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Lucas' Production Falls 42% YOY as Company Cuts Costs

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   |    Thursday,July 14,2016

Lucas Energy, Inc. announced its fourth quarter and fiscal year-end results for the periods ending March 31, 2016.

Anthony C. Schnur, Chief Executive Officer of Lucas Energy, said: "While the past year was another difficult one for the energy industry, it afforded our Company with multiple opportunities, with the most significant being our agreement to acquire the working interests in certain oil and gas properties in Texas and Oklahoma from Segundo Resources. Also during the year we regained compliance with the NYSE MKT exchange by restructuring and extending our existing term loan and completing a 1-for-25 reverse stock split.  Additionally, we entered into several financial transactions, some of which will be triggered after the close of the Segundo acquisition. 

"We did not realize full production potential in fiscal 2016 because some of our top producing wells were offline at various times throughout the year.  Our production was also significantly impacted by declines in realized oil prices that limited our ability to provide sufficient cash flow to the field level, especially during the fiscal fourth quarter when prices averaged $31.68, $30.32, and $37.55 per barrel for the months of January, February and March, respectively.  As a result, our average production fell 42% from the prior year.

"We continue to remain vigilant in controlling our costs." Mr. Schnur continued.  "During the year, we lowered our respective lease operating expenses and G&A costs by 49% and 25%, this following our respective fiscal 2015 reductions of 34% and 13% year over year.  We relocated our corporate offices, reducing our monthly lease payments by about 40%.  As we develop acquired acreage, we expect to materially increase our production and expand and optimize our asset base.  We believe these efforts, combined with our ongoing cost-cutting initiatives, will stabilize our cash flow, improve our profitability margins, and ultimately achieve greater value for our shareholders."

Review and Outlook

The price of a barrel of oil in mid-2014 was over $100; by the end of 2015 it was in the $30 range and in the first calendar quarter reached into the twenties.  The resulting fallout saw 42 bankruptcies among energy companies in 2015 followed by an additional 39 in the first five months of 2016.  Survival in our industry has been the primary objective, and we have done so to date.  In fact, we view the current market environment as an opportunity to expand our footprint and grow the company.  The first-step in our transition from a distressed turnaround concern to a renewed acquisition-focused, growth-oriented company is the strategic business combination announced in December of 2015.  This transaction is currently under review by the Securities Exchange Commission, and the parties anticipate closing, which is subject to various conditions, to occur during the second quarter of fiscal 2017. 

As previously disclosed, we expect that once the acquisition is completed, our asset base and daily production will increase significantly with the addition of the Hunton formation Mid-continent reserves in Central Oklahoma.  We also intend to redirect our strategic vision with the initial rebranding name change to "Camber Energy." Camber is a noun, meaning a slightly convexed, or arched shape, which bears resemblance to the production curve of the Hunton reserves which exhibit an atypical inclining rate of production in the first 18 to 24 months, and a very low decline rate thereafter.  We are excited about the course we have chosen, and we are eager to bring it to a close.

The Company also completed a series of financial transactions during the year that provided working capital and near-term debt relief and provided for a capital infusion at the closing of the acquisition.  By working closely with our lender, we restructured the existing debt on our balance sheet, affording us the opportunity to continue to operate as well as transact.  Our current capital requirements are augmented through a convertible loan note facility that we expect to utilize through closing.  Finally, as announced on April 7, 2016, Lucas entered into a series of agreements with an institutional investor whereby it will receive $10.0 million of equity capital, subject to meeting certain conditions including the acquisition of the Segundo assets.  This financing was specifically arranged to ensure our fiscal stability and liquidity as we begin our growth as Camber Energy.

We intend to drill the acquired acreage, funding permitting, and have identified 50 Hunton locations where an initial six locations are under review.  That review will assess current drilling costs, updated production profiles and the availability of electrical and saltwater disposal facilities.   Any development schedule will be dependent on when we are able to close the acquisition.  Beyond those known locations, we believe there are opportunities to develop other sands present in the acreage. 

Our existing properties are located in the Eagle Ford Shale trend, one of the most active plays in the U.S.  Drilling activity around our Eagle Ford assets continues to support an enhanced view of our position.  In addition, leading operators in the Eagle Ford area have developed drilling and completion technologies that have significantly reduced production risk and decreased per well capital costs.  While commodity prices have dropped precipitously, the associated cost to drill and complete have fallen as well.  We continue to review opportunities to accelerate development of our five million barrels of proved Eagle Ford and other oil reserves through either direct development or strategic partnerships.  

Our long-term strategy is to grow the Company in three ways: develop our acquired and existing assets; expand our existing footprint through bolt-on acquisitions; and continue to pursue material acquisitions.  The prolonged down cycle in oil, or otherwise referred to as "lower for longer," likely favors a strategy of focused acquisition in the near term, but we will be flexible and opportunistic.  It is our intent to create an asset portfolio of increasing production AND expanded drilling inventory where we can apply technical expertise to the asset.   

With our acquisition of Segundo, we also acquire technical knowledge of how the impact of dewatering practices improves production rates, how sophisticated field-wide saltwater disposal systems and proprietary electrical infrastructure can lower operating costs, and how this combined process can be applied to other formations that harbor characteristics similar to the Hunton formation.  Identifying and acquiring properties in areas analogous to the Hunton will be a key component to the future growth of the company.

The last several years have been difficult for Lucas, and the fiscal 2016 results bear that out.  However, we are confident in our future direction and ambitious growth initiative.  What we will create with Segundo and the establishment of Camber is a platform on which to build our Company, through the acquisition, and development of additional reserves through and out of this cyclical downturn. 

Fiscal 2016 Annual Results

For the twelve months ending March 31, 2016, Lucas reported a fiscal year net loss of $25.4 million, or a loss of ($17.58) per share), compared to a net loss of $5.1 million or ($3.78) per share in the twelve months ending March 31, 2015.  Fiscal year 2016 included impairment charges [related to the full-cost write-down of its oil and gas assets].  Excluding for the impairment charges, the adjusted net loss for fiscal year 2016 was $4.8 million, or ($2.80 per share compared to a net loss of $5.1 million, or ($3.78) per share in fiscal 2015.

Total crude oil and natural gas revenues for fiscal 2016 were $1.0 million compared to $3.0 million for the same period a year ago due primarily to a 45% drop in crude oil prices and a 42% decrease in annual production volumes.  The decline in crude oil prices impacted revenues by approximately $1.3 million and the lower production volumes decreased revenues by another $0.7 million when compared with the same period last year.  The production decline is primarily attributable to two of the Company's top producing wells being shut-in for over two months.  Capital constraints prohibited the Company from performing timely workovers on three other top producing wells, which experienced down times ranging from between 20 and 256 days.  Other factors impacting production were severe flooding conditions in Texas during the year, significant interference from offset activity, and the higher front-end production in the prior reporting period related to workover drilling and lateral programs.

Lease operating expenses of $0.7 million for the year ended March 31, 2016 decreased $0.7 million, or 49%, from $1.5 million for the same period a year ago, principally due to less production related to reduced drilling activity and workover activity due to limited funding and the Company's efforts to preserve capital while maintaining cash flow.  General and administrative expenses (excluding share-based compensation) decreased approximately $0.8 million or 24% for fiscal 2016 compared to the prior year despite a one-time expense of $0.4 million related to transaction costs associated with the Segundo acquisition.  Last year's expenses included $0.3 million of legal expenses, investment banking fees and other transaction costs related to strategic initiates that were subsequently abandoned. 

Depreciation, depletion, amortization and accretion (DD&A) expenses for the 2016 fiscal year decreased $0.7 million, or 43%, from the same period a year ago, primarily due to a 42% reduction in production volumes by 15,886 barrels of oil equivalent (BOE) to 22,190 BOE.  Average daily production was 61 barrels of oil per day (BOPD) compared to 104 BOPD in fiscal 2015, all of which was produced from the Austin Chalk formation.

In fiscal 2016, the Company recorded an impairment of $21.4 million associated with oil and gas properties primarily due to a significant decline in commodity prices during the fiscal year, which triggered a full-cost write-down of these assets.  These fields were reduced to the fair value of approximately $14.0 million using discounted future cash flows.