Saratoga Resources, Inc. Reports Fourth Quarter And 2012 Financial Results

Saratoga Resources, Inc. (NYSE MKT: SARA; the “Company” or “Saratoga”) today announced financial and operating results for the quarter and year-ended December 31, 2012.

Key Financial Results

Year-Ended 2012
  • Production of 1,116,300 barrels of oil equivalent, or 3,058 barrels of oil equivalent per day, for 2012, up 18% from 2011;
  • Oil and gas revenues of $82.5 million for 2012 compared to $76.2 million for 2011;
  • Discretionary cash flow of $29.3 million, or $1.00 per fully diluted share, for 2012 compared to discretionary cash flow of $30.5 million, or $1.37 per fully diluted share, for 2011;
  • EBITDAX of $45.7 million for 2012 compared to $47.9 million for 2011;
  • Operating income of $12.3 million, or $0.42 per fully diluted share, for 2012 compared to operating income of $25.3 million, or $1.13 per fully diluted share, for 2011; and
  • Net loss of $(3.7) million, or $(0.13) per fully diluted share, for 2012 compared to net income of $20.8 million, or $0.93 per fully diluted share, for 2011.

Fourth Quarter
  • Oil and gas revenues of $22.9 million for fourth quarter 2012 compared to $22.7 million in the fourth quarter 2011;
  • Discretionary cash flow of $9.7 million, or $0.31 per fully diluted share, for the fourth quarter of 2012 compared to discretionary cash flow of $7.5 million, or $0.28 per fully diluted share, in the fourth quarter of 2011;
  • EBITDAX of $13.8 million for the fourth quarter of 2012 compared to $13.0 million in the fourth quarter of 2011; and
  • Net loss of $(2.9) million, or $(0.09) per fully diluted share, for the fourth quarter of 2012 compared to net income of $10.7 million, or $0.40 per fully diluted share, in the fourth quarter of 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.

All key financial results for 2012 and the fourth quarter of 2012 reflect the effects of Hurricane Isaac which resulted in the 100% shut-in of production for 17 days late in the third quarter of 2012, curtailed production well into the fourth quarter as wells were being brought back onto production, and an estimated $2.24 million of damage to company assets, of which we expect insurance to cover approximately $1.84 million.

The change in revenues for the 2012 quarter and year reflects an increase in production volumes (up 18% year over year) partially offset by lower realized oil and natural gas prices. The increase in production reflects accelerated investment in our development and infrastructure program beginning in the second half of 2011 and continuing through 2012, partially offset by the shut-in of production resulting from Hurricane Isaac. While revenue continued to benefit from the realization of premiums to WTI pricing attributable to LLS and HLS pricing for our oil production, average realized prices were down 0.5% for oil, 29.7% for natural gas and 8.2% on a per barrel of oil equivalent (BOE) basis reflecting a general moderation in oil prices and narrowing premiums on our natural gas production.

The decline in operating income and profitability for the year and fourth quarter reflects a substantial decline in production volumes late in the third quarter and continuing into the fourth quarter as a result of Hurricane Isaac. For the full year, the decline in operating income and profitability also reflects, among other items, (i) increased DD&A expense (up $11.8 million, or 75.8%) as a result of our increased investments in our development program, higher production volumes and a reduction in reserves associated with certain predominately gas wells, (ii) a substantial increase in plugging and abandonment costs (up $2.1 million, or 527.3%) as a result of plugging of orphaned high pressure wells, (iii) increased lease operating expense (up $2.2 million, or 12.8%) as a result of increased production volumes and transportation and other expenses associated with restoring production following Hurricane Isaac, (iv) increased workover expense (up $1.2 million, or 43.6%) as a result of an increase in the number of workovers undertaken, and (v) increased severance taxes (up $1.7 million, or 27.5%) as a result of increased production and a reduction in the number of wells qualifying for reduced severance taxes; all partially offset by a decline in dry hole costs (down $3.8 million, or 97.6%) as a result of drilling one dry hole during 2011. Also contributing to the decline in profitability during 2012 versus 2011 was a decrease in income tax benefit (down $5.1 million, or 74.4%) as a result of recognition of deferred tax assets, and a one-time gain of $7.7 million realized during 2011 as a result of the early extinguishment of debt.

Operational Highlights

Operational highlights for 2012 included:
  • 3 development wells, 12 recompletions and 16 workovers completed;
  • 15 new pool discoveries;
  • 87 gross (86 net) wells in production at December 31, 2012;
  • Plugged and abandoned 5 orphaned legacy wells;
  • The majority of wells shut-in due to Hurricane Isaac restored to production by year-end; and,
  • 32,027 gross/net acres in 11 fields under lease at December 31, 2012.

During 2012, Saratoga drilled 3 successful development wells, the Jupiter well in Grand Bay Field, the North Tiger well in Breton Sound 18 Field and the Mesa Verde well in Vermilion 16 Field. The wells encountered multiple potentially productive intervals and included 15 new pool discoveries. A fourth development well, the Buddy well, had been drilled and tested at December 31, 2012 and was completed after year end.

Saratoga also undertook 12 recompletions and 16 workovers during the year. Eleven of the 12 recompletions were successful, with 1 recompletion not reaching its objectives due to mechanical issues, although the reserves will stay on the books and be accessed through future development drilling.

Plugging and abandonment operations were completed on 5 wells on expired leases on which Saratoga inherited P&A obligations from the previous owners. Saratoga had never produced 4 out of 5 of the wells in question and those wells included the four deepest and highest pressure wells in our P&A inventory.

Production Highlights
  • Oil and gas production of 192.6 thousand barrels of oil (“MBO”) and 702.1 million cubic feet of gas (“MMCFG”), or 309.6 thousand barrels of oil equivalent (“MBOE”) (62% oil) in Q4 2012, and 676.4 MBO and 2,639.5 MMCFG, or 1,116.3 MBOE (61% oil) for 2012, up 18% from 945.6 MBOE in 2011.

The increase in production during 2012 reflects accelerated investment in our development and infrastructure upgrade program. The gains in production during 2012 were substantially curtailed by the effects of Hurricane Isaac. Production was 100% shut-in for 17 days and bottlenecks principally associated with third party operations continued to partially curtail production for much of the fourth quarter of 2012 and into 2013. By year-end, the majority of the wells had been brought back onto production following Hurricane Isaac and development operations had resumed.

Reserve Highlights

  • Year-end 2012 SEC proved reserves consisted of 8.407 million barrels of oil (“MMBO”) and 52.918 billion cubic feet of gas (“BCFG”), or 17.227 million barrels of oil equivalent (“MMBOE”), down 9.2% from 18.969 MMBOE of proved reserves at year-end 2011;
  • Oil represents 49% of year-end 2012 1P reserves;
  • Year-end 2012 PV10 of $407 million, down 12.3% from $464 million at year-end 2011;
  • Proved developed (“PDP”) reserves comprised 25.2% of year-end 2012 proved reserves;
  • Year-end 2012 probable reserved totaled 5.851 MMBO and 44.980 BCFG, or 13.348 MMBOE;
  • Year-end 2012 possible reserves totaled 14.758 MMBO and 117.257 BCFG, or 34.301 MMBOE;
  • Year-end 2012 3P reserves totaled 64.875 MMBOE.

The decline in reserves related entirely to natural gas and resulted principally from a combination of lower natural gas prices and thinner sands than originally anticipated in our Mesa Verde well. Lower natural gas pricing reflected in our reserve report adversely affected well economics reducing both the total volumes and forecast revenues in our reserve report. The average benchmark prices utilized for the year-end 2012 reserve report were $94.71 per barrel of crude oil and $2.76 per MMBtu of natural gas as compared to $96.19 per barrel of crude oil and $4.11 per MMBtu of natural gas utilized for the year-end 2011 reserve report. The Mesa Verde well, while successful and incurring multiple potential pay sands, was thinner than anticipated in the Marg A sands resulting in a negative revision to 1P reserves at Vermilion 16 field of 2,637 MBOE (94% gas).

The reduction in reserves associated with lower natural gas prices and thinner sands in Mesa Verde was partially offset by increases in oil reserves following drilling of our North Tiger, Jupiter and Buddy wells and field studies at Breton Sound 32 and Grand Bay fields, which together accounted for 1.467 MMBOE of positive reserve revisions. As a result, our oil reserves increased from 42% of total reserves at year-end 2011 to 49% at year-end 2012.

An additional 0.306 MMBO and 0.797 BCFG, or 0.439 MMBOE, of proved undeveloped (“PUD”) reserves with PV10 of $18.26 million, as reflected in the Company’s year-end reserve report, have been converted to PDP reserves during the first quarter of 2013.

Also, during the first quarter of 2013, Saratoga was the apparent high bidder on four leases totaling 19,814 acres in the Central Gulf of Mexico. Preliminary unaudited reserve potential for those leases has been estimated internally at 51.2 gross MMBOE, of which 5.4 gross MMBOE are expected to subsequently be qualified as PUD reserves.

Development Plans
  • Low risk recompletions, thru-tubing plugbacks and workovers from inventory of 58 proved developed non-producing (“PDNP”) opportunities in 7 fields;
  • Development of proved undeveloped (“PUD”) reserves from inventory of 89 PUD opportunities in 28 wellbores in 4 fields; and
  • Strategic partnerships and joint ventures for risk-sharing on exploratory drilling of deep and ultra-deep prospects at Grand Bay and Vermilion 16 and on new Central Gulf of Mexico leases.

Our near term development plans are focused on proved undeveloped opportunities and conversion of PDNP opportunities. At December 31, 2012, permitting had been completed on 2 proved undeveloped wells and permitting was underway on 7 additional proved undeveloped wells. We presently anticipate drilling up to 6 proved undeveloped wells during 2013, including the Buddy well which was drilled during 2012 and completed in early 2013 and the Roux Toux well, which was drilled and completed in Q1 2013, and 5 to 6 development wells annually thereafter.

At Grand Bay, approximately 20 shut-in wells have been identified that appear to be candidates for tubing replacement and resumption of production. These wells were each producing between 20-50 BOPD prior to being shut-in. The tubing replacement program involves mounting a pulling unit on a shallow water barge at an estimated cost of less than $200,000 per well. If successful, for an approximate cost of $4 million, up to 400 BOPD might be added to production, representing a payout of less than 6 months.

Saratoga continues to monitor ongoing exploratory drilling operations of ultra-deep prospects near our lease holdings and to conduct discussions with potential partners regarding the development of our ultra-deep prospects. The results of ongoing third party ultra-deep exploratory drilling are expected to drive the ultimate determination regarding potential development of Saratoga’s ultra-deep prospects.

Subject to final award of leases by the Bureau of Ocean Energy Management, Saratoga also intends to seek partners to drill, develop and operate its prospects in the Central Gulf of Mexico on which it was the apparent high bidder.

Supplementing the development program, Saratoga is pursuing several initiatives in Main Pass 25 to increase production and improve economics in that field. Those initiatives are also expected to reduce dependency upon third party facilities operators which caused the shut-in of most of the Company’s production in that field during the first quarter of 2013 due to third party production issues on a neighboring platform to which the Company produces. The initiatives include a recompletion of the 7900’ sand in the SL 16432 #2 well, which was successfully carried out during the quarter, and pursuit of an arrangement with another operator to increase handling capacity at the Company’s facilities in Main Pass 25. Recompletion of the 7900’ sand is expected to provide sufficient gas lift gas to unload oil wells in the field. The preliminary agreement with a third party operator includes the Company’s handling of production from a new discovery in the field by the third party operator and the provision by that operator of certain equipment to upgrade the handling capacity of the Company’s Main Pass 25 facilities. If that arrangement is carried out, the Company would potentially add production handling capacity at its Main Pass 25 facilities allowing the Company to generate production handling revenues from the other operator, bring Company production from the field handled by a third party back to Main Pass 25 and reduce monthly operating costs in the field by as much as $100,000 per month while lowering line pressures and potentially increasing production in that field by up to 400 gross barrels of oil per day while adding a potential source of additional gas lift gas.

Financial Position and CAPEX Highlights

  • $32.3 million of cash on hand at December 31, 2012, up from $15.9 million at December 31, 2011;
  • $62.5 million of shareholders’ equity at December 31, 2012, up from $41.9 million at December 31, 2011;
  • $23.3 million of equity raised during 2012 from sale of common stock and warrants;
  • $25.0 million of new debt raised during 2012 from sale of senior secured notes;
  • $59.8 million of CAPEX for 2012;
  • $40 million CAPEX budgeted for 2013;
  • 2013 CAPEX budget fully funded by cash on hand and projected operating cash flow;
  • Working capital adjusted debt to trailing twelve month EBITDAX of 2.9 times; and
  • Net asset value per share of approximately $9.00.

Saratoga continued to strengthen its financial position during 2012, securing $23.3 million of additional equity through the sale of common stock in a private placement and through the exercise of warrants. Saratoga further supplemented its liquidity through the sale of $25.0 million of additional senior secured notes. Supplemented by capital raised during the year, Saratoga continued to fund its operations, including its development program, from cash on hand and operating cash flows, growing its CAPEX from $9.7 million in 2010 and $25.6 million in 2011 to $59.8 million in 2012. The 2013 CAPEX budget of $40 million is expected to be fully funded from cash on hand and operating cash flow.

Management Comments

Thomas Cooke, Chairman and CEO, commented, “2012 was certainly a challenging year for Saratoga, with the effects of Hurricane Isaac, weak gas prices and a few unique projects on our plate. At the same time, management is gratified by the accomplishments during the year, particularly our ability to grow production and generate discretionary cash flow of $1.00 per share. Those were notable achievements and a credit to our entire team which was confronted with the challenges of weathering and recovering from Hurricane Isaac. We were 100% shut-in for 17 days and suffered lingering curtailment of production and delays in projects into 2013 as third-party operators brought their facilities back onto line to accommodate our production. We put on hold and deferred a number of projects in our development and maintenance program in the wake of the hurricane. Together, the shut-in of production and deferral of projects put us behind schedule relative to our development program and well below projected production and revenue targets. While we are pleased that our assets displayed resiliency in weathering the hurricane and with the efforts of our team in bringing our assets back on line, the loss of revenues and cost of coming back on line resulted in financial performance well below management’s targets for the year.

We did see positive developments during the year, including growing our production by 18%, and we believe we are well positioned going into 2013 to continue our production growth. We successfully completed all three of the development wells undertaken during 2012, adding new pool discoveries and setting up future development opportunities in the process. We solidified our lease position in Vermilion 16 and are well positioned to participate in the current ultra-deep trend with the drilling of our Mesa Verde well and are expanding and enhancing the quality of our prospect inventory through our drilling program, our reinstitution of our field reserve studies and our anticipated acquisition of four Gulf of Mexico lease blocks as a result of apparent high bids in a March 2013 lease sale. Entering 2013, we have a solid net asset value per share of approximately $9.00, what we view as a favorable hedge portfolio in place, a strong cash position and anticipated cash flow which we believe will fully fund our development program in 2013. We will focus on our deep inventory of prospects and we are confident that our development program and other initiatives, including the expected addition of up to 400 gross barrels of oil per day aggregate from our tubing replacement program, will net excellent results in 2013 and beyond.”

Conference Call Information

The company will host a conference call to discuss these results on March 27, 2013 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 (800) 736-6099. Interested international parties can participate in the call by dialing (914) 495-8532. The participant passcode for both the U.S. and international call is 20088841. 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 listen to the live call.

About Saratoga Resources

Saratoga Resources is an independent exploration and production company with offices in Houston, Texas and Covington, Louisiana. Principal holdings cover 32,027 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, but not limited to, statements regarding future ability to 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, ability to secure leases 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 BALANCE SHEETS
 
December 31,
2012   2011
ASSETS
Current assets:
Cash and cash equivalents $ 32,302,313 $ 15,874,680
Accounts receivable 12,430,158 10,539,757
Prepaid expenses and other 1,268,971 1,189,406
Deferred tax asset, net - 1,400,000
Other current assets   150,000     150,000  
Total current assets 46,151,442 29,153,843
 
Property and equipment:
Oil and gas properties - proved (successful efforts method) 260,916,084 196,101,827
Other   795,138     658,113  
261,711,222 196,759,940
Less: Accumulated depreciation, depletion and amortization   (81,640,272 )   (53,830,820 )
Total property and equipment, net 180,070,950 142,929,120
 
Deferred tax asset, net 8,499,575 5,147,962
Other assets, net   19,929,394     20,531,218  
Total assets $ 254,651,361   $ 197,762,143  
 
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 7,259,244 $ 4,598,534
Revenue and severance tax payable 6,129,867 5,709,773
Accrued liabilities 10,787,044 8,451,655
Derivative liabilities – short term 171,086 -
Short-term notes payable 373,360 344,256
Asset retirement obligation – current   256,200     1,548,945  
Total current liabilities 24,976,801 20,653,163
 
Long-term liabilities
Asset retirement obligation 16,815,736 9,852,920
Long-term debt, net of discount of $2,104,106 and $2,115,195, respectively   150,395,894     125,384,805  
Total long-term liabilities 167,211,630 135,237,725
 
Commitment and contingencies (see notes)
 
Stockholders' equity:
Common stock, $0.001 par value; 100,000,000 shares authorized 30,905,101 and 26,714,815 shares issued and outstanding at December 31, 2012 and 2011, respectively 30,905 26,714
Additional paid-in capital 77,140,451 52,674,252
Accumulated other comprehensive loss (171,086 ) -
Retained earnings   (14,537,340 )   (10,829,711 )
 
Total stockholders' equity   62,462,930     41,871,255  
 
Total liabilities and stockholders' equity $ 254,651,361   $ 197,762,143  
 
Saratoga Resources, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME
 
For the Year Ended
December 31,
2012   2011   2010
Revenues:
Oil and gas revenues $ 82,528,932 $ 76,159,268 $ 52,734,207
Oil and gas hedging 72,078 - -
Other revenues   1,411,465     4,774,882     2,284,008  
 
Total revenues 84,012,475 80,934,150 55,018,215
 
Operating Expense:
Lease operating expense 19,317,283 17,123,890 13,774,406
Workover expense 3,828,197 2,666,600 2,154,482
Exploration expense 547,192 596,065 1,921,943
Loss on plugging and abandonment 2,468,969 393,599 -
Dry hole costs 93,353 3,912,823 -
Depreciation, depletion and amortization 27,407,700 15,591,048 16,001,826
Impairment expense 401,752 641,791 -
Accretion expense 1,510,165 1,672,900 1,668,268
Gain on revision of asset retirement obligations (245,007 ) (303,633 ) -
Gain on purchase price adjustment - (1,426,778 ) -
Loss on settlement of accounts payable - - 990,786
General and administrative 8,584,486 8,704,536 8,476,124
Severance taxes   7,768,426     6,090,666     5,214,677  
 
Total operating expenses   71,682,516     55,663,507     50,202,512  
 
Operating income 12,329,959 25,270,643 4,815,703
 
Other income (expense):
Commodity derivative expense, net - - 696,550
Interest income 32,433 248,935 115,350
Interest expense (17,651,496 ) (17,947,784 ) (22,584,934 )
Financing expense (7,527 ) (837,364 ) -
Gain on extinguishment of debt   -     7,708,486     -  
 
Total other expense   (17,626,590 )   (10,827,727 )   (21,773,034 )
 
Net income (loss) before reorganization expenses and income taxes (5,296,631 ) 14,442,916 (16,957,331 )
Reorganization expenses   161,416     436,092     2,198,359  
Net income (loss) before income taxes (5,458,047 ) 14,006,824 (19,155,690 )
Income tax provision (benefit)   (1,750,418 )   (6,839,117 )   285,838  
Net income (loss) $ (3,707,629 ) $ 20,845,941   $ (19,441,528 )
 

Other Comprehensive income (loss)
Unrealized loss on derivative instruments   (171,086 )   -     -  
Total comprehensive income (loss) $

(3,878,715
) $ 20,845,941   $ (19,441,528 )
 
Net income (loss) per share:
Basic $ (0.13 ) $ 0.95   $ (1.14 )
Diluted $ (0.13 ) $ 0.93   $ (1.14 )
 
Weighted average number of common shares outstanding:
Basic   29,378,542     21,975,480     16,996,166  
Diluted   29,378,542     22,367,696     16,996,166  
 
Saratoga Resources, Inc.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
 
      Additional   Net   Other   Total
Common Stock Paid-in Income Comprehensive Stockholders’
Shares   Amount Capital (Loss) (Loss) Equity (Deficit)
Balance, December 31, 2009 16,690,292 $ 16,690 $ 19,887,814 $ (12,234,124 ) $ - $ 7,670,380
 
Common issued to vendors 483,306 483 990,302 - - 990,785
 
Common issued for services 125,000 125 287,375 - - 287,500
 

Fair value of warrants issued in connection with debt restructuring
- - 4,099,116 - - 4,099,116
 
Fair value of warrants issued for services - - 120,000 - - 120,000
 
Stock-based employee compensation - - 2,162,644 - - 2,162,644
 
Net loss -   -   -     (19,441,528 )   -     (19,441,528 )
 
Balance, December 31, 2010 17,298,598 17,298 27,547,251 (31,675,652 ) - (4,111,103 )
 
Common stock options exercised 118,354 118 43,082 - - 43,200
 
Common stock warrants exercised 1,043,748 1,044 (1,044 ) - - -
 
Common stock issued in private placement 8,254,115 8,254 34,761,844 - - 34,770,098
 

Fair value of warrants cancelled in debt restructuring
- - (10,620,000 ) - - (10,620,000 )
 
Stock-based employee compensation - - 943,119 - - 943,119
 
Net income -   -   -     20,845,941     -     20,845,941  
 
Balance, December 31, 2011 26,714,815 26,714 52,674,252 (10,829,711 ) - 41,871,255
 
Common stock options exercised 208,599 209 405,047 - - 405,256
 
Common stock warrants exercised 892,327 892 4,460,743 - - 4,461,635
 
Common stock issued in private placement 3,089,360 3,090 18,394,490 - - 18,397,580
 
Stock-based employee compensation - - 1,205,919 - - 1,205,919
 
Other comprehensive loss - - - - (171,086 ) (171,086 )
 
Net income -   -   -     (3,707,629 )   -     (3,707,629 )
 
Balance, December 31, 2012 30,905,101 $ 30,905 $ 77,140,451   $ (14,537,340 ) $ (171,086 ) $ 62,462,930  
 
Saratoga Resources, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
For the Year Ended December 31,
2012   2011   2010
Cash flows from operating activities:
Net income (loss) $ (3,707,629 ) $ 20,845,941 $ (19,441,528 )
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation, depletion, amortization and impairment 27,809,452 16,232,839 16,001,826
Accretion expense 1,510,165 1,672,900 1,668,268
Amortization of debt issuance costs and debt discount 1,304,362 2,228,909 2,492,390
Commodity derivative (income) expense - - (473,962 )
Dry hole costs 93,353 3,912,823 -
Stock-based compensation 1,205,919 943,119 2,570,144
Loss on settlement of accounts payable - - 990,786
Loss on plugging and abandonment 2,468,969 393,599 -
Gain on purchase price adjustment - (1,426,778 ) -
Gain on revision of asset retirement obligations (245,007 ) (303,633 ) -
Gain on extinguishment of debt - (7,708,486 ) -
Deferred tax benefit (1,951,613 ) (6,547,962 ) -
Changes in operating assets and liabilities:
Accounts receivable (1,890,401 ) (1,499,920 ) (1,660,182 )
Prepaids and other (79,565 ) (150,688 ) 295,751
Accounts payable 180,923 (930,081 ) (11,556,869 )
Revenue and severance tax payable 420,094 641,443 (841,880 )
Payments to settle asset retirement obligations (3,062,625 ) (1,148,655 ) (153,655 )
Accrued liabilities   2,002,499     6,689,890     8,742,502  
Net cash provided (used) by operating activities 26,058,896 33,845,260 (1,366,409 )
 
Cash flows from investing activities:
Additions to oil and gas property (57,096,363 ) (29,347,415 ) (9,417,471 )
Additions to other property and equipment (137,025 ) (96,541 ) (24,293 )
Other assets   944,305     (1,028,048 )   (767,381 )
Net cash used by investing activities (56,289,083 ) (30,472,004 ) (10,209,145 )
 
Cash flows from financing activities:
Issuance of warrants - - 100
Proceeds from issuance of common stock 23,264,470 14,813,298 -
Proceeds from short-term notes payable 1,685,226 1,649,068 1,260,276
Proceeds from long term debt 24,645,000 -
Repayment of short-term notes payable (1,656,122 ) (1,590,110 ) (1,389,234 )
Repayment of debt borrowings - (268,224 ) (5,500,000 )
Repayment of debt borrowings - related party - (736,633 ) -
Debt issuance costs of long term debt (1,280,754 ) (5,775,959 ) -
Settlement of commodity hedges recorded in purchase accounting   -     -     38,913  
Net cash provided (used) by financing activities   46,657,820     8,091,440     (5,589,945 )
 
Net increase (decrease) in cash and cash equivalents 16,427,633 11,464,696 (17,165,499 )
Cash and cash equivalents - beginning of period   15,874,680     4,409,984     21,575,483  
Cash and cash equivalents - end of period $ 32,302,313   $ 15,874,680   $ 4,409,984  
 
Supplemental disclosures of cash flow information:
Cash paid for income taxes $ 201,195 $ 130,000 902,491
Cash paid for interest 8,011,117 8,210,196 10,537,405
 
Non-cash investing and financing activities:
Unrealized loss on derivative instruments (171,086 ) - -
Accounts payable for oil and gas additions $ 2,479,787 $ 870,186 181,933
Accrued liabilities for oil and gas additions 332,891 124,712 280,556
Revisions to asset retirement obligations 4,572,244 1,542,172 281,389
Asset retirement obligations acquired 181,318 67,728 -
Accrued interest converted to long-term debt - - 30,811,843
Repayment of debt borrowing made directly to then existing lender by new lender and from proceeds from issuance of common stock (145,231,776 )
Proceeds from issuance of long-term debt paid directly to then existing lender - 125,231,775
Proceeds from issuance of common stock paid directly to then existing lender - 20,000,000
Debt issuance costs from issuance of warrants - - 4,099,016
 

Proved Oil and Gas Reserves
        Gas (Mcf)   Oil (Bbls)   Boe
For the year ended December 31, 2010
Beginning of year 62,247,900 7,578,100 17,952,751
Acquisition of reserves 887,679 252,047 399,994
Discoveries and extensions - - -
Improved recovery - - -
Revisions (377,179 ) 598,253 535,390
Production (1,882,800 ) (550,000 ) (863,800 )
End of year 60,875,600 7,878,400 18,024,335
Proved developed reserves
Beginning of year 9,387,400 2,984,800 4,549,367
End of year 5,112,400 2,656,600 3,508,667
 
For the year ended December 31, 2011
Beginning of year 60,875,600 7,878,400 18,024,335
Acquisition of reserves 1,717,000 172,900 459,067
Discoveries and extensions 1,456,000 18,400 261,067
Improved recovery - - -
Revisions 3,951,000 511,200 1,169,700
Production (2,038,000 ) (605,900 ) (945,567 )
End of year 65,961,600 7,975,000 18,968,602
Proved developed reserves
Beginning of year 5,112,400 2,656,600 3,508,667
End of year 10,101,000 2,580,600 4,264,100
 
For the year ended December 31, 2012
Beginning of year 65,961,600 7,975,000 18,968,602
Acquisition of reserves - - -
Discoveries and extensions - - -
Improved recovery - - -
Revisions (10,403,800 ) 1,108,000 (625,968 )
Production (2,639,500 ) (676,400 ) (1,116,317 )
End of year 52,918,300   8,406,600   17,226,317  
Proved developed reserves
Beginning of year 10,101,000 2,580,600 4,264,100
End of year 9,159,500 2,809,200 4,335,783
 

Standardized Measure of Discounted Future Net Cash Flows

The standardized measure of discounted future net cash flows from our estimated proved oil and gas reserves is as follows:
      (dollars in thousands)   2012   2011   2010
Future cash inflows $ 1,102,848 $ 1,210,125 $ 934,061
Future production costs (258,251 ) (281,429 ) (209,593 )
Future development costs   (232,806 )   (226,552 )   (239,510 )
Future net cash flows before income taxes 611,791 702,144 484,958
Future income tax expense   (171,671 )   (207,555 )   (130,490 )
Future net cash flows before 10% discount 440,120 494,589 354,468
10% annual discount for estimating timing of cash flows   (147,435 )   (163,705 )   (118,811 )
Standardized measure of discounted future net cash flows $ 292,685   $ 330,884   $ 235,657  
 

Set forth in the table below is a summary of the changes in the standardized measure of discounted future net cash flows for our proved oil and gas reserves:
      (dollars in thousands)   2012   2011   2010
Beginning of year $ 330,884 $ 235,657 $ 145,586
Sales of oil and gas produced, net of production costs (51,615 ) (49,945 ) (31,270 )
Net change in prices and production costs (2,218 ) 108,942 135,389
Extension, discoveries, and improved recovery, less related costs - 16,128 -
Development costs incurred during the year 20,993 7,088 -
Net change in estimated future development costs (19,437 ) 7,493 (49,840 )
Revisions of previous quantity estimates (20,211 ) 37,107 13,943
Net change from acquisitions of minerals in place - 16,861 3,689
Net change in income taxes 19,232 (53,119 ) (1,919 )
Accretion of discount 46,431 31,597 22,398
Changes in timing and other   (31,374 )   (26,925 )   (2,319 )
End of year $ 292,685   $ 330,884   $ 235,657  
 

Non-GAAP Financial Measures

Discretionary Cash Flow is a non-GAAP financial measure.

The company defines Discretionary Cash Flow as net income (loss) before income tax expense (benefit), interest expense and depreciation, depletion and amortization excluding interest income, realized gains on out-of-period derivative contract settlements, (gain) loss on the sale of assets, acquisition costs, settlements for prior claims, other various non-cash items (including asset impairments, income from equity investments, stock-based compensation, unrealized (gain) loss on derivative contracts and provision for doubtful accounts), exploration and dry hole costs and costs associated with the company’s bankruptcy.

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.
  For the Three Months Ended   For the Twelve Months Ended
December 31, December 31,
2012   2011 2012   2011
 
Net income (loss) as reported $ (2,873,847) $ 10,717,486 $ (3,707,629) $ 20,845,941

Depreciation, depletion and amortization
13,237,168 3,213,959 27,407,700 15,591,048
Impairment expense 357,476 641,791 401,752 641,791
Income tax expense (benefit) (1,550,947) (6,747,749) (1,951,613) (6,839,117)
Exploration expense 177,773 22,988 547,192 596,065
Loss on plugging and abandonment - 393,599 2,468,969 393,599
Dry hole costs - 124,912 93,353 3,912,823
Accretion expense (156,347) 424,422 1,510,165 1,672,900
Gain on revision of asset retirement obligation (245,007) (303,633) (245,007) (303,633)
Stock based compensation 165,792 149,824 1,205,919 943,119
Debt issuance costs and discount 363,385 295,997 1,304,362 2,228,909
Gain on extinguishment of debt - - - (7,708,486)
Other income – prior acquisition adj.   225,900   (1,426,779)   225,900   (1,426,779)
Discretionary Cash Flow $ 9,701,346 $ 7,506,817 $ 29,261,063 $ 30,548,180
 

EBITDAX is a non-GAAP financial measure.

The company defines EBITDAX as net income (loss) before income tax expense (benefit), interest expense and depreciation, depletion and amortization excluding interest income, realized gains on out-of-period derivative contract settlements, (gain) loss on the sale of assets, acquisition costs, settlements for prior claims, other various non-cash items (including asset impairments, income from equity investments, noncontrolling interest, stock-based compensation, unrealized (gain) loss on derivative contracts and provision for doubtful accounts), exploration and dry hole costs and costs associated with the company’s bankruptcy.

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:
  For the Three Months Ended   For the Twelve Months Ended
December 31, December 31,
2012   2011 2012   2011
 
Net income (loss) as reported $ (2,873,847) $ 10,717,486 $ (3,707,629) $ 20,845,941
Depreciation, depletion and amortization 13,237,168 3,213,959 27,407,700 15,591,048
Impairment expense 357,476 641,791 401,752 641,791
Income tax expense (benefit) (1,536,522) (6,747,749) (1,951,613) (6,839,117)
Exploration expense 177,773 22,988 547,192 596,065
Loss on plugging and abandonment - 393,599 2,468,969 393,599
Dry hole costs - 124,912 93,353 3,912,823
Accretion expense (156,347) 424,422 1,510,165 1,672,900
Gain on revision of asset retirement obligation (245,007) (303,633) (245,007) (303,633)
Stock based compensation 165,792 149,824 1,205,919 943,119
Interest expense, net 4,588,458 4,315,916 17,626,590 17,698,849
Reorganization costs   39,888   61,678   161,416   436,092
EBITDAX $ 13,754,832 $ 13,015,193 $ 45,720,002 $ 47,880,991
 

PV10 is the estimated present value of the future net revenues from proved oil and natural gas reserves before income taxes, discounted using a 10% discount rate. PV10 is considered a non-GAAP financial measure under SEC regulations because it does not include the effects of future income taxes, as is required in computing the standardized measure of discounted future net cash flows. Saratoga believes that PV10 is an important measure that can be used to evaluate the relative significance of its oil and natural gas properties and that PV10 is widely used by security analysts and investors when evaluating oil and natural gas companies. Because many factors that are unique to each individual company impact the amount of future income taxes to be paid, the use of a pre-tax measure provides greater comparability of assets when evaluating companies. Saratoga believes that most other companies in the oil and natural gas industry calculate PV10 on the same basis. PV10 is computed on the same basis as the standardized measure of discounted future net cash flows, but without deducting income taxes.

Copyright Business Wire 2010

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