TRANS ENERGY INC - 10-K - Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following Management's Discussion and Analysis of Financial Condition and
Results of Operations ("MD&A") is intended to help the reader understand Trans
Energy's financial position, changes in financial condition, and results of
operations. MD&A is provided as a supplement to the Company's Consolidated
Financial Statements and the accompanying Notes to Consolidated Financial
Statements ("Footnote" or "Notes") and should be read in conjunction with the
Consolidated Financial Statements and Notes.
Certain statements in this report including, without limitation, statements
regarding future financial results and performance, plans and objectives,
capital expenditures and the Company's or management's beliefs, expectations or
opinions, are forward-looking statements. The Company's forward-looking
statements should be read in conjunction with the Company's comments in this
report under the heading, "Disclosure Regarding Forward-Looking Statements."
Actual results may differ materially from those statements as a result of
factors, risks and uncertainties over which the Company has no control. For a
list of these factors, risks and uncertainties, refer to Item 1A - Risk Factors.
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Business Strategy
Trans Energy is an independent energy company primarily engaged in the
acquisition, exploration, development, and production of oil and natural gas
properties, with interests targeting the Marcellus Shale in West Virginia. We
successfully increased our drilling program in 2014 and 2013, adding both
natural gas and natural gas liquids reserves to the Company's 2014 proved
developed reserve base. Furthermore, the Company established major interconnects
with interstate pipelines to allow increased access to the market.
We intend to focus our development and exploration efforts in our Marcellus
Properties and utilize our acreage position to expand our reserve base through
continued exploratory and development drilling in the Marcellus Shale during
2016 and beyond. We will evaluate our properties on a continuous basis in order
to optimize our existing asset base. We plan to employ the latest drilling,
completion and fracturing technology in all of our wells to enhance
recoverability and accelerate cash flows associated with these wells.
In summary, our strategy is to increase our oil and gas reserves and production
while keeping our development costs and operating costs as low as possible. We
will implement this strategy through drilling exploratory and development wells
from our inventory of available prospects that we have evaluated for geologic
and mechanical risk and future reserve or resource potential. The success of
this strategy is contingent on various risk factors, as discussed elsewhere in
this Form 10-K.
The implementation of our strategy requires that we continually incur
significant capital expenditures in order to replace current production and find
and develop new oil and gas reserves. In order to finance our capital and
exploration program, we depend on cash flow from operations or bank debt and
equity offerings as discussed below in Liquidity and Capital Resources.
Results of Operations
Fiscal Year Ended
December 31,
2015 2014
Total revenues 12,442,028 27,220,818
Total costs and expenses (25,457,922 ) (35,472,423 )
Gain (loss) on sale of assets (12,221 ) 6,902,322
Loss from operations (13,028,115 ) (1,349,283 )
Other expenses (6,601,352 ) (11,190,978 )
Income tax expense - -
Net loss (19,629,467 ) (12,540,261 )
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The following table is a summary of revenues, volumes, and pricing for the twelve months ended December 31, 2015 and 2014.
Twelve Months Ended December 31, 2015 compared to the Twelve Months Ended
December 31, 2014
Twelve Months Ended
December 31, Increase/
2015 2014 (Decrease)
Natural gas sales $ 10,377,032 $ 22,119,129 $ (11,742,097 ) (53.1 %)
Oil sales $ 52,215 $ 168,479 $ (116,264 ) (69.0 %)
Natural gas liquid sales $ 1,832,292 $ 4,681,751
$ (2,849,459 ) (60.9 %)
Total Oil & Gas Sales $ 12,261,539 $ 26,969,359 $ (14,707,820 ) (54.5 %)
Transportation and other revenue $ 180,489 $ 251,459 $ (70,970 ) (28.2 %)
Total revenue $ 12,442,028 $ 27,220,818 $ (14,778,790 ) (54.3 %)
Net Production
Natural gas sales (Mcf) 6,505,617 6,274,237 231,380 3.7 %
Oil sales (Bbls) 1,434 2,206 (772 ) (35.0 %)
Natural gas liquids (gallons) 8,043,999 5,356,463 2,687,536 50.2 %
Natural Gas Equivalent ( Mcfe) 7,663,364 7,052,683 610,681 8.7 %
Average Sales Price per Unit
Natural Gas (Mcf) $ 1.60 $ 3.53 $ (1.93 ) (54.7 %)
Oil (Bbls) $ 36.41 $ 76.37 $ (39.96 ) (52.3 %)
Natural gas liquids (gallons) $ 0.23 $ 0.87 $ (0.64 ) (73.6 %)
Natural Gas Equivalent (Mcfe) $ 1.60 $ 3.82 $ (2.22 ) (58.1 %)
Expenses
All data presented below is derived from costs and production volumes for the
relevant period indicated.
Twelve Months Ended
December 31,
2015 2014
Costs and Expenses of Production:
Production Expenses $ 10,494,539 $
11,380,977
Production Taxes 1,114,040
1,762,696
G&A Expenses (Excluding Share-Based Compensation) 4,074,255 11,497,882
Non-Cash Shared-Based Compensation 993,149
1,128,676
Depletion of Oil and Natural Gas Properties 8,555,779
9,425,267
Impairment of Oil and Natural Gas Properties -
-
Depreciation and Amortization 220,102
272,088
Accretion of Discount on Asset Retirement Obligation 6,058
4,837
Costs and Expenses Per Mcfe of Production:
Production Expenses $ 1.37 $
1.61
Production Taxes 0.15
0.25
G&A Expenses (Excluding Share-Based Compensation) 0.53
1.63
Non-Cash Shared-Based Compensation 0.13
0.16
Depletion of Oil and Natural Gas Properties 1.12
1.34
Impairment of Oil and Natural Gas Properties -
-
Depreciation and Amortization 0.03
0.04
Accretion of Discount on Asset Retirement Obligation - -
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Total revenues of $12,422,028 for the year ended December 31, 2015 decreased
$14,788,790 or 54.3% compared to $27,220,818 for the year ended December 31,
2014. The decrease in revenue is primarily due to a decrease in natural gas,
oil, and natural gas liquid (NGL) prices that was only partially offset by an
increase in natural gas and natural gas liquid (NGL) production volumes. During
2014 and 2013 we focused our efforts on the implementation of our drilling
program in Marshall and Wetzel Counties, West Virginia. The increase in 2015
natural gas and NGL volumes resulted from bringing new wells into production.
Production costs decreased $1,535,094 or 11.7% for 2015 as compared to 2014, due
to a change in estimate for ad valorem taxes in the third quarter of 2015 and
lower production taxes, offset in part by higher gathering, transportation and
processing fees associated with increased production in Marshall and Wetzel
counties. In lieu of constructing and maintaining a pipeline, the Company has
agreed to pay the transporter $0.35 per Mcf to transport a contractual amount of
production on the first well drilled on the pad. After the contractual amount is
transported, the price reduces to $0.15 per Mcf to transport gas. Any future
wells drilled are charged $0.15 per Mcf for transporting the gas produced. We
are contractually obligated to provide 2,000,000 MMBTU/mile of lateral extension
that must be fulfilled within the first five years in order to reduce our
transportation fee per Mcf. If the volumes are not met the transportation fee
remains at $0.35 per Mcf.
Depreciation, depletion, amortization and accretion expense decreased $920,253
or 9.5% for 2015 as compared to 2014, primarily due to higher production volumes
and lower capitalized costs in 2015.
The Company recorded no impairments of its oil and gas properties for the year ended December 31, 2015 or 2014.
Environmental settlement and related costs decreased $6,600,000 or 100% due to the settlement related to the Clean Water Act in 2014.
Selling, general and administrative expense decreased $959,154 or 15.9% for 2015
as compared to 2014, primarily due to an increase in legal and professional fees
which was offset by a decrease in share based compensation for the year.
Gain on sale of assets decreased by $6,914,543 for 2015 as compared to 2014 due
to the gain on sale resulting from the sale of over-riding royalty interests to
Republic Energy Ventures and Wellbore Capital, LLC in 2014.
Our loss from operations was $13,028,115 for 2015 as compared to a loss of $1,349,283 for 2014. This change is primarily due to lower revenues and lower gain on sale of assets during 2015 which was offset by the Clean Water Act settlement and increased production costs in 2014.
Interest expense decreased $822,886 or 4.2% for 2015 as compared to 2014, due
the Chambers loan refinancing in 2014 which was offset by a significantly higher
loan balance due to Morgan Stanley as a result of additional borrowings and PIK
interest. The average loan balance for 2015 and 2014 was $115,199,392 and
$101,303,895 respectively.
Gain on commodity derivative increased $3,767,633 or 43.9% for 2015 as compared
to 2014 primarily due to the increase in the fair value of our gas hedges, and
includes the gain booked in the second quarter of 2015 related to the resetting
of certain of our hedges.
Net loss of $19,629,467 for the year ended December 31, 2015 increased
$7,089,206 or 56.5% compared to $12,540,261 for the year ended December 31,
2014. This increase in net loss is due primarily to a decrease in revenues and
lower gain on sale of assets during 2015 which was offset by an increase in the
gain on commodity derivatives.
We have accumulated approximately $94.0 million of net operating loss
carryforwards as of December 31, 2015, which may be offset against future tax
obligations through 2034. The use of these losses to reduce future income taxes
will depend on the generation of sufficient taxable income prior to the
expiration of the net operating loss carryforwards. In the event of certain
changes in control, there would be an annual limitation on the amount of net
operating loss carryforwards which can be used. We recorded no income tax
expense in 2015 or 2014.
No tax benefit has been reported in the financial statements for the years ended
December 31, 2015 or 2014 because the potential tax benefit of the loss carry
forward is offset by a valuation allowance of the same amount.
Off Balance Sheet Arrangements
None.
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Liquidity and Capital Resources
Historically, we have satisfied our working capital needs with operating
revenues, borrowed funds and the proceeds of acreage sales. At December 31,
2015, we have negative working capital of $116,988,273 compared to a negative
working capital of $4,211,011 at December 31, 2014. This decrease in working
capital is primarily attributed to a reclassification of our notes payable to
current, offset by a decrease in accrued expenses.
During 2015, net cash used in operating activities was $1,714,891 compared to
net cash provided of $5,927,614 in 2014. This decrease in cash flow from
operating activities is primarily due to a decrease in commodity prices and a
decrease to accounts payable during 2015.
We expect our cash flow provided by operations for 2016 to increase because of
higher projected commodity prices, combined with steady operating, general and
administrative, interest and financing costs per Mcfe.
Excluding the effects of significant unforeseen expenses or other income, our
cash flow from operations fluctuates primarily because of variations in oil and
gas production and prices, or changes in working capital accounts and actual
well performance. In addition, our oil and gas production may be curtailed due
to factors beyond our control, such as downstream activities on major pipelines
causing us to shut-in production for various lengths of time.
During 2015, net cash used for investing activities was $186,055 compared to net
cash used of $13,385,539 in 2014. The reason for the change was a decrease in
expenditures for oil and gas properties during 2015 compared to 2014.
During 2015, net cash provided by financing activities was $1,020,413 compared to net cash provided of $6,315,623 in 2014. This change reflects that the Company's debt decreased by a greater amount in 2014 than in 2015.
We are currently in default under our Credit Agreement and have been relying
upon an informal forbearance from our lenders under that facility. See
"Subsequent Events" below. We can give no assurance that our lenders will
continue to forebear on the exercise of their remedies under the Credit
Agreement. We are currently evaluating all available means to raise additional
capital, including restructuring the Credit Agreement, issuing additional equity
securities, and sales of a substantial part of our assets. We can give no
assurance that any of these endeavors will be successful.
Inflation
In the opinion of our management, inflation has not had a material overall effect on our operations. However, our Credit Agreement is indexed to LIBOR and any increase in LIBOR would affect our interest costs.
Subsequent Events
On May 20, 2016, we notified the Administrative Agent under our Credit Agreement
that we were in default thereunder. The following defaults currently exist under
the Credit Agreement:
• American Shale has failed to maintain the Asset Coverage Ratio as set
forth in Section 6.21 of the Credit Agreement since September 30, 2015;
• American Shale has failed to timely provide the materials required
pursuant to Sections 5.06 (r), (u), and (v) for the months ended
December 31, 2015, January 31, 2016, February 29, 2016 and March 31, 2016;
• American Shale has failed to timely effect the Tug Hill Disposition in
accordance with Section 5.19;
• American Shale has failed to timely engage a financial advisor reasonably
acceptable to Administrative Agent and to commence the related refinancing
activities in accordance with Section 5.20;
• American Shale has failed to timely provide the annual financial
statements pursuant to Section 5.06 (a) for the year ended December 31,
2015;
• American Shale has failed to timely provide the Reserve Report pursuant to
Section 5.06 (d) for the year ended December 31, 2015;
• American Shale has failed to timely provide the Quarterly Report on
Hedging pursuant to Section 5.06 (g) for the quarter ended September 30,
2015.
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If these defaults under the Credit Agreement are not waived or otherwise
resolved within the cure periods provided, the Administrative Agent will have
the right to accelerate all of the outstanding indebtedness under the Credit
Facility. If the Administrative Agent were to accelerate all of the obligations
outstanding under the Credit Facility, we estimate that we would be required to
pay approximately $135 million to the Administrative Agent and the Lenders. The
debt balance under the Credit Agreements is presented as a current liability on
the Company's balance sheet as of December 31, 2015.
We are currently in discussions with the Administrative Agent and the Lenders
regarding a potential restructuring of the obligations outstanding under the
Credit Agreement. While we hope to close the restructuring as soon as possible,
definitive documentation is subject to negotiation. Additionally, we can provide
no assurances that we will be able to successfully finalize such a
restructuring, that the terms of any such restructuring will be acceptable to us
or the timing or closing of such a restructuring.
Effective May 1, 2016, Tyler Construction Company, Inc., a subsidiary of the
Company ("Assignor") entered into an assignment and bill of sale of Gas Pipeline
(hereinafter, "Assignment") with Diversified Gas & Oil Corp. ("Assignee")
whereby the Assignor assigned the pipeline, customers, sales meters and
equipment to the Assignee, and the Assignee assumed the Assignor's obligation to
Dominion Field Services, Inc. under a contract between them in the amount of
$87,469. Additionally, at closing, the Assignee paid the Assignor the sum of
$32,530.
On April 3, 2015, the Company and its wholly owned subsidiaries American Shale
Development, Inc. and Prima Oil Company, Inc., along with Republic Energy
Ventures, LLC, Republic Partners VIII, LLC, Republic Partners VI, LP, Republic
Partners VII, LLC, and Republic Energy Operating, LLC (collectively, the
"Sellers") entered into a Purchase and Sale Agreement (the "PSA"), pursuant to
which the Sellers agreed to sell certain interests located in Wetzel County,
West Virginia, including 5,159 net acres held by the Company and the Company's
interest in twelve Marcellus producing wellbores, to TH Exploration, LLC
("Buyer"). On July 30, 2015, the Buyer elected to formally extend the expiration
date of the PSA until August 14, 2015 (the "Extension Period"). During the
Extension Period, the Buyer provided notice to the Company that the PSA would
terminate on August 13, 2015. The Company believes that the PSA terminated as a
result of such notice. Because of uncertainty surrounding whether the Buyer
would contest the termination of the PSA along with Management's intention to
sell the underlying assets as soon as such uncertainty was definitively
resolved, the Wetzel county assets are being reported as assets held for sale at
December 31, 2015. If those assets were reported as proved oil and gas
properties for 2015, the Company would have reported additional depletion
expense of $4,372,965. In January 2016, the Wetzel county assets were
reclassified to proved oil and gas properties and a catch up entry for the
depletion was booked by the Company. No assets were ultimately sold under this
PSA.
Forward-looking and Cautionary Statements
This report includes forward-looking statements. These forward-looking
statements may relate to such matters as anticipated financial performance,
future revenues or earnings, business prospects, projected ventures, new
products and services, anticipated market performance and similar matters. When
used in this report, the words "may," "will," "expect," "anticipate,"
"continue," "estimate," "project," "intend," and similar expressions are
intended to identify forward-looking statements regarding events, conditions,
and financial trends that may affect our future plans of operations, business
strategy, operating results, and our future plans of operations, business
strategy, operating results, and financial position. We caution readers that a
variety of factors could cause our actual results to differ materially from the
anticipated results or other matters expressed in forward-looking statements.
These risks and uncertainties, many of which are beyond our control, include:
• the sufficiency of existing capital resources and our ability to raise
additional capital to fund cash requirements for future operations;
• uncertainties involved in the rate of growth of our business and
acceptance of any products or services;
• success of our drilling activities;
• volatility of the stock market, particularly within the energy sector;
• the risk factors described elsewhere herein; and
• general economic conditions.
Although we believe the expectations reflected in these forward-looking statements are reasonable, such expectations cannot guarantee future results, levels of activity, performance or achievements.
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Critical Accounting Policies
We consider accounting policies related to our estimates of proved reserves,
accounting for derivatives, share-based payments, accounting for oil and natural
gas properties, asset retirement obligations and accounting for income taxes as
critical accounting policies. The policies include significant estimates made by
management using information available at the time the estimates are made.
However, these estimates could change materially if different information or
assumptions were used. These policies are summarized in Note 1 of Notes to
Consolidated Financial Statements.
New Accounting Standards
In May 2014, the Financial Accounting Standards Board issued Accounting
Standards Update No. 2014-09, "Revenue from Contracts with Customers (Topic
606)" ("ASU 2014-09"). ASU 2014-09 is intended to improve the financial
reporting requirements for revenue from contracts with customers by providing a
principle based approach. The core principal of the standard is that revenue
should be recognized when the transfer of promised goods or services is made in
an amount that the entity expects to be entitled to in exchange for the transfer
of goods and services. ASU 2014-09 also requires disclosures enabling users of
financial statements to understand the nature, amount, timing and uncertainty of
revenue and cash flows arising from contracts with customers. The original
effective date for financial statements issued by public companies was for
annual reporting periods beginning after December 15, 2016. In July 2015, the
FASB deferred the effective date for annual reporting periods beginning after
December 15, 2017 (including interim reporting periods within those periods).
Early adoption is permitted to the original effective date. The Company is
currently evaluating the potential impact of ASU 2014-09 on the financial
statements.
In April 2015 the Financial Accounting Standards Board issued ASU 2015-03,
"Simplifying the Presentation of Debt Issuance Costs" ("ASU 2015-03"). This
standard amends the existing guidance to require that debt issuance costs be
presented in the balance sheet as a deduction from the carrying amount of the
related debt liability instead of as a deferred charge. ASU No. 2015-03 is
effective on a retrospective basis for annual reporting periods beginning after
December 15, 2015, but early adoption is permitted. The Company is currently
evaluating the effect that the adoption of this standard will have on its
financial statements and related disclosures.
The Company has reviewed all other recently issued accounting standards in order
to determine their effects, if any, on the consolidated financial statements.
Based on that review, the Company believes that none of these standards will
have a significant effect on current or future earnings or results of
operations.
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