Saratoga Resources, Inc. Reports Result Of Operations And Second Quarter 2012 Financials

Saratoga Resources, Inc. (NYSE MKT: SARA; the “Company” or “Saratoga”) today announced financial and operating results for the quarter ended June 30, 2012.

Key Financial Results
  • Oil and gas revenues of $23.8 million for the second quarter 2012 compared to $18.8 million for the second quarter 2011;
  • Lease operating expenses (“LOE”) of $4.7 million ($14.49 per BOE) for second quarter 2012 compared to $4.1 million ($19.06 per BOE) for second quarter 2011;
  • General and administrative expenses (“G&A”) of $2.3 million ($7.22 per BOE) for second quarter 2012 compared to $1.9 million ($8.93 per BOE) for second quarter 2011;
  • Net income of $0.9 million, or $0.03 per fully diluted share, for second quarter 2012 compared to net income of $2.8 million, or $0.12 per fully diluted share, for the second quarter 2011;
  • EBITDAX of $13.4 million ($41.71 per BOE) for the second quarter 2012 compared to $13.3 million ($61.29 per BOE) for the second quarter 2011; and
  • Discretionary cash flow of $9.4 million, or $0.32 per fully diluted share, for the second quarter 2012 compared to discretionary cash flow of $9.4 million, or $0.42 per fully diluted share, for the second quarter 2011.

Discretionary cash flow and EBITDAX are non-GAAP financial measures and are defined and reconciled to the most directly comparable GAAP measure under “Non-GAAP Financial Measures” below.

The 27% increase in revenues for the second quarter 2012 reflects increased production volumes (up 48% compared to the second quarter 2011) offsetting decreased prices realized from oil and gas sales (down 2.3% and 44.0% respectively).

While LOE increased by 13% over the corresponding quarter in 2011, this reflects increased production for the second quarter and there was a 24% decrease on a per BOE basis. Similarly, G&A increased by 20% over the corresponding quarter in 2011 but was 19% lower on a per BOE basis.

While net income was much lower during the 2012 second quarter relative to the corresponding quarter in 2011, the 2012 quarter reflected substantially increased workover activity and expense (up $1.4 million) and completion of plugging and abandonment operations commenced in the first quarter on orphaned wells ($0.9 million) while the 2011 quarter reflected lower severance taxes and income tax expense (in the aggregate $1.5 million less than the 2012 quarter) relating to certain Louisiana severance tax credits and utilization of net operating losses.

Operational Highlights

Operational highlights for second quarter 2012 included:
  • Began development drilling operations on the Mesa Verde SL 3763 #14 well in Vermilion 16 Field;
  • 9 recompletions, including 1 SWD recompletion;
  • 15 workovers completed, including maintenance for SWD wells;
  • 15 new pool discoveries;
  • 102 gross (101 net) wells in production at June 30, 2012; and
  • 32,185 gross (32,185 net) acres in 12 fields under lease at June 30, 2012.

During the second quarter 2012, Saratoga commenced its develop drilling program, spudding the Mesa Verde well and preparing to spud the Jupiter and North Tiger wells. Saratoga also invested $13.4 million in 9 recompletions, 5 of which were successful, 2 of which were unsuccessful and 2 of which were still in progress at the end of the quarter, and an additional $3.5 million on 15 workovers, 13 of which were successful and 2 of which were unsuccessful. One of the recompletions and four of the workovers involved operations on wells for salt water disposal.

The Mesa Verde SL 3763 #14 well in Vermilion 16 field was spud on May 14, 2012 and reached a total depth of 16,250 feet MD/TVD on July 23, 2012. The well encountered up to 15 potentially productive intervals, including the Marg A, LF, Rob 54 and Amph B sands between 11,333 and 15,890 feet. The Marg A sequence was encountered structurally higher than expected with much thinner MA-2, MA-3 and MA-4 sands compared to downdip well control to the northeast. We will be evaluating a possible future sidetrack of the Mesa Verde well targeting thicker sand development to the north of the existing well bore. Meanwhile, we have run a production liner in anticipation of testing and completing the well.

In July 2012, the Jupiter SL 185QQ #202 well in the Grand Bay field was spud and reached total depth of 9,680 feet MD/TVD. The well encountered 104 feet of net pay in 15 sands between 5,516 and 9,042 feet and has been completed as a commercial producer and tied back to our Grand Bay facilities.

In July 2012, the North Tiger SL 20433 #1 well in Breton Sound Block 19 was spud and reached total depth of 9,532 feet MD/9,300 feet TVD. The well encountered 59 feet of net pay in 6 sands. Completion operations on the well are ongoing with the well expected to be a commercial producer and tied back to our Breton Sound 18 facilities.

Together, the Jupiter and North Tiger wells encountered 15, previously unbooked, new pool discoveries.

Development drilling, as well as our recompletion and workover programs, ran slightly behind schedule during the quarter. Timing of our ongoing recompletion and workover program is expected to be affected for the balance of 2012 by a temporary shortage of workover rigs for inland water operations in South Louisiana. Following an incident involving a workover rig of one of our vendors while working for a neighboring operator, all of the vendor’s rigs were taken out of service pending a full coastguard inspection and reinstatement of insurance coverage. As a result of such events, there is currently an approximately eight week wait for access to workover rigs in our principle area of operations. This is expected to result in delays in commencement of well maintenance and recompletions requiring workover barge rigs.

Production Highlights
  • Oil and gas production of 195.1 thousand barrels of oil (“MBO”) and 761.6 thousand cubic feet of gas (“MCFG”), or 322.1 MBOE (61% oil) for the second quarter 2012, up 48% from 217 MBOE for the second quarter 2011;
  • Average daily production of 3,539 net barrels of oil equivalent per day (“BOEPD”) for the second quarter, 27% higher than during the first quarter 2012; and
  • Average oil and gas prices down 3.3% and 18.5% for the second quarter relative to the first quarter 2012.

Increases in production year-over-year and compared to the 2012 first quarter reflect investments in infrastructure de-bottlenecking and recompletions during the second half of 2011 and the first quarter 2012. The Jupiter and North Tiger wells are both expected to come onto production during the third quarter and, subject to testing and completion, the Mesa Verde well is expected to come onto production late in the quarter or early in the fourth quarter.

Reserve Highlights

  • Quarter-end Company estimate of SEC proved reserves consisted of 7.973 million barrels of oil (“MMBO”) and 67.718 billion cubic feet of gas (“BCFG”), or 19.260 million barrels of oil equivalent (“MMBOE”), up 0.8% from 19.099 MMBOE of proved reserves at end of first quarter 2012 or up 1.5% from 18.969 MMBOE of proved reserves at year-end 2011;
  • Reserve replacement ratio of 151% compared to year-end 2011;
  • Proved developed reserves comprised 20% of quarter-end proved reserves compared to 22% of proved reserves at December 31, 2011; and
  • Quarter-end Company estimate of 3P reserves totaled 74.438 MMBOE.

Reserve growth and reserve replacement ratio reflect conversion of reserves through the recompletions undertaken during the first quarter, updated commodity pricing and revised timing of capital expenditures and does not reflect unbooked new pool discoveries from the Jupiter and North Tiger wells drilled subsequent to June 30, 2012.

Development Plans
  • Low risk recompletions, thru-tubing plugbacks and workovers from inventory of 56 proved developed non-producing (“PDNP”) opportunities in 10 fields;
  • Development of proved undeveloped (“PUD”) reserves from inventory of 90 PUD opportunities in 26 wellbores in 5 fields; and
  • Strategic partnerships and joint ventures for risk-sharing on exploratory ultra-deep prospects at Grand Bay and Vermilion 16.

Our near term development plans are focused on proved undeveloped opportunities and conversion of PDNP opportunities. At June 30, 2012, permitting had been completed and was underway on several proved undeveloped wells and development drilling had begun at Vermilion 16 Field.

As noted above, three development wells have been drilled and cased (Jupiter, North Tiger and Mesa Verde) and are in various stages of being completed and brought on line as of the date of this report. We expect to drill at least one more development well before the end of 2012 and expect to drill up to seven development wells per year thereafter.

Financial Position and CAPEX Highlights

  • $33.7 million of cash on hand at June 30, 2012;
  • $13.1 million of working capital at June 30, 2012;
  • $21.8 million of CAPEX for second quarter 2012, including $12.1 million on drilling and $8.4 million on recompletions and workovers;
  • Between $35-40 million CAPEX planned for balance of 2012; and
  • 2012 CAPEX budget fully funded by cash on hand and projected operating cash flow.

Saratoga fully funded its CAPEX budget during the second quarter of 2012, as it has done for more than three years, from its cash on hand and operating cash flows.

Management Comments

Michael O. Aldridge, Chief Financial Officer, commented "The second quarter of 2012 was one of continued progress with respect to production, EBITDAX and cash flow growth, as well as an increase in development drilling activity, which should result in continued positive growth in coming quarters."

Mr. Aldridge added "We have engaged Mobius Risk Group to assist us in the process of implementing a hedging strategy that involves layering in price protection to guard against short-term adverse commodity price moves and the resulting impact on our second half of 2012 business plan. At this time, we are actively negotiating volumes and length of hedges with prospective counterparties and we will continue to layer in hedges to protect our short-, mid- and longer-term strategies."

Conference Call Information

The company will host a conference call on Thursday, August 9, 2012 to discuss its second quarter 2012 results and to provide a current update on operations.

The call will begin at 10:30 AM EDT (9:30 AM CDT, 7:30 AM PDT) and interested parties in the U.S. can participate in the call by dialing (866) 501-1535. Interested international parties can participate in the call by dialing (216) 672-5582. The participant passcode for both the U.S. and international call is 11426728. Alternatively, the audio content of the call can be accessed on the Company’s web site at www.saratogaresources.com. The call will be archived on the Company web site for parties who are unable to participate in the live call. Also, a written transcript of the call will be available on the Company’s website beginning 72 hours after the call.

Further details, including a slide presentation accompanying the call, will be accessible on the Company’s website at www.saratogaresources.com in advance of the call.

About Saratoga Resources

Saratoga Resources is an independent exploration and production company with offices in Houston, Texas and Covington, Louisiana. Principal holdings cover 32,185 gross/net acres, mostly held-by-production (all depths), currently located in the transitional coastline and protected in-bay environment on parish and state leases of south Louisiana. Most of the company's large drilling inventory has multiple pay objectives that range from as shallow as 1,000 feet to the ultra-deep prospects below 20,000 feet in water depths of less than 10 feet. For more information, go to Saratoga's website at www.saratogaresources.com and sign up for regular updates by clicking on the Updates button.

Forward-Looking Statements

This press release includes certain estimates and other forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, including statements regarding future ability to complete wells, fund the company’s development program and grow reserves, production, revenues and profitability, ability to reach and sustain target production levels, ability to secure commitments to participate in exploration of deep shelf prospects, and the ultimate outcome of such efforts. Words such as "expects”, "anticipates", "intends", "plans", "believes", "assumes", "seeks", "estimates", "should", and variations of these words and similar expressions, are intended to identify these forward-looking statements. While we believe these statements are accurate, forward-looking statements are inherently uncertain and we cannot assure you that these expectations will occur and our actual results may be significantly different. These statements by the Company and its management are based on estimates, projections, beliefs and assumptions of management and are not guarantees of future performance. Important factors that could cause actual results to differ from those in the forward-looking statements include the factors described in the "Risk Factors" section of the Company's filings with the Securities and Exchange Commission. The Company disclaims any obligation to update or revise any forward-looking statement based on the occurrence of future events, the receipt of new information, or otherwise.
SARATOGA RESOURCES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 
       
For the Three Months Ended

June 30,
For the Six Months Ended

June 30,
2012 2011 2012 2011
Revenues:
Oil and gas revenues $ 23,790,638 $ 18,774,903 $ 43,134,318 $ 34,573,191
Other revenues   323,345     2,281,301     1,197,593     3,430,051  
Total revenues 24,113,983 21,056,204 44,331,911 38,003,242
 
Operating Expense:
Lease operating expense 4,668,000 4,134,023 9,238,699 8,093,112
Workover expense 2,067,833 632,705 3,539,301 1,190,436
Exploration expense 98,290 24,957 155,686 406,389
Loss on plugging and abandonment 856,679 - 2,468,969 -
Dry hole costs 3,479 - 93,353 -
Depreciation, depletion and amortization 5,575,388 5,192,857 10,512,540 8,367,627
Accretion expense 555,504 424,422 1,111,008 848,844
General and administrative 2,324,182 1,937,304 5,070,665 3,900,288
Severance taxes   2,192,246     1,232,533     3,873,125     2,665,074  
Total operating expenses   18,341,601     13,578,801     36,063,346     25,471,770  
 
Operating income 5,772,382 7,477,403 8,268,565 12,531,472
 
Other income (expense):
Interest income 5,526 172,020 8,842 199,586
Interest expense   (4,312,678 )   (4,654,626 )   (8,723,789 )   (9,235,512 )
Total other expense   (4,307,152 )   (4,482,606 )   (8,714,947 )   (9,035,926 )
 
Net income (loss) before reorganization expense and income taxes 1,465,230 2,994,797 (446,382 ) 3,495,546
Reorganization expense   35,036     138,982     78,241     248,994  
Net income (loss) before income taxes 1,430,194 2,855,815 (524,623 ) 3,246,552
Income tax expense (benefit)   569,909     22,214     (165,834 )   54,714  
Net income (loss) $ 860,285   $ 2,833,601   $ (358,789 ) $ 3,191,838  
 
Net income (loss) per share:
Basic $ 0.03   $ 0.15   $ (0.01 ) $ 0.18  
Diluted $ 0.03   $ 0.12   $ (0.01 ) $ 0.15  
 
Weighted average number of common shares outstanding:
Basic   28,657,191     19,145,269     27,886,081     18,238,913  
Diluted   29,285,509     22,700,506     27,886,081     21,647,823  
 
SARATOGA RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
   
June 30, December 31,
2012 2011
ASSETS
 
Current assets:
Cash and cash equivalents $ 33,676,705 $ 15,874,680
Accounts receivable 9,406,137 10,539,757
Prepaid expenses and other 2,677,183 1,189,406
Deferred tax asset, net - 1,400,000
Other current asset   150,000     150,000  
Total current assets 45,910,025 29,153,843
 
Property and equipment:
Oil and gas properties - proved (successful efforts method) 224,075,472 196,101,827
Other   672,500     658,113  
224,747,972 196,759,940
Less: Accumulated depreciation, depletion and amortization   (64,343,359 )   (53,830,820 )
Total property and equipment, net 160,404,613 142,929,120
 
Deferred tax asset, net 6,778,796 5,147,962
Other assets, net   20,905,813     20,531,218  
Total assets $ 233,999,247   $ 197,762,143  
 

LIABILITIES AND STOCKHOLDERS' EQUITY
 
Current liabilities:
Accounts payable $ 13,647,111 $ 4,598,534
Revenue and severance tax payable 5,759,464 5,709,773
Accrued liabilities 10,911,746 8,451,655
Short-term notes payable 1,497,979 344,256
Asset retirement obligation – current   970,433     1,548,945  
Total current liabilities 32,786,733 20,653,163
 
Long-term liabilities:
Asset retirement obligation 10,833,212 9,852,920
Long-term debt, net of unamortized discount of $1,941,627 and $2,115,195, respectively   125,558,373     125,384,805  
Total long-term liabilities 136,391,585 135,237,725
 
Commitment and contingencies (see notes)
 
Stockholders' equity:

Common stock, $0.001 par value; 100,000,000 shares authorized 30,691,601 and 26,714,815 shares issued and outstanding at June 30, 2012 and December 31, 2011, respectively
30,691 26,714
Additional paid-in capital 75,978,738 52,674,252
Retained deficit   (11,188,500 )   (10,829,711 )
 
Total stockholders' equity   64,820,929     41,871,255  
 
Total liabilities and stockholders' equity $ 233,999,247   $ 197,762,143  
 
SARATOGA RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
  For the Six Months Ended
June 30,
2012   2011
Cash flows from operating activities:
Net income (loss) $ (358,789 ) $ 3,191,838
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation, depletion and amortization 10,512,540 8,367,627
Accretion expense 1,111,008 848,844
Amortization of debt issuance costs 441,986 126,384
Amortization of debt discount 173,568 1,449,042
Dry hole costs 93,353 -
Stock-based compensation 835,194 465,798
Loss on plugging and abandonment 2,468,969 -
Deferred tax benefit (230,834 ) -
Changes in operating assets and liabilities:
Accounts receivable 1,133,620 809,938
Prepaids and other (1,487,777 ) (1,277,781 )
Accounts payable 6,210,509 (1,189,178 )
Revenue and severance tax payable 49,691 (448,759 )
Payments to settle asset retirement obligations (709,228 ) (985,501 )
Accrued liabilities   (939,214 )   666,513  
Net cash provided by operating activities 19,304,596 12,024,765
 
Cash flows from investing activities:
Additions to oil and gas property (24,298,595 ) (3,351,651 )
Additions to other property and equipment (14,387 ) (54,437 )
Other assets   (816,581 )   (1,209,507 )
Net cash used by investing activities (25,129,563 ) (4,615,595 )
 
Cash flows from financing activities:
Proceeds from issuance of common stock 22,473,270 7,452,948
Proceeds from short-term notes payable 1,685,206 1,649,065
Repayment of short-term notes payable   (531,484 )   (512,935 )
Net cash provided by financing activities   23,626,992     8,589,078  
 
Net increase (decrease) in cash and cash equivalents 17,802,025 15,998,248
Cash and cash equivalents - beginning of period   15,874,680     4,409,984  
Cash and cash equivalents - end of period $ 33,676,705   $ 20,408,232  
 
Supplemental disclosures of cash flow information:
Cash paid for income taxes $ 65,000 $ 65,000
Cash paid for interest 7,495,018 7,628,983
 
Non-cash investing and financing activities:
Accounts payable for oil and gas additions $ 2,838,068 $ 4,286,631
Accrued liabilities for oil and gas additions 930,335 347,612
Accrued interest converted to long-term debt – related party - $ 131,205
 

Non-GAAP Financial Measures

Discretionary Cash Flow is a non-GAAP financial measure.

Discretionary Cash Flow is a supplemental financial measure used by the company’s management and by securities analysts, investors, lenders, rating agencies and others who follow the industry as an indicator of the company’s ability to internally fund exploration and development activities. Discretionary cash flow should not be considered as a substitute for net income, operating income, cash flows from operating activities or any other measure of financial performance or liquidity presented in accordance with generally accepted accounting principles (“GAAP”). Discretionary cash flow excludes some, but not all, items that affect net income and operating income and these measures may vary among other companies. Therefore, the company’s Discretionary Cash Flow may not be comparable to similarly titled measures used by other companies.

The table below reconciles the most directly comparable GAAP financial measure to Discretionary Cash Flow.
Reconciliation of Net Income (Loss) to Discretionary Cash Flow
       

For the Three Months Ended June 30,

For the Six Months Ended June 30,
2012 2011 2012 2011
Net income (loss) as reported $ 860,285 $ 2,833,601 $ (358,789 ) $ 3,191,838
Exploration expense 98,290 24,957 155,686 406,389
Loss on plugging and abandonment 856,679 - 2,468,969 -
Dry hole costs 3,479 - 93,353 -
Depreciation, depletion and amortization 5,575,388 5,192,857 10,512,540 8,367,627
Accretion expense 555,504 424,422 1,111,008 848,844
Stock-based compensation 573,411 175,113 835,194 465,798
Debt issuance and discount 314,077 804,134 617,203 1,575,425
Income tax provision (benefit)   537,409   -   (230,834 )   -
Discretionary Cash Flow $ 9,374,522 $ 9,455,084 $ 15,204,330   $ 14,855,921
 

EBITDAX is a non-GAAP financial measure.

EBITDAX is a supplemental financial measure used by the company’s management and by securities analysts, investors, lenders, rating agencies and others who follow the industry as an indicator of the company’s ability to internally fund exploration and development activities and to service or incur additional debt. The company also uses this measure because EBITDAX allows the company to compare its operating performance and return on capital with those of other companies without regard to financing methods and capital structure. EBITDAX should not be considered as a substitute for net income, operating income, cash flows from operating activities or any other measure of financial performance or liquidity presented in accordance with generally accepted accounting principles (“GAAP”). EBITDAX excludes some, but not all, items that affect net income and operating income and these measures may vary among other companies. Therefore, the company’s EBITDAX may not be comparable to similarly titled measures used by other companies.

The table below reconciles the most directly comparable GAAP financial measure to EBITDAX.

Reconciliation of Net Income (Loss) to EBITDAX
       

 

For the Three Months Ended June 30,

For the Six Months Ended June 30,
2012 2011 2012 2011
Net income (loss) as reported $ 860,285 $ 2,833,601 $ (358,789 ) $ 3,191,838
Exploration expense 98,290 24,957 155,686 406,389
Loss on plugging and abandonment 856,679 - 2,468,969 -
Dry hole costs 3,479 - 93,353 -
Depreciation, depletion and amortization 5,575,388 5,192,857 10,512,540 8,367,627
Accretion expense 555,504 424,422 1,111,008 848,844
Stock-based compensation 573,411 175,113 835,194 465,798
Interest expense, net 4,307,152 4,482,606 8,714,947 9,035,926
Reorganization expenses 35,036 138,982 78,241 248,994
Income tax provision (benefit) 569,909 22,214 (165,834 ) 54,714
               
EBITDAX $ 13,435,133 $ 13,294,752 $ 23,445,315   $ 22,620,130
 

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