The ceiling test write-down totaled $87.7 million (net of tax). The Company follows the full cost method of accounting for its investment in its oil and natural gas properties. Under the rules established by the Securities and Exchange Commission, companies are required to calculate a comparison of net capitalized cost of proved oil and gas reserves to the discounted present value of future cash flows from the related proved reserves (net of tax). The calculation is made quarterly utilizing prices as of the end of the current quarter, including the impact of the Company's qualifying hedging activity, held flat for the life of the reserves. Because the capitalized costs exceeded discounted future cash flows (net of tax) the assets were written down to the then value of the discounted future cash flows (net of tax), resulting in the impairment.
Discretionary Cash Flow
Discretionary cash flow for the third quarter of 2006 was $30.8 million, up 15% compared to $26.8 million for the third quarter of 2005. The increase in discretionary cash flow between the periods is primarily a result of higher average realized prices and improved production volumes, offset in part by higher operating costs. In the third quarter of 2006, the Company received an average of 9% more for its oil and natural gas compared to the third quarter of 2005. Discretionary cash flow for the first nine months of 2006 increased by $8.3 million to $105.8 million compared to $97.5 million for the same period of 2005.
Production volumes for the third quarter of 2006 totaled 5.7 billion cubic feet of gas equivalent ("Bcfe"), up 14% compared to 5.0 Bcfe for the third quarter of 2005. Average daily production for the third quarter was 62.1 million cubic feet of gas equivalent ("Mmcfe") compared to 54.5 Mmcfe for the third quarter of 2005. The variance in average daily production volumes between the two periods is due primarily to a portion of the Company's production being shut-in as a result of the damage caused by Hurricane Katrina in the third quarter of 2005. Production volumes for the first nine months of 2006 were 18.0 Bcfe compared to 19.7 Bcfe for the same period of 2005.
Total revenues for the third quarter of 2006 were $46.1 million, or $8.06 per Mcfe, an increase of 25% on a dollar basis and 10% on a per Mcfe basis, compared to total revenues of $36.8 million, or $7.35 per Mcfe, for the third quarter of 2005. The variance between the two periods for total revenues is due primarily to the lower production in the third quarter 2005 caused by Hurricane Katrina, in conjunction with higher average realized prices. Total revenues for the first nine months of 2006 increased by $19.1 million to $150.1 million compared to $131.0 million for the same period of 2005.
Lease Operating Expenses
Lease operating expenses for the third quarter of 2006 were $6.5 million compared to $3.4 million for the third quarter of 2005. Lease operating expense increased between the periods primarily due to additional properties acquired and drilled since the last period, industrywide increases in service costs and significantly higher insurance costs resulting from last year's hurricane season. The Company's insurance rates increased by more than four times the previous year's annual premiums and represented $1.5 million during the third quarter of 2006. The Company anticipates that the higher insurance costs for properties in its Gulf Coast producing region will continue in effect for the foreseeable future. Lease operating expenses for the first nine months of 2006 were $16.1 million compared to $12.2 million for the same period of 2005.
Severance and Ad Valorem Taxes
Severance and ad valorem taxes for the third quarter of 2006 were $3.2 million compared to $2.2 million for the third quarter of 2005. The variance is due primarily to an increase in oil and gas prices, a higher natural gas tax rate and an increase in production. The majority of Meridian's current oil and natural gas production comes from Louisiana, where the severance tax rates are 12.5% of gross oil revenues and $0.373 per Mcf for natural gas. Over the course of the last year, the tax rate has increased from $0.208 to $0.252 to its current rate of $0.373 per Mcf.
Depletion and Depreciation
Depletion and depreciation for the third quarter of 2006 was $28.2 million compared to $19.7 million for the third quarter of 2005. On a per Mcfe basis, depletion and depreciation for the third quarter was $4.94 per Mcfe compared to $3.94 per Mcfe for the third quarter of 2005. Depreciation and depletion expense on a per Mcfe basis increased primarily due to the impact of negative reserve revisions during 2005 and the rising costs in the industry for current and projected capital expenditures and the recognition of certain geological and geophysical, land and other related costs associated with the Company's continued exploration program that have not been fully evaluated to date. Depletion and depreciation for the first nine months of 2006 was $85.4 million compared to $70.5 million for the same period of 2005. As a result of the above referenced ceiling test write-down, the Company's future depletion rate is expected to decrease.
General and Administrative Expenses
General and administrative expenses for the third quarter of 2006 were $4.4 million compared to $4.0 million for the third quarter of 2005. General and administrative expenses for the first nine months of 2006 were $13.9 million compared to $13.3 million the same period of 2005.
As previously announced, the Company recently entered into several new hedging contracts to hedge a portion of its expected oil production for 2006, 2007 and 2008. The additional oil hedge contracts were completed in the form of costless collars, and ranged between a floor price of $60.00 and a ceiling price of $96.10 with monthly volumes ranging between 3,000 and 5,000 barrels between September 2006 and July 2008. The costless collars provide the Company with a lower limit "floor" price and an upper limit "ceiling" price on the hedged volumes. The floor price represents the lowest price the Company will receive for the hedged volumes while the ceiling price represents the highest price the Company will receive for the hedged volumes. The costless collars are settled monthly based on the NYMEX futures contract during each respective month. A schedule showing the Company's complete hedging position is located below.
Non-GAAP Financial Measure
In this press release, we refer to a non-GAAP financial measure we call "discretionary cash flow." As used herein, discretionary cash flow represents net income plus depletion and depreciation, deferred taxes and other non-cash items included in the Consolidated Statements of Operations prepared in accordance with GAAP. Management believes this measure is a financial indicator of our Company's ability to internally fund capital expenditures and service outstanding debt. Management also believes this non-GAAP financial measure of cash flow is useful information to investors because it is widely used by professional research analysts in the valuation, comparison, rating and investment recommendations of companies within the oil and gas exploration and production industry. Discretionary cash flow should not be considered an alternative to net cash provided by operating activities or net income, as defined by GAAP.
The Meridian Resource Corporation is an independent oil and natural gas company engaged in the exploration for and development of oil and natural gas in Louisiana, Texas, Oklahoma, Kentucky and the Gulf of Mexico. Meridian has access to an extensive inventory of seismic data and, among independent producers, is a leader in using 3-D seismic and other technologies to analyze prospects, define risk and target and complete high-potential wells for exploration and development. Meridian is headquartered in Houston, Texas, and has offices in Tulsa, Oklahoma, as well as a field office in Weeks Island, Louisiana.
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