UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
x
|
Quarterly
Report Pursuant To Section 13 or 15(d) of The Securities Exchange Act of
1934
|
For
The Quarterly Period Ended September 30, 2009
OR
o
|
Transition
Report Pursuant To Section 13 or 15(d) of The Securities Exchange Act of
1934
|
Commission
File Number: 000-51801
ROSETTA
RESOURCES INC.
(Exact
name of registrant as specified in its charter)
Delaware
|
43-2083519
|
(State
or other jurisdiction of incorporation or organization)
|
(I.R.S.
Employer Identification No.)
|
|
|
717
Texas, Suite 2800, Houston, TX
|
77002
|
(Address
of principal executive offices)
|
(Zip
Code)
|
|
|
(Registrant's
telephone number, including area code) (713)
335-4000
|
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes x No o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of
this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such
files). Yes o No o
Indicate
by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting
company. See definitions of “large accelerated filer,” “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Securities Exchange
Act of 1934.
Large
accelerated filer x
|
Accelerated
filer o
|
|
|
Non-Accelerated
filer o
|
Smaller
Reporting Company o
|
(Do not
check if smaller reporting company)
|
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Securities Exchange Act of 1934). Yes o No x
The
number of shares of the registrant's Common Stock, $.001 par value per share,
outstanding as of November 4, 2009 was 52,366,529.
Part
I –
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Financial
Information
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3
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17
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27
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28
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Part
II –
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29
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29
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29
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29
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29
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29
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29
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30
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31
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PART
I. FINANCIAL INFORMATION
Item 1. Financial Statements
Rosetta
Resources Inc.
Consolidated
Balance Sheet
(In
thousands, except share amounts)
|
|
September
30,
2009
|
|
|
December
31,
2008
|
|
|
|
(Unaudited)
|
|
|
|
|
Assets
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
65,698 |
|
|
$ |
42,855 |
|
Restricted
cash
|
|
|
- |
|
|
|
1,421 |
|
Accounts
receivable
|
|
|
18,946 |
|
|
|
41,885 |
|
Derivative
instruments
|
|
|
20,305 |
|
|
|
34,742 |
|
Prepaid
expenses
|
|
|
3,816 |
|
|
|
5,046 |
|
Other
current assets
|
|
|
5,282 |
|
|
|
4,071 |
|
Total
current assets
|
|
|
114,047 |
|
|
|
130,020 |
|
Oil
and natural gas properties, full cost method, of which $24.8 million at
September 30, 2009 and $50.3 million at December 31, 2008 were excluded
from amortization
|
|
|
1,983,514 |
|
|
|
1,900,672 |
|
Other
fixed assets
|
|
|
11,915 |
|
|
|
9,439 |
|
|
|
|
1,995,429 |
|
|
|
1,910,111 |
|
Accumulated
depreciation, depletion, and amortization, including
impairment
|
|
|
(1,427,711 |
) |
|
|
(935,851 |
) |
Total
property and equipment, net
|
|
|
567,718 |
|
|
|
974,260 |
|
|
|
|
|
|
|
|
|
|
Deferred
loan fees
|
|
|
5,401 |
|
|
|
1,168 |
|
Deferred
tax asset
|
|
|
175,964 |
|
|
|
42,652 |
|
Other
assets
|
|
|
2,138 |
|
|
|
6,278 |
|
Total
other assets
|
|
|
183,503 |
|
|
|
50,098 |
|
Total
assets
|
|
$ |
865,268 |
|
|
$ |
1,154,378 |
|
|
|
|
|
|
|
|
|
|
Liabilities
and Stockholders' Equity
|
|
|
|
|
|
|
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|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
2,046 |
|
|
$ |
2,268 |
|
Accrued
liabilities
|
|
|
27,710 |
|
|
|
48,824 |
|
Royalties
payable
|
|
|
12,979 |
|
|
|
17,388 |
|
Derivative
instruments
|
|
|
258 |
|
|
|
985 |
|
Prepayment
on gas sales
|
|
|
7,203 |
|
|
|
19,382 |
|
Deferred
income taxes
|
|
|
7,467 |
|
|
|
12,575 |
|
Total
current liabilities
|
|
|
57,663 |
|
|
|
101,422 |
|
Long-term
liabilities:
|
|
|
|
|
|
|
|
|
Derivative
instruments
|
|
|
1,479 |
|
|
|
- |
|
Long-term
debt
|
|
|
288,628 |
|
|
|
300,000 |
|
Other
long-term liabilities
|
|
|
27,769 |
|
|
|
26,584 |
|
Total
liabilities
|
|
|
375,539 |
|
|
|
428,006 |
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies (Note 9)
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
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|
Stockholders'
equity:
|
|
|
|
|
|
|
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|
Preferred
stock, $0.001 par value; authorized 5,000,000 shares; no shares
issued in 2009 or 2008
|
|
|
- |
|
|
|
- |
|
Common
stock, $0.001 par value; authorized 150,000,000 shares; issued 51,187,734
shares and 51,031,481 shares at September 30, 2009 and December 31, 2008,
respectively
|
|
|
51 |
|
|
|
51 |
|
Additional
paid-in capital
|
|
|
778,427 |
|
|
|
773,676 |
|
Treasury
stock, at cost; 186,861 and 155,790 shares at September 30, 2009 and
December 31, 2008, respectively
|
|
|
(3,290 |
) |
|
|
(2,672 |
) |
Accumulated
other comprehensive income
|
|
|
11,671 |
|
|
|
24,079 |
|
Accumulated
deficit
|
|
|
(297,130 |
) |
|
|
(68,762 |
) |
Total
stockholders' equity
|
|
|
489,729 |
|
|
|
726,372 |
|
Total
liabilities and stockholders' equity
|
|
$ |
865,268 |
|
|
$ |
1,154,378 |
|
The
accompanying notes to the financial statements are an integral part
hereof.
Rosetta
Resources Inc.
Consolidated
Statement of Operations
(In
thousands, except per share amounts)
(Unaudited)
|
|
Three
Months Ended
September
30,
|
|
|
Nine
Months Ended
September
30,
|
|
|
|
2009
|
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|
2008
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|
2009
|
|
|
2008
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
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Natural
gas sales
|
|
$ |
60,049 |
|
|
$ |
114,308 |
|
|
$ |
201,360 |
|
|
$ |
362,894 |
|
Oil
sales
|
|
|
4,435 |
|
|
|
15,728 |
|
|
|
16,116 |
|
|
|
49,941 |
|
Total
revenues
|
|
|
64,484 |
|
|
|
130,036 |
|
|
|
217,476 |
|
|
|
412,835 |
|
Operating
Costs and Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease
operating expense
|
|
|
13,312 |
|
|
|
12,857 |
|
|
|
47,921 |
|
|
|
40,445 |
|
Depreciation,
depletion, and amortization
|
|
|
23,029 |
|
|
|
46,951 |
|
|
|
95,928 |
|
|
|
150,103 |
|
Impairment
of oil and gas properties
|
|
|
- |
|
|
|
205,659 |
|
|
|
379,462 |
|
|
|
205,659 |
|
Treating
and transportation
|
|
|
1,805 |
|
|
|
1,780 |
|
|
|
4,608 |
|
|
|
4,624 |
|
Marketing
fees
|
|
|
27 |
|
|
|
840 |
|
|
|
585 |
|
|
|
2,602 |
|
Production
taxes
|
|
|
1,109 |
|
|
|
2,336 |
|
|
|
4,183 |
|
|
|
11,528 |
|
General
and administrative costs
|
|
|
10,414 |
|
|
|
15,419 |
|
|
|
32,358 |
|
|
|
41,042 |
|
Total
operating costs and expenses
|
|
|
49,696 |
|
|
|
285,842 |
|
|
|
565,045 |
|
|
|
456,003 |
|
Operating
income (loss)
|
|
|
14,788 |
|
|
|
(155,806 |
) |
|
|
(347,569 |
) |
|
|
(43,168 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
(income) expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense, net of interest capitalized
|
|
|
5,239 |
|
|
|
3,186 |
|
|
|
13,880 |
|
|
|
11,209 |
|
Interest
income
|
|
|
(16 |
) |
|
|
(586 |
) |
|
|
(93 |
) |
|
|
(1,141 |
) |
Other
(income) expense, net
|
|
|
(11 |
) |
|
|
(40 |
) |
|
|
149 |
|
|
|
(170 |
) |
Total
other expense
|
|
|
5,212 |
|
|
|
2,560 |
|
|
|
13,936 |
|
|
|
9,898 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before provision for income taxes
|
|
|
9,576 |
|
|
|
(158,366 |
) |
|
|
(361,505 |
) |
|
|
(53,066 |
) |
Provision
for income taxes
|
|
|
3,845 |
|
|
|
(58,991 |
) |
|
|
(133,138 |
) |
|
|
(20,495 |
) |
Net
income (loss)
|
|
$ |
5,731 |
|
|
$ |
(99,375 |
) |
|
$ |
(228,367 |
) |
|
$ |
(32,571 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.11 |
|
|
$ |
(1.96 |
) |
|
$ |
(4.48 |
) |
|
$ |
(0.64 |
) |
Diluted
|
|
$ |
0.11 |
|
|
$ |
(1.96 |
) |
|
$ |
(4.48 |
) |
|
$ |
(0.64 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
50,994 |
|
|
|
50,813 |
|
|
|
50,961 |
|
|
|
50,636 |
|
Diluted
|
|
|
51,291 |
|
|
|
50,813 |
|
|
|
50,961 |
|
|
|
50,636 |
|
The
accompanying notes to the financial statements are an integral part
hereof.
Rosetta
Resources Inc.
Consolidated
Statement of Cash Flows
(In
thousands)
(Unaudited)
|
|
Nine
Months Ended
September
30,
|
|
|
|
2009
|
|
|
2008
|
|
Cash
flows from operating activities
|
|
|
|
|
|
|
Net
income (loss)
|
|
$ |
(228,367 |
) |
|
$ |
(32,571 |
) |
Adjustments
to reconcile net income (loss) to net cash from operating
activities
|
|
|
|
|
|
|
|
|
Depreciation,
depletion and amortization
|
|
|
95,928 |
|
|
|
150,103 |
|
Impairment
of oil and gas properties
|
|
|
379,462 |
|
|
|
205,659 |
|
Deferred
income taxes
|
|
|
(131,056 |
) |
|
|
(24,939 |
) |
Amortization
of deferred loan fees recorded as interest expense
|
|
|
1,621 |
|
|
|
885 |
|
Amortization
of original issue discount recorded as interest expense
|
|
|
228 |
|
|
|
- |
|
Stock
compensation expense
|
|
|
4,951 |
|
|
|
4,975 |
|
Other
non-cash items
|
|
|
- |
|
|
|
(418 |
) |
Change
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
22,939 |
|
|
|
1,544 |
|
Prepaid
expenses
|
|
|
1,230 |
|
|
|
4,863 |
|
Other
current assets
|
|
|
(1,211 |
) |
|
|
181 |
|
Other
assets
|
|
|
(444 |
) |
|
|
192 |
|
Accounts
payable
|
|
|
(222 |
) |
|
|
3,046 |
|
Accrued
liabilities
|
|
|
(5,546 |
) |
|
|
4,516 |
|
Royalties
payable
|
|
|
(16,589 |
) |
|
|
8,265 |
|
Net
cash provided by operating activities
|
|
|
122,924 |
|
|
|
326,301 |
|
Cash
flows from investing activities
|
|
|
|
|
|
|
|
|
Acquisition
of oil and gas properties
|
|
|
(3,721 |
) |
|
|
(29,570 |
) |
Purchases
of oil and gas assets
|
|
|
(99,191 |
) |
|
|
(167,629 |
) |
Disposals
of oil and gas properties and assets
|
|
|
19,483 |
|
|
|
27 |
|
Decrease
in restricted cash
|
|
|
1,421 |
|
|
|
- |
|
Net
cash used in investing activities
|
|
|
(82,008 |
) |
|
|
(197,172 |
) |
Cash
flows from financing activities
|
|
|
|
|
|
|
|
|
Borrowings
on revolving credit facility
|
|
|
28,400 |
|
|
|
- |
|
Payments
on revolving credit facility
|
|
|
(40,000 |
) |
|
|
- |
|
Deferred
loan fees
|
|
|
(5,855 |
) |
|
|
- |
|
Proceeds
from stock options exercised
|
|
|
- |
|
|
|
3,669 |
|
Purchases
of treasury stock
|
|
|
(618 |
) |
|
|
(831 |
) |
Net
cash (used in) provided by financing activities
|
|
|
(18,073 |
) |
|
|
2,838 |
|
|
|
|
|
|
|
|
|
|
Net
increase in cash
|
|
|
22,843 |
|
|
|
131,967 |
|
Cash
and cash equivalents, beginning of period
|
|
|
42,855 |
|
|
|
3,216 |
|
Cash
and cash equivalents, end of period
|
|
$ |
65,698 |
|
|
$ |
135,183 |
|
|
|
|
|
|
|
|
|
|
Supplemental
non-cash disclosures:
|
|
|
|
|
|
|
|
|
Capital
expenditures included in accrued liabilities
|
|
$ |
9,489 |
|
|
$ |
23,316 |
|
The
accompanying notes to the financial statements are an integral part
hereof.
Rosetta
Resources Inc.
Notes
to Consolidated Financial Statements (unaudited)
(1)
Organization and Operations of the Company
Nature of
Operations. Rosetta Resources Inc. (together with its
consolidated subsidiaries, the “Company”) is an independent oil and gas company
that is engaged in oil and natural gas exploration, development, production and
acquisition activities in the United States. The Company’s main operations are
primarily concentrated in the Sacramento Basin of California, the Rockies, the
Lobo and Perdido Trends in South Texas, the State Waters of Texas and the Gulf
of Mexico.
These
interim financial statements have not been audited. However, in the
opinion of management, all adjustments, consisting of only normal recurring
adjustments necessary for a fair presentation of the financial statements have
been included. Results of operations for interim periods are not
necessarily indicative of the results of operations that may be expected for the
entire year. In addition, these financial statements have been
prepared in accordance with the instructions to Form 10-Q and, therefore, do not
include all disclosures required for financial statements prepared in conformity
with accounting principles generally accepted in the United States of
America. These financial statements and notes should be read in
conjunction with the Company’s audited Consolidated Financial Statements and the
notes thereto included in the Company’s Annual Report on Form 10-K for the year
ended December 31, 2008 ("2008 Annual Report"). In preparing these
financial statements, the Company has evaluated events and transactions for
potential recognition or disclosure through November 6, 2009, the date the
financial statements were issued, and have concluded that there were no
subsequent events.
Certain
reclassifications of prior year balances have been made to conform them to the
current year presentation. These reclassifications have no impact on
net income (loss).
(2)
Summary of Significant Accounting Policies
The
Company has provided a discussion of significant accounting policies, estimates
and judgments in its 2008 Annual Report.
Principles of
Consolidation. The accompanying consolidated financial
statements as of September 30, 2009 and December 31, 2008 and for the three and
nine months ended September 30, 2009 and 2008 contain the accounts of the
Company and its majority owned subsidiaries after eliminating all significant
intercompany balances and transactions.
Recent
Accounting Developments
The
following recently issued accounting developments have been applied or may
impact the Company in future periods.
Business
Combinations. In December 2007, the Financial Accounting Standards
Board (“FASB”) revised the authoritative guidance for business combinations,
extending its applicability to all transactions and other events in which one
entity obtains control over one or more other businesses. The revised
guidance broadens the fair value measurement and recognition of assets acquired,
liabilities assumed, and interests transferred as a result of business
combinations and requires that acquisition-related costs incurred prior to the
acquisition be expensed. The revised guidance also expands the
definition of what qualifies as a business, and this expanded definition could
include prospective oil and gas purchases. This could cause us to
expense transaction costs for future oil and gas property purchases that we have
historically capitalized. Additionally, this guidance expands the
required disclosures to improve the financial statement users’ abilities to
evaluate the nature and financial effects of business
combinations. This guidance is effective for business combinations
for which the acquisition date is on or after January 1, 2009. The
adoption of the revised guidance did not have a significant impact on our
consolidated financial position, results of operations or cash
flows.
Non-controlling Interests in
Consolidated Financial Statements. In December 2007, the
FASB issued authoritative guidance which improves the relevance, comparability
and transparency of the financial information that a reporting entity provides
in its consolidated financial statements by establishing accounting and
reporting standards for the non-controlling interest in a subsidiary and for the
deconsolidation of a subsidiary. This guidance is effective for
fiscal years beginning after December 15, 2008. The adoption of this
guidance did not have a significant impact on our consolidated financial
position, results of operations or cash flows.
Disclosures about Derivative
Instruments and Hedging Activities. In March 2008, the
FASB issued authoritative guidance related to disclosures about derivative
instruments and hedging activities, which is intended to improve financial
reporting about derivative instruments and hedging activities by requiring
enhanced disclosures. This guidance is effective for fiscal years
beginning after November 15, 2008. The Company adopted the disclosure
requirements beginning January 1, 2009. See Note 4 - Commodity
Hedging Contracts and Other Derivatives.
Fair Value
Measurements. In February 2008, the FASB issued authoritative
guidance which delayed the effective date of fair value accounting for
nonfinancial assets and liabilities, except for items that are recognized or
disclosed at fair value in the financial statements on a recurring basis (at
least annually), until fiscal years beginning after November 15,
2008. Beginning January 1, 2009, we implemented the guidance for
nonfinancial assets and liabilities. The adoption of this guidance
did not have an impact on our consolidated financial position, results of
operations or cash flows. In October 2008, the FASB issued guidance
on determining the fair value of a financial asset when the market for that
asset is not active. This guidance clarifies the application of fair value
accounting in a market that is not active and provides an example to illustrate
key considerations in determining the fair value of a financial asset when the
market for that financial asset is not active. This guidance was effective
upon issuance, including prior periods for which financial statements have not
been issued. We applied this guidance to financial assets measured at fair
value on a recurring basis at September 30, 2009. See Note 5 - Fair Value
Measurements. The adoption of this guidance did not have a significant impact on
our consolidated financial position, results of operations or cash
flows.
In April
2009, the FASB issued authoritative guidance to provide additional application
guidance and enhance disclosures regarding fair value measurements and
impairments of securities. This guidance provides guidelines for
making fair value measurements for assets and liabilities for which the volume
and level of activity for the asset or liability have significantly decreased or
for transactions that are not orderly more consistent with the principles
presented in earlier guidance, enhances consistency in financial reporting by
increasing the frequency of fair value disclosures, and provides additional
guidance designed to create greater clarity and consistency in accounting for
and presenting impairment losses on securities for other-than-temporary
impairments. This guidance is effective for interim and annual
periods ending after June 15, 2009, with early adoption permitted for periods
ending after March 15, 2009. We applied this guidance for the period
ended June 30, 2009 and the adoption did not have a significant impact on the
Company’s consolidated financial position, results of operations or cash
flows.
Subsequent
Events. In May 2009, the FASB issued authoritative guidance on
subsequent events to incorporate accounting guidance that originated as auditing
standards into the body of authoritative literature issued by the
FASB. This guidance requires the evaluation of subsequent events
through the date the financial statements are issued or are available for issue
and the disclosure of the date through which subsequent events were evaluated
and the basis for that date. This guidance is effective for interim
and annual financial periods ending after June 15, 2009. The Company
adopted the requirements of this guidance for the period ended June 30, 2009 and
the adoption did not have a significant impact on our consolidated financial
position, results of operations or cash flows. See Note 1 –
Organization and Operations of the Company.
FASB
Codification. In July 2009, the FASB issued guidance making
the FASB Accounting Standards Codification the single source of authoritative
nongovernmental U.S. GAAP. The Codification is not intended to change
GAAP, however, it will represent a significant change in researching issues and
referencing U.S. GAAP in financial statements and accounting
policies. This guidance is effective for financial statements issued
for interim and annual periods ending after September 15, 2009. We
applied this guidance for the period ended September 30, 2009.
Oil and Gas Reporting
Requirements. In December 2008, the Securities and Exchange
Commission (“SEC”) released Release No. 33-8995, “Modernization of Oil and Gas
Reporting” (the “Release”). The disclosure requirements under this
Release will require reporting of oil and gas reserves using an average price
based upon the prior 12-month period rather than year-end prices and the use of
new technologies to determine proved reserves if those technologies have been
demonstrated to result in reliable conclusions about reserves
volumes. Companies will also be allowed, but not required, to
disclose probable and possible reserves in SEC filings. In addition,
companies will be required to report the independence and qualifications of its
reserves preparer or auditor and file reports when a third party is relied upon
to prepare reserves estimates or conduct a reserves audit. The new
disclosure requirements become effective for the Company beginning with our
annual report on Form 10-K for the year ending December 31, 2009. In
September 2009, the FASB issued its proposed guidance on oil and gas reserve
estimation and disclosure, aligning their requirements with the SEC’s final
rule. In October 2009, the SEC issued Staff Accounting Bulletin
(“SAB”) No. 113 to bring existing SEC guidance into conformity with the
Release. The principle revisions of the guidance include changing the
price used in determining quantities of oil and gas reserves, as noted above;
eliminating the option to use post-quarter-end prices to evaluate write-offs of
excess capitalized costs under the full cost method of accounting; removing the
exclusion of unconventional methods used in extracting oil and gas from oil
sands or shale as an oil and gas producing activity; and removing certain
questions and interpretative guidance which are no longer
necessary. We are currently evaluating the impact of this
guidance on our financial statements and oil and gas accounting
disclosures.
(3)
Property, Plant and Equipment
The
Company’s total property, plant and equipment consist of the
following:
|
|
September
30,
2009
|
|
|
December
31,
2008
|
|
|
|
(In
thousands)
|
|
Proved
properties
|
|
$ |
1,920,891 |
|
|
$ |
1,813,527 |
|
Unproved/unevaluated
properties
|
|
|
24,793 |
|
|
|
50,252 |
|
Gas
gathering systems and compressor stations
|
|
|
37,830 |
|
|
|
36,893 |
|
Total
oil and natural gas properties
|
|
|
1,983,514 |
|
|
|
1,900,672 |
|
Other
fixed assets
|
|
|
11,915 |
|
|
|
9,439 |
|
Total
property and equipment, gross
|
|
|
1,995,429 |
|
|
|
1,910,111 |
|
Less:
Accumulated depreciation, depletion, and amortization
|
|
|
(1,427,711 |
) |
|
|
(935,851 |
) |
Total
property and equipment, net
|
|
$ |
567,718 |
|
|
$ |
974,260 |
|
The
Company capitalizes internal costs directly identified with acquisition,
exploration and development activities. The Company capitalized $1.3 million and
$1.5 million of internal costs for the three months ended September 30, 2009 and
2008, respectively, and $3.1 million and $4.3 million for the nine months ended
September 30, 2009 and 2008, respectively.
Included
in the Company’s oil and gas properties are asset retirement costs of $22.1
million and $23.2 million as of September 30, 2009 and December 31, 2008,
respectively.
Oil and
gas properties include costs of $24.8 million and $50.3 million at September 30,
2009 and December 31, 2008, respectively, that were excluded from capitalized
costs being amortized. These amounts primarily represent unproved
properties and unevaluated exploration projects in which the Company owns a
direct interest.
Pursuant
to full cost accounting rules, the Company must perform a ceiling test each
quarter on its proved oil and gas assets within each separate cost
center. The Company’s ceiling test was calculated using hedge
adjusted market prices of gas and oil at September 30, 2009, which were based on
a Henry Hub price of $3.30 per MMBtu and a West Texas Intermediate oil price of
$67.00 per Bbl (adjusted for basis and quality differentials). Cash
flow hedges of natural gas production in place at September 30, 2009 increased
the calculated ceiling value by approximately $50.7 million
(pre-tax). The use of these prices would have resulted in a pre-tax
write-down of $18.8 million at September 30, 2009. As allowed under
the full cost accounting rules, the Company re-evaluated its ceiling test on
October 29, 2009 using the market price for Henry Hub of $4.59 per MMBtu and
West Texas Intermediate of $76.25 per Bbl (adjusted for basis and quality
differentials). At these prices, cash flow hedges of natural gas
production in place increased the calculated ceiling value by approximately
$29.3 million (pre-tax). Utilizing these prices, the calculated
ceiling amount exceeded the net capitalized cost of oil and gas
properties. As a result, no write-down was recorded for the quarter
ended September 30, 2009. It is possible that another write-down of
the Company's oil and gas properties could occur in the future should oil
and natural gas prices decline, the Company experiences significant downward
adjustments to the estimated proved reserves, and/or the Company's commodity
hedges settle and are not replaced.
The
Company’s ceiling test was calculated using hedge adjusted market prices of gas
and oil at March 31 and June 30, 2009, which were based on a Henry Hub price of
$3.63 per MMBtu and $3.89 per MMBtu, respectively, and a West Texas Intermediate
oil price of $46.00 per Bbl and $66.25 per Bbl (adjusted for basis and quality
differentials), respectively, compared to prices of $5.71 per MMBtu and $41.00
per Bbl at December 31, 2008. Cash flow hedges of natural gas
production in place at March 31 and June 30, 2009 increased the calculated
ceiling value by approximately $79.7 million (pre-tax) and $55.3 million
(pre-tax), respectively. Based upon these analyses, a non-cash,
pre-tax write-down of $379.5 million was recorded at March 31, 2009 and the
Company did not record a write-down at June 30, 2009.
The
Company generated $19.5 million of proceeds from divestitures of oil and gas
properties and assets in non-core operating areas during the nine months ended
September 30, 2009. Of these divestitures, $18.0 million were
recorded as credits to the full cost pool with no gain or loss recognized, $0.8
million was recorded as a reimbursement of costs previously paid for gathering
facilities associated with divested properties, and $0.7 million related to the
sale of compressors that were not included in the pool for which an immaterial
loss on sale was recorded.
(4)
Commodity Hedging Contracts and Other Derivatives
The
following financial fixed price swap and costless collar transactions were
outstanding with associated notional volumes and average underlying prices that
represent hedged prices of commodities at various market locations at September
30, 2009:
Settlement
Period
|
Derivative
Instrument
|
Hedge
Strategy
|
|
Notional
Daily Volume
MMBtu
|
|
|
Total
of Notional Volume
MMBtu
|
|
|
Average
Floor/Fixed Prices per
MMBtu
|
|
|
Average
Ceiling Prices per MMBtu
|
|
|
Natural
Gas Production Hedged (1)
|
|
|
Fair
Market Value
Asset/(Liability)
(In
thousands)
|
|
2009
|
Swap
|
Cash
flow
|
|
|
52,141 |
|
|
|
4,796,972 |
|
|
$ |
7.64 |
|
|
$ |
- |
|
|
|
49 |
% |
|
$ |
13,338 |
|
2009
|
Costless
Collar
|
Cash
flow
|
|
|
5,000 |
|
|
|
460,000 |
|
|
|
8.00 |
|
|
|
10.05 |
|
|
|
5 |
% |
|
|
1,315 |
|
2010
|
Swap
|
Cash
flow
|
|
|
12,521 |
|
|
|
4,570,000 |
|
|
|
7.79 |
|
|
|
- |
|
|
|
11 |
% |
|
|
7,352 |
|
2010
|
Costless
Collar
|
Cash
flow
|
|
|
5,041 |
|
|
|
1,840,000 |
|
|
|
5.75 |
|
|
|
7.55 |
|
|
|
4 |
% |
|
|
(299 |
) |
2011
|
Swap
|
Cash
flow
|
|
|
5,000 |
|
|
|
1,825,000 |
|
|
|
5.72 |
|
|
|
|
|
|
|
5 |
% |
|
|
(976 |
) |
2011
|
Costless
Collar
|
Cash
flow
|
|
|
10,000 |
|
|
|
3,650,000 |
|
|
|
5.75 |
|
|
|
7.55 |
|
|
|
10 |
% |
|
|
(1,488 |
) |
|
|
|
|
|
|
|
|
|
17,141,972 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
19,242 |
|
|
(1)
|
Estimated
based on anticipated future gas
production.
|
The
Company has hedged the interest rates on $100.0 million of its
outstanding debt from September 30, 2009 through December 31, 2010. As of
September 30, 2009, the Company had the following financial interest rate swap
position outstanding:
`
Settlement
Period
|
Derivative
Instrument
|
Hedge
Strategy
|
|
Average
Fixed Rate
|
|
|
Fair
Market Value
Asset/(Liability)
(In
thousands)
|
|
October
1, 2009 - December 31, 2010
|
Swap
|
Cash
Flow
|
|
|
1.24 |
% |
|
$ |
(642 |
) |
The
Company’s current cash flow hedge positions are with counterparties who are also
lenders in the Company’s credit facilities. This eliminates the need
for independent collateral postings with respect to any margin obligation
resulting from a negative change in fair market value of the derivative
contracts in connection with the Company’s hedge related credit
obligations. As of September 30, 2009, the Company made no deposits
for collateral.
The
following table sets forth the results of hedge transaction settlements for the
respective period for the Consolidated Statement of Operations:
|
|
Three
Months Ended September 30,
|
|
|
Nine
Months Ended September 30,
|
|
Natural
Gas
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Quantity
settled (MMBtu)
|
|
|
5,256,972 |
|
|
|
6,706,092 |
|
|
|
15,599,493 |
|
|
|
19,498,524 |
|
Increase
(decrease) in natural gas sales revenue (In thousands)
|
|
$ |
22,918 |
|
|
$ |
(12,125 |
) |
|
$ |
60,077 |
|
|
$ |
(29,420 |
) |
Interest
Rate Swaps
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
(decrease) in interest expense (In thousands)
|
|
$ |
- |
|
|
$ |
(372 |
) |
|
$ |
1,034 |
|
|
$ |
(832 |
) |
As of
September 30, 2009, the Company expects to reclassify gains of $20.0 million to
earnings from the balance in accumulated other comprehensive income on the
Consolidated Balance Sheet during the next twelve months.
The
Company is exposed to certain risks relating to its ongoing business
operations. The primary risks managed using derivative instruments
are commodity price risk and interest rate risk. Forward contracts on
various commodities are entered into to manage the price risk associated with
forecasted sales of the Company’s natural gas and oil
production. Interest rate swaps are entered into to manage interest
rate risk associated with the Company’s variable-rate borrowings.
Authoritative
guidance for derivatives requires companies to recognize all derivative
instruments as either assets or liabilities at fair value in the statement of
financial position. In accordance with this guidance, the Company
designates commodity forward contracts as cash flow hedges of forecasted sales
of natural gas and oil production and interest rate swaps as cash flow hedges of
interest rate payments due under variable-rate borrowings.
Additional
Disclosures about Derivative Instruments and Hedging Activities
Cash
Flow Hedges
For
derivative instruments that are designated and qualify as a cash flow hedge, the
effective portion of the gain or loss on the derivative is reported as a
component of other comprehensive income and reclassified into earnings in the
same period or periods during which the hedged transaction affects
earnings. Gains and losses on the derivative representing either
hedge ineffectiveness or hedge components excluded from the assessment of
effectiveness are recognized in current earnings.
As of
September 30, 2009, the Company had outstanding natural gas commodity forward
contracts with a notional volume of 17,141,972 MMBtus that were entered into to
hedge forecasted natural gas sales.
As of
September 30, 2009, the total notional amount of the Company’s
receive-variable/pay-fixed interest rate swaps was $100.0
million. The Company includes the realized gain or loss on the hedged
items (that is, interest on variable-rate borrowings) in the same line item –
interest expense, net of interest capitalized – as the offsetting gain or loss
on the related interest rate swaps.
Information
on the location and amounts of derivative fair values in the statement of
financial position and derivative gains and losses in the statement of
operations as of September 30, 2009 is as follows:
|
Fair
Values of Derivative Instruments
Derivative
Assets (Liabilities)
|
|
|
|
|
|
|
|
September
30, 2009
|
|
|
Balance
Sheet Location
|
|
Fair
Value
|
|
Derivatives
designated as hedging instruments
|
|
|
(in
thousands)
|
|
|
|
|
|
|
Interest rate
swap
|
Derivative
Instruments - current assets
|
|
$ |
(429 |
) |
Interest
rate swap
|
Derivative
Instruments - current liabilities
|
|
|
(258 |
) |
Interest
rate swap
|
Derivative
Instruments - non-current liabilities
|
|
|
10 |
|
Interest
rate swap
|
Other
assets - non-current assets
|
|
|
32 |
|
Commodity
contracts
|
Derivative
Instruments - current assets
|
|
|
20,734 |
|
Commodity
contracts
|
Derivative
Instruments - non-current liabilities
|
|
|
(1,489 |
) |
|
|
|
|
|
|
Total
derivatives designated as hedging instruments
|
|
|
$ |
18,600 |
|
|
|
|
|
|
|
Total
derivatives not designated as hedging instruments
|
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
derivatives
|
|
|
$ |
18,600 |
|
Derivatives
in Cash Flow Hedging Relationships |
|
Amount
of Gain or (Loss) Recognized in OCI on Derivative (Effective
Portion)
|
|
|
Amount
of Gain or (Loss) Recognized in OCI on Derivative (Effective
Portion)
|
|
Location
of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective
Portion) |
|
Amount
of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective
Portion)
|
|
|
Amount
of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective
Portion)
|
|
Location
of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion
and Amount Excluded from Effectiveness Testing) |
|
Amount
of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion
and Amount Excluded from Effectiveness Testing)
|
|
|
Amount
of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion
and Amount Excluded from Effectiveness Testing)(1)
|
|
|
Three
Months Ended
September
30, 2009
|
|
|
Nine
Months Ended
September
30, 2009
|
|
|
Three
Months Ended
September
30, 2009
|
|
|
Nine
Months Ended
September
30, 2009
|
|
|
Three
Months Ended
September
30, 2009
|
|
|
Nine
Months Ended
September
30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate swap
|
|
$ |
(3,709 |
) |
|
$ |
40,949 |
|
Interest
expense, net of interest capitalized
|
|
$ |
- |
|
|
$ |
(512 |
) |
Interest
expense, net of interest capitalized
|
|
$ |
- |
|
|
$ |
(522 |
) |
Commodity
contracts
|
|
|
(550 |
) |
|
|
(1,679 |
) |
Natural
gas sales
|
|
|
22,918 |
|
|
|
60,077 |
|
Natural
gas sales
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
(4,259 |
) |
|
$ |
39,270 |
|
|
|
$ |
22,918 |
|
|
$ |
59,565 |
|
|
|
$ |
- |
|
|
$ |
(522 |
) |
|
(1)
|
The
amount of gain or (loss) recognized in income represents $0.5 million
related to the ineffective portion of the hedging relationships. Nothing
was excluded from the assessment of hedge
effectiveness.
|
On April
9, 2009, the Company entered into an amended and restated revolving credit
agreement replacing the previous revolving credit agreement. At the
time of the amended and restated revolving credit agreement, the Company had two
outstanding interest rate swaps which established a fixed interest rate for a
portion of the previous outstanding revolver that were designated as cash flow
hedges and which became ineffective. During the second quarter of
2009, the Company ceased cash flow hedge accounting for these interest rate
swaps which resulted in approximately $0.5 million in interest
expense. Because these swaps matured during the quarter ended June
30, 2009, the Company did not recognize any unrealized mark to market gains or
losses within the Consolidated Statement of Operations related to the swaps
during the period. For the three and nine months ended September 30,
2009, there were no gains or losses recognized in income representing hedge
components excluded from the assessment of effectiveness.
(5)
Fair Value Measurements
The
Company adopted the authoritative guidance for fair value measurements effective
January 1, 2008 for financial assets and liabilities and effective January 1,
2009 for non-financial assets and liabilities. The Company’s
financial assets and liabilities are measured at fair value on a recurring
basis. The Company discloses its recognized non-financial assets and
liabilities, such as asset retirement obligations and other property and
equipment, at fair value on a non-recurring basis. For non-financial
assets and liabilities, the Company is required to disclose information that
enables users of its financial statements to assess the inputs used to develop
these measurements. As none of the Company’s non-financial assets and
liabilities are impaired during the period-ended September 30, 2009, and no
other fair value measurements are required to be recognized on a non-recurring
basis, no additional disclosures are provided at September 30,
2009.
As
defined in the guidance, fair value is the amount that would be received to sell
an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date (“exit price”). To
estimate fair value, the Company utilizes market data or assumptions that market
participants would use in pricing the asset or liability, including assumptions
about risk and the risks inherent in the inputs to the valuation
technique. These inputs can be readily observable, market
corroborated or generally unobservable. The guidance establishes a
fair value hierarchy that prioritizes the inputs to valuation techniques used to
measure fair value. The hierarchy gives the highest priority to
unadjusted quoted market prices in active markets for identical assets or
liabilities (“Level 1”) and the lowest priority to unobservable inputs (“Level
3”). The three levels of the fair value hierarchy are as
follows:
|
–
|
Level
1 inputs are quoted prices (unadjusted) in active markets for identical
assets or liabilities.
|
|
–
|
Level
2 inputs are quoted prices for similar assets and liabilities in active
markets or inputs that are observable for the asset or liability, either
directly or indirectly through market corroboration, for substantially the
full term of the financial
instrument.
|
|
–
|
Level
3 inputs are measured based on prices or valuation models that require
inputs that are both significant to the fair value measurement and less
observable from objective
sources.
|
Level 3
instruments include money market funds, natural gas swaps, natural gas zero
cost collars and interest rate swaps. The Company’s money market funds
represent cash equivalents whose investments are limited to United States
Government Securities, securities backed by the United States Government, or
securities of United States Government agencies. The fair value
represents cash held by the fund manager as of September 30,
2009. The Company identified the money market funds as Level 3
instruments due to the fact that quoted prices for the underlying investments
cannot be obtained and there is not an active market for the underlying
investments. The Company utilizes counterparty and third party broker
quotes to determine the valuation of its derivative
instruments. Fair values derived from counterparties and brokers are
further verified using the closing price as of September 30, 2009 for the
relevant NYMEX futures contracts and exchange traded contracts for each
derivative settlement location.
The
following table sets forth by level within the fair value hierarchy the
Company’s financial assets and liabilities that were accounted for at fair value
on a recurring basis as of September 30, 2009. As required, financial assets and
liabilities are classified in their entirety based on the lowest level of input
that is significant to the fair value measurement. The Company’s assessment of
the significance of a particular input to the fair value measurement requires
judgment and may affect the valuation of fair value assets and liabilities and
their placement within the fair value hierarchy levels.
|
|
At
fair value as of September 30, 2009
(In
thousands)
|
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
Assets
(Liabilities):
|
|
|
|
|
|
|
|
|
|
|
|
|
Money
market funds
|
|
|
- |
|
|
|
- |
|
|
|
2,035 |
|
|
|
2,035 |
|
Commodity
derivative contracts
|
|
|
- |
|
|
|
- |
|
|
|
19,242 |
|
|
|
19,242 |
|
Interest
rate swap contracts
|
|
|
- |
|
|
|
- |
|
|
|
(642 |
) |
|
|
(642 |
) |
Total
|
|
|
- |
|
|
|
- |
|
|
|
20,635 |
|
|
|
20,635 |
|
The
determination of the fair values above incorporates various
factors. These factors include the credit standing of the
counterparties involved, the impact of credit enhancements and the impact of the
Company’s nonperformance risk on its liabilities. The Company considered credit
adjustments for the counterparties using current credit default swap values and
default probabilities for each counterparty in determining fair value and
recorded a downward adjustment to the fair value of its derivative assets in the
amount of $0.03 million at September 30, 2009.
The table
below presents a reconciliation of the assets and liabilities classified as
Level 3 in the fair value hierarchy during the nine months ended September 30,
2009. Level 3 instruments presented in the table consist of net derivatives
that, in management’s judgment, reflect the assumptions a marketplace
participant would have used at September 30, 2009.
|
|
Derivatives
Asset
(Liability)
(In
thousands)
|
|
|
Money
Market Funds Asset (Liability)
(In
thousands)
|
|
|
Total
(In
thousands)
|
|
Balance
as of January 1, 2009
|
|
$ |
38,372 |
|
|
$ |
5,025 |
|
|
$ |
43,397 |
|
Total
(gains) losses (realized or unrealized)
|
|
|
|
|
|
|
|
|
|
|
|
|
included
in earnings
|
|
|
- |
|
|
|
10 |
|
|
|
10 |
|
included
in other comprehensive income
|
|
|
39,270 |
|
|
|
- |
|
|
|
39,270 |
|
Purchases,
issuances and settlements
|
|
|
(59,042 |
) |
|
|
(3,000 |
) |
|
|
(62,042 |
) |
Transfers
in and out of level 3
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Balance
as of September 30, 2009
|
|
$ |
18,600 |
|
|
$ |
2,035 |
|
|
$ |
20,635 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
amount of total gains or losses for the period included in earnings
attributable to the change in unrealized gains or losses relating to
assets still held at September 30, 2009
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
At
September 30, 2009, the carrying value of cash and cash equivalents, accounts
receivable, other current assets and current liabilities reported in the
consolidated balance sheet approximate fair value because of their short-term
nature. The carrying amount of long-term debt reported in the
consolidated balance sheet at September 30, 2009 is $288.6 million. The
Company calculated the fair value of its long-term debt as of September 30,
2009, in accordance with the authoritative guidance for fair value measurements
using a discounted cash flow technique that incorporates a market interest yield
curve with adjustments for duration, optionality, and risk
profile. Based on this calculation, the Company has determined the
fair market value of its debt to be $301.7 million at September 30,
2009.
(6)
Asset Retirement Obligation
Activity
related to the Company’s asset retirement obligation (“ARO”) is as
follows:
|
|
Nine
Months Ended September 30, 2009
|
|
|
|
(In
thousands)
|
|
ARO
as of December 31, 2008
|
|
$ |
27,944 |
|
Revision
of previous estimates
|
|
|
(1,750 |
) |
Liabilities
incurred during period
|
|
|
1,797 |
|
Liabilities
settled/divested during period
|
|
|
(1,192 |
) |
Accretion
expense
|
|
|
1,770 |
|
ARO
as of September 30, 2009
|
|
$ |
28,569 |
|
Of the
total ARO, $1.0 million is included in accrued liabilities and $27.6 million is
included in Other long-term liabilities on the Consolidated Balance Sheet at
September 30, 2009.
(7)
Long-Term Debt
On April
9, 2009, the Company entered into an Amended and Restated Senior Revolving
Credit Agreement with BNP Paribas, as Administrative Agent, and the other
lenders identified therein (“Restated Revolver”) providing a senior secured
revolving line of credit in the amount of up to $600.0 million, replacing the
prior revolving credit agreement, and extending its term until July 1, 2012.
Availability under the Restated Revolver is restricted to the borrowing base,
which is subject to review and adjustment on a semi-annual basis and other
interim adjustments, including adjustments based on the Company’s hedging
arrangements. The borrowing base under the Restated Revolver was set at $375.0
million as of September 30, 2009. The semi-annual borrowing base review was
completed during October 2009, and the borrowing base under the Restated
Revolver was reduced from $375.0 million to $350.0 million. Amounts outstanding
under the Restated Revolver bear interest, as amended, at specified margins over
London Interbank Offered Rate (LIBOR) of 2.25% to 3.00%. Borrowings under the
Restated Revolver are collateralized by perfected first priority liens and
security interests on substantially all of the Company’s assets, including a
mortgage lien on oil and natural gas properties having at least 80% of the
pre-tax SEC PV-10 reserve value, a guaranty by all of the Company’s domestic
subsidiaries, and a pledge of 100% of the membership interests of domestic
subsidiaries. These collateralized amounts under the mortgages are subject to
semi-annual reviews based on updated reserve information. The Company is subject
to the financial covenants of a minimum current ratio of not less than 1.0 to
1.0 as of the end of each fiscal quarter and a maximum leverage ratio of not
greater than 3.5 to 1.0, calculated at the end of each fiscal quarter for the
four fiscal quarters then ended, measured quarterly. In addition, the Company is
subject to covenants, including limiting dividends and other restricted
payments, transactions with affiliates, incurrence of debt, changes of control,
asset sales, and liens on properties. On October 22, 2009, the Company entered
into the First Amendment to the Restated Revolver that deletes the “Reference
Bank Cost of Funds Rate” option in the definition of Alternate Base Rate, allows
the Company to make investments in US government securities, which mature in 15
months rather than one year, provides for certain other modifications to
permitted investments, and provides for the release of the Lenders’ lien on a
certain deposit account. The Company paid a facility fee on the total
commitment of $4.6 million. As of November 6, 2009, the Company has $190.0
million outstanding with $160.0 million available for borrowing under the
revolving line of credit.
On April
9, 2009, the Company also entered into an Amended and Restated Second Lien Term
Loan Agreement with BNP Paribas, as Administrative Agent, and other lenders
identified therein (“Restated Term Loan”) replacing the prior Term Loan
extending its term until October 2, 2012. Borrowings under the Restated Term
Loan were initially set at $75.0 million and bear interest at LIBOR plus 8.5%
with a LIBOR floor of 3.5%. The Restated Term Loan had an option to increase
fixed and floating rate borrowings by up to $25.0 million to $100.0 million
prior to May 9, 2009. The Company exercised this option on April 21, 2009 and
the increased borrowings consisted of $5.0 million of floating rate borrowings
and $20.0 million of fixed rate borrowings at 13.75%. The loan is collateralized
by second priority liens on substantially all of the Company’s assets. The
Company is subject to the financial covenants of a minimum asset coverage ratio
of not less than 1.5 to 1.0 and a maximum leverage ratio of not more than 4.0 to
1.0, calculated at the end of each fiscal quarter for the four fiscal quarters
then ended, measured quarterly. In addition, the Company is subject to
covenants, including limiting dividends and other restricted payments,
transactions with affiliates, incurrence of debt, changes of control, asset
sales, and liens on properties. On October 22, 2009, the Company also
entered into the First Amendment to the Restated Term Loan that deletes the
“Reference Bank Cost of Funds Rate” option in the definition of Alternate Base
Rate, allows the Company to make investments in US government securities, which
mature in 15 months rather than one year, provides for certain other
modifications to permitted investments, and provides for the release of the
Lenders’ lien on a certain deposit account. The Company paid an original issue
discount of $1.6 million and a facility fee of $0.9 million on the total
commitment. As of September 30, 2009, the Company had $80.0 million
of variable rate borrowings and $20.0 million of fixed rate borrowings
outstanding under the Restated Term Loan. There were no additional
borrowings under the Restated Term Loan subsequent to September 30, 2009 through
the date of this Quarterly Report on Form 10-Q.
As of
September 30, 2009, the Company had total outstanding borrowings of $288.6
million. At September 30, 2009, the Company’s weighted average
borrowing rate was 5.02%. Net borrowing availability under the
Revolver was $185.0 million at September 30, 2009. The Company was in
compliance with all covenants at September 30, 2009.
As of
September 30, 2009, all amounts drawn under the Restated Revolver are due and
payable on July 1, 2012. The principal balance associated with the
Restated Term Loan is due and payable on October 2, 2012.
(8)
Income Taxes
As of
September 30, 2009, the Company had no unrecognized tax benefits. The
effective tax rate for the three and nine months ended September 30, 2009 was
40.2% and 36.8%, respectively. The effective tax rate for the three and
nine months ended September 30, 2008 was 37.2% and 38.6%, respectively. The
provision for income taxes differs from the tax computed at the federal
statutory income tax rate primarily due to state income taxes, tax credits, a
shortfall related to stock-based compensation, and other permanent
differences. The income tax benefit for the nine months ended
September 30, 2009 includes a $1.0 million downward adjustment recorded in the
three months ended March 31, 2009 related to 2008 state taxes.
The
Company provides for deferred income taxes on the difference between the tax
basis of an asset or liability and its carrying amount in our financial
statements in accordance with authoritative guidance for accounting for income
taxes. This difference will result in taxable income or deductions in
future years when the reported amount of the asset or liability is recovered or
settled, respectively. Considerable judgment is required in determining when
these events may occur and whether recovery of an asset is more likely than
not. Deferred tax assets are reduced by a valuation allowance when,
in the opinion of management, it is more likely than not that some portion or
all of the deferred tax assets will not be realized. At September 30,
2009, the Company has a deferred tax asset of approximately $176.0 million
resulting primarily from the difference between the book basis and tax basis of
its oil and natural gas properties. The Company believes that it is
more likely than not that this deferred tax asset will be realized through
future taxable income generated by the production of its oil and natural gas
properties.
(9)
Commitments and Contingencies
The
Company is party to various oil and natural gas litigation matters arising out
of the normal course of business. The ultimate outcome of each of these matters
cannot be absolutely determined, and the liability the Company may ultimately
incur with respect to any one of these matters in the event of a negative
outcome may be in excess of amounts currently accrued for with respect to such
matters. Management does not believe any such matters will have a material
adverse effect on the Company’s financial position, results of operations or
cash flows.
(10)
Comprehensive Income (Loss)
The
Company’s total other comprehensive income (loss) is shown below:
|
|
Three
Months Ended September 30,
|
|
|
Nine
Months Ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(In
thousands)
|
|
Accumulated
other comprehensive (loss) income beginning of period
|
|
|
|
|
$ |
28,725 |
|
|
|
|
|
$ |
(96,756 |
) |
|
|
|
|
$ |
24,079 |
|
|
|
|
|
$ |
(7,225 |
) |
Net
income (loss)
|
|
|
5,731 |
|
|
|
|
|
|
|
(99,375 |
) |
|
|
|
|
|
|
(228,367 |
) |
|
|
|
|
|
|
(32,571 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in fair value of derivative hedging instruments
|
|
|
(4,259 |
) |
|
|
|
|
|
|
142,431 |
|
|
|
|
|
|
|
39,270 |
|
|
|
|
|
|
|
(18,002 |
) |
|
|
|
|
Hedge
settlements reclassed to income
|
|
|
(22,918 |
) |
|
|
|
|
|
|
12,497 |
|
|
|
|
|
|
|
(59,043 |
) |
|
|
|
|
|
|
30,251 |
|
|
|
|
|
Tax
provision related to hedges
|
|
|
10,123 |
|
|
|
|
|
|
|
(57,711 |
) |
|
|
|
|
|
|
7,365 |
|
|
|
|
|
|
|
(4,563 |
) |
|
|
|
|
Total
other comprehensive (loss) income
|
|
|
(17,054 |
) |
|
|
(17,054 |
) |
|
|
97,217 |
|
|
|
97,217 |
|
|
|
(12,408 |
) |
|
|
(12,408 |
) |
|
|
7,686 |
|
|
|
7,686 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
loss
|
|
|
(11,323 |
) |
|
|
|
|
|
|
(2,158 |
) |
|
|
|
|
|
|
(240,775 |
) |
|
|
|
|
|
|
(24,885 |
) |
|
|
|
|
Accumulated
other comprehensive income
|
|
|
|
|
|
$ |
11,671 |
|
|
|
|
|
|
$ |
461 |
|
|
|
|
|
|
$ |
11,671 |
|
|
|
|
|
|
$ |
461 |
|
(11)
Earnings (Loss) Per Share
Basic
earnings per share is computed by dividing income available to common
stockholders by the weighted average number of shares outstanding for the
period. Diluted earnings per share reflects the potential dilution
that could occur if outstanding common stock awards and stock options were
exercised at the end of the period.
The
following is a calculation of basic and diluted weighted average shares
outstanding:
|
|
Three
Months Ended
September
30,
|
|
|
Nine
Months Ended
September
30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(In
thousands)
|
|
Basic
weighted average number of shares outstanding
|
|
|
50,994 |
|
|
|
50,813 |
|
|
|
50,961 |
|
|
|
50,636 |
|
Dilution
effect of stock option and awards at the end of the period
|
|
|
297 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Diluted
weighted average number of shares outstanding
|
|
|
51,291 |
|
|
|
50,813 |
|
|
|
50,961 |
|
|
|
50,636 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Anti-dilutive
stock awards and shares
|
|
|
1,450 |
|
|
|
611 |
|
|
|
1,963 |
|
|
|
617 |
|
Because
the Company reported a loss from continuing operations for the nine months ended
September 30, 2009, no unvested stock awards and options were included in
computing loss per share because the effect was anti-dilutive. In
computing loss per share, no adjustments were made to reported net
loss.
(12)
Stock-Based Compensation
Performance
Share Units
Pursuant
to the approved Amended and Restated 2005 Long-Term Incentive Plan, the
Company’s Compensation Committee agreed to allocate a portion of the 2009
long-term incentive grants to executives as performance share units
(“PSUs”). The PSUs are payable, at the Company’s option, either in
shares of common stock or as a cash payment equivalent to the fair market value
of a share of common stock at settlement based on the achievement of certain
performance metrics or market conditions at the end of a three-year performance
period. The Company’s current intent is to settle these awards in
cash. Consequently, the PSUs are accounted for as
liability-classified awards. At the end of the three-year performance
period, the number of shares vested can range from 0% to 200% of the targeted
amount as determined by the Compensation Committee of the Board of
Directors. The PSUs have no voting rights. PSUs may be
vested solely at the discretion of the Board in the event of a participant’s
involuntary termination of employment for reasons other than cause or
termination for good reason but will be forfeited in the event of the
participant’s voluntary termination or involuntary termination for
cause. Any PSUs not vested by the Board at the end of a performance
period will expire.
Compensation
expense associated with PSUs is re-measured at the end of each reporting period
through the settlement date using the quarter-end closing common stock prices
for awards that are solely based on performance conditions or a Monte Carlo
binomial model for awards that contain market conditions to reflect the current
fair value. Compensation expense is recognized ratably over the
performance period based on the Company’s estimated achievement of the
established metrics. Compensation expense for awards with performance
conditions will only be recognized for those awards for which it is probable
that the performance conditions will be achieved and which are expected to
vest. The compensation expense will be estimated based upon an
assessment of the probability that the performance metrics will be achieved,
current and historical forfeitures, and the Board’s anticipated vesting
percentage. Compensation expense for awards with market conditions is
re-measured at the end of each reporting period based on the fair value derived
from the Monte Carlo binomial model.
The
Company granted 350,698 PSUs on March 3, 2009. No additional PSUs
have been granted nor have any vested or forfeited and the fair value per unit
at September 30, 2009 was $14.77 for awards with performance conditions and
$8.44 for awards with market conditions. For the quarter and nine
months ended September 30, 2009, the Company recognized $0.2 million of
compensation expense associated with the PSUs.
(13) Geographic
Area Information
The
Company has one reportable segment, oil and natural gas exploration and
production, as determined in accordance with authoritative guidance for
disclosures about segments.
The
Company owns oil and natural gas interests in six main geographic areas all
within the United States or its territorial waters. Geographic revenue and
property, plant and equipment information below are based on physical location
of the assets at the end of each period.
Oil
and Natural Gas Revenue
The table
below presents the Company’s gross oil and natural gas revenues by geographic
area.
|
|
Three
Months Ended
September
30,
|
|
|
Nine
Months Ended
September
30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(In
thousands)
|
|
California
|
|
$ |
12,393 |
|
|
$ |
38,310 |
|
|
$ |
45,154 |
|
|
$ |
118,898 |
|
Rockies
|
|
|
4,498 |
|
|
|
6,993 |
|
|
|
15,900 |
|
|
|
23,400 |
|
South
Texas
|
|
|
17,706 |
|
|
|
59,941 |
|
|
|
63,888 |
|
|
|
174,697 |
|
Texas
State Waters
|
|
|
1,413 |
|
|
|
13,555 |
|
|
|
8,819 |
|
|
|
44,292 |
|
Other
Onshore
|
|
|
3,662 |
|
|
|
12,039 |
|
|
|
13,869 |
|
|
|
37,442 |
|
Gulf
of Mexico
|
|
|
1,892 |
|
|
|
11,323 |
|
|
|
9,769 |
|
|
|
43,527 |
|
Gain
(loss) on hedges
|
|
|
22,920 |
|
|
|
(12,125 |
) |
|
|
60,077 |
|
|
|
(29,421 |
) |
Total
revenue
|
|
$ |
64,484 |
|
|
$ |
130,036 |
|
|
$ |
217,476 |
|
|
$ |
412,835 |
|
Oil
and Natural Gas Properties
The table
below presents the Company’s gross oil and natural gas properties by geographic
area and other fixed assets.
|
|
September
30, 2009
|
|
|
December
31, 2008
|
|
|
|
(In
thousands)
|
|
California
|
|
$ |
623,034 |
|
|
$ |
619,593 |
|
Rockies
|
|
|
184,996 |
|
|
|
175,294 |
|
South
Texas
|
|
|
772,822 |
|
|
|
712,464 |
|
Texas
State Waters
|
|
|
66,952 |
|
|
|
65,085 |
|
Other
Onshore
|
|
|
182,154 |
|
|
|
171,855 |
|
Gulf
of Mexico
|
|
|
153,556 |
|
|
|
156,381 |
|
Other
|
|
|
11,915 |
|
|
|
9,439 |
|
Total
property and equipment
|
|
$ |
1,995,429 |
|
|
$ |
1,910,111 |
|
Item 2. Management’s Discussion and Analysis of Financial
Condition and Results of Operations
CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This
report includes forward-looking information regarding Rosetta that is intended
to be covered by the “forward-looking statements” within the meaning of the
Private Securities Litigation Reform Act of 1995, Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. All statements other than statements of historical fact included or
incorporated by reference in this report are forward-looking statements,
including without limitation all statements regarding future plans, business
objectives, strategies, expected future financial position or performance,
expected future operational position or performance, budgets and projected
costs, future competitive position, or goals and/or projections of management
for future operations. In some cases, you can identify a forward-looking
statement by terminology such as “may,” “will,” “could,” “should,” “expect,”
“plan,” “project,” “intend,” “anticipate,” “believe,” “estimate,” “predict,”
“potential,” “pursue,” “target” or “continue,” the negative of such terms or
variations thereon, or other comparable terminology.
The
forward-looking statements contained in this report are largely based on our
expectations for the future, which reflect certain estimates and assumptions
made by our management. These estimates and assumptions reflect our best
judgment based on currently known market conditions, operating trends, and other
factors. Although we believe such estimates and assumptions to be reasonable,
they are inherently uncertain and involve a number of risks and uncertainties
that are beyond our control. As such, management’s assumptions about future
events may prove to be inaccurate. For a more detailed description of the risks
and uncertainties involved, see Item 1A. Risk Factors in Part II. of this
report. We do not intend to publicly update or revise any
forward-looking statements as a result of new information, future events,
changes in circumstances, or otherwise. These cautionary statements qualify all
forward-looking statements attributable to us, or persons acting on our behalf.
Management cautions all readers that the forward-looking statements contained in
this report are not guarantees of future performance, and we cannot assure any
reader that such statements will be realized or that the events and
circumstances they describe will occur. Factors that could cause actual results
to differ materially from those anticipated or implied in the forward-looking
statements herein include, but are not limited to:
–
|
general
economic conditions, either internationally, nationally or in
jurisdictions affecting our
business;
|
–
|
conditions
in the energy and economic markets;
|
–
|
our
ability to access the capital markets on favorable terms or at
all;
|
–
|
our
ability to obtain credit and/or capital in desired amounts and/or on
favorable terms;
|
–
|
the
ability and willingness of our current or potential counterparties or
vendors to enter into transactions with us and/or to fulfill their
obligations to us;
|
–
|
failure
of our joint interest partners to fund any or all of their portion of any
capital program;
|
–
|
the
occurrence of property acquisitions or
divestitures;
|
–
|
the
supply and demand for natural gas and
oil;
|
–
|
the
price of natural gas and oil;
|
–
|
competition
in the natural gas and oil
industry;
|
–
|
the
availability and cost of relevant raw materials, goods and
services;
|
–
|
the
availability and cost of processing and
transportation;
|
–
|
changes
or advances in technology;
|
–
|
potential
reserve revisions;
|
–
|
future
processing volumes and pipeline
throughput;
|
–
|
developments
in oil-producing and natural gas-producing
countries;
|
–
|
drilling
and exploration risks;
|
–
|
several
possible new legislative initiatives and regulatory changes
potentially adversely impacting our business and industry, including, but
not limited to, national healthcare, cap and trade, hydraulic
fracturing, state and federal corporate income taxes, retroactive royalty
or production tax regimes, changes in environmental regulations,
environmental risks and liability under federal, state and local
environmental laws and regulations;
|
–
|
effects
of the application of applicable laws and regulations, including changes
in such regulations or the interpretation
thereof;
|
–
|
present
and possible future claims, litigation and enforcement
actions;
|
–
|
lease
termination due to lack of activity or other disputes with mineral lease
and royalty owners, whether regarding calculation and payment of royalties
or otherwise;
|
–
|
the
weather, including the occurrence of any adverse weather conditions and/or
natural disasters affecting our business;
and
|
–
|
any
other factors that impact or could impact the exploration of oil or
natural gas resources, including but not limited to the geology of a
resource, the total amount and costs to develop recoverable reserves,
legal title, regulatory, natural gas administration, marketing and
operational factors relating to the extraction of oil and natural
gas.
|
Overview
The
following discussion addresses material changes in the results of operations for
the three and nine months ended September 30, 2009 compared to the three and
nine months ended September 30, 2008, and the material changes in financial
condition since December 31, 2008. It is presumed that readers have
read or have access to our 2008 Annual Report, which includes, as part of
Management’s Discussion and Analysis of Financial Condition and Results of
Operations, disclosures regarding critical accounting policies.
The
following summarizes our performance for the first nine months of 2009 as
compared to the same period for 2008:
|
·
|
Production
on an equivalent basis decreased
5%;
|
|
·
|
Total
revenue, including the effects of hedging, decreased $195.4 million or
47%;
|
|
·
|
Average
realized gas prices including hedging decreased $4.05 per Mcf, or 43%, to
$5.46 per Mcf at September 30, 2009 from $9.51 per Mcf at September 30,
2008 and average realized oil prices decreased $63.93 per Bbl, or 56%, to
$50.55 per Bbl at September 30, 2009 from $114.48 per Bbl at September 30,
2008;
|
|
·
|
A
non-cash impairment of oil and gas properties of $379.5 million pre-tax
($238.1 million net of tax) was recorded during the first quarter due to a
decline in natural gas prices;
|
|
·
|
Net
loss increased $195.8 million to a net loss of $228.4 million; net income
excluding impairments would have been $9.7
million;
|
|
·
|
Diluted
loss per share increased $3.84 to diluted loss per share of $4.48; diluted
earnings per share excluding impairment would have been $0.19 per share;
and
|
|
·
|
36
gross (29 net) wells were drilled with a net success rate of 83% compared
to 112 gross (95 net) wells drilled with a net success rate of 86% for the
comparable period in 2008.
|
In early
2008, we began a strategic shift toward a business model that we
believed would generate more sustainable, predictable performance over time
by focusing on positions and programs in unconventional onshore domestic
basins. These basins are characterized by having lower hydrocarbon risk,
project inventory and repeatable programs. Our strategy shift is
accompanied by goals to deliver, over time, both acceptable rates of production
growth, as well as growth in proved, probable and possible
reserves. The timing of and extent to which we can implement this
strategy shift will depend on several factors, most notably commodity prices,
availability of and access to credit, and ability to capture organic and
inorganic opportunities.
Under
commodity price scenarios of at least $6.00 per Mcf and $70.00 per Bbl, we
believe we can successfully implement our strategy shift because of some
inherent strengths. Of note, we believe our core existing onshore assets will
yield significant inventory upside when analyzed through an unconventional
resource approach. Our studies have identified meaningful levels of new
inventory for the Company from these assets and we believe that there is
additional potential. Furthermore, although we are in the early
stages of evaluating our positions in the Eagle Ford play in South Texas and
Bakken play in the Alberta Basin of Montana, we believe we have some unique
exposure to inventory upside given the encouraging results we have experienced
to date. We are further advantaged, in our view, by having an
experienced workforce and management team with background in unconventional
resource operations. Finally, we have a financial and capital allocation
approach that we believe allows us to adapt to the unpredictable
industry cycles and manage through the current economic downturn. These factors
do not ensure our success in executing our strategy shift, but we believe they
provide a competitive advantage towards executing our strategy shift over
the longer term. Under an extended period of commodity prices below
$5.00 per Mcfe, our ability to implement our business strategy would likely be
constrained, particularly given our relatively low level of 2010 and 2011
hedges. Management continuously analyzes and evaluates possible
actions that could be taken if a protracted low price environment persists with
a focus on preserving an acceptable level of liquidity and cash flow to execute
our programs.
The
current plan for implementing our business strategy is to pursue, over time,
both organic and inorganic opportunities that meet the Company’s criteria for
funding, particularly inventory potential and attractive financial
returns. Several studies began in 2008 to test organic concepts in areas
where we currently have assets for the purpose of identifying possible
upside and inventory. These studies are continuing in
2009. We also actively study domestic basins where we
believe the Company can enter and/or expand and compete
successfully. The Company’s entry into the Eagle Ford and Bakken
plays are prime examples of the type of play entry that the Company intends to
pursue.
While we
have a preference for organic opportunities, we have also expanded our
capability to evaluate and pursue large and small acquisition opportunities that
make sense for the Company. We believe this balanced approach is needed for
long-term success. Our ability to execute inorganic activities will
depend on market conditions, including availability of acquisition
opportunities, relative valuations, and access to funding sources that could
include proceeds from non-core asset divestitures, as well as proceeds from
capital market activities. Thus far in 2009, we have generated
approximately $20.0 million of proceeds from non-core divestitures, and we
continue to test the market for additional non-core
divestitures. While we continuously evaluate our portfolio to
identify possible divestiture candidates, we are not driven to sell assets
unless values are compelling.
We
entered 2009 in a position to execute our business plan and affect our desired
goals, subject to commodity prices and market factors, and these factors
generally weakened during the year. The outlook for commodity prices
continues to be uncertain driven primarily by sluggish demand for natural gas
and commodity oversupply. Given this outlook, we continue to exercise
prudence and caution with our capital spending in order to preserve liquidity
and maximize the financial position of the Company. The priority for
our 2009 organic spending remains to spend less than our internally generated
cash flow plus cash on hand. We have exercised the discretion to
adjust capital spending, either up or down, throughout the year in response to
market conditions, the availability of proceeds from possible divestitures,
access to attractive acquisitions, and follow-on to success in our organic
programs. Our 2009 capital focus has been to drill a limited number
of Lobo wells in South Texas, conduct recompletion programs in the
Sacramento Basin, and test our two exploratory plays in the Eagle Ford and
Bakken. We currently project 2009 organic capital spending to be
approximately $125.0 million, up modestly from our prior guidance primarily
reflecting additional drilling and leasing in the Eagle Ford and Bakken
plays. We believe we are on track to achieve between 130 – 140
MMcfe/d of full-year 2009 production, excluding acquisitions and
divestitures, and we also believe that our fourth quarter volumes will improve
compared to third quarter.
Our
capital program for 2010 has not yet been determined, but the planning exercise
is underway. We have identified more projects for capital funding in
2010 than we are willing to fund at current prices. Our capital
allocation for 2010 will likely be driven by the following considerations:
relative project economics, uplift efficiency, reserve potential, maintaining
leasehold, and a desire to accelerate activity in our new plays. We
expect to provide 2010 capital and production guidance once our final budget is
approved in December. However, we are comfortable indicating at this time that,
given our liquidity position, we expect to fund a higher capital program in 2010
and to grow production and reserves next year and beyond. We expect
that a significant portion of next year's capital will be directed toward
funding our emerging play successes. The ultimate level of 2010 capital spending
and growth will be determined by available cash flows from operating
activities, access to liquidity, and proceeds from possible property
divestitures. To the extent that capital expenditures or prudent
acquisitions require cash flow in excess of available funds, we would consider
drawing on our unused capacity under our existing revolving credit
facility. In addition, we are positioned to raise additional funds in
the capital markets as deemed appropriate. We currently do not have
any stated plans to issue securities but would consider doing so under certain
circumstances, notably to fund an attractive acquisition, accelerate
follow-on development activities in our Eagle Ford and/or Bakken plays, or fund
entry into new resource plays.
Our
industry continues to operate in one of the most challenging business
environments in recent history. The credit crisis, lower natural gas
prices and a weak domestic and global economic outlook are all adversely
impacting the business environment. We work continuously with our
lenders to effectively stay abreast of market and creditor conditions to ensure
prudent and timely decisions should market conditions deteriorate
further. Additionally, during April 2009, we amended and restated
our second lien term loan, which allowed us to increase our borrowings under the
facility from $75.0 million to $100.0 million. As of November 6,
2009, the undrawn credit available to us was $160.0 million. We have
not received any indication from our lenders that draws under the credit
facility are restricted below current availability at this time, and we are
proactively communicating with them on a routine basis. During October 2009, our
borrowing base was set at $350.0 million, which is reduced from the $375.0
million set during April 2009. Despite this reduction, our liquidity
position, including cash on hand, is generally unchanged at $225.0
million. The April 2009 amendments and restatements to our credit
agreements also extended the maturities of our credit facilities to
2012. We believe these actions provide capacity and time for managing
through the current
downturn.
Our
capital expenditures are primarily in areas where we are operator and have high
working interests. As a result, we do not believe we
have significant exposure to joint interest partners who may be unable to
fund their portion of any capital program, but we are monitoring partner
situations in light of the current economic environment. We are
actively working with service companies and suppliers to mitigate costs, and we
are examining all cash costs for improved efficiency.
All
counterparties to our derivative instruments are participants in our credit
facilities, and we have not received any indication that any of these
counterparties are unable to perform their required obligations under the terms
of the derivative contracts, although we are mindful that this could change and
are staying alert for such changes. Similarly, we have not received any
indication that any of the banks participating in the existing bank facility are
incapable of performing their obligations under the terms of the credit
agreement.
With
respect to the current market environment for liquidity and access to credit,
we, through banks participating in our credit facility, have invested available
cash in interest and non-interest bearing demand deposit accounts in those
participating banks and in money market accounts and funds whose
investments are limited to United States Government Securities, securities
backed by the United States Government, or securities of United States
Government agencies. We followed this policy prior to the recent changes in
credit markets and believe this is an appropriate approach for the investment of
Company funds in the current environment.
Critical
Accounting Policies and Estimates
In our
2008 Annual Report we identified our most critical accounting policies upon
which our financial condition depends as those relating to oil and natural gas
reserves, full cost method of accounting, derivative transactions and hedging
activities, income taxes and stock-based compensation.
We assess
the impairment for oil and natural gas properties for the full cost accounting
method on a quarterly basis using a ceiling test to determine if impairment is
necessary. If the net capitalized costs of oil and natural gas properties exceed
the cost ceiling, we are subject to a ceiling test write-down to the extent of
such excess. A ceiling test write-down is a charge to earnings and cannot be
reinstated even if the cost ceiling increases at a subsequent reporting date. If
required, it would reduce earnings and impact shareholders’ equity in the period
of occurrence and result in a lower depreciation, depletion and amortization
expense in the future.
Our
ceiling test was calculated using hedge adjusted market prices of gas and oil at
September 30, 2009, which were based on a Henry Hub price of $3.30 per MMBtu and
a West Texas Intermediate oil price of $67.00 per Bbl (adjusted for basis and
quality differentials). Cash flow hedges of natural gas production in
place at September 30, 2009 increased the calculated ceiling value by
approximately $50.7 million (pre-tax). The use of these prices would
have resulted in a pre-tax write-down of $18.8 million at September 30,
2009. As allowed under the full cost accounting rules, we
re-evaluated our ceiling test on October 29, 2009 using the market price for
Henry Hub of $4.59 per MMBtu and West Texas Intermediate of $76.25 per Bbl
(adjusted for basis and quality differentials). At these prices, cash
flow hedges of natural gas production in place increased the calculated ceiling
value by approximately $29.3 million (pre-tax). Utilizing these
prices, the calculated ceiling amount exceeded our net capitalized cost of oil
and gas properties. As a result, no write-down was recorded for the
quarter ended September 30, 2009. Due to the volatility of commodity
prices, should natural gas and oil prices decline in the future, we experience a
significant downward adjustment to our estimated proved
reserves, and/or our commodity hedges settle and are not
replaced, it is possible that another write-down of our oil and gas properties
could occur.
Our
ceiling test was calculated using hedge adjusted market prices of gas and oil at
March 31 and June 30, 2009, which were based on a Henry Hub price of $3.63 per
MMBtu and $3.89 per MMBtu, respectively, and a West Texas Intermediate oil price
of $46.00 per Bbl and $66.25 per Bbl (adjusted for basis and quality
differentials), respectively, compared to prices of $5.71 per MMBtu and $41.00
per Bbl at December 31, 2008. Cash flow hedges of natural gas
production in place at March 31 and June 30, 2009 increased the calculated
ceiling value by approximately $79.7 million (pre-tax) and $55.3 million
(pre-tax), respectively. Based upon these analyses, we recorded a
non-cash, pre-tax write-down of $379.5 million at March 31, 2009 and we did not
record a non-cash, pre-tax write-down at June 30, 2009.
We have
entered into financial fixed price swaps with prices ranging from $5.54 per
MMBtu to $8.58 per MMBtu covering approximately 4.8 million MMBtu, or 49%, of
our 2009 production, 4.6 million MMBtu, or 11%, of our 2010 production, and 1.8
million MMBtu, or 5%, of our 2011 production. We have also entered
into costless collar transactions covering approximately 0.5 million MMBtu of
our 2009 production with an average floor price of $8.00 per MMBtu and an
average ceiling price of $10.05 per MMBtu and approximately 1.8 million MMBtu of
our 2010 production and approximately 3.7 million MMBtu of our 2011 production
with an average floor price of $5.75 per MMBtu and an average ceiling price of
$7.55 per MMBtu. Approximately 82% of total hedged transactions
represents hedged prices of commodities at the PG&E Citygate and Houston
Ship Channel. Our current cash flow hedge positions are with
counterparties who are lenders in our credit facilities. This
arrangement eliminates the need for independent collateral postings with respect
to any margin obligation resulting from a negative change in fair market value
of the derivative contracts in connection with our hedge related credit
obligations. As of September 30, 2009, we made no deposits for
collateral. Our derivative instrument assets and liabilities relate
to commodity hedges that represent the difference between hedged prices and
market prices on hedged volumes of the commodities as of September 30,
2009. We evaluated non-performance risk using current credit
default swap values and default probabilities for each counterparty and recorded
a downward adjustment to the fair value of our derivative assets in the amount
of $0.03 million at September 30, 2009.
We
utilize counterparty and third party broker quotes to determine the
valuation of our derivative instruments. Fair values derived from
counterparties and brokers are further verified using the settled price as of
September 30, 2009 for NYMEX futures contracts and exchange traded contracts for
each derivative settlement location. We have used this valuation
technique since the adoption of the authoritative guidance for fair value
measurements on January 1, 2008, and we have made no changes or adjustments to
our technique since then. We mark to market on a quarterly
basis.
Recent
Accounting Developments
For a
discussion of recent accounting developments, see Note 2 to the Consolidated
Financial Statements in Part I. Item 1. Financial Statements of this Form
10-Q.
Results
of Operations
Revenues. Our revenues are derived
from the sale of our oil and natural gas production, which includes the effects
of qualifying hedge contracts. Our revenues may vary significantly
from period to period as a result of changes in commodity prices or volumes of
production sold. Total revenue, including the effects of hedging, for
the first nine months of 2009 was $217.5 million, which is a decrease of $195.4
million, or 47%, from the nine months ended September 30,
2008. Natural gas sales, excluding the effects of hedging, decreased
by $251.1 million. Of this decrease, $237.9 million is attributable
to a 63% decrease in natural gas prices and $13.2 million is due to a 3%
decrease in production volumes. Oil sales decreased by $33.8 million
of which $20.4 million was attributable to a 56% decrease in the price of oil
and $13.4 million was attributable to decreased
production. Approximately 93% of our revenue was attributable to
natural gas sales on total volumes of 38.8 Bcfe in the first nine months of
2009.
The
following table presents information regarding our revenues (including the
effects of hedging) and production volumes:
|
|
Three
Months Ended
September
30,
|
|
|
Nine
Months Ended
September
30,
|
|
|
|
2009
|
|
|
2008
|
|
|
%
Change
Increase/
(Decrease)
|
|
|
2009
|
|
|
2008
|
|
|
%
Change
Increase/
(Decrease)
|
|
|
|
(In
thousands, except percentages and per unit amounts)
|
|
Natural
gas sales
|
|
$ |
60,049 |
|
|
$ |
114,308 |
|
|
|
(47 |
%) |
|
$ |
201,360 |
|
|
$ |
362,894 |
|
|
|
(45 |
%) |
Oil
sales
|
|
|
4,435 |
|
|
|
15,728 |
|
|
|
(72 |
%) |
|
|
16,116 |
|
|
|
49,941 |
|
|
|
(68 |
%) |
Total
revenues
|
|
$ |
64,484 |
|
|
$ |
130,036 |
|
|
|
(50 |
%) |
|
$ |
217,476 |
|
|
$ |
412,835 |
|
|
|
(47 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Production:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gas
(Bcf)
|
|
|
10.7 |
|
|
|
12.1 |
|
|
|
(12 |
%) |
|
|
36.9 |
|
|
|
38.1 |
|
|
|
(3 |
%) |
Oil
(MBbls)
|
|
|
69.0 |
|
|
|
130.3 |
|
|
|
(47 |
%) |
|
|
318.8 |
|
|
|
436.2 |
|
|
|
(27 |
%) |
Total
Equivalents (Bcfe)
|
|
|
11.1 |
|
|
|
12.9 |
|
|
|
(14 |
%) |
|
|
38.8 |
|
|
|
40.8 |
|
|
|
(5 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
per unit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Avg.
Gas Price per Mcf
|
|
$ |
5.61 |
|
|
$ |
9.47 |
|
|
|
(41 |
%) |
|
$ |
5.46 |
|
|
$ |
9.51 |
|
|
|
(43 |
%) |
Avg.
Gas Price per Mcf excluding hedges
|
|
$ |
3.47 |
|
|
$ |
10.47 |
|
|
|
(67 |
%) |
|
$ |
3.83 |
|
|
$ |
10.28 |
|
|
|
(63 |
%) |
Avg.
Oil Price per Bbl
|
|
$ |
64.28 |
|
|
$ |
120.66 |
|
|
|
(47 |
%) |
|
$ |
50.55 |
|
|
$ |
114.48 |
|
|
|
(56 |
%) |
Avg.
Revenue per Mcfe including hedges
|
|
$ |
5.81 |
|
|
$ |
10.08 |
|
|
|
(42 |
%) |
|
$ |
5.61 |
|
|
$ |
10.12 |
|
|
|
(45 |
%) |
Natural
Gas. For the three
months ended September 30, 2009, natural gas revenue decreased by $54.3 million,
including the realized impact of derivative instruments, from the comparable
period in 2008, to $60.0 million from $114.3 million. This decrease is primarily
due to the significant decline in commodity prices. The average gas
price, including the effects of hedging, decreased by $3.86 per Mcf from $9.47
per Mcf for the three months ended September 30, 2008 to $5.61 per Mcf for the
comparable period in 2009. The effect of gas hedging activities on
natural gas revenue for the three months ended September 30, 2009 was a gain of
$22.9 million as compared to a loss of $12.1 million for the three months ended
September 30, 2008.
For the
nine months ended September 30, 2009, natural gas revenue decreased by 45%, or
$161.5 million, including the realized impact of derivative instruments, from
the same period in 2008 to $201.4 million. This decrease was due to a
lower average gas price. The average gas price, including the effects
of hedging, decreased by 43%, or $4.05 per Mcf, from $9.51 per Mcf for the nine
months ended September 30, 2008 to $5.46 per Mcf for the same period in
2009. The effect of gas hedging activities on natural gas revenue for
the nine months ended September 30, 2009 was a gain of $60.1 million as compared
to a loss of $29.4 million for the nine months ended September 30,
2008.
Crude
Oil. For the three
months ended September 30, 2009, oil revenue was $4.4 million as compared to
$15.7 million for the same period in 2008. This decrease is
attributable to the average realized price decrease of $56.38 per Bbl from
$120.66 per Bbl for the three months ended September 30, 2008 to $64.28 per Bbl
for the three months ended September 30, 2009. The decrease in
oil production volumes was primarily due to a decline in well performance at our
Sabine Lake property.
For the
nine months ended September 30, 2009, oil revenue decreased by 68%, or $33.8
million, compared to the same period in 2008 to $16.1 million. This
decrease is primarily attributable to lower average oil prices of $50.55 per Bbl
for the nine months ended September 30, 2009 compared to $114.48 per Bbl for the
same period in 2008. Oil volumes decreased overall by 27% for the
nine months ended September 30, 2009 compared to the same period in 2008 due to
decreases in production in Sabine Lake and the Gulf of Mexico region compared to
the same period in 2008.
Operating
Expenses
The
following table presents information regarding our operating
expenses:
|
|
Three
Months Ended
September
30,
|
|
|
Nine
Months Ended
September
30,
|
|
|
|
2009
|
|
|
2008
|
|
|
%
Change
Increase/
(Decrease)
|
|
|
2009
|
|
|
2008
|
|
|
%
Change
Increase/
(Decrease)
|
|
|
|
(In
thousands, except percentages and per unit amounts)
|
|
Lease
operating expense
|
|
$ |
13,312 |
|
|
$ |
12,857 |
|
|
|
4 |
% |
|
$ |
47,921 |
|
|
$ |
40,445 |
|
|
|
18 |
% |
Production
taxes
|
|
|
1,109 |
|
|
|
2,336 |
|
|
|
(53 |
%) |
|
|
4,183 |
|
|
|
11,528 |
|
|
|
(64 |
%) |
Depreciation,
depletion and amortization
|
|
|
23,029 |
|
|
|
46,951 |
|
|
|
(51 |
%) |
|
|
95,928 |
|
|
|
150,103 |
|
|
|
(36 |
%) |
Impairment
of oil and gas properties
|
|
|
- |
|
|
|
205,659 |
|
|
|
(100 |
%) |
|
|
379,462 |
|
|
|
205,659 |
|
|
|
85 |
% |
General
and administrative costs
|
|
|
10,414 |
|
|
|
15,419 |
|
|
|
(32 |
%) |
|
|
32,358 |
|
|
|
41,042 |
|
|
|
(21 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
per unit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Avg.
lease operating expense per Mcfe
|
|
$ |
1.20 |
|
|
$ |
1.00 |
|
|
|
20 |
% |
|
$ |
1.24 |
|
|
$ |
0.99 |
|
|
|
25 |
% |
Avg.
production taxes per Mcfe
|
|
$ |
0.10 |
|
|
$ |
0.18 |
|
|
|
(44 |
%) |
|
$ |
0.11 |
|
|
$ |
0.28 |
|
|
|
(61 |
%) |
Avg.
DD&A per Mcfe
|
|
$ |
2.07 |
|
|
$ |
3.64 |
|
|
|
(43 |
%) |
|
$ |
2.47 |
|
|
$ |
3.68 |
|
|
|
(33 |
%) |
Avg.
G&A per Mcfe
|
|
$ |
0.94 |
|
|
$ |
1.19 |
|
|
|
(21 |
%) |
|
$ |
0.83 |
|
|
$ |
1.01 |
|
|
|
(18 |
%) |
Lease Operating
Expense. Lease operating expense increased $0.5 million for
the three months ended September 30, 2009 as compared to the three months ended
September 30, 2008. The overall increase is due primarily to a
$1.3 million increase in direct lease operating expense, a $0.3 million increase
in insurance expense, and a $0.2 million increase in ad valorem tax expense
partially offset by a $1.3 million decrease in workover expenses. The
increase in direct lease operating expense is due to increased operating
expenses from newly acquired properties from the Petroflow and Constellation
acquisitions, which occurred during the second and fourth quarters of 2008,
respectively, as well as non-operated lease operating expense. The
increase in insurance expense is primarily due to increased premiums for new
policies and the increase in ad valorem tax expense is primarily due to higher
property value assessments in California. The decrease in workover
expenses is due primarily to the September 2009 receipt of insurance proceeds
related to Hurricane Ike, which occurred in September 2008, and to an overall
decrease in workover activity.
Lease
operating expense increased $7.5 million for the nine months ended September 30,
2009 as compared to the nine months ended September 30, 2008. The
overall increase is due to a $6.5 million increase in direct lease operating
expense primarily related to acquisitions and non-operated lease operating
expense and a $2.9 million increase in ad valorem tax expense partially offset
by a $0.3 million decrease in insurance expense and a $1.6 million decrease in
workover expense primarily due to the receipt of insurance proceeds related to
Hurrican Ike. The higher costs are related to the increase in the number of
operating wells, particularly in the Rockies and South Texas due to acquisitions
and the Lobo drilling program, and the higher ad valorem taxes are due to higher
property value assessments in California.
Production
Taxes. Production taxes decreased $1.2 million for the three
months ended September 30, 2009 as compared to the three months ended September
30, 2008 primarily due to the 67% decrease in realized natural gas and oil
prices, excluding hedges, and the 14% decrease in production.
Production
taxes decreased $7.3 million for the nine months ended September 30, 2009 as
compared to the nine months ended September 30, 2008 primarily due to the 63%
decrease in realized natural gas and oil prices, excluding hedges, and the 5%
decrease in production.
Depreciation, Depletion and
Amortization. Depreciation, depletion and amortization
(“DD&A”) expense decreased $23.9 million for the three months ended
September 30, 2009 as compared to the three months ended September 30,
2008. The decrease is due to the full cost ceiling test impairment
charges recognized during the second half of 2008 and during the first quarter
of 2009, which decreased the full cost pool and thus the DD&A
rate. The DD&A rate for the third quarter of 2009 was $2.07 per
Mcfe while the rate for the third quarter of 2008 was $3.64 per
Mcfe. The decrease in the rate was due to a lower full cost asset
base over a comparable reserve base in the third quarter of 2009 as compared to
the same period in 2008.
DD&A
expense decreased $54.2 million for the nine months ended September 30, 2009 as
compared to the nine months ended September 30, 2008. The decrease is
due to the full cost ceiling test impairment charges recognized during the
second half of 2008 and during the first quarter of 2009 which decreased the
full cost pool and thus the DD&A rate. The DD&A rate for the
nine months ended September 30, 2009 was $2.47 per Mcfe while the rate for the
same period of 2008 was $3.68 per Mcfe. The decrease in the rate was
due to a lower full cost asset base over a comparable reserve base in the first
three quarters of 2009 as compared to the same period in 2008.
Impairment of Oil and Gas
Properties. The table below sets forth relevant assumptions
utilized in our quarterly ceiling test computations for the respective periods
noted.
|
|
2009
|
|
|
|
Total
Impairment
|
|
|
September 30(1)
|
|
|
June
30
|
|
|
March
31
|
|
Henry
Hub natural gas price (per MMBtu)(2)
|
|
|
|
|
$ |
4.59 |
|
|
$ |
3.89 |
|
|
$ |
3.63 |
|
West
Texas Intermediate oil price (per Bbl)(2)
|
|
|
|
|
$ |
76.25 |
|
|
$ |
66.25 |
|
|
$ |
46.00 |
|
Increase
(decrease) of calculated ceiling value due to cash flow hedges (pre-tax)
(in thousands)
|
|
|
|
|
$ |
29,334 |
|
|
$ |
55,299 |
|
|
$ |
79,664 |
|
Impairment
recorded (pre-tax) (in thousands)
|
|
$ |
379,462 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
379,462 |
|
|
|
2008
|
|
|
|
Total
Impairment
|
|
|
September
30
|
|
|
June
30
|
|
|
March
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Henry
Hub natural gas price (per MMBtu)(2)
|
|
|
|
|
|
$ |
7.12 |
|
|
$ |
13.10 |
|
|
$ |
9.37 |
|
West
Texas Intermediate oil price (per Bbl)(2)
|
|
|
|
|
|
$ |
96.37 |
|
|
$ |
140.22 |
|
|
$ |
105.63 |
|
Increase
(decrease) of calculated ceiling value due to cash flow hedges (pre-tax)
(in thousands)
|
|
|
|
|
|
$ |
37,440 |
|
|
$ |
(141,123 |
) |
|
$ |
(60,043 |
) |
Impairment
recorded (pre-tax) (in thousands)
|
|
$ |
205,659 |
|
|
$ |
205,659 |
|
|
$ |
- |
|
|
$ |
- |
|
|
(1)
|
Our
ceiling test was calculated using hedge adjusted market prices of gas and
oil at September 30, 2009, which were based on a Henry Hub price of $3.30
per MMBtu and a West Texas Intermediate oil price of $67.00 per Bbl
(adjusted for basis and quality differentials). Cash flow
hedges of natural gas production in place at September 30, 2009 increased
the calculated ceiling value by approximately $50.7 million
(pre-tax). The use of these prices would have resulted in a
pre-tax write-down of $18.8 million at September 30, 2009. As
allowed under the full cost accounting rules, we re-evaluated our ceiling
test on October 29, 2009 using the market price for Henry Hub of $4.59 per
MMBtu and West Texas Intermediate of $76.25 per Bbl (adjusted for basis
and quality differentials). At these prices, cash flow hedges
of natural gas production in place increased the calculated ceiling value
by approximately $29.3 million (pre-tax). Utilizing these
prices, the calculated ceiling amount exceeded our net capitalized cost of
oil and gas properties. As a result, no write-down was recorded
for the quarter ended September 30,
2009.
|
|
(2)
|
Adjusted
for basis and quality
differentials.
|
Due to
the volatility of commodity prices, should natural gas and oil prices decline in
the future, we experience a significant downward adjustment to our estimated
proved reserves, and/or our commodity hedges settle and are not
replaced, it is possible that another write-down of our oil and gas properties
could occur.
General and Administrative
Costs. General and administrative costs decreased by $5.0
million for the three months ended September 30, 2009 as compared to the three
months ended September 30, 2008. This decrease is primarily due to
the decrease of $5.7 million in legal expenses incurred during the third quarter
of 2008 associated with the Calpine litigation, which was settled during the
fourth quarter of 2008, the $0.6 million decrease in contract services, and the
decrease of $0.5 million in bonus accrual. These decreases were
partially offset by an increase in salaries, wages and benefits expense of $1.4
million due to an increase in headcount of 13 employees for the third quarter of
2009 compared to the third quarter of 2008 as well as an increase in option and
stock expense of $0.6 million primarily due to the severance agreement with the
former controller.
General
and administrative costs decreased by $8.7 million for the nine months ended
September 30, 2009 as compared to the nine months ended September 30, 2008. The
decrease is primarily due to the decrease of $11.7 million in legal fees
associated with the Calpine litigation, which was settled during the fourth
quarter of 2008, and a $1.2 million decrease in the bonus accrual offset by $3.3
million of higher payroll and benefit costs relating to the increase in employee
headcount and $1.1 million of increased office rent expense for additional
office space in Houston.
Total
Other Expense
Total
other expense includes interest expense, interest income and other
income/expense, net which increased $2.7 million for the three months ended
September 30, 2009 compared to the three months ended September 30,
2008. The interest income is earned on cash balances, which were
lower during the quarter ended September 30, 2009 compared to September 30,
2008. Interest expense was higher for the quarter ended September 30,
2009 compared to the same period in 2008 due primarily to an increase in
interest rates related to the debt refinancing. The weighted average interest
rate for the third quarter of 2009 was 4.99% compared to 4.14% for the same
period in 2008.
For the
nine months ended September 30, 2009, total other expense increased by $4.0
million as compared to the nine months ended September 30, 2008 primarily as a
result of reduced interest income earned due to lower cash balances for the
period ended September 30, 2009 compared to the same period in 2008 and
increased interest expense due to increased interest rates as a result of the
debt refinancing during the period. The year to date weighted average
interest rate for the period ended September 30, 2009 was 4.30% compared to
4.10% for the same period in 2008.
Provision
for Income Taxes
The
effective tax rate for the three and nine months ended September 30, 2009 was
40.2% and 36.8%, respectively. The effective tax rate for the three and
nine months ended September 30, 2008 was 37.2% and 38.6%, respectively. The
provision for income taxes differs from the tax computed at the federal
statutory income tax rate primarily due to state income taxes, tax credits, a
shortfall related to stock-based compensation, and other permanent
differences. The income tax benefit for the nine months ended
September 30, 2009 includes a $1.0 million downward adjustment recorded in the
three months ended March 31, 2009 related to 2008 state taxes.
We
provide for deferred income taxes on the difference between the tax basis of an
asset or liability and its carrying amount in our financial statements in
accordance with authoritative guidance for accounting for income
taxes. This difference will result in taxable income or deductions in
future years when the reported amount of the asset or liability is recovered or
settled, respectively. Considerable judgment is required in determining when
these events may occur and whether recovery of an asset is more likely than
not. Deferred tax assets are reduced by a valuation allowance when,
in the opinion of management, it is more likely than not that some portion or
all of the deferred tax assets will not be realized. At September 30,
2009, we have a deferred tax asset of approximately $176.0 million resulting
primarily from the difference between the book basis and tax basis of our oil
and natural gas properties. We believe that it is more likely than
not that this deferred tax asset will be realized through future taxable income
generated by the production of our oil and natural gas properties.
Liquidity
and Capital Resources
Our
primary source of liquidity and capital is our operating cash flow. We also
maintain a revolving line of credit, which can be accessed as needed to
supplement operating cash flow. Additionally, we have an effective
universal shelf registration statement on file with the SEC, which positions us
to raise additional funds in the capital markets as deemed
appropriate. However, we currently do not have any stated plans to
issue securities.
Operating Cash
Flow. Our cash flows depend on many factors, including the
price of oil and natural gas and the success of our development and exploration
activities as well as future acquisitions. We have the discretion to manage our
exposure to commodity price fluctuations by executing derivative transactions to
hedge the change in prices of a portion of our production, thereby mitigating
our exposure to price declines, but these transactions will also limit our
earnings potential in periods of rising natural gas prices. The effects of these
derivative transactions on our natural gas sales are discussed above under
“Results of Operations – Natural Gas.” Our current hedge positions
are expected to increase revenue by $14.7 million during the fourth quarter of
2009. The majority of our capital expenditures are discretionary and
could be curtailed if our cash flows decline from expected
levels. Current economic conditions and lower commodity prices could
adversely affect our cash flow and liquidity. We will continue to monitor our
cash flow and liquidity and if appropriate, we may consider accessing capital
markets or adjusting our capital expenditure program.
Senior Secured Revolving Line of
Credit. On April 9, 2009, we entered into the Restated
Revolver with BNP Paribas, as Administrative Agent, and the other lenders
identified therein providing a senior secured revolving line of credit in the
amount of up to $600.0 million, replacing the prior revolving credit agreement,
and extending its term until July 1, 2012. Availability under the Restated
Revolver is restricted to the borrowing base, which is subject to review and
adjustment on a semi-annual basis and other interim adjustments, including
adjustments based on our hedging arrangements. Our borrowing base is
dependent on a number of factors including our level of reserves as well as the
pricing outlook at the time of the redetermination. A reduction in capital
spending could result in a reduced level of reserves thus causing a reduction in
the borrowing base. The borrowing base under the Restated Revolver was set at
$375.0 million as of September 30, 2009. We completed our borrowing base review
during October 2009 and the borrowing base under the Restated Revolver was
reduced from $375.0 million to $350.0 million. Amounts outstanding
under the Restated Revolver bear interest, as amended, at specified margins over
London Interbank Offered Rate (LIBOR) of 2.25% to 3.00%. Borrowings under the
Restated Revolver are collateralized by perfected first priority liens and
security interests on substantially all of our assets, including a mortgage lien
on oil and natural gas properties having at least 80% of the pre-tax SEC PV-10
reserve value, a guaranty by all of our domestic subsidiaries, and a pledge of
100% of the membership interests of domestic subsidiaries. These collateralized
amounts under the mortgages are subject to semi-annual reviews based on updated
reserve information. We are subject to the financial covenants of a minimum
current ratio of not less than 1.0 to 1.0 as of the end of each fiscal quarter
and a maximum leverage ratio of not greater than 3.5 to 1.0, calculated at the
end of each fiscal quarter for the four fiscal quarters then ended, measured
quarterly with the pro forma effect of acquisitions and
divestitures. At September 30, 2009, our current ratio was 5.7 and
the leverage ratio was 1.6. In addition, we are subject to covenants
limiting dividends and other restricted payments, transactions with affiliates,
incurrence of debt, changes of control, asset sales, and liens on properties. We
were in compliance with all covenants at September 30, 2009. On
October 22, 2009, we entered into the First Amendment to the Restated Revolver
that deletes the “Reference Bank Cost of Funds Rate” option in the definition of
Alternate Base Rate, allows the Company to make investments in US government
securities, which mature in 15 months rather than one year, provides for certain
other modifications to permitted investments, and provides for the release of
the Lenders’ lien on a certain deposit account. As of November 6,
2009, we have $190.0 million outstanding, which is due and payable on July 1,
2012, with $160.0 million available for borrowing under the Restated
Revolver.
Second Lien Term Loan.
On April 9, 2009, we also entered into Restated Term Loan
with BNP Paribas, as Administrative Agent, and other lenders identified therein
replacing the prior Term Loan extending its term until October 2, 2012.
Borrowings under the Restated Term Loan were initially set at $75.0 million and
bear interest at LIBOR plus 8.5% with a LIBOR floor of 3.5%. The Restated Term
Loan had an option to increase fixed and floating rate borrowings by up to $25.0
million to $100.0 million prior to May 9, 2009. We exercised this option on
April 21, 2009 and the increased borrowings consisted of $5.0 million of
floating rate borrowings and $20.0 million of fixed rate borrowings at 13.75%.
The loan is collateralized by second priority liens on substantially all of our
assets. We are subject to the financial covenants of a minimum asset coverage
ratio of not less than 1.5 to 1.0 and a maximum leverage ratio of not more than
4.0 to 1.0, calculated at the end of each fiscal quarter for the four fiscal
quarters then ended, measured quarterly with the pro forma effect of
acquisitions and divestitures. At September 30, 2009, our asset
coverage ratio was 3.0 and the leverage ratio was 1.6. In addition,
we are subject to covenants limiting dividends and other restricted payments,
transactions with affiliates, incurrence of debt, changes of control, asset
sales, and liens on properties. We were in compliance with all covenants at
September 30, 2009. As of September 30, 2009, we had $80.0 million of
variable rate borrowings and $20.0 million of fixed rate borrowings outstanding
under the Restated Term Loan. At September 30, 2009, the principal
balance of the Restated Term Loan was due and payable on October 2,
2012. On October 22, 2009, we also entered into the First Amendment
to the Restated Term Loan that also deletes the “Reference Bank Cost of Funds
Rate” option in the definition of Alternate Base Rate, allows the Company to
make investments in US government securities, which mature in 15 months rather
than one year, provides for certain other modifications to permitted
investments, and provides for the release of the Lenders’ lien on a certain
deposit account.
Our
current liquidity position is supported by our
Restated Revolver. Our ability to raise capital depends on the
current state of the capital markets, which are subject to general economic and
industry conditions. We will continue to monitor the financial markets as the
availability and price of capital in these markets could negatively affect our
liquidity position.
Cash
Flows
The
following table presents information regarding the change in our cash
flow:
|
|
Nine
Months Ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In
thousands)
|
|
Cash
flows provided by operating activities
|
|
$ |
122,924 |
|
|
$ |
326,301 |
|
Cash
flows used in investing activities
|
|
|
(82,008 |
) |
|
|
(197,172 |
) |
Cash
flows (used in) provided by financing activities
|
|
|
(18,073 |
) |
|
|
2,838 |
|
Net
increase in cash and cash equivalents
|
|
$ |
22,843 |
|
|
$ |
131,967 |
|
Operating Activities. Key
drivers of net cash provided by operating activities are commodity prices,
production volumes and costs and expenses, which primarily include operating
costs, taxes other than income taxes, transportation and general and
administrative expenses. Net cash provided by operating activities
continued to be a primary source of liquidity and capital used to finance our
capital program.
Cash
flows provided by operating activities decreased by $203.4 million for the nine
months ended September 30, 2009 as compared to the same period for
2008. The decrease in 2009 primarily resulted from lower realized
average natural gas and oil prices. In addition, at September 30,
2009, we had a working capital surplus of $56.4 million. This surplus
was primarily attributable to the increase in derivative instruments and a
decrease in accrued liabilities and royalties payable.
Investing
Activities. The primary driver of cash used in investing
activities is capital spending.
Cash
flows used in investing activities decreased by $115.2 million for the nine
months ended September 30, 2009 as compared to the same period for
2008. During the nine months ended September 30, 2009, we
participated in the drilling of 36 gross wells as compared to the drilling of
112 gross wells during the same period in 2008.
Financing
Activities. The primary drivers of cash (used in) provided by
financing activities are borrowings and repayments on the revolving credit
facility and equity transactions associated with the exercise of stock options
and vesting of restricted stock.
Cash
flows (used in) provided by financing activities decreased by $20.9 million as
compared to the same period for 2008. The net decrease is
primarily related to $40.0 million of payments on the revolving credit facility
in the second and third quarters of 2009, $5.9 million of loan fees paid in
connection with the Restated Revolver and Restated Term Loan during the second
quarter of 2009, offset by $28.4 million of borrowings on the revolving credit
facility during the first half of 2009.
Capital
Expenditures
Our
capital expenditures for the nine months ended September 30, 2009 decreased by
$99.0 million to $85.9 million compared to the same period in
2008. During the nine months ended September 30, 2009, we
participated in the drilling of 36 gross wells with the majority of these being
in the Lobo region. Our positive operating cash flow and cash on hand
are sufficient to fund planned capital expenditures for 2009, which are
projected to be $125.0 million. We have the discretion to adjust
capital spending plans throughout the remainder of the year in response to
market conditions and the availability of proceeds from possible
divestitures.
Commodity
Price Risk, Interest Rate Risk and Related Hedging Activities
The
energy markets have historically been very volatile and there can be no
assurance that oil and natural gas prices will not be subject to wide
fluctuations in the future. To mitigate our exposure to changes in commodity
prices, management hedges oil and natural gas prices from time to time primarily
through the use of certain derivative instruments including fixed price swaps,
basis swaps, costless collars and put options. Although not risk free, we
believe these activities will reduce our exposure to commodity price
fluctuations and thereby achieve a more predictable cash flow. Consistent with
this policy, we have entered into a series of natural gas fixed-price swaps and
costless collars, which are intended to establish a fixed price or an average
floor and ceiling price for 4 to 11% of our expected natural gas production
through 2011. The fixed-price swap agreements we have entered into require
payments to (or receipts from) counterparties based on the differential between
a fixed price and a variable price for a notional quantity of natural gas
without the exchange of underlying volumes. The notional amounts of these
financial instruments were based on expected proved production from existing
wells at inception of the hedge instruments.
As of
September 30, 2009, borrowings under our Restated Revolver and Restated Term
Loan mature on July 1, 2012 and October 2, 2012, respectively, and bear interest
at a LIBOR-based rate. This exposes us to risk of earnings loss due to increases
in market interest rates. To mitigate this exposure, as of September 30, 2009,
we have entered into a series of interest rate swap agreements through December
2010. If we determine the risk may become substantial and the costs
are not prohibitive, we may enter into additional interest rate swap agreements
in the future.
The
following table sets forth the results of commodity and interest rate swap
hedging transaction settlements for the period ended September 30,
2009:
|
|
Three
Months Ended
September
30,
|
|
|
Nine
Months Ended
September
30,
|
|
Natural
Gas
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Quantity
settled (MMBtu)
|
|
|
5,256,972 |
|
|
|
6,706,092 |
|
|
|
15,599,493 |
|
|
|
19,498,524 |
|
Increase
(decrease) in natural gas sales revenue (In thousands)
|
|
$ |
22,918 |
|
|
$ |
(12,125 |
) |
|
$ |
60,077 |
|
|
$ |
(29,420 |
) |
Interest
Rate Swaps
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
(decrease) in interest expense (In thousands)
|
|
$ |
- |
|
|
$ |
(372 |
) |
|
$ |
1,034 |
|
|
$ |
(832 |
) |
In
accordance with the authoritative guidance for derivatives, all derivative
instruments, not designated as a normal purchase sale, are recorded on the
balance sheet at fair market value and changes in the fair market value of the
derivatives are recorded each period in current earnings or other comprehensive
income, depending on whether a derivative is designated as a hedge transaction,
and depending on the type of hedge transaction. Our derivative contracts are
cash flow hedge transactions in which we are hedging the variability of cash
flow related to a forecasted transaction. Changes in the fair market value of
these derivative instruments are reported in other comprehensive income and
reclassified as earnings in the period(s) in which earnings are impacted by the
variability of the cash flow of the hedged item. We assess the effectiveness of
hedging transactions on a quarterly basis, consistent with documented risk
management strategy for the particular hedging relationship. Changes in the fair
market value of the ineffective portion of cash flow hedges, if any, are
included in other income (expense).
Our
current commodity and interest rate hedge positions are with counterparties that
are participants in our credit facilities. This allows us to secure any margin
obligation resulting from a negative change in the fair market value of the
derivative contracts in connection with our credit obligations and eliminate the
need for independent collateral postings. As of September 30, 2009,
we had no deposits for collateral.
Capital
Requirements
The
historical capital expenditures summary table is included in Item 1. Business in
our 2008 Annual Report and is incorporated herein by reference.
Our
capital expenditures for the period ended September 30, 2009 were $85.9 million,
and we have plans to carefully execute an organic capital program in 2009 that
can be funded from internally generated cash flows. We also have the
discretion to access capital markets, if appropriate, and use available cash,
borrowings under our Restated Revolver, and proceeds from divestitures to fund
capital expenditures, including acquisitions, that make sense for the
Company. However, our main priority for the foreseeable future is to
preserve liquidity and maximize the financial position of the
Company.
Commitments
and Contingencies
As is
common within the industry, we have entered into various commitments and
operating agreements related to the exploration and development of and
production from proved oil and natural gas properties. It is management’s
belief that such commitments will be met without a material adverse effect on
our financial position, results of operations or cash flows.
We are
party to various litigation matters and administrative claims arising out of the
normal course of business. Although the ultimate outcome of each of these
matters cannot be absolutely determined, and the liability the Company may
ultimately incur with respect to any one of these matters in the event of a
negative outcome may be in excess of amounts currently accrued with respect to
such matters, management does not believe any such matters will have a material
adverse effect on the Company’s financial position, results of operations or
cash flows.
Item 3. Quantitative and Qualitative Disclosures About
Market Risk
We are
currently exposed to market risk primarily related to adverse changes in oil and
natural gas prices and interest rates. We use derivative instruments to manage
our commodity price risk caused by fluctuating prices and our interest rate risk
caused by fluctuating interest rates. We do not enter into derivative
instruments for trading purposes. For information regarding our exposure to
certain market risks, see Item 7A. “Quantitative and Qualitative Disclosure
About Market Risk” in our 2008 Annual Report and Note 4 included in Part I. Item
1. Financial Statements of this Form 10-Q.
At
September 30, 2009, we had open natural gas derivative hedges in an asset
position with a fair value of $19.2 million. A 10 percent increase in
natural gas prices would reduce the fair value by approximately $8.3 million,
while a 10 percent decrease in natural gas prices would increase the fair value
by approximately $8.1 million. The effects of these derivative
transactions on our natural gas sales are discussed above under “Results of
Operations – Natural Gas”. Additionally, at September 30, 2009, we
had open interest rate swap hedges in a liability position of $0.6
million. A 10 percent increase in interest rates would increase the
fair value by approximately $0.09 million, while a 10 percent decrease in
interest rates would decrease the fair value by approximately $0.09
million. These fair value changes assume volatility based on
prevailing market parameters at September 30, 2009. In addition, the
majority of our capital expenditures is discretionary and could be curtailed if
our cash flows decline from expected levels.
Our
current cash flow hedge positions are with counterparties who are lenders in our
credit facilities. Based upon communications with these
counterparties, the obligations under these transactions are expected to
continue to be met. We evaluated non-performance risk using current credit
default swap values and default probabilities for each counterparty and recorded
a downward adjustment to the fair value of our derivative assets in the amount
of $0.03 million at September 30, 2009. We currently know of no
circumstances that would limit access to our credit facility or require a change
in our debt or hedging structure.
Item 4. Controls and Procedures
(a) Under
the supervision and with the participation of our management, including our
Chief Executive Officer and Chief Financial Officer, we conducted an evaluation
of the effectiveness of the design and operation of our disclosure controls and
procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended (“Exchange Act”), as of September 30,
2009. Based on that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that, as of September 30, 2009, our disclosure
controls and procedures were effective in providing reasonable assurance that
information required to be disclosed by us in the reports filed or submitted by
us under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in the SEC’s rules and forms, and that such
information is accumulated and communicated to the Company’s management,
including the Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required
disclosure.
Other
than the remediation measure described below under “Management’s Remediation
Efforts” no change in our internal control over financial reporting (as defined
in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the
fiscal quarter ended September 30, 2009 that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
Management’s
Remediation Efforts.
In our Quarterly Report on Form 10-Q for the period ended June 30, 2009,
management concluded that the Company did not maintain effective controls over
the monthly calculation and review of the DD&A expense calculation as of
June 30, 2009, which constituted a material weakness. Specifically, effective
controls did not exist to ensure that the proper inputs were used in the
calculation.
During
the third quarter of 2009, management has enhanced the controls over its
DD&A expense calculation process to ensure that the proper inputs are used
in the calculation. Specifically, management has performed a more comprehensive
monthly review of the calculation, including a month to month comparison of
variances in financial components of the calculation and quarterly verification
by operations personnel that reserve information and associated costs are
correct and properly included in the calculation. The enhanced
controls have enabled management to ensure that the DD&A expense calculation
is performed accurately. These enhanced controls were in place and
operating effectively as of September 30, 2009.
(b) Other
than as noted above, there were no changes in our internal control over
financial reporting that occurred during the most recent fiscal quarter that
have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
PART II. Other Information
Item 1. Legal Proceedings
We are
party to various oil and natural gas litigation matters arising out of the
ordinary course of business as well as administrative claims related to
employment issues. While the outcome of these proceedings cannot be
predicted with certainty, we do not expect these matters to have a material
adverse effect on the consolidated financial statements.
As of the
date of this filing, there have been no material changes in our risk factors
from those previously disclosed in Item 1A of our 2008 Annual Report, except as
set forth below.
Certain
federal income tax deductions currently available with respect to oil and gas
exploration and development may be eliminated as a result of future
legislation.
Among the
changes contained in President Obama’s budget proposal, released by the White
House on February 26, 2009, is the elimination of certain key U.S. federal
income tax preferences currently available to oil and gas exploration and
production companies. Such changes include, but are not limited to,
(i) the repeal of the percentage depletion allowance for oil and gas properties;
(ii) the elimination of current deductions for intangible drilling and
development costs; (iii) the elimination of the deduction for certain U.S.
production activities; and (iv) an extension of the amortization period for
certain geological and geophysical expenditures. Additionally, the
Senate Bill version of the Oil Industry Tax Break Repeal Act of 2009, introduced
on April 23, 2009, and the Senate Bill version of the Energy Fairness for
America Act, introduced on May 20, 2009, include many of the proposals outlined
in President Obama’s budget proposal. It is unclear, however, whether
any such changes will be enacted or how soon such changes could be
effective. The passage of any legislation as a result of the budget
proposal, either Senate Bill or any other similar change in U.S. federal income
tax law could eliminate certain tax deductions within the industry that are
currently available with respect to oil and gas exploration and production
development, and any such change could negatively affect our financial condition
and results of operations.
Item 2. Unregistered Sales of Equity Securities and
Use of Proceeds
Purchases
of Equity Securities by the Issuer and Affiliated Purchasers for the three
months ended September 30, 2009
Period
|
|
Total
Number of Shares Purchased (1)
|
|
|
Average
Price Paid per Share
|
|
|
Total
Number of Shares Purchased as Part of Publicly Announced Plans or
Programs
|
|
|
Maximum
Number (or Approximate Dollar Value) of Shares that May yet Be Purchased
Under the Plans or Programs
|
|
July
1 - July 31
|
|
|
3,058 |
|
|
$ |
8.79 |
|
|
|
- |
|
|
|
- |
|
August
1 - August 31
|
|
|
534 |
|
|
|
10.44 |
|
|
|
- |
|
|
|
- |
|
September
1 - September 30
|
|
|
1,323 |
|
|
|
11.94 |
|
|
|
- |
|
|
|
- |
|
Total
|
|
|
4,915 |
|
|
$ |
9.82 |
|
|
|
- |
|
|
|
- |
|
(1)
|
All
of the shares repurchased were surrendered by employees to pay tax
withholding upon the vesting of restricted stock awards. These
repurchases were not part of a publicly announced program to repurchase
shares of our common stock, nor do we have a publicly announced program to
repurchase shares of our common
stock.
|
Issuance
of Unregistered Securities
None.
Item 3. Defaults Upon Senior
Securities
None.
Item 4. Submission of Matters to a Vote of
Security Holders
None.
Item
5. Other Information
None.
Exhibit
Number
|
|
Description
|
3.1
|
|
Certificate
of Incorporation (incorporated herein by reference to Exhibit 3.1 to the
Company’s Registration Statement on Form S-1 filed on October 7, 2005
(Registration No. 333-128888)).
|
3.2
|
|
Amended
and Restated Bylaws (incorporated herin by reference to Exhibit 3.2 to the
Company's Current Report on Form 8-K filed on December 10, 2008
(Registration No. 000-51801)).
|
4.1
|
|
Registration
Rights Agreement (incorporated herein by reference to Exhibit 4.1 to the
Company’s Registration Statement on Form S-1 filed on October 7, 2005
(Registration No. 333-128888)).
|
10.18
|
|
Amended
and Restated Senior Revolving Credit Agreement (incorporated herin by
reference to Exhibit 10.18 to the Company's Current Report on Form 8-K
filed on April 15, 2009 (Registration No. 000-51801)).
|
10.19
|
|
Amended
and Restated Second Lien Term Loan Agreement (incorporated herin by
reference to Exhibit 10.19 to the Company's Current Report on Form 8-K
filed on April 15, 2009 (Registration No. 000-51801)).
|
10.44*
|
|
First
Amendment dated October 22, 2009 to Amended and Restated Senior Revolving
Credit Agreement attached hereto as Exhibit 10.44.
|
10.45*
|
|
First
Amendment dated October 22, 2009 to Amended and Restated Second Lien Term
Loan Agreement attached hereto as Exhibit 10.45.
|
31.1
|
|
Certification
of Periodic Financial Reports by Chief Executive Officer in satisfaction
of Section 302 of the Sarbanes-Oxley Act of 2002
|
31.2
|
|
Certification
of Periodic Financial Reports by Chief Financial Officer in satisfaction
of Section 302 of the Sarbanes-Oxley Act of 2002
|
32.1
|
|
Certification
of Periodic Financial Reports by Chief Executive Officer and Chief
Financial Officer in satisfaction of Section 906 of the Sarbanes-Oxley Act
of 2002
|
__________________
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
ROSETTA
RESOURCES INC.
|
|
By:
|
/s/ MICHAEL J. ROSINSKI
|
|
Michael
J. Rosinski
|
|
Executive
Vice President and Chief Financial Officer
|
|
|
|
|
(Duly
Authorized Officer and Principal Financial
Officer)
|
Date:
November 6, 2009
ROSETTA
RESOURCES INC.
EXHIBIT
INDEX
Exhibit
Number
|
|
Description
|
3.1
|
|
Certificate
of Incorporation (incorporated herein by reference to Exhibit 3.1 to the
Company’s Registration Statement on Form S-1 filed on October 7, 2005
(Registration No. 333-128888)).
|
3.2
|
|
Amended
and Restated Bylaws (incorporated herin by reference to Exhibit 3.2 to the
Company's Current Report on Form 8-K filed on December 10, 2008
(Registration No. 000-51801)).
|
4.1
|
|
Registration
Rights Agreement (incorporated herein by reference to Exhibit 4.1 to the
Company’s Registration Statement on Form S-1 filed on October 7, 2005
(Registration No. 333-128888)).
|
10.18
|
|
Amended
and Restated Senior Revolving Credit Agreement (incorporated herin by
reference to Exhibit 10.18 to the Company's Current Report on Form 8-K
filed on April 15, 2009 (Registration No. 000-51801)).
|
10.19
|
|
Amended
and Restated Second Lien Term Loan Agreement (incorporated herin by
reference to Exhibit 10.19 to the Company's Current Report on Form 8-K
filed on April 15, 2009 (Registration No. 000-51801)).
|
|
|
First
Amendment dated October 22, 2009 to Amended and Restated Senior Revolving
Credit Agreement attached hereto as Exhibit 10.44.
|
|
|
First
Amendment dated October 22, 2009 to Amended and Restated Second Lien Term
Loan Agreement attached hereto as Exhibit 10.45.
|
|
|
Certification
of Periodic Financial Reports by Chief Executive Officer in satisfaction
of Section 302 of the Sarbanes-Oxley Act of 2002
|
|
|
Certification
of Periodic Financial Reports by Chief Financial Officer in satisfaction
of Section 302 of the Sarbanes-Oxley Act of 2002
|
|
|
Certification
of Periodic Financial Reports by Chief Executive Officer and Chief
Financial Officer in satisfaction of Section 906 of the Sarbanes-Oxley Act
of 2002
|
__________________