included required commodity hedging.
Outlook, risks and unusual items
- Capital plan: The 2011 non-acquisition capital budget was revised to $27.5 million; $19.6 million had been spent through September 30. Actual timing and spending could vary with commodity prices, drilling results, service availability and other factors.
- Asset sale proposal: A proposed sale of a majority interest in the Electra/Burkburnett field was on hold pending market conditions that would permit the prospective buyer’s IPO and completion of definitive agreements.
- Hedging and exposure: Commodity derivatives had a net fair value of $12.6 million and generated substantial unrealized gains. Management reported hedges covering approximately 65% of projected production through June 30, 2014. Q3 sales concentration was notable: Shell Energy North America-US accounted for about 69% of oil and gas sales revenue.
- Credit and market risks: The company highlighted covenant-compliance and refinancing risks, volatile credit markets, variable-rate debt, commodity-price exposure, and risks involving cash deposits and customer counterparties. A 100-basis-point LIBOR increase was estimated to raise annual interest expense by about $1.3 million on the revolver and $0.3 million on the unhedged portion of the term loan.
- Tax and legal items: Q3 tax expense included $2.1 million related to Section 382 limitations on net operating losses. A Woolley well dispute was cash-settled for $0.6 million in August after a $0.8 million second-quarter charge. Management said other ordinary-course litigation was not expected to materially affect the company.
- Subsequent reorganization: Announced in October 2011, the reorganization and officer/employee departures were expected to be completed by June 2012. Estimated expense was $2.6 million, including $1.8 million in severance and $0.8 million in accelerated stock compensation.
- Controls: Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Key facts for investors to verify
- Confirm the registrant identity: the filing names RAM Energy Resources, Inc., whereas the request metadata names Battalion Oil Corp.
- Reconcile liquidity disclosures: the balance sheet reports $44,000 of cash, while MD&A also cites approximately $2.3 million of cash accounts and deposits and describes less than $0.1 million of cash and cash equivalents.
- Assess covenant headroom and borrowing-base availability after future redeterminations; the filing reports $25 million of nominal revolver availability and covenant compliance at quarter-end.
- Distinguish recurring operating performance from derivative mark-to-market gains, and evaluate production declines, unit costs and hedge volumes/terms.
- Track the proposed Electra/Burkburnett transaction, the reorganization’s final cost, and the effects of the Section 382 NOL limitation.