Teton Energy Posts Q4 2008 Results
Teton Energy announced that for the fourth quarter of 2008, operating revenues from oil and gas sales increased 53 percent from the fourth quarter of 2007 to $4.9 million and operating cash flow from oil and gas activities increased 40 percent to $2.8 million. EBITDAX (a non-GAAP measure - refer to last table of press release for a reconciliation to net income), was $7.0 million in the fourth quarter of 2008 compared to $18.0 million in 2007, which included the $17.4 million gain from the sale of a portion of the Company's Piceance Basin assets.
For the fourth quarter of 2008, the Company realized net income of $4.8 million, or earnings of $0.20 per fully diluted share of common stock, compared to net income of $12.4 million, or earnings of $0.67 per fully diluted share of common stock, for the same period in 2007 (which included the effect of the Piceance sale). The results for the fourth quarter of 2008 include an unrealized commodity derivative gain of $13.7 million, an impairment charge of $10.2 million largely related to the Teton/Noble AMI in the DJ Basin, and other non-cash items totaling approximately $0.5 million. Excluding these items, the adjusted net loss for the fourth quarter of 2008 would have been $1.8 million, or $.09 per fully diluted share.
For the year ended December 31, 2008, operating revenues from oil and gas sales increased 355 percent from 2007 to $28.5 million and operating cash flow from oil and gas activities (defined as oil and gas sales less lease operating expense, workover expense, transportation expense and production taxes) increased approximately 350 percent to $20.2 million. EBITDAX was $15.5 million in 2008 compared to $17.4 million in 2007, which included the $17.4 million gain from the Piceance sale.
For the year ended December 31, 2008, the Company realized a net loss of $14.2 million, or a loss of $0.67 per fully diluted share of common stock, compared to earnings for 2007 of $2.4 million, or $0.13 per fully diluted share of common stock. The results for the year ended December 31, 2007 include the effect of a gain from the sale of a portion of the Company's Piceance Basin assets of $17.4 million. The results for the year ended December 31, 2008 include an impairment charge of $14.3 million related primarily to the Teton/Noble AMI in the DJ Basin, an unrealized commodity derivative gain of $12.7 million, and other non-cash items totaling approximately $16.4 million.
These other non-cash items included amortization of debt discount and issuance costs of approximately $9.3 million, lease expirations of $3.4 million and stock-based compensation of approximately $3.7 million. Excluding these items, the adjusted net income for the full year 2008 would have been $3.8 million, or $0.22 per fully diluted share.
Estimated proved reserves increased 86 percent to 26.2 billion cubic feet equivalent ("Bcfe") as of December 31, 2008, compared to 14.1 Bcfe on December 31, 2007. Proved reserves consisted of 18.1 Bcfe of proved developed reserves and 8.1 Bcfe of proved undeveloped reserves. Proved reserves were 64 percent natural gas and 36 percent crude oil. Reserves increased 15 Bcfe before net production of 2.8 Bcfe. These results are based on a full independent reserve report prepared by Netherland, Sewell & Associates, Inc. ("NSAI").
In addition to proved reserves, NSAI estimates the Company has approximately 36.5 Bcfe of probable reserves and 15.1 Bcfe of possible reserves as of December 31, 2008. In total, the Company has approximately 77.8 Bcfe in 3P reserves. Although not yet recognized by the Securities and Exchange Commission ("SEC") at year-end 2008, recent changes to the SEC's oil and gas reporting guidelines will allow probable and possible reserves to be reported at year-end 2009.
At December 31, 2008, the pretax present value of the proved reserves discounted at 10 percent was $28.2 million, using year-end posted prices of $4.61 per million British thermal units (MMbtu) of natural gas on CIG and $41.00 per barrel of crude oil on Plains Marketing, L.P. West Texas Intermediate (WTI). Using an average five year NYMEX strip price of $6.90 per MMbtu and $62.88 per barrel, the estimated proved reserves would have been 29.0 Bcfe and the PV-10 estimate would have been $57.0 million.
The changes from 2007 year-end estimated proved reserves to 2008 year-end estimated proved reserves included an acquisition of oil and gas properties in the Central Kansas Uplift ("CKU") of approximately 9.7 Bcfe, production of 2.8 Bcfe, drilling additions/extensions of 9.4 Bcfe, downward revisions before pricing revisions of 2.5 Bcfe and downward pricing revisions of 1.7 Bcfe. The acquisition total reflects the booking of CKU reserves at year-end 2008 pricing before 2008 production.
At mid-year 2008 pricing, CKU reserves were 12.3 Bcfe of reserves with the following adjustments between June 30 and December 31, 2008: 3.2 Bcfe for downward pricing revisions, 0.6 Bcfe for downward engineering revisions, 0.9 Bcfe for drilling additions and 0.6 Bcfe of production since June 30, 2008.
Estimated net production for the full year 2008 increased 129 percent from 2007 to approximately 2.8 Bcfe. Teton replaced an estimated 536 percent of its production in 2008. Based on 2008 production, Teton's ratio of reserves to production is approximately nine years for total proved reserves. The Company's estimated production in 2008 was 59 percent natural gas and 41 percent crude oil.
Other Operations Highlights
Operational highlights during 2008 include the following:
- Oil and gas sales increased 355 percent to 2,812 million cubic feet equivalent ("MMcfe") at an average realized wellhead price of $10.60 per thousand cubic feet equivalent ("Mcfe") after realized hedging results ($10.12 per Mcfe pre-hedging) in 2008 as compared to oil and gas sales volumes of 1,227 MMcfe at an average realized wellhead price of $6.06 per Mcfe after realized hedging results ($5.10 per Mcfe pre-hedging) in 2007.
- The Company participated in the drilling and completion of 146 gross producing wells (40 net) in 2008 as compared to 106 gross producing wells (22.0 net) in 2007.
- Total gross producing wells increased to 315 (125 net) at December 31, 2008 as compared to 132 gross producing wells (44.5 net) at December 31, 2007.
- The Company completed the purchase of reserves, production and certain oil and gas properties in the Central Kansas Uplift for $53.6 million in cash, stock and warrants after post-closing adjustments.
Operating Expense Details
Oil and gas operating expenses, including lease operating expense, workover expense, transportation expense and production taxes, for the full year 2008 collectively increased 103 percent to $2.93 per Mcfe from $1.44 per Mcfe, largely due to the higher costs on a per Mcfe basis of operating oil wells versus gas wells, higher service costs, higher taxes due to significantly higher commodity prices and a significant increase in volumes.
The Company's gross margin (oil and gas revenues, including realized gains or losses on commodity hedging positions, less oil and gas operating expenses) in 2008 increased 66 percent on a per Mcfe basis to $7.67 from $4.62 in 2007.
Exploration expense in 2008 increased 162 percent and relates largely to expired undeveloped leaseholds, delay rentals and geological and geophysical expenses incurred in the CKU and the eastern DJ Basin. The Company uses 3D seismic data to locate potential drilling sites in each basin.
General and administrative expense in 2008 increased seven percent due largely to an increase in compensation expense and office expenses. Compensation expense increased due to an increase in staffing and Board of Directors compensation and office expenses increased due to an increase in office supplies and rent expense, largely due to the increased staffing. These expense increases were all offset somewhat by a reduction in outside professional fees and savings in public company compliance costs related to efficiencies implemented throughout 2008 and various other smaller items.
Depreciation, depletion and accretion expense in 2008 increased 282 percent, largely due to increased volumes and higher capitalized costs resulting from the 2008 drilling program.
Other Financial Highlights
Other financial highlights for the year ended December 31, 2008 include the following:
- The Company amended and increased its bank credit facility with JPMorgan from $50 million to $150 million and increased the available borrowing base from $10 million to $34.5 million as of December 31, 2008.
- The Company completed the repayment of its $9.0 million of 8% Senior Subordinated Convertible Notes issued on May 16, 2007: $6.6 million was repaid in cash and $2.4 million was converted into 480,000 shares of common stock at a conversion price of $5.00 per share.
- The Company raised $30 million (originally $40 million before repayment of $10 million put option) before fees and expenses in the third quarter of 2008 by issuing 10.75% Secured Convertible Debentures ("Debentures") due June 2013, which could be converted into 4.6 million shares of Teton common stock. Subsequently, in the fourth quarter of 2008, one of the holders converted $3.75 million of the Debentures for a total cost to the Company of approximately $1.7 million.
- The Company completed the syndication of its revolving credit facility with a group of four banks, including JPMorgan Chase Bank as administrative agent.
- The Company and all investors who held warrants to purchase 3,960,000 shares of the Company's common stock at a $5.00 strike price, with a cashless exercise feature at the option of the holders, through May 2012 agreed to exchange the warrants for 990,000 shares of Teton Common stock. This resulted in a $7.8 million gain for the Company.
Capital expenditures for 2008 totaled $35.3 million and consisted of exploration and production and lease acquisition activities in the following areas: (i) $17.6 million in the Piceance Basin; (ii) $6.1 million in the Central Kansas Uplift; (iii) $1.4 million in the Williston Basin; (iv) $9.5 million in the DJ Basin and (v) $0.7 million in the Big Horn Basin.
Price Risk Management
Teton manages its overall exposure to commodity price fluctuations through the use of various hedging contracts for some of its production. The duration of various hedging contracts depends on the Company's view of market conditions, available contract prices and operating strategy. The use of such contracts is intended to limit the risk of fluctuating cash flows. As of December 31, 2008, Teton had hedging contracts in effect for approximately 99 percent of its then-current daily net crude oil production via costless collars at a West Texas Intermediate (WTI) floor price of $90.00 per barrel and a WTI ceiling price of $104.00 per barrel.
At December 31, 2008, Teton had total assets of $126.9 million, total long-term debt outstanding of $55.9 million and a long term debt to capitalization ratio of 48 percent.
Karl Arleth, Chief Executive Officer and President, commented, "Teton had an excellent year in many respects in 2008 despite the challenging environment we are currently facing. We had significant increases in revenues, reserves and production. We furthered our goal of expanding our operated properties and established a more balanced portfolio between crude oil and natural gas assets and better geographical diversification with our Central Kansas Uplift acquisition. Teton added proved reserves in 2008 as a result of highly repeatable drilling success in the Piceance Basin and the Central Kansas acquisition in April 2008. Our efforts were nonetheless overshadowed by the dramatic drop in commodity prices at year-end 2008, which adversely impacted our year-end reserves as they did for a large portion of the E&P sector. Regardless, we believe that we are well positioned from a hedging standpoint as we have approximately 99 percent of our total current crude oil production for 2009 hedged. Our reserves were also impacted by disappointing results in our non-operated DJ Basin project and the postponement of 20 completions in the Piceance Basin by our operating partner. We are evaluating the possible sale of these two non-operated assets as we remain focused on increasing the percentage of operated assets. We are also focused on striving to maintain a strong balance sheet and necessary liquidity during these challenging times."
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