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NFR Energy LLC Announces 2012 Third Quarter Financial and Operational Results

November 14, 2012

HOUSTON, Nov. 14, 2012 /PRNewswire/ — NFR Energy LLC today reported its unaudited third quarter 2012 financial and operating results.

Key Third Quarter Results and Recent Events:

  • Drilled and completed Berckenhoff #1H – second well in the Eagle ford Shale
  • Completed sale of Montana assets for approximately $18 million
  • Post- September 30, executed second farm-out agreement providing NFR to earn 50% of 4,600 acres in Dewitt County in the Eagle Ford Shale.
  • Subsequent to September 30(th), the company has completed two Cotton Valley horizontal wells off a single pad in the Minden area. The two wells, the Jones 4H and the Redwine 4H, are producing at a combined gross rate of 12.7 MMCFD gas and 125 BOPD condensate with an additional estimated 370 barrels of NGL liquids per day. The wells are currently restricted due to pipeline constraints. In the next week we anticipate resolving this issue and the wells will be increased to a combined gas rate of 20 MMCFD.

Results of the Third Quarter 2012

Production volumes during the three months ended September 30, 2012 were 11.5 Bcfe, an increase of 0.5 Bcfe or 4% from third quarter 2011 production.

Revenues from production of oil and natural gas decreased from $52.7 million in the third quarter of 2011 to $42.5 million in the third quarter of 2012, a decrease of 19%. The net decrease in oil and natural gas revenues of $10.2 million in the third quarter of 2012 compared to the third quarter of 2011 resulted mainly from a decrease in average prices per Mcfe of 23%, offset by in an increase in production of 4%.

During the third quarter of 2012, the Company’s hedged realized average price for natural gas was $5.64 per Mcf. This is $2.76 per Mcf more than the Company’s unhedged realized average price of $2.88 per Mcf. In the third quarter of 2012, approximately 73% of our natural gas volumes and 46% of our oil volumes were hedged, which resulted in a realized gain on such derivative instruments of approximately $27.1 million. In the third quarter of 2011, approximately 79% of our natural gas volumes were hedged, which resulted in a realized gain on such derivative instruments of $18.7 million.

Lease operating expenses increased from $6.8 million in the third quarter of 2011 to $9.0 million in the third quarter of 2012, an increase of 33%. The increase in lease operating expense is due to an increase in production associated with our two recent producing property acquisitions in East Texas (closed in 2H of 2011). Lease operating expenses increased from $0.61 per Mcfe in the third quarter of 2011 to $0.79 per Mcfe in the third quarter of 2012. The increase of $0.18 per Mcfe is primarily due to an increase in production volumes attributed to the vertical well production acquired in the second half of 2011 previously mentioned.

Marketing, gathering, transportation and other expenses was $5.3 million in the third quarters of 2011 and 2012. Marketing, gathering, transportation and other expenses decreased on a per unit basis from $0.48 per Mcfe in the third quarter of 2011 to $0.46 per Mcfe in the third quarter of 2012.

Production and ad valorem taxes decreased from $2.2 million in the third quarter of 2011 to $2.0 million in the third quarter of 2012, a decrease of 11%, primarily as a result of the timing of the approval of high cost gas tax exemptions that are currently received on all of our horizontal gas wells. This decrease is offset by an increase in production and ad valorem taxes as a result of a 4% increase in production. The Company expects future volatility with production taxes as a result of timing of approval for the aforementioned exemptions. Production taxes as a percentage of natural gas and oil revenues before the effects of hedging were 5% and 4% for the third quarter of 2012 and 2011, respectively.

General and administrative expenses decreased from $5.5 million in the third quarter of 2011 to $5.1 million in the third quarter of 2012, a decrease of $0.4 million, or 7%, primarily as a result of lower due diligence and other acquisition costs in 2012,. General and administrative expenses decreased from $0.50 per Mcfe in the third quarter of 2011 to $0.44 per Mcfe in the third quarter of 2012 primarily as a result of an increase in production volumes without a proportionate increase in general and administrative expenses.

DD&A increased from $20.2 million in the third quarter of 2011 to $20.3 million in the third quarter of 2012, an increase of $0.1 million, as a result of the impact of the increased production. Depletion, depreciation, and amortization decreased from $1.84 per Mcfe in the third quarter of 2011 to $1.77 per Mcfe in the third quarter of 2012 due to a lower depletion and amortization base resulting from divested assets in the third quarter of 2012.

There were non-cash impairment charges primarily related to oil and natural gas properties in the third quarter of 2012 of $233.5 million and impairments related to the write-down of carrying value of certain sizes of casing inventory of $0.4 million. In the third quarter of 2011, we did not record an impairment charge as a result of full cost ceiling limitation or for other assets. The impairment charges in 2012 are due to the carrying value of proved oil and gas properties in excess of the ceiling limitation as a result of the decline in the average of the historical unweighted first-day-of-the-month natural gas prices from the prior twelve month periods ended June 30, 2012 to September 30, 2012 of $3.15 to $2.83, respectively.

Interest expense, excluding capitalized interest of $1.5 million and $1.0 million, respectively, increased from $9.9 million for the third quarter of 2011 to $11.4 million for the third quarter of 2012, an increase of $1.5 million, primarily as a result of additional borrowings on our senior secured revolving credit facility that were used to fund capital expenditures.

Certain of the Company’s derivative contracts are not eligible for hedge accounting, and as a result, are required to be marked-to-market each period, with all gains or losses on such contracts, (realized or unrealized) being recognized in our results of operations. During the three months ended September 30, 2012 and 2011, the company recognized an $8.2 million loss and a $3.6 million loss on derivative instruments, respectively. The amount of future gain or loss recognized on derivative instruments is dependent upon future natural gas prices, which will affect the value of the contracts, and the eligibility of the contract for hedge accounting treatment.

Along with the sale of the Company’s producing assets in the Bear Paws, the Company also closed on the sale of its controlling ownership interests in the associated Montana gathering entities of Lodge Creek Pipelines, LLC and Willow Greek Gathering, LLC on August 31, 2012, which resulted in a loss of $9.9 million.

Results of the nine months ended September 30, 2012

Production volumes during the nine months ended September 30, 2012 were 37.6 Bcfe, an increase of 7.0 Bcfe or 23% from nine months ended September 30, 2011 production. The increase in production is attributed to positive results from the Company’s drilling program and continued success of its recent acquisitions.

Revenues from production of oil and natural gas decreased from $147.4 million in the first nine months of 2011 to $131.8 million in the first nine months of 2012, a decrease of 11%. The net decrease in oil and natural gas revenues of $15.6 million in the first nine months of 2012 compared to the first nine months of 2011 resulted from the decrease in average prices per Mcfe of 27% offset by an increase in production due to acquisitions and drilling success of 23%.

During the nine months ended September 30, 2012, the Company’s hedged realized average price for natural gas was $5.20 per Mcf. This is $2.64 per Mcf more than the Company’s unhedged realized average price of $2.56 per Mcf. In the first nine months of 2012, approximately 66% of our natural gas volumes and 45% of our oil volumes were hedged, which resulted in a realized gain on such derivative instruments of approximately $85.1 million. In the first nine months of 2011, approximately 73% of our natural gas volumes were hedged, which resulted in a realized gain on such derivative instruments of $48.5 million.

Lease operating expenses increased from $18.0 million in the first nine months of 2011 to $32.3 million in the first nine months of 2012, an increase of 80%. The increase in lease operating expense is due to an increase in production associated with our two recent producing property acquisitions in East Texas. Lease operating expenses increased from $0.59 per Mcfe in the first nine months of 2011 to $0.86 per Mcfe in the first nine months of 2012. The increase of $0.27 per Mcfe is primarily due to acquisition related transition services costs, one-time costs for compliance improvements and operating efficiency efforts of approximately $3.0 million and an increase in production volumes associated with vertical wells acquired in the second half of 2011 with higher operating costs compared to the first nine months of 2011.

Marketing, gathering, transportation and other expenses increased from $14.4 million in the first nine months of 2011 to $16.0 million in the first nine months of 2012, an increase of 11%. The increase is due to an increase in production volumes by 23%. Marketing, gathering, transportation and other expenses decreased on a per unit basis from $0.47 per Mcfe in the first nine months of 2011 to $0.42 per Mcfe in the first nine months of 2012. The decrease is due primarily to the Company’s ability to secure favorable marketing and transportation contract terms with respect to the property acquisitions completed in 2011.

Production and ad valorem taxes decreased from $5.8 million in the first nine months of 2011 to $5.1 million in the first nine months of 2012, a decrease of 13%, primarily as a result of the timing of the approval of high cost gas tax exemptions that are currently received on all of our horizontal gas wells. This decrease is offset by an increase in production and ad valorem taxes as a result of a 23% increase in production. The Company expects future volatility with production taxes as a result of timing of approval for the aforementioned exemptions. Production taxes as a percentage of natural gas and oil revenues before the effects of hedging were 4% for the first nine months of 2012 and 2011.

General and administrative expenses decreased from $17.4 million in the first nine months of 2011 to $15.3 million in the first nine months of 2012, a decrease of $2.1 million, or 12%, primarily as a result of lower due diligence and other acquisition costs in 2012. General and administrative expenses decreased from $0.57 per Mcfe in the first nine months of 2011 to $0.41 per Mcfe in the first nine months of 2012 primarily as a result of an increase in production volumes without a proportionate increase in general and administrative expenses.

DD&A increased from $55.1 million in the first nine months of 2011 to $71.6 million in the first nine months of 2012, an increase of $16.5 million, or 30%, as a result of the impact of the increased production. Depletion, depreciation, and amortization increased from $1.80 per Mcfe in the first nine months of 2011 to $1.90 per Mcfe in the first nine months of 2012 due to higher depletion and amortization base resulting from acquired assets and capital expenditures.

There were non-cash impairment charges primarily related to oil and natural gas properties in the first nine months of 2012 of $654 million, impairment charges for gas gathering and processing equipment of $11.5 million and impairments related to the write-down of carrying value of certain sizes of casing inventory of $0.7 million. In the first nine months of 2011, we did not record an impairment charge as a result of full cost ceiling limitation; however, impairment charges of $0.7 million were recorded related to the write-down of carrying value of certain sizes of casing inventory. The impairment charges in 2012 are due to the carrying value of proved oil and gas properties in excess of the ceiling limitation as a result of the decline in the average of the historical unweighted first-day-of-the-month natural gas prices from the prior twelve month periods ended December 31, 2011 to September 30, 2012 of $4.12 to $2.83, respectively.

Interest expense, excluding capitalized interest of $4.8 million and $3.2 million, respectively, increased from $28.4 million for the first nine months of 2011 to $34.5 million for the first nine months of 2012, an increase of $6.1 million, primarily as a result of additional borrowings on our senior secured revolving credit facility that were used to fund our capital expenditures.

Certain of our derivative contracts are not eligible for hedge accounting, and as a result, are required to be marked-to-market each period, with all gains or losses (realized or unrealized) on such contracts, being recognized in our results of operations. During the nine months ended September 30, 2012 and 2011, the company recognized a $13.3 million loss and a $19.0 million loss on derivative instruments, respectively. The amount of future gain or loss recognized on derivative instruments is dependent upon future natural gas prices, which will affect the value of the contracts, and the eligibility of the contract for hedge accounting treatment.

Along with the sale of the Company’s producing assets in the Bear Paws, the Company also closed on the sale of its controlling ownership interests in the associated Montana gathering entities of Lodge Creek Pipelines, LLC and Willow Greek Gathering, LLC on August 31, 2012, which resulted in a loss of $9.9 million.

Debt/Liquidity

As of September 30, 2012, our borrowing base under our senior secured revolving credit facility was $570.9 million, and we had total outstanding indebtedness of approximately $398 million. As of October 19, 2012, our borrowing base has been redetermined and reduced from $570.9 million to $525 million. After giving the effect to our redetermined borrowing base, we were able to incur approximately $127 million of secured indebtedness under our credit facility. As of November 13, 2012, the Company has repaid $3.0 million and had an outstanding balance of $395 million.

NFR will host a conference call at 9:30 a.m. CDT on November 14, 2012. To participate in the call, dial 1-888-606-5934 and international participants should dial 1-517-308-9375. The participant passcode is NFR2012. A replay of the conference call will be available through the Company’s website at http://www.nfrenergy.com for the three months ended September 30, 2012.

NFR Energy LLC is a privately?held natural gas and oil company based in Houston, Texas. The Company’s current operations are principally located in East Texas, with production from the Haynesville Shale and Cotton Valley Sand formations and in South Texas, with production from the Eagle Ford Shale formation.

This press release includes “forward-looking statements.” All statements, other than statements of historical facts, included in this press release that address activities, events or developments that the Company expects, believes or anticipates will or may occur in the future are forward-looking statements. These statements include, but are not limited to forward-looking statements about plans, strategies, objectives and anticipated financial and operating results of the Company, including the Company’s drilling program, production, hedging activities, capital expenditure levels and other guidance. These statements are based on certain assumptions made by the Company based on management’s experience and perception of historical trends, current conditions, anticipated future developments and other factors believed to be appropriate. Such statements are subject to a number of assumptions, risks and uncertainties, many of which are beyond the control of the Company, which may cause actual results to differ materially from those implied or expressed by the forward-looking statements. These risks include, but are not limited to, commodity price volatility, inflation, lack of availability of drilling and production equipment and services, environmental risks, drilling and other operating risks, regulatory changes, the uncertainty inherent in estimating natural gas and oil reserves and in projecting future rates of production, cash flow, access to capital and the timing of development expenditures. See “Risk Factors” in the Company’s Annual Report posted at www.nfrenergy.com and other public filings and press releases.

Any forward-looking statement speaks only as of the date on which such statement is made and the Company undertakes no obligation to correct or update any forward-looking statement, whether as a result of new information, future events or otherwise.

    NFR ENERGY LLC
    Operational and Financial Statistics

                                                              Three Months Ended    Nine Months Ended
                                                                 September 30,        September 30,
                                                                 -------------        -------------
                                                                               2012                 2011     2012     2011
                                                                               ----                 ----     ----     ----
    Oil, natural gas and NGL sales by product (in thousands):
    Natural gas                                                             $28,259              $40,168  $82,415 $112,103
    Oil                                                                       6,934                3,021   21,059   10,795
    NGL                                                                       7,269                9,510   28,358   24,466
                                                                              -----                -----   ------   ------
    Total                                                                   $42,462              $52,699 $131,832 $147,364

    Production data:
    Natural gas (Bcf)                                                          9.81                 9.71    32.20    27.03
    Oil (MBbl)                                                                70.70                35.39   215.21   121.01
    NGL (MBbl)                                                               200.88               179.37   689.95   480.90
    Combined (Bcfe)(1)                                                        11.44                11.00    37.63    30.64

    Average prices before effects of hedges (2):
    Natural gas (per Mcf)                                                     $2.88                $4.14    $2.56    $4.15
    Oil (per Bbl)                                                            $98.08               $85.36   $97.85   $89.21
    NGL (per Bbl)                                                            $36.19               $53.02   $41.10   $50.88
    Combined (per Mcfe)(1)                                                    $3.71                $4.79    $3.50    $4.81

    Average realized prices after effects of hedges (2):
    Natural gas (per Mcf)                                                     $5.64                $6.06    $5.20    $5.94
    Oil (per Bbl)                                                            $98.08               $85.36   $97.85   $89.21
    NGL (per Bbl)                                                            $36.19               $53.02   $41.10   $50.88
    Combined (per Mcfe)(1)                                                    $6.08                $6.49    $5.77    $6.39

    Average costs (per Mcfe)(1):
    Lease operating                                                           $0.79                $0.61    $0.86    $0.59
    Workover                                                                  $0.04                $0.09    $0.05    $0.08
    Marketing, gathering, transportation and other                            $0.46                $0.48    $0.42    $0.47
    Production and ad valorem taxes                                           $0.17                $0.20    $0.13    $0.19
    General and administrative                                                $0.44                $0.50    $0.41    $0.57
    Depletion, depreciation and amortization                                  $1.77                $1.84    $1.90    $1.80

    (1) Oil production was converted at six Mcf per Bbl to calculate combined production and per Mcfe amounts.
    (2)  Average prices shown in the table reflect prices both before and after the effects of our realized commodity hedging transactions. Our calculation of such effects includes realized gains or losses on cash settlements
         for commodity derivatives.

    NFR ENERGY LLC
    CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

                                                                    Three Months Ended      Nine Months Ended
                                                                      September 30,           September 30,

                                                                                      2012                   2011       2012      2011
                                                                                      ----                   ----       ----      ----

                                                                     (in thousands)          (in thousands)

    Revenues
         Oil, natural gas and natural gas liquids sales                            $42,462                $52,699   $131,832  $147,364
         Gain on derivative instruments                                             27,060                 18,678     85,135    48,472
         Other                                                                          48                     21        (53)      103
    Total revenues                                                                  69,570                 71,398    216,914   195,939
                                                                                    ------                 ------    -------   -------
    Operating expenses
         Lease operating                                                             9,019                  6,758     32,304    17,972
         Workover                                                                      498                    988      1,757     2,556
         Marketing, gathering, transportation and other                              5,301                  5,277     15,982    14,425
         Production and ad valorem taxes                                             1,976                  2,222      5,059     5,823
         General and administrative                                                  5,058                  5,463     15,292    17,385
         Depletion, depreciation and amortization                                   20,296                 20,215     71,592    55,094
         Gain on bargain purchase                                                        -                (54,459)         -   (81,183)
         Accretion                                                                     199                    168        680       446
         Bad debt                                                                        -                      -          -         3
         Impairments                                                               233,923                      -    666,223       656
         Loss on sale of assets                                                      9,880                      -      9,880         -
    Total operating expenses                                                       286,150                (13,368)   818,769    33,177
                                                                                   -------                -------    -------    ------
    Other income (expenses)
         Interest                                                                  (11,396)                (9,938)   (34,456)  (28,377)
         Loss on derivative instruments                                             (8,212)                (3,555)   (13,340)  (19,026)
         Other income (expenses)                                                        16                     37       (292)      (53)
    Total other expenses                                                           (19,592)               (13,456)   (48,088)  (47,456)
                                                                                   -------                -------    -------   -------
    Net income (loss) including noncontrolling interests                          (236,172)                71,310   (649,943)  115,306
    Less:  Net income (loss) applicable to noncontrolling interests                    (14)                   (18)        17       (86)

    Net income (loss) applicable to controlling interests                        $(236,186)               $71,292  $(649,926) $115,220
                                                                                 ---------                -------  ---------  --------

    NFR ENERGY LLC
    ADJUSTED EBITDA

                                                             Three Months Ended        Nine Months Ended
                                                                September 30,            September 30,
                                                                -------------            -------------
                                                                                 2012                   2011       2012      2011
                                                                                 ----                   ----       ----      ----
                                                                      (in thousands)

    Net income (loss) applicable to controlling interests                   $(236,186)               $71,292  $(649,926) $115,220

    Reconciliation to derive Adjusted EBITDA (1):
    Interest expense, net of capitalized interest                              11,396                  9,938     34,456    28,377
    Depletion, depreciation and amortization                                   20,296                 20,215     71,592    55,094
    Impairments                                                               233,923                      -    666,223       656
    Loss on derivative instruments                                              7,528                  2,958     11,482    17,497
    Gain on bargain purchase                                                        -                (54,459)         -   (81,183)
    Pro forma adjustments                                                           -                  2,096          -    11,551
    Loss on sale of assets                                                      9,880                      -      9,880         -
    Other                                                                          52                     35        572       265
    Net (income) loss applicable to noncontrolling interests                       14                     18        (17)       86
    Adjusted EBITDA (1)                                                       $46,903                $52,093   $144,262  $147,563
                                                                              -------                -------   --------  --------

    (1)            Adjusted EBITDA
                   are non-GAAP
                   financial
                   measures. We use
                   Adjusted EBITDA
                   as a
                   supplemental
                   financial
                   measure.
                   Adjusted EBITDA
                   is calculated in
                   a manner
                   consistent with
                   the indenture
                   governing our
                   2017 Notes and
                   our senior
                   secured
                   revolving credit
                   facility as net
                   income (loss)
                   before interest,
                   taxes,
                   depreciation and
                   amortization, as
                   further adjusted
                   to include other
                   adjustments,
                   such as
                   impairment,
                   accretion
                   expense,
                   unrealized hedge
                   gains or losses
                   and other non-
                   cash charges and
                   pro forma
                   adjustments for
                   acquisitions and
                   divestitures
                   that may not be
                   comparable to
                   similarly titled
                   measures,
                   employed by
                   other companies.
                   Adjusted EBITDA
                   are measures of
                   performance
                   calculated in
                   accordance with
                   GAAP. Adjusted
                   EBITDA should
                   not be
                   considered in
                   isolation or as
                   a substitute for
                   operating
                   income, net
                   income or loss,
                   cash flows
                   provided by
                   operating,
                   investing and
                   financing
                   activities, or
                   other income or
                   cash flow
                   statement data
                   prepared in
                   accordance with
                   GAAP. Adjusted
                   EBITDA provide
                   no information
                   regarding a
                   company's
                   capital
                   structure,
                   borrowings,
                   interest costs,
                   capital
                   expenditures,
                   and working
                   capital movement
                   or tax position.
                   Adjusted EBITDA
                   do not represent
                   funds available
                   for
                   discretionary
                   use because
                   those funds are
                   required for
                   debt service,
                   capital
                   expenditures,
                   working capital,
                   and other
                   commitments and
                   obligations.
                   However, our
                   management team
                   believes
                   Adjusted EBITDA
                   are useful to an
                   investor in
                   evaluating our
                   company because
                   these measures:

                  >                   are widely used by investors in
                                      the natural gas and oil
                                      industry to measure a company's
                                      operating performance without
                                      regard to items excluded from
                                      the calculation of such term,
                                      which can vary substantially
                                      from company to company
                                      depending upon accounting
                                      methods and book value of
                                      assets, capital structure and
                                      the method by which assets were
                                      acquired, among other factors;

                  >                   help investors to more
                                      meaningfully evaluate and
                                      compare the results of our
                                      operations from period to
                                      period by removing the effect
                                      of our capital structure from
                                      our operating structure; and

                  >                   are used by our management team
                                      for various purposes, including
                                      strategic planning and
                                      forecasting. Adjusted EBITDA is
                                      also the basis for covenants
                                      under the indenture governing
                                      our 2017 Notes regulating
                                      future debt issuance and
                                      restricted payments and
                                      pursuant to maintenance
                                      covenants under our senior
                                      secured revolving credit
                                      facility.

    NFR
     ENERGY
     LLC
     Selected
     Balance
     Sheet
     Data
                              September 30,              December 31,
                                                   2012                     2011
                                                   ----                     ----
                              (in thousands)
    Assets:
        Total
         current
         assets                                 $81,443                 $125,665
        Total
         property
         plant
         and
         equipment,
         net                                    813,147                1,507,862
        Other
         noncurrent
         assets                                  26,656                   51,589
    Total
     assets                                    $921,246               $1,685,116
                                               ========               ==========

     Liabilities
     and
     member's
     capital:
        Total
         current
         liabilities                            $65,811                 $106,550
        Credit
         facility                               398,000                  418,000
        Senior
         notes                                  347,253                  346,782
        Other
         noncurrent
         liabilities                             35,803                   33,611
    Total
     Liabilities                                846,867                  904,943
                                                -------                  -------

         Member's
         capital                                 74,379                  780,173

    Total
     Liabilities
     and
     member's
     capital                                   $921,246               $1,685,116
                                               ========               ==========

     Selected
     Cash
     Flow
     Data
                     Nine Months Ended September 30,
                                                   2012                     2011
                                                   ----                     ----
                              (in thousands)
    Net
     cash
     provided
     by
     operating
     activities                                $106,973                 $101,432
    Net
     cash
     used
     in
     investing
     activities                                 (88,762)                (414,196)
    Net
     cash
     provided
     by
     (used
     in)
     financing
     activities                                 (20,183)                 312,126
                                                -------                  -------
    Net
     decrease
     in
     cash
     and
     cash
     equivalents                                 (1,972)                    (638)

    Cash
     and
     cash
     equivalents,
     beginning
     of
     period                                       4,306                    4,437
    Cash
     and
     cash
     equivalents,
     end
     of
     period                                      $2,334                   $3,799
                                                 ======                   ======

SOURCE NFR Energy LLC


Source: PR Newswire