Gasco Energy Inc Reports Operating Results (10-Q)

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Nov 14, 2012
Gasco Energy Inc (GSX, Financial) filed Quarterly Report for the period ended 2012-09-30.

Gasco Energy, Inc. has a market cap of $22.5 million; its shares were traded at around $0.13 with and P/S ratio of 1.3.

Highlight of Business Operations:

The accompanying unaudited condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates realization of assets and the satisfaction of liabilities in the normal course of business for the twelve-month period following the date of these consolidated financial statements. However, due to the extreme volatility in commodity prices in recent years, and the significant extended decline in natural gas prices in particular, the Company has not been able to recover its exploration and development costs as anticipated. There are significant uncertainties regarding the Companys ability to generate sufficient cash flows from operations to fund its ongoing operations and planned capital activities, and the Company currently anticipates that cash on hand and forecasted cash flows from operations will only be sufficient to fund cash requirements for working capital, including debt payment obligations, and planned capital expenditures through the second quarter of 2013. This expectation is based on various assumptions, including those related to future natural gas and oil prices, production results and the effectiveness of the Companys cash management strategy discussed below, some or all of which may not prove to be correct and may result in the Companys inability to meet cash requirements prior to the second quarter of 2013. The Companys prior revolving credit facility matured on June 29, 2012, and as of the date of this Quarterly Report, the Company has been unable to obtain a replacement facility on acceptable terms and is no longer actively in discussions to obtain a replacement facility. Furthermore, the Company may not achieve profitability from operations in the near future or at all. The Company had net losses and negative cash flow from operations for the three and nine months ended September 30, 2012 and at September 30, 2012 had an accumulated deficit of $235,956,378.

respectively. Additionally, the Company capitalized stock compensation expense related to its consultants as further described in Note 7 Stock-Based Compensation herein. Costs associated with production and general corporate activities are expensed in the period incurred. The Company charges a marketing fee related to the sale of its natural gas production to the wells in which it is the operator and, therefore, the net income attributable to the outside working interest owners from such marketing activities of $37,896 and $69,700 was recorded as an adjustment to proved properties during the three and nine months ended September 30, 2012, respectively, and $22,017 and $88,352 during the three and nine months ended September 30, 2011. Proceeds from property sales are generally credited to the full cost pool without gain or loss recognition unless such a sale would significantly alter the relationship between capitalized costs and the proved reserves attributable to a cost center. A significant alteration would typically involve a sale of 25% or more of the proved reserves related to a single full cost pool. Please see Note 3 Asset Sales, herein.

Under the full cost method of accounting, the ceiling test provides that capitalized costs less related accumulated depletion and deferred income taxes for each cost center may not exceed the sum of (i) the present value of future net revenue from estimated production of proved oil and gas reserves using current prices, excluding the future cash outflows associated with settling asset retirement obligations that have been accrued on the balance sheet, at a discount factor of 10%; plus (ii) the cost of properties not being amortized, if any; plus (iii) the lower of cost or estimated fair value of unproved properties included in the costs being amortized, if any; less (iv) income tax effects related to differences in the book and tax basis of oil and gas properties. Should the net capitalized costs for a cost center exceed the sum of the components noted above, a ceiling test write-down would be recognized to the extent the excess capitalized costs exceed this ceiling limitation. The present value of estimated future net revenues is computed by applying the average first-day-of-the-month oil and gas price during the 12-month period ended September 30, 2012 to estimated future production of proved oil and gas reserves as of the end of the period, less estimated future expenditures to be incurred in developing and producing the proved reserves assuming the continuation of existing economic conditions. As of March 31, 2012, June 30, 2012 and September 30, 2012, the full cost pool exceeded the ceiling limitation based on the average first-day-of-the-month oil and gas prices of $82.58 per barrel and $2.94 per Mcf during the 12-month period ended March 31, 2012, $81.16 per barrel and $2.57 per Mcf during the 12-month period ended June 30, 2012 and $80.35 per barrel and $2.23 per Mcf during the 12-month period ended September 30, 2012. Therefore, impairment expense of $9,071,000 was recorded during the nine months ended September 30, 2012.

On June 15, 2011, the Company issued warrants (June Warrants) to purchase 18,750,000 shares of common stock and on August 3, 2011, the Company issued warrants (August Warrants and collectively with the June Warrants, the Warrants) to purchase 11,500,000 shares of common stock. The Warrants are exercisable immediately for a term of sixty months, beginning at issuance, at an initial exercise price of $0.35 per share; however, the exercise price and number of shares of common stock issuable on exercise of the Warrants are subject to adjustment in the event of any stock split, reverse stock split, stock dividend, recapitalization, reorganization or similar transaction. If the Company makes a distribution of its assets to all of its stockholders, holders of the Warrants may be entitled to participate. In the event of a Fundamental Transaction (as defined in the Warrants), at the election of a holder of a Warrant, the Company may be required to purchase the holders Warrant for cash in an amount equal to the value of the remaining unexercised portion of the Warrant. As a result, the Warrants are accounted for as a liability on the Companys consolidated balance sheets with changes in their fair value reported in earnings. Subject to certain exceptions, if the average of the daily volume weighted-average price of a share of common stock for some period of time equals or exceeds 200% of the initial exercise price of the Warrants, and if at the time of such measurement the Equity Conditions (as defined in the Warrants) are satisfied, then the Company may, subject to certain conditions, require the holders of the Warrants to exercise.

Cash provided by operations decreased by $5,452,613 from September 30, 2011 to September 30, 2012. The decrease in cash provided by operations was primarily due to a $8,008,938 decrease in oil and gas revenue caused by a 32% decrease in equivalent production and a 39% decrease in gas prices partially offset by a 5% increase in oil prices received during the first nine months of 2012.

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