UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
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|X| QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE
ACT OF 1934
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For
the Quarterly Period Ended March
31, 2008
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or
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|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
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For the transition period from __________ to __________.
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Commission File Number 001-31657
ARENA RESOURCES, INC.
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(Exact name of registrant as specified in its charter)
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Nevada
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73-1596109
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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6555 S. Lewis Ave.
Tulsa, Oklahoma 74136
(Address of principal executive offices)
(918) 747-6060
(Registrant's telephone number)
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 past 12 months, and (2) has been subject to such filing requirements for the
past 90 days.
|X| Yes |_| No
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 Exchange Act:
Large accelerated filer |X|
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Accelerated filer |_|
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Non-accelerated filer |_|
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Smaller reporting company |_|
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Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act):
|_| Yes |X| No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date:
As of April 30, 2008, the Company had outstanding 35,107,411 shares of common
stock ($0.001 par value).
1
INDEX
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Arena Resources, Inc.
For the Quarter Ended March 31, 2008
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Part I. Financial Information
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Page
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Item 1. Financial Statements (Unaudited)
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3
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Condensed Consolidated Balance Sheets as of March 31, 2008 and
December 31, 2007 (Unaudited)
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4
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Condensed Consolidated Statements of Operations for the Three Months
Ended March 31, 2008 and 2007 (Unaudited)
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5
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Condensed Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 2008 and 2007 (Unaudited)
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6
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Notes to Condensed Consolidated Financial Statements (Unaudited)
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7
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
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15
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
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18
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Item 4. Controls and Procedures
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19
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Part II. Other Information
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Item 1. Legal Proceedings
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20
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Item 1A. Risk Factors
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20
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
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20
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Item 3. Defaults Upon Senior Securities
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20
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Item 4. Submission of Matters to a Vote of Security Holders
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20
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Item 5. Other Information
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20
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Item 6. Exhibits
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20
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Signatures
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21
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2
Part I
Financial Information
Item 1. Financial
Statements:
The condensed consolidated financial
statements included herein have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with accounting principles
generally accepted in the United States of America have been condensed or omitted pursuant
to such rules and regulations, although the Company believes that the disclosures are
adequate to make the information presented not misleading.
In the opinion of the Company, all
adjustments, consisting of only normal recurring adjustments, necessary to present fairly
the consolidated financial position of the Company and the consolidated results of its
operations and its cash flows have been made. The results of its operations and its cash
flows for the three months ended March 31, 2008 are not necessarily indicative of the
results to be expected for the year ending December 31, 2008.
3
ARENA RESOURCES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
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March 31,
2008
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December 31,
2007
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ASSETS
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Current Assets
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Cash
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$
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6,687,188
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$
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5,213,459
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Accounts receivable
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23,664,455
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20,462,160
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Joint interest billing receivable
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2,832,756
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3,355,537
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Prepaid expenses
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29,045
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133,393
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Total Current Assets
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33,213,444
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29,164,549
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Property and Equipment
, Using Full Cost Accounting
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Oil and gas properties subject to amortization
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380,850,166
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339,887,859
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Drilling rigs
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6,423,897
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6,254,737
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Land, buildings, equipment and leasehold improvements
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4,860,533
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4,512,224
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Total Property and Equipment
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392,134,596
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350,654,820
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Less: Accumulated depreciation and amortization
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(36,796,492)
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(30,497,371)
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Net Property and Equipment
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355,338,104
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320,157,449
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Total Assets
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$
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388,551,548
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$
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349,321,998
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LIABILITIES AND STOCKHOLDERS' EQUITY
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Current Liabilities
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Accounts payable
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$
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13,399,418
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$
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12,525,202
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Income taxes payable
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-
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539,793
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Fair value of oil derivative
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5,056,201
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4,446,822
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Accrued liabilities
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2,480,044
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1,704,658
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Total Current Liabilities
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20,935,663
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19,216,475
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Long-Term Liabilities
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Notes payable
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40,500,000
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35,000,000
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Asset retirement liability
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3,618,305
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3,397,830
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Deferred income taxes
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44,429,683
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33,896,728
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Total Long-Term Liabilities
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88,547,988
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72,294,558
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Stockholders' Equity
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Preferred stock - $0.001 par value; 10,000,000 shares authorized;
no shares issued or outstanding
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-
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-
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Common stock - $0.001 par value; 100,000,000 shares authorized;
35,107,411 shares and 34,278,779 shares outstanding, respectively
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35,108
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34,279
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Additional paid-in capital
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194,173,945
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190,852,118
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Retained earnings
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88,044,461
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69,726,066
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Accumulated other comprehensive loss
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(3,185,617)
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(2,801,498)
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Total Stockholders' Equity
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279,067,897
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257,810,965
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Total Liabilities and Stockholders' Equity
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$
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388,551,548
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$
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349,321,998
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See the accompanying notes to unaudited condensed
consolidated financial statements.
4
ARENA RESOURCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the Three Months Ended March 31,
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2008
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2007
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Oil and Gas Revenues
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$
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45,312,392
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$
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16,651,301
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Costs and Operating Expenses
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Oil and gas production costs
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2,911,925
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2,360,949
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Oil and gas production taxes
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2,329,750
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958,651
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Realized loss on oil derivatives
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1,588,440
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-
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Depreciation, depletion and amortization
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6,139,933
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2,657,555
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Accretion expense
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68,425
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43,497
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General and administrative expense
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2,622,983
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1,234,786
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Total Costs and Operating Expenses
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15,661,456
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7,255,438
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Other Income (Expense)
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Interest income
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40,961
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50,828
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Interest expense
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(615,080)
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(404,167)
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Net Other Expense
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(574,119)
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(353,339)
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Income Before Provision for Income Taxes
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29,076,817
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9,042,524
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Provision for Deferred Income Taxes
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(10,758,422)
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(3,334,634)
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Net Income
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$
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18,318,395
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$
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5,707,890
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Basic Net Income Per Common Share
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0.52
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0.19
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Diluted Net Income Per Common Share
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0.51
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0.18
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Other Comprehensive Loss
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Unrealized loss on oil derivative, net of tax
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(384,119)
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-
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Total Other Comprehensive Income
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$
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17,934,276
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$
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5,707,890
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See the accompanying notes to unaudited condensed
consolidated financial statements.
5
ARENA RESOURCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Three Months Ended March 31,
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2008
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2007
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Cash Flows From Operating Activities
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Net income
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$
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18,318,395
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$
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5,707,890
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Adjustments to reconcile net income to net cash
provided by operating activities:
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Depreciation, depletion and amortization
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6,139,933
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2,653,585
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Provision for income taxes
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10,758,422
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3,334,634
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Stock based compensation
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1,760,812
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639,624
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Accretion of asset retirement obligation
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68,425
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43,497
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Changes in assets and liabilities:
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Accounts and joint interest receivable
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(2,679,514)
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708,355
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Other changes in deferred income taxes
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(540,000)
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-
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Prepaid expenses
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104,348
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81,515
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Excess tax benefits from share-based payment arrangements
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-
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(1,714,733)
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Accounts payable and accrued liabilities
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1,549,185
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(5,397,930)
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Net Cash Provided by Operating Activities
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35,480,006
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6,056,437
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Cash Flows from Investing Activities
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Purchase and development of oil and gas properties
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(40,550,652)
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(24,373,643)
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Purchase of buildings, drilling rigs & equipment
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(517,469)
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(1,902,646)
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Net Cash Used in Investing Activities
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(41,068,121)
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(26,276,289)
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Cash Flows From Financing Activities
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Cash paid for offering costs
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(5,000)
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-
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Proceeds from exercise of warrants
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38,844
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270,003
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Proceeds from exercise of options
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1,528,000
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485,500
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Excess tax benefits from share-based payment arrangements
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-
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1,714,733
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Proceeds from issuance of notes payable
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5,500,000
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17,200,000
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Payment of notes payable
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-
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(400,000)
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Net Cash Provided by Financing Activities
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7,061,844
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19,270,236
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Net Increase in Cash
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1,473,729
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(949,616)
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Cash at Beginning of Period
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5,213,459
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4,919,984
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Cash at End of Period
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$
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6,687,188
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$
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3,970,368
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Supplemental Cash Flow Information
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Cash paid for income taxes
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$
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540,000
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$
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-
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Cash paid for interest
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482,599
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590,641
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Non-Cash Investing and Financing Activities
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Asset retirement obligation incurred in property development
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252,467
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75,804
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Depreciation on drilling rigs capitalized as oil and gas properties
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159,187
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49,922
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See the accompanying notes to unaudited condensed
consolidated financial statements.
6
ARENA RESOURCES, INC.
NOTES TO UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008
NOTE 1 BASIS OF
PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Condensed Consolidated
Financial Statements
The accompanying condensed consolidated
financial statements have been prepared by the Company and are unaudited. In the opinion
of management, the accompanying unaudited financial statements contain all adjustments
necessary for fair presentation, consisting of normal recurring adjustments, except as
disclosed herein.
The accompanying unaudited interim
financial statements have been condensed pursuant to the rules and regulations of the
Securities and Exchange Commission; therefore, certain information and disclosures
generally included in financial statements have been condensed or omitted. The condensed
financial statements should be read in conjunction with the Companys annual
financial statements included in its annual report on Form 10-K as of December 31, 2007.
The financial position and results of operations for the three months ended March 31, 2008
are not necessarily indicative of the results to be expected for the full year ending
December 31, 2008.
During 2007 the Company completed a 2
for 1 stock split, in the form of a stock dividend. Accordingly, all share amounts
throughout these financial statements have been retroactively restated to account for the
split.
Nature of
Operations
Arena Resources, Inc. (the Company) owns
interests in oil and gas properties located in Oklahoma, Texas, Kansas and New Mexico. The
Company is engaged primarily in the acquisition, exploration and development of oil and
gas properties and the production and sale of oil and gas. The accompanying statements of
operations and cash flows include the operations of their wholly owned subsidiaries from
the date of acquisition/formation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities, disclosure of
contingent assets and liabilities and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Fair Values of Financial
Instruments
The carrying amounts reported in the balance sheets for
accounts receivable, joint interest billings receivable, accounts payable, and accrued
liabilities approximate fair value because of the immediate or short-term maturity of
these financial instruments. The carrying amounts reported for notes payable and long-term
debt approximate fair value because the underlying instruments are at interest rates which
approximate current market rates. The fair value estimates for oil derivatives are derived
from published market prices for the underlying commodities to determine discounted
expected future cash flows as of the date of the estimate. See Note 9Derivative
Instruments.
Consolidation
The accompanying consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
Concentration of Credit Risk
and Major Customer
The Company has cash in excess of federally
insured limits at March 31, 2008. During the three months ended March 31, 2008, sales to
one customer represented 83% of oil and gas revenues. At March 31, 2008, this customer
made up 86% of accounts receivable.
7
ARENA RESOURCES, INC.
NOTES TO UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008
Oil and Gas
Properties
The Company uses the full cost method of accounting for
oil and gas properties. Under this method, all costs associated with acquisition,
exploration, and development of oil and gas reserves are capitalized. Costs capitalized
include acquisition costs, geological and geophysical expenditures, lease rentals on
undeveloped properties and costs of drilling and equipping productive and non-productive
wells. Drilling costs include directly related overhead costs. Capitalized costs are
categorized either as being subject to amortization or not subject to amortization.
All capitalized costs of oil and gas
properties, including the estimated future costs to develop proved reserves and estimated
future costs of abandonment and site restoration, are amortized on the unit-of-production
method using estimates of proved reserves as determined by independent engineers.
Investments in unproved properties and major development projects are not amortized until
proved reserves associated with the projects can be determined. The Company evaluates oil
and gas properties for impairment at least annually. Amortization expense for the three
months ended March 31, 2008 was $6,139,933, based on depletion at the rate of $11.78 per
barrel of oil equivalent compared to $2,657,555, based on depletion at the rate of $7.89
per barrel of oil equivalent for the three months ended March 31, 2007. These amounts
include $49,691 and $8,437 of depreciation for the three months ended March 31, 2008 and
2007, respectively.
In addition, capitalized costs are
subject to a ceiling test which limits such costs to the estimated present value of future
net revenues from proved reserves, discounted at a 10-percent interest rate, based on
current economic and operating conditions, plus the lower of cost or fair market value of
unproved properties. Consideration received from sales or transfers of oil and gas
property is accounted for as a reduction of capitalized costs. Revenue is not recognized
in connection with contractual services performed on properties in which the Company holds
an ownership interest.
Drilling Rigs
Drilling rigs are valued at historical cost adjusted for impairment loss
less accumulated depreciation. Historical costs include all direct costs associated with
the acquisition of drilling rigs and placing them in service. Drilling rigs are
depreciated over 10 years and the depreciation is capitalized as part of oil and gas
properties subject to amortization. For the three months ended March 31, 2008 and 2007 the
Company had depreciation of $159,187 and $49,922, respectively, on the Company owned
drilling rigs.
Land, Buildings, Equipment and
Leasehold Improvements
Land, buildings, equipment and leasehold
improvements are valued at historical cost adjusted for impairment loss less accumulated
depreciation. Historical costs include all direct costs associated with the acquisition of
land, buildings, equipment and leasehold improvements and placing them in service.
Depreciation of buildings and
equipment is calculated using the straight-line method based upon the following estimated
useful lives:
Buildings and improvements
|
30 years
|
Office equipment and software
|
5-7 years
|
Machinery and equipment
|
5-7 years
|
One building has not been placed in
service and, therefore, the Company has not recorded any depreciation on this building.
Depreciation expense on the buildings and improvements was $29,152 for the three months
ended March 31, 2008. No depreciation was taken during the three months ended March 31,
2007 on buildings and improvement, as there were no Company owned buildings during that
time period. An aggregate value of $530,000 has been attributed to the land on which the
buildings are located and is not depreciated.
8
ARENA RESOURCES, INC.
NOTES TO UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008
Basic and Diluted Income Per
Common Share
Basic income per common share is computed by dividing
net income by the weighted-average number of common shares outstanding during the period.
Diluted income per share reflects the potential dilution that could occur if all contracts
to issue common stock were converted into common stock, except for those that are
anti-dilutive. The dilutive effect of stock options and other share based compensation is
calculated using the treasury method with an offset from expected proceeds upon exercise
of the stock options and unrecognized compensation expense.
Recent Accounting
Pronouncements
In February 2007, the FASB issued SFAS
No. 159,
The Fair Value Option for Financial Assets and Financial
LiabilitiesIncluding an amendment to FASB Statement No. 115
(SFAS
159). SFAS 159 allows companies to choose to measure eligible assets and liabilities
at fair value with changes in value recognized in earnings. Fair value treatment for
eligible assets and liabilities may be elected either prospectively upon initial
recognition, or if an event triggers a new basis of accounting for an existing asset or
liability. The Company adopted SFAS 159 on January 1, 2008. The adoption of SFAS 159
had no material impact on its financial position and results of operations as the Company
has not elected to utilize the fair value option on any assets or liabilities.
In March 2008, the FASB issued SFAS
No. 161,
Disclosures about Derivative Instruments and Hedging Activitiesan
amendment of FASB Statement No. 133
, which changes the disclosure requirements for
derivative instruments and hedging activities. Enhanced disclosures are required to
provide information about (a) how and why an entity uses derivative instruments, (b) how
derivative instruments and related hedged items are accounted for under Statement 133 and
its related interpretations, and (c) how derivative instruments and related hedged items
affect an entitys financial position, financial performance, and cash flows. This
Statement is effective for financial statements issued for fiscal years and interim
periods beginning after November 15, 2008, with early application encouraged. This
Statement will require the additional disclosures described above. The Company is does not
expect the adoption of SFAS 161 to have a material impact on its results of operations or
financial condition.
In December 2007, the FASB issued
Statements of Financial Accounting Standards No. 141 (revised 2007), Business
Combinations (SFAS 141R) and No. 160, Noncontrolling Interests in
Consolidated Financial Statements an amendment to ARB No. 51 (SFAS
160). Both SFAS 141R and SFAS 160 are to be adopted effective January 1,
2009. SFAS 141R requires the application of several new or modified accounting
concepts that, due to their complexity, could introduce a degree of volatility in periods
subsequent to a material business combination. SFAS 141R requires that all
business combinations result in assets and liabilities acquired being recorded at their
fair value, with limited exceptions. Other areas related to business
combinations that will require changes from current GAAP include: contingent
consideration, acquisition costs, contingencies, restructuring costs, in process research
and development and income taxes, among others. SFAS 160 will primarily impact
the presentation of minority or noncontrolling interests within the Balance Sheet and
Statement of Operations as well as the accounting for transactions with noncontrolling
interest holders. The Company does not expect the adoption of SFAS 141R or 160 to have a material
impact on its results of operations or financial condition.
9
ARENA RESOURCES, INC.
NOTES TO UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008
NOTE 2 EARNINGS
PER SHARE INFORMATION
For the Three Months Ended March 31,
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
Net Income
|
$
|
18,318,395
|
|
$
|
5,707,890
|
|
|
|
|
|
|
|
Basic Weighted-Average Common Shares Outstanding
|
|
34,892,570
|
|
|
29,512,394
|
|
|
|
|
|
|
Effect of dilutive securities
|
|
|
|
|
|
Warrants
|
|
228,232
|
|
|
411,932
|
|
|
|
|
|
|
Stock options
|
|
1,108,624
|
|
|
1,331,946
|
|
|
|
|
|
|
|
Diluted Weighted-Average Common Shares Outstanding
|
|
36,229,426
|
|
|
31,256,272
|
|
|
|
|
|
|
|
Basic Income Per Common Share
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
0.52
|
|
|
0.19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Income Per Common Share
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
0.51
|
|
|
0.18
|
|
|
|
|
|
|
|
For the three months ended March 31,
2008, 525,000 stock options were not included in the computation of diluted income per
share as their effects are anti-dilutive.
NOTE 3 PROPERTY
AND EQUIPMENT
Acquisition of Oil and Gas
Properties
On December 11, 2007, the Company consummated a
transaction pursuant to which the Company acquired a 100% working interest, 75% net
revenue interest, in the South Fuhrman Mascho Unit, a 100% working interest, 78.125% net
revenue interest, in the University Consolidated IX Unit and a 100% working interest, 75%
net revenue interest, in approximately 5,040 acres of undeveloped acreage (collectively,
the Properties), all of which are located in Andrews County, Texas. The
Properties were acquired from Phoenix PetroCorp, Inc. The effective date of the
acquisition was December 1, 2007. The Company acquired the Properties for their current
production, as well as for the approximately 120 additional drilling locations which we
estimate exist on the Properties. The Company paid $49,000,000 to the sellers. In
addition, the Company paid acquisition costs of $222,250, including the issuance of 5,000
shares of common stock as a consulting and finders fee, valued at $204,750, or
$40.95 per share. The acquisition was funded through the use of cash on hand and proceeds
from the Companys credit facility.
The following unaudited pro forma
information is presented to reflect the operations of the Company as if the acquisitions
of the properties had been completed on January 1, 2007:
For the Three Months Ended March 31,
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
Oil and Gas Revenues
|
$
|
45,312,392
|
|
$
|
17,090,595
|
|
|
|
|
|
|
|
Net Income
|
|
18,318,395
|
|
|
5,208,603
|
|
|
|
|
|
|
|
Income Per Common Share
|
|
|
|
|
|
|
|
|
|
|
|
Basic Net Income Per Common Share
|
$
|
0.52
|
|
$
|
0.16
|
|
|
|
|
|
|
Diluted Net Income Per Common Share
|
|
0.51
|
|
|
0.15
|
|
|
|
|
|
|
10
ARENA RESOURCES, INC.
NOTES TO UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008
NOTE 4 NOTES
PAYABLE
Credit facility
In June 2007, the Company entered into a new agreement that
increased the borrowing base under its credit facility to $100,000,000, while leaving the
credit facility at $150,000,000. Additionally, the interest rate was changed to be a
floating rate equal to the 30, 60 or 90 day LIBOR rate plus 1.75%. Additionally, the
subordination of the loans from two officers was released. All other terms and conditions
remained the same. As of March 31, 2008, the Company was in compliance with all covenants
and had $40,500,000 outstanding under this credit facility.
NOTE 5 ASSET
RETIREMENT OBLIGATION
The Company provides for the
obligation to plug and abandon oil and gas wells at the dates properties are either
acquired or the wells are drilled. The asset retirement obligation is adjusted each
quarter for any liabilities incurred or settled during the period, accretion expense and
any revisions made to the estimated cash flows. The reconciliation of the asset retirement
obligation for the three months ended March 31, 2008 is as follows:
Balance, January 1, 2008
|
$
|
3,397,830
|
Liabilities incurred
|
|
252,467
|
Accretion expense
|
|
68,425
|
Liabilities settled
|
|
(100,417)
|
|
Balance, March 31, 2008
|
$
|
3,618,305
|
|
NOTE 6
STOCKHOLDERS EQUITY
Warrants
exercised
During the three months ended March 31, 2008, the Company
issued 8,632 shares of common stock from the exercise of warrants with an exercise price
of $4.50 per share, for proceeds of $38,844.
Options
exercised
During the three months ended March 31, 2008, the Company
issued 820,000 shares of common stock from the exercise of options for proceeds of
$1,528,000. Of these options, 800,000 had an exercise price of $1.85 per share and 20,000
had an exercise price of $2.40 per share.
NOTE 7 EMPLOYEE
STOCK OPTIONS
Compensation expense charged against
income for stock based awards during the three months ended March 31, 2008 was $1,760,812,
as compared to $639,624 for the three months ended March 31, 2007, and is included in
general and administrative expense in the accompanying financial statements.
The Company did not grant any
nonqualified stock options to directors and employees during the three months ended March
31, 2008. A summary of the status of the stock options as of March 31, 2008 and changes
during the three months ended March 31, 2008 is as follows:
11
ARENA RESOURCES, INC.
NOTES TO UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008
|
|
Options
|
|
|
Weighted-Average Exercise Price
|
|
|
|
|
|
|
|
Outstanding at December 31, 2007
|
|
3,450,000
|
|
$
|
13.55
|
|
|
|
|
|
|
Exercised
|
|
(820,000)
|
|
|
1.86
|
|
|
|
|
|
|
|
Outstanding at March 31, 2008
|
|
2,630,000
|
|
|
17.19
|
|
|
|
|
|
|
|
Exercisable at March 31, 2008
|
|
495,000
|
|
$
|
8.32
|
|
|
|
|
|
|
|
As of March 31, 2008, there was
approximately $11,642,928 of unrecognized compensation cost related to stock options that
will be recognized over a weighted average period of 2.72 years. The aggregate intrinsic
value of options expected to vest at March 31, 2008 was $42,558,601. The aggregate
intrinsic value of options exercisable at March 31, 2008 was $19,161,450. The intrinsic
value is based on a March 31, 2008 closing price of the Companys common stock of
$38.71.
The 820,000 options exercised during
the three months ended March 31, 2008 had an intrinsic value of $10,329,700 on the date of
exercise. Any excess tax benefits from the vesting of restricted stock and the exercise of
stock options will not be recognized in paid-in capital until the Company is in a current
tax paying position. Presently, all of the Companys income taxes are deferred and
the Company has substantial net operating losses available to carryover to future periods.
Accordingly, no excess tax benefits have been recognized for the three months ended March
31, 2008.
NOTE 8
CONTINGENCIES AND COMMITMENTS
Standby Letters of Credit
A commercial bank has issued standby letters of credit on behalf of
the Company to the states of Texas, Oklahoma, New Mexico and Kansas totaling $660,432 to
allow the Company to do business in those states. The standby letters of credit are valid
until cancelled or matured and are collateralized by the revolving credit facility with
the bank. Letter of credit terms range from one to five years. The Company intends to
renew the standby letters of credit for as long as the Company does business in those
states. No amounts have been drawn under the standby letters of credit.
NOTE 9 DERIVATIVE
INSTRUMENTS
In 2007 the Company entered into a
derivative contract in order to manage the commodity price risk for a portion of
production through 2008. The Companys current derivative contract is a costless
collar. A collar is a contract which combines both a put option or floor and a
call option or ceiling. The Company receives the excess, if any, of the floor
price over the reference price, based on NYMEX quoted prices, and pays the excess, if any,
of the reference price over the ceiling price. The following is information relating to
the Companys collar position as of March 31, 2008.
Commodity
|
Period
|
Volume
|
Floor
|
Ceiling
|
WTI Crude Oil
|
August 2007 - December 2008
|
458,000
|
$ 65.00
|
$ 80.50
|
12
ARENA RESOURCES, INC.
NOTES TO UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008
The changes in fair value of the oil
hedging contracts in place at March 31, 2008, resulted in an increase in the liability of
$609,379, to $5,056,201. The after tax impact of the change in the fair value of the hedge
of $384,119 is reflected in other comprehensive income. Changes in the fair value of
derivative instruments designated as cash flow hedges, to the extent they are effective in
offsetting cash flows attributable to the hedged risk, are recorded in other comprehensive
income until the hedged item is recognized in earnings. Any change in fair value from
ineffectiveness is recognized currently in unrealized derivative gain or loss in the
consolidated statements of operations.
Cash settlements of cash flow hedges
are recorded as a loss on derivatives in the operating section of the Companys
statement of operations. Our statement of operations for the three months ended March 31,
2008 includes a loss on derivative instrument of $1,558,440. No amounts were shown for the
three months ended March 31, 2007 because the Company did not have any hedging contracts
in place at that time.
NOTE 10 FAIR
VALUE MEASUREMENTS
SFAS No. 157, Fair Value
Measurements (SFAS 157), establishes a framework for fair value measurements in the
financial statements by providing a definition of fair value, provides guidance on the
methods used to estimate fair value and expands disclosures about fair value measurements.
On January 1, 2008, the Company applied SFAS 157 for its assets and liabilities that
are measured at fair value on a recurring basis, primarily our costless collars. The
initial adoption of SFAS 157 had no material impact on the Companys Consolidated
Financial Statements. In February 2008, the FASB issued FASB Staff Position
(FSP) FAS 157-2, permitting entities to delay application of SFAS 157 to fiscal years
beginning after November 15, 2008, for non-financial assets and non-financial
liabilities, except for items that are recognized or disclosed at fair value in the
financial statements on a recurring basis (at least annually). Beginning January 1,
2009, the Company will apply SFAS 157 fair value requirements to non-financial assets and
non-financial liabilities that are not recognized or disclosed on a recurring basis. SFAS
157 requires two distinct transition approaches: (1) cumulative-effect adjustment to
beginning retained earnings for certain financial instrument transactions and
(2) prospectively as of the date of adoption through earnings or other comprehensive
income, as applicable for all other instruments. Upon adopting SFAS 157, the Company
applied a prospective transition as it did not have financial instrument transactions that
required a cumulative-effect adjustment to beginning retained earnings.
Fair value is the price that would be
received to sell an asset or the amount paid to transfer a liability in an orderly
transaction between market participants (an exit price) at the measurement date. Fair
value is a market based measurement considered from the perspective of a market
participant. The Company uses 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. These inputs can be readily observable, market
corroborated, or unobservable. The Company primarily applies a market approach for
recurring fair value measurements using the best available information while utilizing
valuation techniques that maximize the use of observable inputs and minimize the use of
unobservable inputs.
SFAS 157 establishes a fair value
hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the
highest priority to quoted prices in active markets for identical assets or liabilities
(Level 1 measurement) and the lowest priority to unobservable inputs (Level 3
measurement). The Companys fair value balances are based on the observability of
those inputs. The three levels of the fair value hierarchy are as follows:
|
|
Level
1 Quoted prices in active markets for identical assets or liabilities that the
Company has the ability to access. Active markets are those in which transactions for the
asset or liability occur in sufficient frequency and volume to provide pricing
information on an ongoing basis. The Company does not have any fair value balances
classified as Level 1.
|
13
ARENA RESOURCES, INC.
NOTES TO UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008
|
|
Level
2 Inputs are other than quoted prices in active markets included in Level 1, that
are either directly or indirectly observable. These inputs are either directly observable
in the marketplace or indirectly observable through corroboration with market data for
substantially the full contractual term of the asset or liability being measured. The
Companys Level 2 items consist of a costless collars.
|
|
|
Level
3 Includes inputs that are not observable for which there is little, if any,
market activity for the asset or liability being measured. These inputs reflect managements
best estimate of the assumptions market participants would use in determining fair value.
Level 3 would include instruments valued using industry standard pricing models and other
valuation methods that utilize unobservable pricing inputs that are significant to the
overall fair value. The Company does not have any fair value balances classified as Level
3.
|
In valuing certain contracts, the
inputs used to measure fair value may fall into different levels of the fair value
hierarchy. For disclosure purposes, assets and liabilities are classified in their
entirety in the fair value hierarchy level based on the lowest level of input that is
significant to the overall fair value measurement. Our assessment of the significance of a
particular input to the fair value measurement requires judgment and may affect the
placement within the fair value hierarchy levels.
The following table sets forth by
level within the fair value hierarchy the Companys liabilities that are measured at
fair value on a recurring basis:
Fair Value Measurements at March 31, 2008 Using:
|
|
|
Quoted Prices in Active Markets for Identical Liabilities:
(Level 1)
|
|
|
Significant Other Observable Inputs
(Level 2)
|
|
|
Significant Unobservable Inputs
(Level 3)
|
|
|
Total
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costless collars
|
$
|
-
|
|
$
|
5,056,201
|
|
$
|
-
|
|
$
|
5,056,201
|
NOTE 11
SUBSEQUENT EVENTS
Subsequent to March 31, 2008, the
Company has drawn $5,500,000 on its credit facility.
14
Item 2. Management's
Discussion and Analysis of Financial Condition and Results of Operations
Results of Operations
For the Three Months Ended March 31, 2008
Oil and natural gas sales.
For
the three months ended March 31, 2008, oil and natural gas sales revenue increased
$28,661,091 to $45,312,392, compared to $16,651,301 for the same period during 2007. Oil
sales increased $27,115,670 and natural gas sales increased $1,545,421. The increases were
the result of our increased volumes due to our development and increased oil and gas
prices between periods. For the three months ended March 31, 2008, oil sales volume
increased 170,518 barrels to 453,056 barrels, compared to 282,538 barrels for the same
period in 2007. The average realized per barrel oil price increased 78% from $51.71 for
the three months ended March 31, 2007 to $92.10 for the three months ended March 31, 2008.
For the three months ended March 31, 2008, gas sales volume increased 58,979 thousand
cubic feet (MCF) to 383,914 MCF, compared to 324,935 MCF for the same period in 2007. The
average realized natural gas price per MCF increased 49% from $6.28 for the three months
ended March 31, 2007 to $9.34 for the three months ended March 31, 2008.
Oil and gas production costs.
Our lease operating expenses (LOE) increased from $2,360,949 or $7.01 per barrel of
oil equivalent (BOE) for the three months ended March 31, 2007 to $2,911,925 or $5.63 per
BOE for the three months ended March 31, 2008. The increase in total LOE was due to our
on-going development projects. The decrease in the per BOE amounts is a result of
increased production as a result of the development of our properties.
Production taxes.
Production
taxes as a percentage of oil and natural gas sales were 6% during the three months ended
March 31, 2007 and decreased to 5% for the three months ended March 31, 2008. Production
taxes vary from state to state. Therefore, these taxes may vary in the future depending on
the mix of production we generate from various states, as well as the possibility that any
state may raise its production tax rate.
Depreciation, depletion and
amortization.
Our depreciation, depletion and amortization expense increased by
$3,482,378 to $6,139,933 for the three months ended March 31, 2008, compared to the same
period in 2007. The increase was primarily a result of an increase in volume and in the
average depletion rate from $7.89 per BOE during the three months ended March 31, 2007 to
$11.78 per BOE during the three months ended March 31, 2008. The increased depletion rate
was the result of increased capitalized costs and development costs.
General and administrative
expenses.
General and administrative expenses increased by $1,388,197 to $2,622,983
for the three months ended March 31, 2008, compared to the same period in 2007. A portion
of this increase was due to the increase of stock-based compensation expense of $1,760,812
as compared to $639,624 for the same period in 2007. The remaining increase was primarily
related to increases in compensation expense associated with an increase in personnel
required to administer our growth.
Interest income.
Interest
income was $40,961 for the three months ended March 31, 2008, compared to $50,828 for the
three months ended March 31, 2007. The decrease was due to lower cash balances between
periods.
Interest expense.
Interest
expense was $615,080 for the three months ended March 31, 2008, compared to $404,167 for
the three months ended March 31, 2007. The increase was due to larger outstanding debt
between the periods.
Income tax expense.
Our
effective tax rate was 37% during the three months ended March 31, 2007 and remained
steady at 37% for the three months ended March 31, 2008.
15
Net income.
Net income
increased from $5,707,890 for the three months ended March 31, 2007 to $18,318,395 for the
same period in 2008. The primary reasons for this increase include increased volumes as a
result of the development of our properties and higher commodity prices between periods,
partially offset by higher lease operating expense, general and administrative expense and
income tax expense due to our growth.
Revenues Year to Date by
Geographic section
Arena reports its net oil and gas
revenues for the year to date as applicable to the following geographic sectors:
OIL
|
Net Production Volume
|
Net Revenue
|
Texas Leases
|
390,062
|
BBLS
|
$
|
35,879,467
|
Oklahoma Leases
|
9,923
|
BBLS
|
$
|
935,850
|
New Mexico Leases
|
53,071
|
BBLS
|
$
|
4,910,289
|
GAS
|
Net Production Volume
|
Net Revenue
|
Texas Leases
|
262,450
|
MCF
|
$
|
2,568,454
|
Oklahoma Leases
|
6,240
|
MCF
|
$
|
39,677
|
New Mexico Leases
|
71,860
|
MCF
|
$
|
776,285
|
Kansas Leases
|
43,364
|
MCF
|
$
|
202,370
|
Significant Subsequent
Events occurring after March 31, 2008:
Subsequent to March 31, 2008, the
Company has drawn $5,500,000 on its credit facility.
Capital Resources and
Liquidity
As shown in the financial statements
for the three months ended March 31, 2008, the Company had cash on hand of $6,687,188,
compared to $5,213,459 as of December 31, 2007. The Company had net cash provided by
operating activities for the three months ended March 31, 2008 of $35,480,006, compared to
$6,056,437 for the same period 2007. Other significant sources of cash inflow were
$5,500,000 drawn down on the Companys credit facility and proceeds from option and
warrant exercises of $1,566,844 in 2008 and $17,200,000 drawn down on the Companys
credit facility and proceeds from option and warrant exercises of $755,503 in 2007. The
most significant cash outflows during the three months ended March 31, 2008 and 2007 were
capital expenditures of $41,068,121 in 2008 and $26,276,289 in 2007 and repayment of notes
payable to related parties of $400,000 in 2007.
In June 2007, the Company entered
into a new agreement that increased the borrowing base under its credit facility to
$100,000,000, while leaving the credit facility at $150,000,000. Additionally, the
interest rate was changed to be a floating rate equal to the 30, 60 or 90 day LIBOR rate
plus 1.75%. Additionally, the subordination of the loans from two officers was released.
All other terms and conditions remained the same. As of March 31, 2008, the Company was in
compliance with all covenants and had $40,500,000 outstanding under this credit facility.
16
Disclosures About Market
Risks
Like other natural resource
producers, Arena faces certain unique market risks. The two most salient risk factors are
the volatile prices of oil and gas and certain environmental concerns and obligations.
Oil and Gas Prices
Current competitive factors in the
domestic oil and gas industry are unique. The actual price range of crude oil is largely
established by major international producers. Pricing for natural gas is more regional.
Because domestic demand for oil and gas exceeds supply, there is little risk that all
current production will not be sold at relatively fixed prices. To this extent Arena does
not see itself as directly competitive with other producers, nor is there any significant
risk that the Company could not sell all production at current prices with a reasonable
profit margin. The risk of domestic overproduction at current prices is not deemed
significant. The primary competitive risks would come from falling international prices
which could render current production uneconomical.
Secondarily, Arena is presently
committed to use the services of the existing gatherers in its present areas of
production. This gives to such gatherers certain short term relative monopolistic powers
to set gathering and transportation costs, because obtaining the services of an
alternative gathering company would require substantial additional costs since an
alternative gatherer would be required to lay new pipeline and/or obtain new rights-of-way
in the lease.
It is also significant that more
favorable prices can usually be negotiated for larger quantities of oil and/or gas
product, such that Arena views itself as having a price disadvantage to larger producers.
Large producers also have a competitive advantage to the extent they can devote
substantially more resources to acquiring prime leases and resources to better find and
develop prospects.
Environmental
Oil and gas production is a highly
regulated activity which is subject to significant environmental and conservation
regulations both on a federal and state level. Historically, most of the environmental
regulation of oil and gas production has been left to state regulatory boards or agencies
in those jurisdictions where there is significant gas and oil production, with limited
direct regulation by such federal agencies as the Environmental Protection Agency.
However, while the Company believes this generally to be the case for its production
activities in Texas, Oklahoma, Kansas and New Mexico, it should be noticed that there are
various Environmental Protection Agency regulations which would govern significant spills,
blow-outs, or uncontrolled emissions.
In Oklahoma, Texas, Kansas and New
Mexico specific oil and gas regulations exist related to the drilling, completion and
operations of wells, as well as disposal of waste oil. There are also procedures incident
to the plugging and abandonment of dry holes or other non-operational wells, all as
governed by the Oklahoma Corporation Commission, Oil and Gas Division, the Texas Railroad
Commission, Oil and Gas Division, the Kansas Corporation Commission, Oil and Gas Division
or the New Mexico Oil Conservation Division.
Compliance with these regulations may
constitute a significant cost and effort for Arena. No specific accounting for
environmental compliance has been maintained or projected by Arena to date. Arena does not
presently know of any environmental demands, claims, or adverse actions, litigation or
administrative proceedings in which it or the acquired properties are involved or subject
to or arising out of its predecessor operations.
17
In the event of a breach of
environmental regulations, these environmental regulatory agencies have a broad range of
alternative or cumulative remedies to include: ordering a cleanup of any spills or waste
material and restoration of the soil or water to conditions existing prior to the
environmental violation; fines; or enjoining further drilling, completion or production
activities. In certain egregious situations the agencies may also pursue criminal remedies
against the Company or its principals.
Forward-Looking
Information
Certain statements in this Section
and elsewhere in this report are forward-looking in nature and relate to trends and events
that may affect the Companys future financial position and operating results. Such
statements are made pursuant to the safe harbor provision of the
Private Securities
Litigation Reform Act of 1995.
The terms expect, anticipate,
intend, and project and similar words or expressions are intended
to identify forward-looking statements. These statements speak only as of the date of this
report. The statements are based on current expectations, are inherently uncertain, are
subject to risks, and should be viewed with caution. Actual results and experience may
differ materially from the forward-looking statements as a result of many factors,
including changes in economic conditions in the markets served by the company, increasing
competition, fluctuations in raw materials and energy prices, and other unanticipated
events and conditions. It is not possible to foresee or identify all such factors. The
company makes no commitment to update any forward-looking statement or to disclose any
facts, events, or circumstances after the date hereof that may affect the accuracy of any
forward-looking statement.
Item 3. Quantitative and
Qualitative Disclosures About Market Risk
Interest Rate Risk
The Company is subject to interest
rate risk on its revolving credit facility, which bears variable interest based upon a
LIBOR rate. Changes in interest rates affect the interest earned on the Companys
cash and cash equivalents and the interest rate paid on borrowings under its bank credit
facility. Currently, the Company does not use interest rate derivative instruments to
manage exposure to interest rate changes.
Commodity Price Risk
The Companys revenues,
profitability and future growth depend substantially on prevailing prices for oil and
natural gas. Prices also affect the amount of cash flow available for capital expenditures
and Arenas ability to borrow and raise additional capital. The amount the Company
can borrow under its bank credit facility is subject to periodic redetermination based in
part on changing expectations of future prices. Lower prices may also reduce the amount of
oil and natural gas that the Company can economically produce. Arena currently sells all
of its oil and natural gas production under price sensitive or market price contracts.
In 2007 the Company entered into a
derivative contract in order to manage the commodity price risk for a portion of its
production through 2008. The Companys current derivative contract is a costless
collar. A collar is a contract which combines both a put option or floor and a
call option or ceiling. The Company receives the excess, if any, of the floor
price over the reference price, based on NYMEX quoted prices, and pays the excess, if any,
of the reference price over the ceiling price. The following is information relating to
the Companys collar position as of March 31, 2008.
Commodity
|
Period
|
Volume
|
Floor
|
Ceiling
|
WTI Crude Oil
|
August 2007 - December 2008
|
458,000
|
$ 65.00
|
$ 80.50
|
18
The changes in fair value of the oil
hedging contracts in place at March 31, 2008, resulted in an increase in the liability of
$609,379. The after tax impact of the change in the fair value of the hedge of $384,119 is
reflected in other comprehensive income. Changes in the fair value of derivative
instruments designated as cash flow hedges, to the extent they are effective in offsetting
cash flows attributable to the hedged risk, are recorded in other comprehensive income
until the hedged item is recognized in earnings. Any change in fair value from
ineffectiveness is recognized currently in unrealized derivative gain or loss in the
consolidated statements of operations.
Cash settlements of cash flow hedges
are recorded as a loss on derivatives in the operating section of the Companys
statement of operations. Our statement of operations for the three months ended March 31,
2008 includes a loss on derivative instrument of $1,558,440. No amounts were shown for the
three months ended March 31, 2007 because the Company did not have any hedging contracts
in place at that time.
Additionally, to the extent we hedge
our commodity price exposure, we will forego the benefits we would have otherwise
experienced if commodity prices were to change in our favor.
Currency Exchange Rate
Risk
Foreign sales accounted for none of
the Companys sales; further, the Company accepts payment for its commodity sales
only in U.S. dollars; hence, Arena is not exposed to foreign currency exchange rate risk
on these sales.
Item 4. Controls and
Procedures
Evaluation of Disclosure
Controls and Procedures
The Company maintains controls and
procedures designed to ensure that information required to be disclosed by the Company in
the reports it files or submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in the rules and
forms of the Securities and Exchange Commission. At the end of the period covered by this
Quarterly Report on Form 10-Q, the Companys management, under the supervision and
with the participation of the Companys Chief Executive Officer and Chief Financial
Officer, evaluated the effectiveness of the design and operation of the Companys
disclosure controls and procedures. Based on that evaluation, the Companys Chief
Executive Officer and Chief Financial Officer concluded that as of the end of such period
the Companys disclosure control and procedures are effective in alerting them to
material information that is required to be included in the reports the Company files or
submits under the Securities Exchange Act of 1934.
Changes in Internal
Controls Over Financial Reporting
There have been no changes in the
Companys internal control over financial reporting during the most recent fiscal
quarter that have materially affected, or are reasonably likely to materially affect, the
Companys internal control over financial reporting.
19
Part II Other
Information
Item 1. Legal Proceedings
None.
Item 1A. Risk Factors
There have been no material changes
from risk factors as previously disclosed in our Form 10-K in response to Item 1A to Part
I of Form 10-K.
Item 2. Unregistered
Sales of Equity Securities and Use of Proceeds
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.
Item 6. Exhibits
20
SIGNATURES
Pursuant to the requirements of the
Securities Exchange Act of 1934, Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
|
REGISTRANT:
ARENA RESOURCES, INC.
|
|
|
Dated: May 7, 2008
|
By:
/s/ Lloyd Tim Rochford
|
|
Lloyd Tim Rochford
|
|
Chief Executive Officer
|
|
|
|
|
Dated: May 7, 2008
|
By:
/s/ Phillip W. Terry
|
|
Phillip W. Terry
|
|
President
|
|
|
|
|
Dated: May 7, 2008
|
By:
/s/ William R. Broaddrick
|
|
William R. Broaddrick
|
|
Vice President, Chief Financial Officer
|
21
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