Business context and reporting period
This unaudited Form 10-Q is for RAM Energy Resources, Inc., an upstream oil and natural gas producer operating mainly in Texas, Oklahoma and Louisiana, for the quarter and six months ended June 30, 2011. The request metadata names Battalion Oil Corp.; the filing itself names RAM Energy Resources, so confirm the issuer and corporate-history link.
Financial performance and position
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Oil and gas sales | $28.1 million | $27.2 million | $53.8 million | $57.1 million |
| Total revenues and other operating income, including derivative effects | $36.8 million | $29.0 million | $48.4 million | $59.9 million |
| Operating income | $16.9 million | $6.7 million | $8.5 million | $16.6 million |
| Net income (loss) | $8.9 million | $2.7 million | $(1.0) million | $5.1 million |
| Operating cash flow | Not separately presented for the quarter | $13.0 million | $21.2 million |
Q2 basic and diluted EPS were $0.11, versus $0.03. Six-month EPS was $(0.01), versus $0.07. Q2 pretax income included $10.7 million of unrealized derivative gains; excluding those gains, management reported adjusted pretax income of $1.5 million. Six-month results included $4.2 million of unrealized derivative losses and approximately $2.7 million of old-debt extinguishment and loan costs; management reported adjusted pretax income of $4.1 million.
- Q2 production was 380 thousand Boe, down 31% year over year; excluding assets sold in December 2010, management estimated a 15% decline. Six-month production fell 31%, or 16% excluding sold assets.
- Q2 average realized price before derivative settlements rose 49% to $73.99/Boe. The cash effect of derivatives reduced Q2 realized price by $5.52/Boe; after settlements, average price was $68.47/Boe.
- Q2 production expense was $21.51/Boe, up 36% from the comparable period excluding sold assets; management attributed the higher unit cost largely to the divestiture of lower-cost gas properties.
- At June 30, cash and equivalents were $0.454 million; current assets were $23.6 million and current liabilities $28.8 million, a $5.1 million working-capital deficit. Total assets were $273.4 million.
- Debt was $205.4 million, including $130 million drawn on the revolving facility and $75 million on the second-lien term loan. Nominal revolver availability was $20 million. The company reported compliance with credit covenants at quarter-end.
- Six-month investing cash outflow was $13.5 million, primarily oil and gas capital spending; financing cash flow was positive $0.9 million. Cash increased $0.4 million to $0.454 million.
Changes, outlook and risks
In March 2011, the company refinanced its prior facility with a $250 million first-lien revolving facility, subject to a $150 million borrowing base, and a $75 million second-lien term loan. The revolver matures in March 2016; the term loan in September 2016. The company expensed about $2.7 million of remaining prior-facility issuance costs. Interest expense declined year over year, and management cited a 6.2% blended rate for the first half of 2011 versus 8.2% in 2010.
Management expected operating cash flow and available credit to cover its forecast needs, but noted financing and covenant risks. The revised 2011 non-acquisition capital budget was $29 million. Its ability to execute the budget and meet debt service depends on prices, production, operating results and continued access to credit; management cautioned that additional financing may not be available on acceptable terms. The company had a $25 million at-the-market equity program but had made no sales under it by June 30.
- Commodity hedges covered approximately 67% of projected production through June 30, 2014. Derivative positions had a net fair-value liability of $4.7 million at June 30; derivative gains and losses flowed through earnings rather than hedge accounting.
- One purchaser, Shell Energy North America-US, represented approximately 71% of Q2 oil and gas sales revenue.
- A litigation dispute over the Woolley #1-23 well resulted in a Q2 charge of $0.8 million, a $0.2 million reduction in proved properties and a $0.6 million estimated settlement liability. Management said other ordinary-course legal matters were not expected to materially affect results.
- Management cited normal production declines and a Louisiana well shut-in for major workover as factors in lower output. It also identified covenant compliance, commodity and interest rates, credit-market access, purchaser/counterparty credit, and climate-related regulation as risks.
- Management stated disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter. No specific full-year production or earnings guidance was provided.
Important facts for investors to verify
- Confirm the relationship between the filing’s issuer, RAM Energy Resources, and the company identified in the request metadata as Battalion Oil Corp.
- Reconcile the balance-sheet cash figure of $0.454 million with the MD&A statement that cash deposits totaled approximately $3.8 million.
- Review borrowing-base availability, covenant definitions and headroom, upcoming redeterminations, and the company’s ability to fund its $29 million capital budget while servicing debt.
- Assess production trends and whether the reported Q2 earnings improvement is sustainable apart from the $10.7 million unrealized derivative gain.
- Check the outcome and final cost of the Woolley settlement, hedge settlement exposure, and any material developments in legal proceedings.