Edge Petroleum Sees Record Net Income for 3Q05

Edge Petroleum reported financial results for the third quarter of 2005 and provided updated 2005 guidance. Net income for the third quarter of 2005 was the highest quarter ever reported at $8.1 million compared to $2.7 million in the third quarter of 2004, an increase of 203%. Highlights included:

  • Third quarter average production was 41.9 MMcfe per day as compared to 30.4 MMcfe per day for the same period in 2004, an increase of 38%.

  • Third quarter, Edge reported production of 3.9 Bcfe as compared to 2.8 Bcfe for the same period in 2004.

  • Revenue for the third quarter of 2005 was the highest ever reported by Edge at $29.6 million as compared to $13.2 million for the same period in 2004.

  • Third quarter results were impacted by non-cash unrealized derivative gains on our oil collars. The Company does not apply cash flow hedge accounting to these economic hedges and as a result, a pre-tax gain of $189,939 and a pre-tax loss of $1.4 million were included in loss on hedging and derivatives for the three-month period ended September 30, 2005 and 2004, respectively.

  • Pro forma third quarter 2005 net income was $9.2 million as compared to $3.5 million for the third quarter of 2004, an increase of 161%. Pro forma net income, before the impact of deferred compensation related to FIN 44 and unrealized derivative activity, is a non-GAAP measure and is reconciled to GAAP net income in the table below.

Production for the third quarter and first nine months of 2005 was 3.9 Bcfe and 12.1 Bcfe, respectively. This compares to production for the prior year third quarter of 2.8 Bcfe and first nine months of 2004 of 8.9 Bcfe. Our average realized price was $7.68 per Mcfe for the third quarter of 2005 compared to $4.73 per Mcfe for the comparable prior year third quarter. For the nine months ended September 30, 2005, our average realized price was $6.50 per Mcfe compared to $5.06 per Mcfe in the same prior year period.

As a result of higher average realized prices, higher production from recent drilling results and our properties acquired at year-end 2004, we reported an increase in revenue of 123% for the third quarter and 75% for the first nine months of 2005 compared to the same periods in 2004, respectively. Revenue for the third quarter of 2005 was $29.6 million compared to $13.2 million in the same period of 2004. Revenue for the first nine months of 2005 was $78.7 million compared to $44.9 million in the first nine months of 2004.

Total operating expenses for the third quarter and first nine months of 2005 were $17.1 million and $47.8 million, respectively, compared to $9.0 million and $29.4 million for the same periods in 2004. Depletion costs for the third quarter of 2005 totaled $8.2 million and averaged $2.13 per Mcfe compared to $5.0 million for the third quarter of 2004 that averaged $1.79 per Mcfe, but down from the previous quarter's rate of $2.18 per Mcfe. For the first nine months of 2005, depletion totaled $25.6 million, or an average of $2.11 per Mcfe, compared to $15.2 million or an average of $1.71 per Mcfe for the same period in 2004. Other general and administrative (G&A) costs for the third quarter of 2005, which does not include deferred compensation expense or bad debt expense, were $2.5 million, 34% higher than the comparable prior year period total of $1.8 million primarily due to higher staffing levels and compensation expense. For the first nine months of 2005, other G&A costs, excluding deferred compensation and bad debt expense, totaled $7.3 million, 33% higher than the comparable 2004 period.

During the third quarter and first nine months of 2005, we recorded a non-cash charge of $1.8 million and $1.9 million, respectively, as compared to a credit of $153,808 and a charge of $1.3 million for the same periods in 2004 as required by Financial Accounting Standards Board Interpretation No. (FIN) 44, "Accounting for Certain Transactions Involving Stock Compensation." Edge had 150,750 options with a strike price of $7.0625 per share and 9,000 options with a strike price of $7.28 per share outstanding as of September 30, 2005, subject to FIN 44 requirements. The average price used to calculate the compensation expense was $26.69 per share at September 30, 2005, as compared to $15.68 at June 30, 2005, $16.25 at March 31, 2005 and $14.66 at December 31, 2004.

Below is a recap of net income and pro forma net income excluding the
impact of deferred compensation related to FIN 44 and the unrealized
derivative activity:

                             Three Months Ended         Nine Months Ended
                                September 30,              September 30,
                              2005         2004         2005         2004

    Net Income              $8,142,572   $2,682,894  $20,075,614   $9,822,211
    Add:
    Deferred Compensation -
     repriced options
     (credit) charge         1,758,848     (153,808)   1,930,493    1,294,677
    Tax impact                (615,597)      53,833     (675,673)    (453,137)
    Net Deferred
     Compensation -
     repriced options        1,143,251      (99,975)   1,254,820      841,540

    Add:
    Unrealized derivative
     loss (gain)              (189,939)   1,434,172      364,135    1,254,911
    Tax impact                  66,479     (501,960)    (127,447)    (439,219)
    Net Unrealized
     derivative loss (gain)   (123,460)     932,212      236,688      815,692

    Pro Forma Net
     Income (A)             $9,162,363   $3,515,131  $21,567,122  $11,479,443

     (A)  This information is provided because management believes exclusion
          of the impact of deferred compensation related to FIN 44 and the
          impact of the Company's unrealized derivatives gain and losses not
          accounted for as cash flow hedges (both tax adjusted) will help
          investors compare results between periods and identify operating
          trends that could otherwise be masked by these items and to
          highlight the impact that commodity price volatility may have on our
          results.

Third quarter 2005 net income was $8.1 million or basic earnings per share of $0.47 and diluted earnings per share of $0.45. Net income for the same period a year ago was $2.7 million or $0.21 basic earnings per share and $0.20 diluted earnings per share. Excluding deferred compensation related to FIN 44 and the unrealized gain on the oil derivative, pro forma net income for the third quarter of 2005 was $9.2 million, or basic earnings per share of $0.53 and diluted earnings per share of $0.51 compared to $3.5 million, or basic earnings per share of $0.27 and diluted earnings per share of $0.26 for the same period in 2004.

Net income for the first nine months of 2005 was $20.1 million, or basic earnings per share of $1.17 and diluted earnings per share of $1.13, an increase in net income of 104% compared to the same period a year ago of $9.8 million, or basic earnings per share of $0.76 and diluted earnings per share of $0.73. Excluding deferred compensation related to FIN 44 and the unrealized non-cash loss on our oil derivative, pro forma net income for the first nine months of 2005 increased 88% totaling $21.6 million, or basic earnings per share of $1.26 and diluted earnings per share of $1.21, compared to pro forma net income for the first nine months of 2004 of $11.5 million or basic earnings per share of $0.89 and diluted earnings per share of $0.85.

Net cash flow provided by operating activities for the third quarter of 2005 was $22.4 million as compared to $11.2 million for the same period in 2004. Net cash flow provided by operating activities before working capital changes for the third quarter of 2005 was $22.7 million compared to $10.8 million for the same period in 2004. For the first nine months of 2005, net cash flow provided by operating activities was $56.2 million and net cash flow provided by operating activities before working capital changes was $60.0 million. Net cash flow provided by operating activities and net cash flow provided by operating activities before working capital changes for the first nine months of 2004 was $34.4 million and $33.7 million, respectively. See the attached schedule for a reconciliation of net cash flow provided by operating activities to net cash flow provided by operating activities before working capital changes.

Debt was $20.0 million at September 30, 2005 and December 31, 2004 as compared to $22.0 million at September 30, 2004. The ratio of debt to total capital at September 30, 2005 was 10.4% as compared to 11.7% at December 31, 2004.

Updating operations, Edge has drilled 46 gross (25.8 net) wells through November 1, 2005, all but two of which were successful. Currently, the Company has seven wells in the process of being drilled. Edge anticipates drilling an additional 7 to 12 wells during the fourth quarter. Edge also announced that it completed the acquisition of certain oil and natural gas working interests in the Chapman Ranch Field in Nueces County, Texas from two private companies on October 13, 2005. The Stock Purchase Agreement to acquire additional interests in this property is expected to close November 30, 2005.

Michael G. Long, Edge's Executive Vice President and CFO, commented on the financial results for the quarter noting, "Our track record of positive operational results so far this year has laid the foundation for the recent quarter's strong financial results and we expect an even better fourth quarter. Our updated fourth quarter and full year guidance is shown below. Industry pressures continue to adversely impact our operating costs, but our operating margin has steadily improved. Over the past couple of months, our view of the future commodity price environment has changed and we now have a greater degree of confidence in our expected level of natural gas and oil prices for 2006. As a result, we do not currently intend to add to our existing hedges although we will continue to evaluate our position and act accordingly. We have no hedging contracts extending beyond December 31, 2006."

John W. Elias, Edge's Chairman, President and CEO reported, "Our operations are continuing at full speed as we predicted with six additional wells drilled as apparent successes since quarter end. Seven wells are currently drilling and we have plans to drill another 7 to 12 wells by year- end, for a total of 60 to 65 wells for the year. Our growing production volumes and continued strong commodity prices have allowed us to once again raise our capital spending levels, increasing the number of wells we plan to drill and our expected year-end production exit rate. The recently announced increase in our capital expenditure budget, before acquisitions, to approximately $94 million reflects the depth of our inventory and the ability of the Edge 'Team' to execute on all fronts. As our tactical attention turns to 2006, I expect Edge to enter the new year with record levels of production in a strong commodity price environment, a deep and growing inventory of drillable prospects and the financial flexibility to execute all aspects of our strategy which has been proven to add shareholder value."

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