Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended June 30, 2006, for RAM Energy Resources, Inc. (formerly Tremisis Energy Acquisition Corporation). On May 8, 2006, the company completed a reverse acquisition merger with RAM Energy, Inc., an independent oil and natural gas company. The merger was accounted for as a recapitalization of RAM Energy, Inc., which is treated as the continuing accounting entity. The company operates exclusively in the upstream segment of the oil and gas industry, with principal operations in Texas, Louisiana, Oklahoma, and New Mexico.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended June 30, 2006 |
Six Months Ended June 30, 2006 |
Six Months Ended June 30, 2005 |
|---|---|---|---|
| Total Revenues | $13,975 | $32,437 | $26,535 |
| Net Income (Loss) | $(3,069) | $(255) | $1,226 |
| Operating Cash Flow | N/A | $16,209 | $9,076 |
| Investing Cash Flow | N/A | $(7,577) | $(5,931) |
| Financing Cash Flow | N/A | $4,241 | $(2,608) |
| Cash and Equivalents (End of Period) | $12,943 | $12,943 | $1,712 |
| Total Debt (Long-term + Current) | $131,813 | $131,813 | $112,846 |
| Stockholders' Deficit | $(30,113) | $(30,113) | $(20,769) |
Note: Revenue includes realized and unrealized losses on derivatives. Operating income for the three months ended June 30, 2006, was $745,000.
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 19% for the quarter and 22% for the six-month period compared to the prior year, driven primarily by a 21% increase in average realized oil and natural gas prices.
- Net Loss: The company reported a net loss of $3.1 million for the quarter and $255,000 for the six months ended June 30, 2006, compared to a net loss of $291,000 and net income of $1.2 million, respectively, in the prior year periods. The loss was driven by non-cash share-based compensation ($2.2 million) and unrealized losses on derivatives.
- Debt Structure: Total indebtedness increased to $131.8 million from $112.8 million. This reflects the April 2006 refinancing into a new $300 million credit facility (Guggenheim facility), which replaced the previous facility and funded a $10 million stock redemption.
- Production Volumes: While prices rose, production volumes declined slightly. For the six months ended June 30, 2006, total production decreased 6.6% compared to the prior year, impacted by a reversionary interest in the Boonsville shallow gas area that vested in September 2005.
Guidance, Outlook, and Risks
- Capital Expenditures: The company budgeted $24.3 million for capital expenditures for the full year 2006. Through the first six months, $10.5 million was spent on oil and gas operations.
- Liquidity: Management believes available borrowings under the credit facility ($37.0 million available at June 30, 2006) and cash flows from operations are sufficient to meet capital and debt service obligations for the foreseeable future.
- Derivative Hedging: The company maintains significant hedging positions to manage commodity price risk. At June 30, 2006, collars were in place covering approximately 1,500 barrels/day of oil and 5,000 Mmbtu/day of natural gas for the remainder of 2006, with floors ranging from $40.00 to $53.34 for oil and $6.33 to $7.16 for gas.
- Legal Contingency: A class-action lawsuit filed in 2002 regarding royalty payments on Magic Circle/CFLP properties remains pending. Management intends to defend vigorously but cannot estimate potential loss. A former joint venture partner is contractually obligated to contribute up to $2.8 million toward any damages.
- Market Risks: Profitability is highly sensitive to oil and natural gas price volatility. The company uses the full-cost method of accounting, meaning significant price declines could trigger asset write-downs.
Investor Verification Checklist
- Merger Accounting: Verify the treatment of the reverse acquisition and the impact of the $2.2 million non-cash share-based compensation expense on net income.
- Debt Covenants: Confirm compliance with the new Guggenheim credit facility covenants, specifically the EBITDA-to-interest and leverage ratios, and the requirement to hedge 50-85% of projected production.
- Derivative Valuation: Review the mark-to-market valuation of derivative contracts, which resulted in significant unrealized losses impacting the bottom line despite higher commodity prices.
- Legal Exposure: Monitor the status of the Magic Circle royalty lawsuit and the enforceability of the $2.8 million indemnity from the former joint venture partner.
- Production Trends: Assess the impact of the Boonsville reversionary interest on future production volumes and the success of new drilling activities in the Barnett Shale and Electra/Burkburnett areas.