During the third quarter of 2007, general and administrative costs decreased to $291,680 from $384,245 in the third quarter of 2006.
Professional fees in the third quarter of 2007 were $38,099 compared to $13,376 in the same period in 2006. This was due to the Company commencing its review of its internal controls over its financial reporting in accordance with Item 3 of the Regulation S-K.
Interest expense for the third quarter of 2007 remained consistent at $94,014 compared to $97,318 in the third quarter of 2006.
Comparison of the Nine Months Ended September 30, 2007 and 2006
The Company recognized $6,368,068 in total revenues from its Kansas Properties and the Swan Creek Field during the first nine months of 2007 compared to $6,704,979 in the first nine months of 2006. The decrease in revenues was due to a decrease in Swan Creek gas sales of 51,901 Mcf along with a decrease in gas prices, also a decrease in oil prices in 2007 which was partially offset by Kansas oil sales increase during this period of 7,939 net bbls which is attributable to well workovers, polymer completion workovers and the Companys portion of an eight-well drilling program. Oil prices in the first nine months of 2007 averaged $60.28 per barrel as compared to $62.94 per barrel in the first nine months of 2006.
The Company realized a net income attributable to common shareholders of $1,702,253 or $0.03 per share of common stock during the first nine months of 2007, compared to a net income in the first nine months of 2006 to common shareholders of $1,556,210 or $0.03 per share of common stock. The Company recognized a tax benefit for NOL carry forwards in the amount of $1,100,000 in the third quarter of 2007.
Production costs and taxes in the first nine months of 2007 increased to $2,902,595 from $2,399,324 in the first nine months of 2006. The difference is due to increased workovers to increase production, increased taxes, and overall cost increases of supplies in the industry.
Depletion, depreciation, and amortization expense for the first nine months of 2007 were $1,422,841 compared to $1,315,445 in the first nine months of 2006. The increase relates to depletion taken on Oil and Gas Properties.
During the first nine months of 2007, general and administrative costs decreased to $989,176 from $1,122,091.
Professional fees in the first nine months of 2007 were $186,458 compared to $140,370 in the same period in 2006. This was due to the Company commencing its review of its internal controls over its financial reporting in accordance with Item 3 of Regulation S-K.
Interest expense for the first nine months of 2007 increased to $245,606 from $146,355 in the first nine months of 2006. The increase relates to the Citibank Loan, as the Citibank loan was not in place until June 29 of 2006.
Liquidity and Capital Resources
On June 29, 2006 the Company closed a $50,000,000 revolving senior credit facility between the Company and Citibank Texas, N.A. in its own capacity and also as agent for other banks. Under the facility, loans and letters of credit will be available to the Company on a revolving basis in an amount outstanding not to exceed the lesser of $50,000,000 or the borrowing base in effect from time to time. The Companys initial borrowing base was set at $2,600,000. The initial loan under the facility with Citibank closed on June 29, 2006 in the principal amount of $2.6 million. On April 19, 2007 as a result of periodic review under the credit facility, the borrowing base was increased to $3.3 million, and the Company borrowed an additional amount of $700,000 which was used for development of the Companys producing properties.
Critical Accounting Policies
The Company prepares its Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States of America, which requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the year. Actual results could differ from those estimates. The Company considers the following policies to be the most critical in understanding the judgments that are involved in preparing the Companys financial statements and the uncertainties that could impact the Companys results of operations, financial condition and cash flows.
Revenue Recognition
The Company uses the sales method of accounting for natural gas and oil revenues. Under this method, revenues are recognized based on actual volumes of oil and gas sold to purchasers. Natural gas meters are placed at the customers locations and usage is billed monthly.
Full Cost Method of Accounting
The Company follows the full cost method of accounting for oil and gas property acquisition, exploration and development activities. Under this method, all productive and non-productive costs incurred in connection with the acquisition of, exploration for and development of oil and gas reserves for each cost center are capitalized. Capitalized costs include lease acquisitions, geological and geophysical work, day rate rentals and the costs of drilling, completing and equipping oil and gas wells. Costs, however, associated with production and general corporate activities are expensed in the period incurred. Interest costs related to unproved properties and properties under development are also
capitalized to oil and gas properties. Gains or losses are recognized only upon sales or dispositions of significant amounts of oil and gas reserves representing an entire cost
center. Proceeds from all other sales or dispositions are treated as reductions to capitalized costs. The capitalized oil and gas property, less accumulated depreciation, depletion and amortization and related deferred income taxes, if any, are generally limited to an amount (the ceiling limitation) equal to the sum of: (a) the present value of estimated future net revenues computed by applying current prices in effect as of the balance sheet date (with consideration of price changes only to the extent provided by contractual arrangements) to estimated future production of proved oil and gas reserves, less estimated future expenditures (based on current costs) to be incurred in developing and producing the reserves using a discount factor of 10% and assuming continuation of existing economic conditions; and (b) the cost of investments in unevaluated properties that are excluded from the costs being
amortized. No ceiling write-downs were recorded in 2007 or 2006.
Oil and Gas Reserves/Depletion Depreciation
and Amortization of Oil and Gas Properties
The capitalized costs of oil and gas properties, plus estimated future development costs relating to proved reserves and estimated costs of plugging and abandonment, net of estimated salvage value, are amortized on the unit-of-production method based on total proved reserves. The costs of unproved properties are excluded from amortization until the properties are evaluated, subject to an annual assessment of whether impairment has occurred.
The Companys proved oil and gas reserves as of December 31, 2006 were determined by LaRoche Petroleum Consultants, Ltd. projecting the effects of commodity prices on production, and timing of development expenditures includes many factors beyond the Companys control.
The future estimates of net cash flows from the Companys proved reserves and their present value are based upon various assumptions about future production levels, prices, and costs that may prove to be incorrect over time. Any significant variance from assumptions could result in the actual future net cash flows being materially different from the estimates.
Asset Retirement Obligations
The Company is required to record the effects of contractual or other legal obligations on well abandonments for capping and plugging wells. Management periodically reviews the estimate of the timing of the wells closure as well as the estimated closing costs, discounted at the credit adjusted risk free rate of 12%. Quarterly, management accretes the 12% discount into the liability and makes other adjustments to the liability for well retirements incurred during the period.