Quarterly / Earnings Reports | Debt | Second Quarter (2Q) Update | Reserves | Financial Results | Capital Markets

Panhandle Lays Low in 2Q; Focus on Balance Sheet Repair

Share Print Bookmark    |    Tuesday,May 10,2016

Panhandle Oil and Gas reported financial and operating results for the Company's fiscal second quarter and six months ended March 31, 2016.

Key Points:

• Reduced debt $10.5 million from Sept. 30, 2015, to $54.5 million through March 31, 2016 (as of May 9, 2016, balance is $51 million).
• Panhandle continues to actively lease out selected mineral holdings during this commodity price downturn.

The leased mineral acreage covers the following areas in Oklahoma and Texas:

1. 4,057 acres in the Permian Basin in Cochran County, Texas. We maintain the right to buy back up to a 10% working interest on a unit-by-unit basis. This lease has a three-year primary term with the right to renew with an additional lease bonus.
2. 685 acres in the STACK play in Canadian, Blaine, Custer and Dewey Counties, Oklahoma. The majority of these leases have a four-year primary term. No Cana Core acreage was leased; Panhandle therefore maintains all of its pre-existing rights to participate with a working interest in that play.
3. 1,226 acres in northwest Dewey and southern Woodward Counties, Oklahoma. This is viewed by some as a potential STACK expansion area.

Highlights:

• Recorded fiscal second quarter 2016 net loss of $7,438,161, $0.44 per diluted share, as compared to net income of $704,207, $0.04 per diluted share, for the 2015 quarter.
• Recorded six month 2016 net loss of $10,237,279, $0.61 per diluted share, compared to net income of $10,937,968, $0.65 per diluted share, for the 2015 six months.
• Incurred 2016 six-month non-cash impairment provision of $11,849,064.
• Generated cash from operating activities of $10,566,650 for the 2016 six-month period, well in excess of $2,554,543 of capital expenditures for drilling and equipping wells.
• Received lease bonus proceeds of $3.2 million in first six months of fiscal 2016 (as of May 9, 2016, lease bonus received has totaled approximately $5.9 million).
• Reported 2016 second-quarter and six-month production of 2,786,303 Mcfe and 5,929,703 Mcfe, respectively.
• Reduced debt $10.5 million from Sept. 30, 2015, to $54.5 million through March 31, 2016 (as of May 9, 2016, balance is $51 million).
• Proved reserves totaled 144.9 Bcfe at March 31, 2016.

Michael C. Coffman, President and CEO, said: "2016 continues to shape up as one of, if not the most difficult years the energy industry has ever seen. Panhandle is experiencing many of the issues other companies have faced.

"The low oil, natural gas and natural gas liquids prices have dramatically reduced our revenues and resulting cash flows. In addition, non-cash impairment charges resulting from the low commodity prices have resulted in large losses for the Company. These impairment charges reduce the carrying value of producing properties on the Company's books to a point-in-time (March 31, 2016) estimated market valuation.

"Thus far in fiscal 2016, we have incurred $11.8 million, pre-tax, of impairment charges. These charges are excluded in financial covenant calculations of our loan agreement. The borrowing base under our loan agreement will be reset in June 2016, and we expect the borrowing base to be reduced from the current $100 million. We expect it to be set at a level that provides ample liquidity for the Company to continue to employ its normal operating strategies."

Operations Update

Panhandle continues to actively lease out selected mineral holdings during this commodity price downturn. The strategy behind this activity is to lease out minerals in cases where we believe the present value of the lease bonus plus the royalty will ultimately exceed the risked present value of participating with a working interest in wells drilled on these mineral holdings.

Thus far in the current fiscal year (Oct. 1, 2015 – May 9, 2016) leases have totaled 6,327 net mineral acres and included approximately $5.9 million of lease bonus receipts (ranging from $100 per acre to $4,300 per acre).

The leased mineral acreage covers the following areas in Oklahoma and Texas:

1. 4,057 acres in the Permian Basin in Cochran County, Texas. We maintain the right to buy back up to a 10% working interest on a unit-by-unit basis. This lease has a three-year primary term with the right to renew with an additional lease bonus.
2. 685 acres in the STACK play in Canadian, Blaine, Custer and Dewey Counties, Oklahoma. The majority of these leases have a four-year primary term. No Cana Core acreage was leased; Panhandle therefore maintains all of its pre-existing rights to participate with a working interest in that play.
3. 1,226 acres in northwest Dewey and southern Woodward Counties, Oklahoma. This is viewed by some as a potential STACK expansion area.

The primarily targeted formations in each of these areas are predominately either limestone or sandstone. By their nature, these reservoirs can be very complex and tend to produce much more variable results than consistent shale resource plays such as the Cana and SCOOP Woodford cores. Generally, there are significant variations over short distances in the reservoir properties in many limestone and sandstone reservoirs leading to potentially wide variations in well-to-well productivity. In fact, the primary target in the STACK and STACK expansion play is the Meramec formation, which is a sub-member of the Mississippian Limestone and has a several-decade long history of producing highly variable wells across northern, central and western Oklahoma. Any mineral acres not drilled within the primary term of the leases will once again become unleased minerals on Panhandle's books.

In all but the Cochran County lease, by leasing we relinquished the right to participate in these units as a working interest owner during the term of the lease; however, we will retain the royalty interest and the perpetual minerals. Royalty interests are considerably more valuable than an equivalent working interest because they do not bear capital investments or operating expenses.

In essence, these transactions eliminate the risk of investing capital in plays and extensions of plays that have materially more risk than drilling in the cores of shale resource plays, while at the same time preserving risked value through lease bonus payments and potential future royalty income streams.

We are also in late stage negotiations to lease out additional mineral rights, which if completed would result in additional meaningful lease bonuses to the Company.

Lease operating expenses were reduced by 10% when comparing the first six months of 2016 to 2015. This decrease was principally due to field optimization work on our Eagle Ford properties.

Fiscal Q2 2016 Results

For the 2016 second quarter, the Company recorded net loss of $7,438,161, or $0.44 per diluted share. This compared to net income of $704,207, or $0.04 per diluted share, for the 2015 second quarter. Net cash provided by operating activities decreased 77% to $2,916,432 for the 2016 second quarter, versus the 2015 second quarter. Capital expenditures for the 2016 fiscal quarter totaled $1,268,429 and continue to be principally directed toward oil and NGL rich plays in south central Oklahoma including the SCOOP and STACK plays. In addition, the Company recorded an $8.1 million non-cash provision for impairment in the 2016 quarter, as compared to a $1.2 million provision in the 2015 quarter.

Total revenues for the 2016 second quarter were $7,587,091, a 48% decrease from $14,679,034 for the 2015 quarter. Oil, NGL and natural gas sales decreased $6,301,363 or 51% in the 2016 quarter, compared to the 2015 quarter, as a result of a 19% decrease in Mcfe production and a 39% decrease in the average per Mcfe sales price. The average sales price per Mcfe of production during the 2016 second quarter was $2.20, compared to $3.60 for the 2015 second quarter. The 2016 quarter included a $1 million gain on derivative contracts, as compared to a $1.9 million gain for the 2015 quarter. The Company will typically hedge 40-60% of its expected production volumes of oil and gas for a duration of up to one year. 

Oil production decreased 21% in the 2016 quarter to 90,760 barrels, versus 114,567 barrels in the 2015 quarter, while gas production decreased 19% to 2,014,139 Mcf for the 2016 quarter, compared to the 2015 quarter. In addition, 37,934 barrels of NGL were sold in the 2016 quarter, as compared to 48,681 barrels in the 2015 quarter.

Six Months 2016 Results

For the 2016 six months, the Company recorded a net loss of $10,237,279, or $0.61 per diluted share. This compared to a net income of $10,937,968, or $0.65 per diluted share, for the 2015 six months. Net cash provided by operating activities decreased 62% year over year to $10,566,650 for the 2016 six months, versus the 2015 six months. Again, cash flow from operations fully funded costs to drill and equip wells for the six months. Capital expenditures for the 2016 six months totaled $2,554,543. The Company recorded an $11.8 million non-cash provision for impairment in the 2016 six months, as compared to a $3.4 million provision in the 2015 period.

Total revenues for the 2016 six months were $19,049,216, a 58% decrease from $45,678,204 for the 2015 six months. Oil, NGL and natural gas sales decreased $16,765,775 or 52% in the 2016 six months, compared to the 2015 six months, as a result of an 18% decrease in Mcfe production and a 42% decrease in the average per Mcfe sales price. The average sales price per Mcfe of production during the 2016 six months was $2.56, compared to $4.44 for the 2015 six months. The 2016 six months included a $.9 million gain on derivative contracts as compared to a $13.2 million gain for the 2015 period.

Oil production decreased 15% in the 2016 six months to 197,122 barrels from 231,150 barrels in the 2015 six months, while gas production decreased 845,877 Mcf, or 17%, compared to the 2015 six months. In addition, 85,985 barrels of NGL were sold in the 2016 six months, which was a 29% decrease compared to 2015 NGL volumes.

Reserves Update

March 31, 2016, mid-year proved reserves were 144.9 Bcfe, as calculated by the Company's consulting petroleum engineering firm, DeGolyer and MacNaughton. This was a decrease of 19.5%, compared to the 180.0 Bcfe of proved reserves at Sept. 30, 2015. SEC prices used for the March 31, 2016, report averaged $2.14 per Mcf for natural gas, $40.07 per barrel for oil and $13.24 per barrel for NGL, compared to $2.84 per Mcf for natural gas, $55.27 per barrel for oil and $19.10 per barrel for NGL at the Sept. 30, 2015, report. The above prices reflect net at the wellhead prices. Total proved developed reserves decreased 15.9% to 90.9 Bcfe, as compared to Sept. 30, 2015, reserve volumes.

Paul Blanchard, Senior Vice President and COO, said: "The Company's 2016 mid-year reserves were down approximately 35 Bcfe as a result of the dramatically lower product prices experienced in the last six months. This fall in product prices produced a decrease in proved developed reserves of 12.6 Bcfe due to wells reaching their projected economic limits much earlier than projected using Sept. 30, 2015, prices. PUD reserves declined 17.7 Bcfe as many future drilling locations became uneconomic at this quarter's SEC mandated product prices. In addition, due to extremely low commodity prices, the Company produced 4.5 Bcfe more than was added through new drilling and completion activity during the six-month period.

"The reserves associated with the product pricing revisions are still in place and will be brought back into the Company's reserve report when prices recover to a level seen in the 2015 year-end report. All of Panhandle's proved, probable and possible locations are either on Company owned perpetual minerals or held-by-production leasehold, and therefore, there is no potential for locations being lost through the expiration of leases at the end of their primary terms."