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Teton Energy Corporation Announces Net Income of $19.3 Million For Third Quarter of 2008

Posted on: Thursday, 6 November 2008, 06:00 CST

DENVER, Nov. 6 /PRNewswire-FirstCall/ -- Teton Energy Corporation ("Teton" or "the Company") today reported operating revenues of $9.8 million for the third quarter of 2008, a 642 percent increase over the third quarter of 2007. The Company reported net income of $19.3 million for the third quarter of 2008, or $0.74 per fully diluted share of common stock. This compares to a loss of $952,000, or $0.06 per fully diluted share of common stock, on operating revenues of $1.3 million for the third quarter of 2007.

The results for the third quarter of 2008 included an unrealized commodity derivative gain of $22.5 million, an impairment charge of $4.0 million related to the Teton/Noble AMI in the DJ Basin, a net non-cash gain on derivative warrant liabilities of $5.9 million due to a decrease in the fair value of the related liability and other non-cash items totaling approximately $1.8 million. These other non-cash items included amortization of debt discount and issuance costs of approximately $250,000 and stock-based compensation of approximately $1.5 million. Excluding these items, the adjusted net loss for the third quarter of 2008 would have been $3.3 million, or $0.15 per fully diluted share.

Operating cash flow from oil and gas activities (defined as oil and gas sales less lease operating expense, transportation expense and production taxes) for the third quarter of 2008 increased 696 percent to $6.5 million, compared to $817,000 for the same period in 2007. Earnings before interest, taxes, depreciation, depletion and accretion, exploration expense, and non- cash general and administrative expense (EBITDAX, a non-GAAP measure - refer to last table of press release for a reconciliation to net income), increased to $3.2 million in the third quarter of 2008 from a negative $197,000 in the third quarter of 2007.

For the nine months ended September 30, 2008, the Company realized a net loss of $18.9 million, or $0.93 per fully diluted share of common stock, on operating revenues of $23.5 million. This compares to a net loss of $10.0 million or a loss of $0.62 per fully diluted share of common stock for the same period in 2007. Excluding a $1.0 million unrealized commodity derivative loss, the $4.0 million impairment charge and other non-cash items totaling $9.0 million, the adjusted net loss for the nine months of 2008 would have been $4.9 million, or $0.24 per fully diluted share.

Operating cash flow from oil and gas activities increased approximately 600 percent for the nine months ended September 30, 2008 to $17.4 million, compared to $2.5 million for the same period of 2007. EBITDAX was $8.4 million for the first nine months of 2008 compared to a negative $570,000 in the same period of 2007.

Operating Metrics. The Company's gross margin (oil and gas revenues, net of the effect of commodity hedging positions, less oil and gas operating expenses) in the third quarter of 2008 increased 211 percent to $6.62 per thousand cubic feet equivalent ("Mcfe") compared to $2.13 per Mcfe in the third quarter of 2007.

Oil and gas operating expenses, including lease operating expense ("LOE"), transportation expense and production taxes, for the third quarter of 2008 collectively increased 219 percent on a per Mcfe basis to $3.92 per Mcfe. The increase per Mcfe was primarily due to the addition of new operating areas with higher oil production which results in higher unit LOE costs and higher transportation costs related to oil in the Central Kansas Uplift ("CKU"). Increased production taxes on an Mcfe basis were the result of higher commodity prices.

Operational Highlights. Operational highlights during the third quarter of 2008 include the following:

-- Oil and gas sales volumes increased 104 percent to 9.0 million cubic feet equivalent per day ("MMcfed"), of which 46 percent was oil and 54 percent was natural gas.

-- The Company realized an average wellhead price of $10.54 per Mcfe after realized hedging results in the third quarter of 2008 compared to an average realized wellhead price of $3.36 per Mcfe after realized hedging results in the third quarter of 2007.

-- The Company participated in the drilling of 51 gross wells in the third quarter and holds an interest in a total of 284 gross producing wells as of September 30, 2008.

Operating Activity by Project. Overall, the Company has interests in eight oil and gas projects, of which five are operated by Teton.

Central Kansas Uplift ("CKU"). Since acquiring the Teton-operated CKU assets of 50 producing wells and 48,000 gross acres in early April 2008, Teton has since drilled 17 gross wells. Ten wells are producing and two wells are being completed as salt water disposal wells. Additional potential producing zones, currently behind pipe, will be opened up as the production in these new wells stabilizes. Net production for the third quarter of 2008 averaged 3.3 million cubic feet equivalent per day ("MMcfed"). The most recent successful well, which came online at the end of October, was producing over 100 barrels of oil per day (600 Mcfed) and is not included in the third quarter average. Due largely to constraints in the credit market and subsequent reductions in capital expenditures for the remainder of 2008, Teton has reduced its drilling plans in the Central Kansas Uplift and now expects to drill an additional three wells for a total of 20 wells in 2008. Teton has performed 13 workovers to date which added incremental gross production of 127 bopd (762 Mcfed).

Piceance Basin. Teton participated in the drilling of 47 gross wells in the first nine months of 2008. The Company expects to participate in the drilling of 52 gross wells for the full year 2008. As of September 30, 2008, 80 gross wells were producing with 28 wells waiting on completion, three wells completing and two wells drilling. Net production averaged 3.7 MMcfed for the third quarter of 2008. The success rate for wells drilled and completed over the life of the project is 100 percent.

DJ Basin. In the Teton/Noble AMI, the Company participated in 69 gross wells during the first nine months of 2008 and expects to participate in a total of 105 gross wells in 2008. As of September 30, 2008, 164 gross wells have been drilled in the play of which 112 wells are currently producing, 14 wells are waiting on completion or on pipeline, two wells are service wells and 36 wells were unsuccessful, resulting in a 77 percent success rate. The Company recorded an impairment charge of $4.0 million in the third quarter as a result of an internal analysis of the project. Production from existing wells is currently lower than expected, resulting in lower reserve estimates being assigned to these wells. Additionally the carrying value of the undeveloped acreage exceeded its fair value and the fair value was adjusted accordingly. Teton has notified the operator that it plans to go non-consent for the remainder of the 2008 drilling program in order to: 1) provide the Company with time to evaluate the results of adding pumping units to existing production to bring the production volumes up to economic levels, and 2) retain the funds that would have been expended for additional new wells in the area due to the credit and capital market constraints and lower commodity prices. In the Washco area, where Teton operates, there are 27 gross and net wells, which produced an average of 912 Mcfed.

Williston Basin. Teton holds a non-operated interest in eight wells, including seven Bakken wells and one Red River well. The Company has received a permit to drill a Red River well in its Goliath project in Williams County, North Dakota. The location is built, a rig has been acquired and the well is expected to spud in November, 2008. In addition the company has signed a participation agreement with Red Technology Alliance LLC ("RTA), which gives RTA the option to fund 100 percent of the drilling, completion and equipping of up to four horizontal Bakken wells in the Williston Basin. If RTA drills the four wells, it would earn a 40 percent interest in the Goliath project and Teton and its partners would retain a 60 percent working interest. Teton would retain a 15 percent working interest in the project.

Big Horn Basin. Teton is in the process of permitting two Greybull Sandstone and two Mowry Shale wells. The Company now plans to spud a Greybull test in the first quarter of 2009, pending receipt of a permit from the Bureau of Land Management. The Company previously announced an agreement with Unit Petroleum Company to fund a portion of the first two wells in return for a 50 percent working interest in approximately 33,000 gross acres.

Other Financial Highlights. Other financial highlights for the third quarter of 2008 and subsequent to September 30, 2008 include the following:

-- On August 1, 2008, as a result of a mid-year review by the Company's bank group, the borrowing base on the Company's senior bank facility was increased by $2 million to $34.5 million.

-- On September 18, 2008, investors that held the Company's 10.75% Secured Convertible Debentures ("Debentures") due June 2013 exercised their 90-day put option to reduce their investment in the Debentures from $40 million to $30 million. The $10 million was paid from an interest bearing account which the Company established to hold this amount in reserve pending the end of the 90- day put option period.

-- On October 7, 2008, the Company and all investors who held warrants to purchase 3,960,000 shares of the Company's common stock at a $5.00 strike price, with a cashless exercise feature at the option of the holders through May 2012 agreed to exchange the warrants for 990,000 shares of Teton Common stock.

Capital Expenditures. In response to lower commodity prices and continued constrained capital markets, the capital expenditure budget for the full year 2008 has been reduced by $5 to $10 million to a range of approximately $30 to $35 million. Capital expenditures accrued or expended through September 30, 2008 totaled $23.3 million. The Company expects to fund its remaining 2008 capital expenditures and its 2009 capital budget through cash on hand, anticipated net cash provided by operating activities, funds available under its existing Credit Facility with a syndicate of banks led by JPMorgan Chase and through potential asset sales of non-operated properties.

Price Risk Management. Teton manages its overall exposure to commodity price fluctuations through the use of various hedging contracts for some of its production. The duration of various hedging contracts depends on the Company's view of market conditions, available contract prices and operating strategy. The use of such contracts is intended to limit the risk of fluctuating cash flows. As of September 30, 2008, Teton had in excess of 90 percent of then current oil production hedged at a floor price of $95.80 per barrel WTI and in excess of 60 percent of then current natural gas production hedged at a floor price of $9.10 per Mcf (NYMEX) and $6.40 per Mcf (CIG).

Balance Sheet. At September 30, 2008, Teton had total assets of $131.7 million, cash and cash equivalents in short-term investments of $2.7 million, total long-term debt outstanding of $55.0 million and a long term debt to total capitalization ratio of 51 percent. The lower debt to capitalization as compared to June 30, 2008 is largely related to an increase in stockholders' equity as a result of the $22.5 million unrealized gain on oil and gas derivative contracts. In accordance with SFAS 133, "Accounting for Derivative Instruments and Hedging Activities," these gains decreased the Company's accumulated deficit, which is a component of stockholders' equity, at September 30, 2008.

CEO comments. Karl Arleth, President and Chief Executive Officer, commented, "Our excellent third quarter results were generated on steady production growth, backstopped by Teton's strong hedge position. Going forward, in these unprecedented times, it is most important for us to focus very strongly on financial discipline and cost control as we move into a more challenging industry environment."

Earnings conference call. Teton invites you to participate in its third quarter 2008 financial and operating results conference call today November 6, 2008 at 9:30 a.m. (Mountain Time) by dialing (877) 407-9210 (Toll Free) or (201) 689-8049 (International). Please dial in five to ten minutes before the start of the call. A replay of the conference call will be available through midnight, November 20, 2008 by dialing (877) 660-6853 (Toll Free) or (201) 612-7415 (International), conference ID#298427 and account #286. Both numbers are needed for the replay. The live conference call may also be accessed on the Internet by logging onto Teton's Web site at http://www.teton-energy.com/. Select Investor Relations, then the Webcasts and Presentations option on the menu. Log on at least ten minutes prior to the start of the call to register, download and install any necessary audio software. An audio replay of the call will also be available on the web site for approximately 60 days following the live webcast.

Financial Results: Three Months Ended Nine Months Ended September 30, September 30, 2008 2007 2008 2007 Operating revenues: Oil and gas sales $9,765 $1,316 $23,526 $3,504 Operating expenses: Lease operating expense 1,469 196 3,122 303 Transportation expense 695 202 1,295 489 Production taxes 1,096 101 1,723 254 Exploration expense 427 123 1,515 737 General and administrative 3,670 1,766 12,245 5,826 Depreciation, depletion and accretion expense 4,797 1,493 10,094 2,642 Impairment expense 4,034 - 4,034 - Total operating expenses 16,188 3,881 34,028 10,251 Operating loss (6,423) (2,565) (10,502) (6,747) Other income (expense): Realized gain (loss) on oil and gas derivative contracts (989) 528 (2,925) 782 Unrealized gain (loss) on oil and gas derivative contracts 22,465 126 (1,014) (71) Gain (loss) on derivative warrant liabilities 5,928 1,935 6,804 (2,694) Interest expense, net (1,677) (976) (11,311) (1,268) Total other income (expense) 25,727 1,613 (8,446) (3,251) Net Income (loss) $19,304 $(952) $(18,948) $(9,998) Basic earnings (loss) per common share $0.88 $(0.06) $(0.93) $(0.62) Fully diluted earnings (loss) per common share(1) $0.74 $(0.06) $(0.93) $(0.62) Basic weighted-average common shares outstanding 21,954,578 16,897,000 20,307,440 16,201,000 Fully diluted weighted- average common shares outstanding 27,076,367 16,897,000 20,307,440 16,201,000 (1) Net income for fully diluted earnings per share was adjusted by interest paid or accrued for the three months ended September 30, 2008, of $654,000, related to the 10.75% Secured Convertible Debentures. Under the "if-converted method" provided for is SFAS No. 128, interest charges applicable to convertible debt shall be added back to the numerator for purposes of computing fully diluted earnings per share. Condensed Consolidated Balance Sheet: (Dollars in thousands) September 30, December 31, 2008 2007 Assets: Cash and cash equivalents $2,650 $24,616 Other current assets 8,887 4,385 Total current assets 11,537 29,001 Net property and equipment 117,063 49,139 Other non-current assets 3,057 159 Total assets 131,657 78,299 Liabilities and Stockholders' Equity: Current liabilities $19,462 $20,742 Long-term debt 55,017 8,000 Other long-term liabilities 3,681 529 Total liabilities 78,160 29,271 Total stockholders' equity 53,497 49,028 Total liabilities and stockholders' equity $131,657 $78,299 Operating Results: Quarter Nine Months Ended September 30, Ended September 30, 2008 2007 2008 2007 Net production volumes (Mcfed) 9,047 4,429 7,074 3,210 Realized price (pre hedging) ($/Mcfe) $11.73 $3.23 $12.14 $4.00 Realized price (net of hedging) ($/Mcfe) $10.54 $3.36 $10.63 $4.23 Lease operating expense ($/Mcfe) $1.76 $0.48 $1.61 $0.34 Transportation expense ($/Mcfe) $0.84 $0.50 $0.67 $0.56 Production taxes ($/Mcfe) $1.32 $0.25 $0.89 $0.29 Gross margin ($/Mcfe)(1) $6.62 $2.13 $7.46 $3.04 Exploration expense ($/Mcfe)(2) $0.51 $0.30 $0.78 $0.84 (1) Gross margin is realized price (net of hedging) less lease operating expense, transportation expense and production taxes. (2) Includes delay rentals, and geological and geophysical costs. Reconciliation of Net income (loss) to EBITDAX: (Dollars in thousands) Three Months Ended Nine Months Ended Sept 30, Sept 30, 2008 2007 2008 2007 Net income (loss) $19,304 $(952) $(18,948) $(9,998) Add: Interest expense, net 1,677 976 11,311 1,268 Depreciation, depletion and accretion expense 4,797 1,493 10,094 2,642 Impairment of oil and gas properties 4,034 - 4,034 - Exploration expense 427 123 1,515 737 Unrealized (gain) loss on oil and gas derivative contracts (22,465) (126) 1,014 71 (Gain) loss on derivative warrant liabilities (5,928) (1,935) (6,804) 2,694 Stock-based compensation expense 1,368 224 6,142 2,016 EDITDAX $3,214 $(197) $8,358 $(570) EBITDAX is not a measure determined pursuant to generally accepted accounting principles, or GAAP, nor is it an alternative to GAAP income. The Company is presenting this information, as it is an important measure of financial performance used by equity analysts.

Company Description. Teton Energy Corporation is an independent oil and gas exploration and production company focused on the acquisition, exploration and development of North American properties. The Company's current operations are concentrated in the prolific Rocky Mountain and Mid-continent regions of the U.S. Teton has leasehold interests in the Central Kansas Uplift, the eastern Denver-Julesburg Basin in Colorado, Kansas and Nebraska, the Piceance Basin in western Colorado, the Williston Basin in North Dakota and the Big Horn Basin in Wyoming. Teton is headquartered in Denver, Colorado and is publicly traded on the NASDAQ under the ticker symbol "TEC". For more information about Teton, please visit the Company's website at http://www.teton-energy.com/.

Forward-Looking Statements. This news release may contain certain forward-looking statements, including declarations regarding Teton's and its subsidiaries' expectations, intentions, strategies and beliefs regarding the future within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements contained herein are based upon information available to Teton's management as at the date hereof and actual results may vary based upon future events, both within and without the control of Teton's management, including risks and uncertainties that could cause actual results to differ materially including, among other things, the impact that additional acquisitions may have on Teton and its capital structure, exploration results, market conditions, oil and gas price volatility, uncertainties inherent in oil and gas production operations and estimating reserves, unexpected future capital expenditures, competition, governmental regulations, and other factors discussed in the Company's Annual Report on Form 10-K for the year ended December 31, 2007, filed with the Securities and Exchange Commission. Teton's disclosure reports are on file at the Securities and Exchange Commission and can be viewed on Teton's website at http://www.teton-energy.com/. Copies are available without charge upon request from the Company.

Teton Energy Corporation

CONTACT: Investors, Ron Wirth, Director of Investor Relations &Administration of Teton Energy Corporation, +1-303-565-4600, ext. 124,rwirth@teton-energy.com

Web site: http://www.teton-energy.com/

Source: PRNewswire-FirstCall

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