Meridian Resource Posts 3Q Operating Results for 2009

The Meridian Resource Corporation announced its third quarter 2009 financial and operational results. A summary of the quarter's results are:

  • Production totaled 3.0 Bcfe, or an average of 33 Mmcfe per day
  • Oil & Gas Revenues totaled $22 million
  • Lease Operating Expense totaled $3.6 million
  • Depletion and Depreciation totaled $8.1 million
  • General & Administrative Expense totaled $4.5 million
  • Discretionary Cash Flow totaled $8.0 million
  • Net loss of $0.8 million, or $0.01 per share

Production

Production volumes for the third quarter of 2009 totaled 3.0 billion cubic feet of gas equivalent ("Bcfe"), or an average of 33 million cubic feet of natural gas equivalent per day ("Mmcfe/d") compared to 3.1 Bcfe or 33 Mmcfe per day for the third quarter of 2008. Sequentially, production is down compared to the average daily production of 38 Mmcfe per day in the second quarter of 2009. Although the Company has been able to maintain a relatively even level of production for the past several quarters, we are now seeing a gradual decline in daily production levels as a result of the reduction in capital spending in the past two quarters. Currently production is approximately 32 Mmcfe per day.

Oil and Gas Revenues

Oil and gas revenues (includes the effects of the Company's oil and gas hedging activities) for the third quarter of 2009 totaled $22.0 million. This compares to $36.8 million for the third quarter of 2008. The variance between the two periods for oil and gas revenues is due primarily to the marked decreases in realized commodity prices. Realized natural gas prices decreased between the periods from $9.67 per Mcf in the third quarter of 2008 to $4.68 per Mcf for the same period in 2009. Realized crude oil prices decreased from $99.42 per barrel in the third quarter of 2008 to $65.06 per barrel in the same period in 2009. Sequentially, oil and gas revenues are down slightly compared to $22.7 million in the second quarter of 2009.

Lease Operating Expenses

The continued focus on reducing lease operating expenses resulted in the third quarter of 2009 expenses of $3.6 million, being down $2.3 million or 39% when compared to $5.9 million for the third quarter of 2008. Sequentially, lease operating expenses were lower by $1.0 million, compared to $4.6 million in the second quarter of 2009. This drop in costs between the second and third quarter of this year further reflects the estimated $3 million annualized reduction in field expenses announced earlier in the year. Since the fourth quarter of 2008, Meridian has had a 29% reduction in quarterly lease operating costs. Excluding onetime charges, the quarterly lease operating expenses for the Company has decreased from approximately $5.1 million in Q4 2008, to approximately $4.9 million in Q1 2009, to approximately $4.5 million in Q2 2009 and approximately $3.6 million in Q3 2009. Lease operating expenses for the first nine months of 2009 were $12.9 million, down by $6.3 million, or 33% compared $19.2 million in the same period last year. This is due primarily to reduced labor costs, saltwater disposal fees, fuel and compression charges, platform and facility charges, lower insurance costs and other efficiencies.

Depletion and Depreciation

Depletion and depreciation for the third quarter of 2009 was $8.1 million down by $7.8 million or 49% compared to $15.9 million for the third quarter of 2008. On a per Mcfe basis, depletion and depreciation for the third quarter was $2.69 per Mcfe compared to $5.19 per Mcfe for the third quarter of 2008. The difference between the two periods on a per unit basis is due primarily to the ceiling test write downs taken by the Company in the fourth quarter of 2008 and the first quarter of 2009. Sequentially, depreciation and depletion expense was also down by 14% compared to $9.4 million in the second quarter of 2009. The difference between the quarters is primarily due to reduced production in the third quarter of 2009.

General and Administrative Expenses

As a result of focusing on reducing cost, our general and administrative expenses for the third quarter of 2009 were $4.5 million compared to $5.9 million for the third quarter of 2008. Sequentially, general and administrative expenses were up slightly compared to $4.3 million in the second quarter of 2009. The increase in general and administrative expenses between the second and third quarter was primarily due to the $0.8 million of legal and consulting fees associated with the forbearance agreements that were negotiated with the Company's senior debt creditors. Excluding the impact of the forbearance legal and consulting fees, general and administrative expense would have been approximately $3.7 million for the third quarter. The total general and administrative expense for the company (capitalized and non-capitalized) has moved from approximately $8.0 million in Q4 2008, to approximately $5.9 million in Q1 2009, to approximately $4.3 million in Q2 2009, and now to approximately $4.5 million in Q3 2009. The total general and administrative expense for the company (capitalized and non-capitalized) for the first nine months of 2009 was $14.7 million, which is down by $13.7 million, or 48% compared to $28.4 million the same period last year. This is primarily the result of the roughly 60% reduction in staff that took place in the first and second quarter of this year (salaries, payroll burden and other associated costs).

Rig Expense

The Company has drilling contracts covering two rigs which it was unable to utilize for drilling, beginning in the first quarter of 2009 for one rig and in the second quarter of 2009 for the other. Under these drilling contracts the Company is obligated for the daily rate of the rigs regardless of the Company's actual use of the rigs. In practice, the rigs have been utilized by third parties and the Company has recorded a liability for the difference between its contracted day rate and that collected by the drilling operator from the third party. For the three and nine month period of 2009, the rig obligations resulted in a charge of $1.2 million and $3.0 million, respectively.

Interest Expense

Interest expense totaled $2.9 million for the third quarter of 2009, compared to $1.4 million for the third quarter of 2008. The increase in interest expense (includes interest and forbearance fees) between the periods was primarily due to forbearance fees and higher interest rates, as a result of the default in the Company's credit facility. Average debt balances were also higher in the third quarter. For the first nine months of 2009 interest expense totaled $6.0 million compared to $3.9 million for the same period last year.

Discretionary Cash Flow

Discretionary cash flow for the third quarter of 2009 was $8.0 million, compared to $19.9 million for the third quarter of 2008. The variance between the two periods was due primarily to lower realized prices; costs associated with the referenced forbearance agreements and increased cost associated with the utilization of drilling rigs under contract, partially offset by reduced lease operating costs and general and administrative expense. Sequentially, discretionary cash flow is lower by approximately $0.8 million compared to $8.8 million for the second quarter of 2009. The difference between these two periods is due in part to increased interest expense.

Net Income / (Loss)

The Company had a net loss to common shareholders for the third quarter of 2009 of $768 thousand or ($0.01) per diluted common share, compared to a net income of $699 thousand, or $0.01 per share for the third quarter of 2008. The variance between the two periods was due primarily to the previously discussed lower commodity prices and the cost associated with the forbearance agreement, offset in part by lower lease operating costs, lower depletion and depreciation expense and lower general and administrative expense.

Liquidity Update

As previously announced, the Company's borrowing base was redetermined by our bank group earlier this year. Fortis Capital Corp., the administrative agent for the bank group, notified the Company that its borrowing base had been reduced from $95 million to $60 million, resulting in a borrowing base deficiency of $35 million. The borrowing base was lowered due primarily to the reduction in borrowing capacity attributable to the value of Meridian's oil and gas properties as a result of precipitous declines in commodity prices. Under the terms of the credit facility agreement, the Company had 90 days from the April 30, 2009 effective date of the redetermination to cure the borrowing base deficiency. Accordingly, a $35 million payment to our bank group for the borrowing base deficiency was due July 29, 2009. As per the SEC 8K filing on August 4, 2009, the Company did not have sufficient cash available to repay the deficiency and, consequently, we failed to pay such amount when due and went into default under the credit facility for such failure. Meridian negotiated a forbearance agreement with its bank group which was signed on September 3, 2009 regarding the deficiency and default. Among other provisions of the agreement, the Company is required to enter into (a) a merger agreement pursuant to which we will merge with or into or be acquired by or transfer all or substantially all of our assets to another person; (b) a capital infusion agreement pursuant to which one or more persons will contribute subordinated debt or equity capital to us in an amount sufficient to enable us to pay to the Lenders an amount equal to 100% of our borrowing base deficiency; or (c) a purchase and sale agreement pursuant to which we agree to sell one or more oil and gas properties for net proceeds sufficient to enable us to pay to the Lenders an amount equal to 100% of our borrowing base deficiency, plus any incremental borrowing base deficiency resulting from such sales. The initial deadline relating to this provision of the forbearance agreement was September 30, 2009. Meridian was not able to meet that deadline and subsequently received several extensions for that deadline. The last extension was granted through November 15, 2009, the purpose of which is to allow Meridian more time to execute potential solutions for the deficiency per the requirements referenced above.

Meridian's management has been working diligently over the past few quarters to resolve numerous impactful liability, contractual and debt issues. Of note is the fact that the Company has never missed an interest payment and that the overall level of debt has steadily come down since the first quarter. The current (10/31/09) outstanding balance due to the bank group has been lowered by $5.5 million to $89.5 million compared to $95 million in the first quarter. Subsequently the borrowing base deficiency has been reduced to a current level of $29.5 million. Additionally, the CIT loan for the Triton rig has been reduced by $2.5 million to $6.3 million compared to $8.8 million at the beginning of the year.

 

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