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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
CHECK ONE
|X| Quarterly report under Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the quarterly period ended September 30, 2003
or
|_| Transition report under Section 13 or 15(d) of the Securities Exchange Act
of 1934 from _______ to ______
COMMISSION FILE NUMBER 0-12500
ISRAMCO, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 13-3145265
(State or other Jurisdiction of I.R.S. Employer Number
Incorporation or Organization)
11767 KATY FREEWAY, HOUSTON, TX 77079
(Address of Principal Executive Offices)
713-621-3882
(Registrant's Telephone Number, Including Area Code)
Indicate by check whether the registrant: (1) filed all reports required to
be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes |X| No |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X|
The number of shares outstanding of the registrant's Common Stock as of
November 14, 2003 was 2,639,853.
PART I - FINANCIAL INFORMATION:
Page
Item 1. Financial Statements (ii)
Consolidated Balance Sheets at September 30, 2003 and December 31, 2002 1
Consolidated Statements of Operations for the three and nine months
ended September 30, 2003 and 2002 2
Consolidated Statements of Cash Flows for the nine months ended
September 30, 2003 and 2002 3
Notes to Consolidated Financial Statements 4
Item 2. Management's discussion and analysis of financial statements 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk 14
Item 4. Controls and Procedures 14
PART II. OTHER INFORMATION 15
Item 1. Legal Proceedings 15
Item 2. Changes in Securities & Use of Proceeds 15
Item 3. Defaults upon senior securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
FORWARD LOOKING STATEMENTS
CERTAIN STATEMENTS MADE IN THIS QUARTERLY REPORT ON FORM 10-Q ARE
"FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995. FORWARD-LOOKING STATEMENTS CAN BE IDENTIFIED BY
TERMINOLOGY SUCH AS "MAY", "WILL", "SHOULD", "EXPECTS", "INTENDS",
"ANTICIPATES", "BELIEVES", "ESTIMATES", "PREDICTS", OR "CONTINUE" OR THE
NEGATIVE OF THESE TERMS OR OTHER COMPARABLE TERMINOLOGY AND INCLUDE, WITHOUT
LIMITATION, STATEMENTS BELOW REGARDING EXPLORATION AND DRILLING PLANS, FUTURE
GENERAL AND ADMINISTRATIVE EXPENSES, FUTURE GROWTH, FUTURE EXPLORATION, FUTURE
GEOPHYSICAL AND GEOLOGICAL DATA, GENERATION OF ADDITIONAL PROPERTIES, RESERVES,
NEW PROSPECTS AND DRILLING LOCATIONS, FUTURE CAPITAL EXPENDITURES, SUFFICIENCY
OF WORKING CAPITAL, ABILITY TO RAISE ADDITIONAL CAPITAL, PROJECTED CASH FLOWS
FROM OPERATIONS, OUTCOME OF ANY LEGAL PROCEEDINGS, DRILLING PLANS, THE NUMBER,
TIMING OR RESULTS OF ANY WELLS, INTERPRETATION AND RESULTS OF SEISMIC SURVEYS OR
SEISMIC DATA, FUTURE PRODUCTION OR RESERVES, LEASE OPTIONS OR RIGHTS,
PARTICIPATION OF OPERATING PARTNERS, CONTINUED RECEIPT OF ROYALTIES, AND ANY
OTHER STATEMENTS REGARDING FUTURE OPERATIONS, FINANCIAL RESULTS, OPPORTUNITIES,
GROWTH, BUSINESS PLANS AND STRATEGY. BECAUSE FORWARD-LOOKING STATEMENTS INVOLVE
RISKS AND UNCERTAINTIES, THERE ARE IMPORTANT FACTORS THAT COULD CAUSE ACTUAL
RESULTS TO DIFFER MATERIALLY FROM THOSE EXPRESSED OR IMPLIED BY THESE
FORWARD-LOOKING STATEMENTS. ALTHOUGH THE COMPANY BELIEVES THAT EXPECTATIONS
REFLECTED IN THE FORWARD-LOOKING STATEMENTS ARE REASONABLE, IT CANNOT GUARANTEE
FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS. MOREOVER, NEITHER THE COMPANY NOR
ANY OTHER PERSON ASSUMES RESPONSIBILITY FOR THE ACCURACY AND COMPLETENESS OF
THESE FORWARD-LOOKING STATEMENTS. THE COMPANY IS UNDER NO DUTY TO UPDATE ANY
FORWARD-LOOKING STATEMENTS AFTER THE DATE OF THIS REPORT TO CONFORM SUCH
STATEMENTS TO ACTUAL RESULTS.
(ii)
ISRAMCO INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands except for share information)
September 30, December 31,
2003 2002
-------- --------
(Unaudited) (Audited)
ASSETS
Current assets:
Cash and cash equivalents 5,966 1,617
Marketable securities, at market 3,539 3,177
Accounts receivable 659 558
Prepaid expenses and other current assets 532 441
-------- --------
Total current assets 10,696 5,793
Property and equipment (successful efforts method for
oil and gas properties) 3,412 3,505
Real Estate 1,887 1,887
Marketable securities, at market 5,401 7,733
Investment in affiliates 10,467 8,641
Deferred tax asset 384 887
Other 221 221
-------- --------
Total assets 32,468 28,667
======== ========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current Liabilities:
Accounts payable and accrued expenses 1,331 2,175
-------- --------
Total current liabilities 1,331 2,175
Commitments and contingencies Common stock $.0l par value;
authorized 7,500,000 shares; issued 2,669,120 shares;
outstanding 2,639,853 at September 30,2003 and December 31,2002 27 27
Additional paid-in capital 26,240 26,240
Retained Earnings 4,637 933
Accumulated other comprehensive income (loss) 397 (544)
Treasury stock, 29,267 shares at
September 30, 2003 and December 31, 2002 (164) (164)
-------- --------
Total shareholders' equity 31,137 26,492
-------- --------
Total liabilities and shareholders' equity 32,468 28,667
======== ========
See notes to the consolidated financial statements.
-1-
ISRAMCO INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except for share information)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
2003 2002 2003 2002
--------- --------- --------- ---------
REVENUES:
Operator fees from related party 451 52 556 199
Oil and gas sales 941 589 2,712 1,730
Interest income 147 199 599 604
Office services to related party 284 181 710 694
Gain on Marketable securities 13 --- 625 ---
Equity in net income of investees 64 --- 1,243 ---
Other Income 28 26 439 26
--------- --------- --------- ---------
1,928 1,047 6,884 3,253
--------- --------- --------- ---------
COSTS AND EXPENSES:
Financial expenses 8 10 40 198
Depreciation, depletion and
Amortization 153 118 465 349
Lease operating expenses and
severance taxes 218 147 638 584
Exploration costs --- 79 22 1,770
Operator expense 201 255 587 597
General and administrative 472 320 1,260 1,066
Loss on marketable securities --- 92 --- 350
Equity in net loss of investees --- 86 --- 392
Impairment of oil and gas assets --- --- 150 ---
--------- --------- --------- ---------
Total expenses 1,052 1,107 3,162 5,306
--------- --------- --------- ---------
Income (loss) before income taxes 876 (60) 3,722 (2,053)
Income (taxes)benefit (18) --- (18) 464
--------- --------- --------- ---------
Net income (loss) from continuing operation 858 (60) 3,704 (1,589)
Cumulative Effect of Accounting change -- --- --- 3,516
--------- --------- --------- ---------
Net income (Loss) 858 (60) 3,704 1,927
========== ========= ========= =========
continuing operation 0.33 (0.02) 1.40 (0,60)
Cumulative Effect of Accounting change -- --- --- 1.33
--------- --------- --------- ---------
0.33 (0.02) 1.40 0.73
========== ========= ========== ==========
Weighted average number of shares
outstanding-basic 2,639,853 2,639,853 2,639,853 2,639,853
========= ========= ========== ==========
Earnings per common share-diluted
continuing operation 0.33 (0.02) 1.40 (0.60)
Cumulative Effect of Accounting change -- --- --- 1.33
--------- --------- --------- ---------
0.33 (0.02) 1.40 0.73
========= ========= ========= =========
Weighted average number of shares
outstanding-diluted 2,639,853 2,639,853 2,639,853 2,639,853
========= ========= ========= =========
See notes to the consolidated financial statements.
-2-
ISRAMCO INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
Nine Months Ended
September 30,
2003 2002
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income 3,704 1,927
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation, depletion and amortization 465 349
Impairment of oil and gas assets 150 --
Dry hole costs -- 1,657
Loss (gain) on marketable securities (620) 350
Equity in net loss (gain) of investees (1,243) 392
Cumulative effect of an Accounting change -- (3,516)
Deferred taxes 18 (464)
Changes in assets and liabilities:
Accounts receivable (101) (40)
Prepaid expenses and other current assets (91) (175)
Accounts payable and accrued liabilities (844) 730
------- -------
Net cash provided by operating activities
1,438 1,210
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Addition to property and equipment (522) (1,215)
Purchase of Real Estate -- (1,887)
Purchase of marketable securities (273) (2,970)
Proceeds from sale of equipment -- 10
Proceeds from sale of marketable securities 3,706 1,912
Purchase of convertible promissory note -- (50)
------- -------
Net cash provided by (used in) investing activities 2,911 (4,200)
------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 4,349 (2,990)
Cash and cash equivalents-beginning of year 1,617 4,280
------- -------
Cash and cash equivalents-end of period 5,966 1,290
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ - $ -
======= =======
Cash paid during the period for taxes $ - $ -
======= =======
See notes to the consolidated financial statements.
-3-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1
As used in these financial statements, the term "Company" refers to Isramco,
Inc. and subsidiaries.
NOTE 2
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q. Accordingly, they
do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion
of Management, all adjustments (consisting of only normal recurring adjustments)
considered necessary for a fair presentation have been included. Results for the
nine months ended September 30, 2003, are not necessarily indicative of the
results that may be expected for the year ended December 31, 2003. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 2002. Certain re-classification of prior year amounts have
been made to conform to current presentation.
NOTE 3 - CONSOLIDATION
The consolidated financial statements include the accounts of the Company, its
direct and indirect non U.S. based wholly-owned subsidiaries Isramco Oil and Gas
Ltd. (Oil and Gas), Isramco B.V., a Netherlands company and Isramco Resources
Inc., a British Virgin Islands company, and its wholly owned subsidiaries, Jay
Petroleum, L.L.C. (Jay), Jay Management L.L.C. (Jay Management) and IsramTec
Inc. (IsramTec). Intercompany balances and transactions have been eliminated in
consolidation.
NOTE 4 -RECENT ACCOUNTING PRONOUNCEMENTS
Effective January 1, 2003, the Company adopted Statement of Financial Accounting
Standards No. 145, "Rescission of SFAS No. 4, 44, and 64, Amendment of SFAS No.
13, and Technical Corrections" ("SFAS No. 145"). SFAS No. 145 requires gains and
losses on early extinguishment of debt to not be classified as extraordinary
items as previously required under SFAS No. 4. SFAS No. 145 further requires any
gain or loss on extinguishment of debt that was classified as an extraordinary
item in prior periods presented to be reclassified. Previously recorded losses
on the early extinguishment of debt that were classified as an extraordinary
item in prior periods have been reclassified to interest expense. The adoption
of SFAS No. 145 had no effect on the Company's consolidated financial position,
consolidated results of operations, or cash flows.
In December 2002, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure,"
("SFAS No. 148"). SFAS No. 148 amends SFAS No. 123 to provide alternative
methods of transition for an entity that voluntarily changes to the fair value
based method of accounting for stock-based employee compensation. SFAS No. 148
also amends the disclosure provisions of SFAS No. 123 to require disclosure
about the effects on reported net income of an entity's stock-based employee
compensation in interim financial statements. The Company adopted SFAS No. 148
on January 1, 2003. The Company did not change to the fair value based method of
accounting for stock-based employee compensation. Accordingly, the adoption of
SFAS No.
-4-
148 would only affect the Company's financial condition or results of operations
if the Company elects to change to the fair value method specified in SFAS No.
123. The adoption of SFAS No. 148 requires the Company to disclose the effects
of its stock-based employee compensation in interim financial statements
beginning with the first quarter of 2003.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities" ("SFAS No. 149"). SFAS No. 149
amends and clarifies accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities
under SFAS No. 133. The new guidance amends SFAS No. 133 for decisions made: (a)
as part of the Derivatives Implementation Group process that effectively
required amendments to SFAS No. 133, (b) in connection with other Board projects
dealing with financial instruments, and (c) regarding implementation issues
raised in relation to the application of the definition of a derivative. The
amendments set forth in SFAS No. 149 improve financial reporting by requiring
that contracts with comparable characteristics be accounted for similarly. SFAS
No. 149 is generally effective for contracts entered into or modified after June
30, 2003 and for hedging relationships designated after June 30, 2003. The
adoption of SFAS No. 149 will not have a material impact on the Company's
consolidated financial position, consolidated results of operations, or cash
flows.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity" ("SFAS 150").
SFAS No. 150 requires certain financial instruments that embody obligations of
the issuer and have characteristics of both liabilities and equity to be
classified as liabilities. The provisions of SFAS No. 150 are effective for
financial instruments entered into or modified after May 31, 2003 and to all
other instruments that exist as of the beginning of the first interim financial
reporting period beginning after June 15, 2003. The Company does not have any
financial instruments that meet the provisions of SFAS No. 150; therefore,
adopting the provisions of SFAS No. 150 had no effect on the Company's
consolidated financial position, consolidated results of operations, or cash
flows.
Effective January 1, 2003, the Company adopted FASB Interpretation No. 45
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others, an Interpretation of FASB
Statements No. 5, 57, and 107 and Rescission of FASB Interpretation No. 34"
("FIN No. 45"). The interpretation requires that upon issuance of a guarantee,
the entity must recognize a liability for the fair value of the obligation it
assumes under that guarantee. In addition, FIN No. 45 requires disclosures about
the guarantees that an entity has issued, including a roll forward of the
entity's product warranty liabilities. This interpretation is intended to
improve the comparability of financial reporting by requiring identical
accounting for guarantees issued with separately identified consideration and
guarantees issued without separately identified consideration. Adoption of this
Interpretation had no effect on the Company's consolidated financial position,
consolidated results of operations, or cash flows.
In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of
Variable Interest Entities, an Interpretation of ARB No. 51" ("FIN No. 46"). The
interpretation requires certain variable interest entities to be consolidated by
the primary beneficiary of the entity if the equity investors in the entity do
not have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. FIN No. 46 is
effective for all new variable interest entities created or acquired after
January 31, 2003. The Company has not utilized such entities and therefore the
adoption of FIN No. 46 had no effect on the Company's consolidated financial
position, consolidated results of operations, or cash flows.
In November 2002, the FASB reached a consensus on EITF Issue No. 00-21,
"Accounting for
-5-
Revenue Arrangements with Multiple Deliverables." This issue addresses how to
account for arrangements that may involve the delivery or performance of
multiple products, services, and/or rights to use assets. The final consensus of
this issue is applicable to agreements entered into in fiscal periods beginning
after June 15, 2003. Additionally, companies will be permitted to apply the
consensus guidance in this issue to all existing arrangements as the cumulative
effect of a change in accounting principle in accordance with APB Opinion No.
20, "Accounting Changes." the adoption of this issue did not have a material
impact on the Company's consolidated financial position, consolidated results of
operations, or cash flows.
NOTE 5 -- OIL AND GAS PROPERTIES
During the nine month period ended September 30, 2003, the Company Purchased a
55% working interest in 13 gas wells located in west Texas in a cost of $
264,000. During the nine month period ended September 30, 2003, the Company
recorded an impairment expense in the amount of $150,000 relating to the
write-off of its investment in the Marine III Permit in the Congo.
NOTE 6 -- EARNINGS PER SHARE COMPUTATION
SFAS No. 128 requires a reconciliation of the numerator (income) and denominator
(shares) of the basic earnings per share ("EPS") computation to the numerator
and denominator of the diluted EPS computation. The Company's reconciliation is
as follows:
For the Nine Months Ended September 30,
2003 2002
Income Shares Income Shares
------ ------ ------ ------
Earnings per common
share-Basic $3,704,000 $2,639,853 $1,927,000 $2,639,853
Effect of dilutive securities:
Stock Options -- -- -- --
Earnings per common
share-Diluted $3,704,000 $2,639,853 $1,927,000 $2,639,853
========= ========= ========= =========
NOTE 7 -- GEOGRAPHICAL SEGMENT INFORMATION
The Company's operations involve a single industry segment--the exploration,
development, production and transportation of oil and natural gas. Its current
oil and gas activities are concentrated in the United States, Israel, and the
Republic of Congo, Africa. Operating in foreign countries subjects the Company
to inherent risks such as a loss of revenues, property and equipment from such
hazards as exploration, nationalization, war and other political risks, risks of
increases of taxes and governmental royalties, renegotiation of contracts with
government entities and changes in laws and policies governing operations of
foreign-based companies.
The Company's oil and gas business is subject to operating risks associated with
the exploration, and production of oil and gas, including blowouts, pollution
and acts of nature that could result in damage to oil and gas wells, production
facilities or formations. In addition, oil and gas prices have fluctuated
substantially in recent years as a result of events, which were outside of the
Company's control. Financial information, summarized by geographic area, is as
follows (in thousands):
-6-
United Consolidated
States Israel Africa Total
--------- -------- --------- ---------
Identifiable assets at September 30, 2003 3,224 97 --- 3,321
Cash and corporate assets 29,147
-------
Total Assets at September 30, 2003 32,468
=======
Identifiable assets at December 31, 2002 3,178 177 150 3,505
Cash and corporate assets 25,162
-------
Total Assets at December 31, 2002 28,667
=======
Nine Months Ended September 30, 2003
Sales and other operating revenue 2,817 1,163 --- 3,980
Costs and operating expenses (1,108) (606) (150) (1,864)
======= ======= ======= =======
Operating profit 1,709 557 (150) 2,116
Financial Income, net 559
General corporate expenses (1,260)
Gain on marketable securities and
Equity in net gain of investees 1,868
Other Income 439
Income taxes (18)
-------
Net Income from continuing operations 3,704
=======
Nine Months Ended September 30, 2002
Sales and other operating revenue 1,836 787 --- 2,623
Costs and operating expenses (1,792) (621) (887) (3,300)
======= ======= ======= =======
Operating profit 44 166 (887) (677)
Financial Income, net 406
General corporate expenses (1,066)
Loss on marketable securities and
equity in net loss of investees (742)
Other income 26
Income taxes 464
-------
Net Loss from continuing operations (1,589)
=======
Three Months Ended September 30, 2002
Sales and other operating revenue 622 199 -- 821
Costs and operating expenses (255) (265) (78) (598)
------- ------- ------- -------
Operating profit 367 (66) (78) 223
Financial Income, net 189
General corporate expenses (320)
Loss on marketable securities and (178)
equity in net loss of investees 26
Income Taxes ---
-------
Net Income from continuing operation (60)
=======
-7-
United Consolidated
States Israel Africa Total
--------- -------- --------- ---------
Three Months Ended September 30, 2003
Sales and other operating revenue 980 698 --- 1,678
Costs and operating expenses (366) (208) --- (574)
------- ------- ------- -------
Operating profit 614 490 --- 1,104
Financial Income, net 139
General corporate expenses (472)
Gain on marketable securities and
equity in net loss of investees 77
Other Income 28
Income taxes (18)
-------
Net Loss from continuing operations 858
=======
NOTE 8 - COMPREHENSIVE INCOME (LOSS)
The Company's comprehensive income (loss) for the nine month and three month
period ended September 30, 2003 and 2002 was as follows: (in thousands)
Nine months
ended September 30,
2003 2002
---- -----
Net Income 3,704 1,927
Other comprehensive gain (loss)
- -available - for - sale securities, net 556 (82)
- -foreign currency translation adjustments, net 385 (901)
----- -----
Comprehensive income (loss) 4,645 944
===== =====
Three months
ended September 30,
2003 2002
---- -----
Net Income 858 (60)
Other comprehensive gain (loss)
- -available - for - sale securities, net 333 169
- -foreign currency translation adjustments, net (207) (180)
----- -----
Comprehensive income (loss) 984 (71)
===== =====
NOTE 9 - CONTINGENCIES
The Company is involved in a dispute with a contractor relating to drilling
costs of the Tilapia well in Congo during 2000. The Company believes that it has
adequately accrued for all amounts due to this contractor as of September 30,
2003.
The Company is also involved in various other legal proceedings arising in the
normal course of business. In the opinion of management, the Company's ultimate
liability, if any, in these pending actions would not have a material adverse
effect on the financial position, operating results or liquidity of the Company.
-8-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
The increase in the Company's consolidated cash and cash equivalents of
$4,349,000 from $1,617,000 at December 31, 2002 to $5,966,000 at September 30,
2003, is primarily attributable to revenues from increased retail gas prices in
the United States and from sale of marketable securities.
Net cash provided by investing activities for the nine-month period ended
September 30, 2003 was $2,911,000 as compared to $4,200,000 net cash used during
the nine-month period ended September 30, 2002. The net cash provided for the
nine months ended September 2003 is primarily attributable to proceeds from the
sale of marketable securities. Net cash used in nine months ended September 2002
is primarily attributable to the purchase of marketable securities and real
estate.
The Company believes that existing cash balances and cash flows from
activities will be sufficient to meet its financing needs. The Company intends
to finance its ongoing oil and gas exploration activities from working capital.
RESULTS OF OPERATIONS
Nine Months Ended September 30, 2003 (the "2003 Period") Compared to the
Nine Months Ended September 30, 2002 (the "2002 Period") and the three months
ended September 30, 2003 compared to the three months ended September 30,2002.
The Company reported net income of $3,704,000 ($1.40 per share) for the
2003 period compared to a net income of $1,927,000 ($0.73 per share) for the
2002 period and income of $858,000 ($0.33 per share) for the three months ended
September 30, 2003, compared to a loss of $60,000 ($0.02 per share) for the
comparable period in 2002. The relatively higher net income for the 2003 Period
compared to the 2002 Period as well as for the three months ended September 30,
2003 compared to the same period in 2002 is primarily attributable to (i)an
increase in revenues from oil and gas sales resulting from higher oil and gas
prices, (ii) gains on marketable securities, the recording of a loss of
$1,657,000 during the 2002 Period in connection with the drilling of the Read
well in Texas and an additional well in Congo (Marine 9 permit), both of which
were plugged and abandoned, and (iii) the recording of a net profit of
$1,243,000 during the 2003 Period in connection with an increase in the net
income of Isramco Negev 2 Limited Partnership and I.N.O.C Dead Sea Limited
Partnerships, affiliate-investees of the Company, resulting primarily from
unrealized gains on marketable securities by such affiliates (compared to a loss
of $392,000 for the comparable period in 2002).
Set forth below is a break-down of these results.
-9-
UNITED STATES
OIL AND GAS REVENUES
(IN THOUSANDS)
Three Months ended September 30 Nine Months Ended September 30
------------------------------- ------------------------------
2003 2002 2003 2002
Oil Volume Sold(Bbl) 6 5 15 16
Gas Volume Sold(MCF) 162 186 458 555
Oil Sales ($) 176 128 423 350
Gas Sales ($) 767 460 2,293 1,377
Average Unit Price
Oil ($/Bbl) * 29.00 24.49 28.55 21.26
Gas ($/MCF) ** 4.74 2.48 5.01 2.48
Bbl - Stock Market Barrel Equivalent to 42 U.S. Gallons
** MCF - 1,000 Cubic Feet
SUMMARY OF EXPLORATION EFFORTS IN ISRAEL
To date, three gas fields were discovered offshore Israel known
respectively as Or, Or South and Nir. Based on the gas finds, a 30 year lease
(including the area of the Or gas discovery) was granted in June 2000
(hereinafter, the "Med Yavne Lease") and an additional 30 year lease (including
the area of the Nir gas discovery) was granted in January 2002 (hereinafter, the
"Med Ashdod Lease").
MED YAVNE LEASE
The Med Yavne Lease covers approximately 53 square kilometers
(approximately 12,000 acres). The Company's participation share of the Med Yavne
Lease is 0.4585%.
MED ASHDOD LEASE
The Med Ashdod Lease covers approximately 250 square kilometers
(approximately 62,000 acres). The Company serves as the operator of the Med
Ashdod Lease and holds a 0.3625% interest therein.
Two prospects within the southern sector have been identified and
recommended for drilling, one of which is for gas and the second for gas or oil.
The operator has examined this report and, based thereon, has established the
priorities for continued exploration. The operator presented its recommendation
to the lease participants in October 2002 that drilling be commenced for oil
(Nizanim 1).
As no decision has yet been taken, the Operator has determined to postpone
the drilling of Nitzanim and, in lieu of such drilling, has presented an
alternative work program as follows: (i) During 2003 - drill a confirmation gas
well (Nir-2) in the Nir field, with a total budget of approximately $10 million;
(ii) During 2004 - drill Nizanim-1 to total depth of 5300 meters (17,400 feet),
with a total budget of approximately $35 million.
-10-
At a partners meeting held on April 3, 2003, certain of the partners
announced their readiness to participate in the confirmation well. On April 30,
2003, the operator, on behalf of Isramco Negev 2 Limited Partnership, one of the
partners, issued to the partners a sole risk notice regarding the drilling of
the confirmation gas well (Nir-2). As certain of the partners declined to
participate in the well, the participation of Isramco Negev 2 Limited
Partnership in the well increased to 56.17805%.
The Nir - 2 confirmations well was spud in the "Med-Ashdod" lease on
September 1, 2003. On September 26, 2003, the Operator advised the partners that
the well reached a depth of 2,031 meters (6,663 feet) and that the wireline logs
performed to this depth indicated the presence of natural gas in the well. Based
on these results, the Operator recommended the partners to perform production
tests. On October 8, 2003, production tests commenced, in accordance with the
recommendation given by the Operator's consultants. On October 16, 2003, the
Operator further advised the partners that the production tests were completed
and that daily flow rates of between 10 million to 29 million cubic feet of gas
were observed in the test. External consultants are currently analyzing the
tests results in order to determine recoverable gas reserves and economic
feasibility of commercial production. Pending the completion of these analyses
it is neither possible to estimate recoverable gas reserves nor economic
feasibility of commercial production. Total drilling costs to date for Nir - 2
are approximately $10.9 million.
MARINE CENTER LICENSE
On September 21, 1999, the Company was awarded a preliminary permit, Marine
Center covering an area of 194 square kilometers. The permit included a
preferential right to obtain a license. In December 2000, Israeli Petroleum
Commissioner issued a license in respect of the area covered by the permit
(hereinafter, the "Marine Center License"), which License continues in effect
through December 3, 2003. The Company holds a 1% participation interest in the
Marine Center License and the remaining interests are held by affiliated
entities.
The Company serves as operator of the Marine Center License.
MARINE SOUTH LICENSE
In January 2002, Israeli Petroleum Commissioner issued a license in respect
of the area covered by the Marine South permit (hereinafter, the "Marine South
License"), which license continues in effect through January 15, 2005 and is
subject to (i) the performance of a seismic 3D survey and the processing of the
results thereof no later than January 15, 2003, (ii) the preparation of an oil
drilling prospect by July 15, 2003 and (iii) the drilling of a well no later
than January 15, 2004. In March 2003, the Petroleum Commissioner granted an
eight month extension for the period in which the above work plan is to be
performed. On October 2003 the Petroleum Commissioner granted an additional
extension of five month for compilation of seismic survey and three month for
drilling a well. The Company serves as operator of the License and holds a 1%
participation interest in the License; the remaining participation interests are
held by affiliated entities.
SUMMARY OF EXPLORATION EFFORTS IN THE UNITED STATES
The Company, through its wholly-owned subsidiaries, Jay Petroleum LLC ("Jay
Petroleum") and Jay Management LLC ("Jay Management"), is involved in oil and
gas production in the United States. Jay Petroleum owns varying working
interests in oil and gas wells in Louisiana, Texas, Oklahoma and Wyoming
Independent estimates of the reserves
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held by Jay Petroleum as of December 31, 2002 are approximately 109,183 net
barrels of proved developed producing oil and 3,381 MMCFs of proved developed
producing natural gas. Jay Management acts as the operator of certain of the
producing oil and gas interests owned or acquired by Jay Petroleum.
In March 2003 gas production from Hoover 4 well located in Oklahoma
commenced. In June 2003 the company purchased a 55% working Interest in 13
existing wells located in west Texas. The Company started to re-enter the wells
for the purpose of gas production.
SUMMARY OF EXPLORATION EFFORTS IN THE CONGO
The oil and gas properties in the Congo consist of the Marine III
Exploration Permit and the Marine 9 Exploration Permit. The Company holds 25%
participation interest in the Marine III Exploration Permit (through Naphtha
Congo Ltd.). The Company's participation interest in the Marine 9 Exploration
Permit is 5%, held through Naphtha Congo Limited Partnership ("Naphtha Congo").
The remaining participants in the Marine 9 License are recognized oil companies.
In March 2003, Naphtha Congo, the operator of the Marine III Exploration
Permit, decided to discontinue the planned work program principally because it
did not believe that the continuation of such program was commercially
reasonable. Based on management's belief that the value of the Company's
investment has been impaired, the Company wrote-off during the nine months ended
September 30, 2003 the amount of $150,000, representing the Company's investment
in Marine III Permit.
In April 2003, Naphtha Congo received notice from the Congolese Ministry of
Oil that the Republic of the Congo has decided to retrieve the rights of Naphtha
Congo Ltd. in Marine III, providing as a reason therefore Naphtha Congo's
non-perform of the required work program. Under applicable law, the Congolese
Government is entitled to request reimbursement in the amount of funds not
expended on the required work program. Naphtha Congo received a letter dated May
16, 2003, from the Congolese Government official supervising oil and gas
exploration demanding that Naphtha Congo remit an unspecified amount equivalent
to the aggregate work obligations that were not undertaken and a penalty of
$294,000.
OPERATOR'S FEES
During the 2003 Period, the Company earned $556,000 in operator fees
compared to $199,000 for the 2002 Period and $451,000 for the three months ended
September 30, 2003 compared to $52,000 for the comparable period in 2002. The
increase in 2003 Period and for the three months ended September 2003, compared
to the same period in 2002 is primarily attributable to the well (NIR 2) that
was spud on September 1, 2003.
OIL & GAS REVENUES
During the 2003 Period, the Company had oil and gas revenues of $2,712,000
compared to $1,730,000 for the 2002 Period and $941,000 for the three months
ended September 30, 2003 compared to $589,000 for the comparable period in 2002.
The increase in the 2003 Period and for the three months ended September 2003,
compared to the same period in 2002 is primarily attributable to an increase in
oil & gas prices
LEASE OPERATING EXPENSES AND SEVERANCE TAXES
Lease operating expenses and severance taxes were primarily in connection
with oil and gas fields in the United States. Oil and gas lease operating
expenses and severance taxes
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for the 2003 Period were $638,000 compared to $584,000 for the 2002 Period and
$218,000 for the three months ended September 30, 2003 compared to $147,000 for
the comparable period in 2002.
OIL AND GAS EXPLORATION COSTS
During the 2003 Period, the Company expended $22,000 in oil and gas
exploration, as compared to $1,770,000 for the same period in 2002. The decrease
in oil and gas exploration costs is primarily attributable to a wells that was
drilled in Texas, and in the Congo during 2002 Period. The wells were plugged
and abandoned.
IMPAIRMENT OF OIL AND GAS INTERESTS
During the 2003 Period, the Company wrote-off the amount of $150,000,
representing the Company's investment in the Marine III Permit in the Congo. The
Company's decision was based on management's assessment that the value of such
investment has been impaired. See "Summary of Exploration Efforts in the Congo".
INTEREST INCOME
Interest income in respect of the 2003 Period was $599,000 compared to
$604,000 for the 2002 Period and $147,000 in respect of the three months ended
September 30, 2003 compared to $199,000 for the same period in 2002. The
decrease in interest income earned by the company during the 2003 Period
compared to the 2002 Period and during the three months ended September 30, 2003
as compared to the same period in 2002 is primarily attributable to interest
earned on marketable securities.
GAIN (LOSS) ON MARKETABLE SECURITIES
During the 2003 Period, the Company recognized a net realized and
unrealized gain on trading securities of $625,000 compared to losses of $350,000
for the 2002 Period and gain of $13,000 for the three months ended September
30,2003 compared to a loss of $92,000 for the same period in 2002.
Increases or decreases in the gains and losses from marketable securities
are dependent on the market prices in general and the composition of the
portfolio of the Company.
EQUITY IN NET INCOME OF INVESTEES
The Company's equity in the net income of investees for the 2003 Period was
$1,243,000 compared to a loss of $392,000 for the 2002 Period. The increase is
primarily attributable to unrealized gains on marketable securities by Isramco
Negev 2 Limited Partnership and I.N.O.C. Dead Sea Limited Partnerships,
affiliate-investees of the Company.
OPERATOR EXPENSE
Operator expenses were incurred primarily in connection with the offshore
activities in Israel. Operator expenses for the 2003 Period were $587,000
compared to $597,000 for the 2002 Period and $201,000 for the three months ended
September 30, 2003 compared to 255,000 for the comparable period in 2002
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GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses for the 2003 Period were $1,260,000
compared to $1,066,000 for the in 2002 Period and $472,000 for the three months
ended September 30, 2003 compared to $320,000 for the same period in 2002. The
increase in general and administrative expenses during the 2003 Period compared
to the 2002 Period and for the three months ended September 2003 compared to the
same Period in 2002 is primarily attributable to expenses incurred in the
provision of professional services by related and third parties during 2003.
OTHER INCOME
Other income includes a sum of $350,000 which represents the settlement of
a liability recorded in connection with a well drilled in Marine 9 Permit.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risks relating to changes in interest rates and foreign currency
exchanges rates were reported in Item 7A of the Company's Annual Report on Form
10-K for the year ended December 31, 2002. There has been no material change in
these market risks since the end of the fiscal year 2002.
ITEM 4. CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures that are designed
to ensure that information required to be disclosed in the Company's Exchange
Act reports is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission's rules and forms,
and that such information is accumulated and communicated to the Company's
management, including its Chief Executive Officer and Principal Financial
Officer, as appropriate, to allow timely decisions regarding required
disclosure. In designing and evaluating the disclosure controls and procedures,
management recognized that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving the
desired control objectives, and management necessarily was required to apply its
judgment in evaluating the cost-benefit relationship of possible controls and
procedures.
Prior to the filing of this report on Form 10-Q, the Company carried out an
evaluation, under the supervision and with the participation of the Company's
Chief Executive and Principal Financial Officer, of the effectiveness of the
design and operation of the Company's disclosure controls and procedures (as
defined in Exchange Act Rules 13(a)-15(e)). Based upon that evaluation, the
Chief Executive and Principal Financial Officer concluded that the Company's
disclosure controls and procedures are effective in timely alerting him to
material information relating to the Company (including its consolidated
subsidiaries) required to be included in the Company's periodic SEC filings.
Subsequent to the date of that evaluation, there have been no changes in
internal controls or in other factors that have materially affected or are
reasonably likely to materially affect internal controls.
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PART II
ITEM 1. LEGAL PROCEEDINGS
The Company, together with Naphtha Congo Ltd., an Israeli and related entity
("Naphtha Congo"), were served in October 2002 in District Court of Harris
County, Texas, with summons and complaint by Romfor International, Ltd., a
contractor ("Contractor") who provided drilling services in the Tilapia permit
in the Congo, alleging breach of contract and damages of approximately $1.5
million and moving for court ordered arbitration. The Contractor and Naphtha
Congo entered into a drilling agreement in October 2000 with respect to the
Tilapia 1 well. The Company indirectly held, through Naphtha Congo, a 50%
participation interest in the Tilapia 1 well.
The Company filed its answer on October 18, 2002, wherein it denied all
allegations made and denied that it is a proper party to the suit and moved to
dismiss the complaint. On March 20, 2003, the court granted the Company's motion
to dismiss the complaint against it and concurrently granted Contractor's motion
to compel arbitration against Naphtha Congo. Subsequently, the Contractor moved
for a new trial and, on July 8, 2003, the court denied the Contractor's motion
for a new trial. On November 3, 2003 the arbitrator's award was forwarded to
Naphta Congo.
According the Arbitrator's award, Naphta Congo is obliged to pay the Contractor
the amount of $693,523.69 as funds due under the drilling contract and in
addition, interest at the rate of 18% per annum.
ITEM 2. CHANGE IN SECURITIES & USE OF PROCEEDS
None
ITEM 3. DEFAULT UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON 8-K
(i) Exhibits
31. Rule 13a-14(a)/15d-14(a) Certification
32. Section 1350 Certification
(ii) Reports on Form 8-K
None
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SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ISRAMCO, INC.
DATE: NOVEMBER 14, 2003 BY /S/ HAIM TSUFF
CHAIRMAN OF THE BOARD,
CHIEF EXECUTIVE AND
PRINCIPAL FINANCIAL OFFICER
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