Edge Petroleum Corp. (EPEX) filed Quarterly Report for the period ended 2009-09-30.
Edge Petroleum Corp. is an independent energy company engaged in theexploration development and production of oil and natural gas. Edge conducts its operations primarily along the onshore Gulf Coast with its primary emphasis in South Texas and Louisiana. The company explores for oil and natural gas by emphasizing an integrated application of highly advanced data visualization techniques and computerized 3-D seismic data analysis to identify potential hydrocarbon accumulations. Edge Petroleum Corp. has a market cap of $2.17 million; its shares were traded at around $0.134 with and P/S ratio of 0.01. Edge Petroleum Corp. had an annual average earning growth of 50.2% over the past 5 years.
Highlight of Business Operations:
Pursuant to the Purchase Agreement, the effective date for the sale of the Equity Interests of the reorganized Subsidiaries is June 30, 2009. The consideration for the Equity Interests to be conveyed pursuant to the Purchase Agreement is $191 million, subject to adjustment for, among other things, a downward adjustment related to certain changes in the NYMEX Strip Price over the five year period from January 1, 2010 through December 31, 2014 (the “Gas Pricing Downward Adjustment”). The Gas Pricing Downward Adjustment is capped at approximately $23.9 million. In addition to the Gas Pricing Downward Adjustment, the Purchase Price is subject to further adjustments, as provided in the Purchase Agreement, including, among others, adjustments relating to (i) costs and expenses incurred by the Debtors in connection with the maintenance of the Debtors’ properties before and after the effective date, (ii) changes in the value of certain of the Company’s hedging contracts in the event of their early termination prior to the closing, (iii) gas imbalance volumes, (iv) environmental conditions, if any, (v) title defects and benefits, if any, (vi) taxes, (vii) proceeds of production before and after the effective date, (viii) unsold inventory as of the effective date, and (ix) prepaid items. The proceeds from the sale of the Equity Interests will be used to substantially reduce our indebtedness under the Revolving Facility. We currently have approximately $226.5 million of outstanding principal under our Revolving Facility which is substantially in excess of the proceeds expected to be received pursuant to the Purchase Agreement.
The Purchase Agreement also (i) provides for a break-up fee (the “Break-Up Fee”) of $6 million together with an expense reimbursement (the “Expense Reimbursement”) of up to $500,000 to the Proposed Purchaser under certain circumstances if the transaction is not ultimately consummated with the Proposed Purchaser, (ii) a deposit by the Proposed Purchaser of $8 million and (iii) a liquidated damages provision which generally
In managing our business, we must deal with many factors inherent to our industry. First and foremost is the fluctuation of oil and natural gas prices. Our revenues, the value of our assets, our ability to obtain bank loans or additional capital on attractive terms have been and will continue to be affected by changes in oil and natural gas prices and the costs to produce our reserves. Oil and natural gas prices are subject to significant fluctuations that are beyond our ability to control or predict without losing some advantage of the upside potential. In recent years, oil and natural gas commodity prices have generally trended upwards in response to robust demand and constrained supplies, with oil and natural gas prices peaking at more than $140.00 per barrel and $13.00 per Mcf, respectively, in July 2008. In late 2008 and early 2009, a world-wide economic recession and oversupply of natural gas in North America led to an unprecedented collapse in oil and natural gas prices, with oil falling by more than $100.00 per barrel and natural gas falling more than $10.00 per Mcf from their
As discussed above, on September 30, 2009, the Debtors entered into the Purchase Agreement with the Proposed Purchaser pursuant to which the Proposed Purchaser will acquire the Equity Interests. Pursuant to the Purchase Agreement, the effective date for the sale of the Equity Interests of the reorganized Subsidiaries is June 30, 2009. The consideration for the Equity Interests to be conveyed pursuant to the Purchase Agreement is $191 million, subject to adjustment for, among other things, the Gas Pricing Downward Adjustment, which is capped at approximately $23.9 million. In addition to the Gas Pricing Downward Adjustment, the Purchase Price is subject to further adjustments, as provided in the Purchase Agreement, including, among others, adjustments relating to (i) costs and expenses incurred by the Debtors in connection with the maintenance of the Debtors’ properties before and after the effective date, (ii) changes in the value of certain of our hedging contracts in the event of their early termination prior to the closing, (iii) gas imbalance volumes, (iv) environmental conditions, if any, (v) title defects and benefits, if any, (vi) taxes, (vii) proceeds of production before and after the effective date, (viii) unsold inventory as of the effective date, and (ix) prepaid items. The proceeds from the sale of the Equity Interests will be used to substantially reduce our indebtedness under the Revolving Facility. We currently have approximately $226.5 million of outstanding principal under our Revolving Facility which is substantially in excess of the proceeds expected to be received pursuant to the Purchase Agreement.
“Ceiling” Test - The full-cost method of accounting for oil and natural gas properties requires a quarterly calculation of a limitation on capitalized costs, often referred to as a full-cost ceiling test. The ceiling is the discounted present value of our estimated total proved reserves (using a 10% discount rate) adjusted for taxes and the impact of cash flow hedges on pricing, if cash flow hedge accounting is applied. The ceiling test calculation dictates that prices and costs in effect as of the last day of the period are to be used in calculating the discounted present value of our estimated total proved reserves. However, if prices increase subsequent to the balance sheet date, but before the filing date, SEC guidelines allow a company to use the subsequent date’s higher prices in calculating the full-cost ceiling. To the extent that our capitalized costs (net of accumulated depletion and deferred taxes) exceed the ceiling, the excess must be written off to expense. Once incurred, this impairment of oil and natural gas properties is not reversible at a later date even if oil and natural gas prices increase. A ceiling test impairment could result in a significant loss for a reporting period; however, future depletion expense would be correspondingly reduced. Our estimated proved reserves volumes have decreased during the period from year-end 2008 to September 30, 2009, but the average prices for oil, natural gas liquids (“NGL”) and natural gas at the balance sheet date as of September 30, 2009 were $70.61 per barrel, $42.37 per barrel and $3.30 per MMBtu, respectively. We were not required to record an impairment during the third quarter of 2009. The impairments taken in the third and fourth quarters of 2008 and first quarter of 2009 significantly impacted our depletion expense in the second and third quarters of 2009. If the 2008 and 2009 impairments had not been taken, our depletion rate would have been approximately $7.48 per Mcfe as compared to $2.45 per Mcfe reported for the three months ended September 30, 2009.
“Ceiling” limitation test - Factors that contribute to a ceiling test impairment include the price used to calculate the reserve limitation threshold and reserve quantities. A reduction in prices at a measurement date could trigger a full-cost ceiling impairment. We recorded an impairment of approximately $78.3 million, net of tax, at March 31, 2009, but we are reporting a cushion of approximately $24.5 million, net of tax, at September 30, 2009. A 10% increase in prices would have increased our cushion by approximately 144%, net of tax. A 10% decrease in prices would have eliminated the cushion and resulted in an impairment of approximately $3.3 million, net of tax. Therefore, should prices decline in the fourth quarter of 2009, due to either market conditions or as a result of the adoption of the modernization of reserves rules applicable at December 31, 2009, the potential for an impairment at year-end exists. Although our hedging program is intended to mitigate the economic impact of any significant price decline, it did not impact our ceiling test at September 30, 2009 because we do not apply cash flow hedge accounting to our derivative contracts. Had we applied cash flow hedge accounting to our outstanding derivative contracts, there would have been a 33% increase in the cushion we calculated as a result of the low prices at the measurement date falling below the derivative price floors. A 10% increase or decrease in reserve volume would have decreased or increased the cushion calculated at September 30, 2009 by approximately 80%.
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