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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-Q


(Mark One)

 

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2014 

or

 

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _________to _______

Commission File Number 1-33571


ESCALERA RESOURCES CO.

(Exact name of registrant as specified in its charter)


 

 

 

 

MARYLAND

 

83-0214692

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S. employer
identification no.)

 

 

 

1675 Broadway, Suite 2200, Denver, Colorado

 

80202

(Address of principal executive offices)

 

(Zip code)

303-794-8445

(Registrant’s telephone number, including area code)

None 

(Former name, former address, and former fiscal year, if changed since last report)


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities 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 No  

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

 

 

 

 

 

 

Large accelerated filer

 

 

Accelerated filer

 

Non-accelerated filer

 

(Do not check if a smaller reporting company)

 

Smaller reporting company

 

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No  

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

 

 

Class

 

Shares outstanding as of October 31, 2014

Common stock, $.10 par value

 

14,289,857

 

 

 


 

ESCALERA RESOURCES CO.

FORM 10-Q

TABLE OF CONTENTS

 

 

 

 

 

Page 

PART I. Financial Information: 

 

 

 

 

 

Item 1. Financial Statements

 

 

 

 

Consolidated Balance Sheets as of September 30, 2014 (unaudited) and December 31, 2013

 

Consolidated Statements of Operations for the Three and Nine months Ended September 30, 2014 and 2013 (Unaudited)

 

Consolidated Statements of Cash Flows for the Nine months Ended September 30, 2014 and 2013 (Unaudited)

 

Notes to Consolidated Financial Statements (Unaudited)

 

 

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

28 

 

 

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

28 

 

 

 

 

Item 4. Controls and Procedures

28 

 

 

 

PART II. Other Information: 

 

 

 

 

 

Item 1. Legal Proceedings

30 

 

 

 

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

30 

 

 

 

 

Item 6. Exhibits

30 

 

 

 

Signatures 

33 

 

 

 

 

2


 

PART I. FINANCIAL INFORMATION 

ITEM 1. FINANCIAL STATEMENTS

ESCALERA RESOURCES CO.

CONSOLIDATED BALANCE SHEETS 

(Amounts in thousands of dollars except share data)

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

 

 

 

 

 

2014

 

 

 

 

ASSETS

 

(unaudited)

 

December 31, 2013

 

Current assets:

    

 

 

    

 

 

  

Cash and cash equivalents

 

$

7,226 

 

$

2,799 

 

Cash held in escrow

 

 

283 

 

 

283 

 

Accounts receivable, net

 

 

4,608 

 

 

5,111 

 

Assets from price risk management

 

 

71 

 

 

205 

 

Other current assets

 

 

4,141 

 

 

3,130 

 

Total current assets

 

 

16,329 

 

 

11,528 

 

Natural gas and oil properties and equipment, successful efforts method:

 

 

 

 

 

 

 

Developed properties

 

 

241,248 

 

 

238,332 

 

Wells in progress

 

 

3,119 

 

 

2,342 

 

Gas transportation pipeline

 

 

5,510 

 

 

5,510 

 

Undeveloped properties

 

 

2,245 

 

 

2,705 

 

Corporate and other assets

 

 

1,559 

 

 

2,041 

 

 

 

 

253,681 

 

 

250,930 

 

Less accumulated depreciation, depletion and amortization

 

 

(145,364)

 

 

(130,518)

 

Net properties and equipment

 

 

108,317 

 

 

120,412 

 

Assets from price risk management

 

 

261 

 

 

402 

 

Other assets

 

 

710 

 

 

58 

 

TOTAL ASSETS

 

$

125,617 

 

$

132,400 

 

 

 

 

 

 

 

 

 

LIABILITIES, PREFERRED STOCK AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable and accrued expenses

 

$

9,501 

 

$

7,327 

 

Liabilities from price risk management

 

 

1,116 

 

 

 

Accrued production taxes

 

 

3,557 

 

 

2,275 

 

Other current liabilities

 

 

 —

 

 

222 

 

Total current liabilities

 

 

14,174 

 

 

9,824 

 

 

 

 

 

 

 

 

 

Line of credit

 

 

45,015 

 

 

47,450 

 

Asset retirement obligation

 

 

8,562 

 

 

8,420 

 

Liabilities from price risk management

 

 

323 

 

 

97 

 

Deferred tax liability

 

 

326 

 

 

1,236 

 

Other long-term liabilities

 

 

 —

 

 

90 

 

Total liabilities

 

 

68,400 

 

 

67,117 

 

Preferred stock, $0.10 par value; 10,000,000 shares authorized; 1,610,000 shares issued

 

 

 

 

 

 

 

and outstanding as of September 30, 2014 and December 31, 2013

 

 

37,972 

 

 

37,972 

 

Stockholders' equity:

 

 

 

 

 

 

 

Common stock, $0.10 par value; 50,000,000 shares authorized; 14,261,075 issued and outstanding at September 30, 2014 and 11,452,473 issued and outstanding at December 31, 2013

 

 

1,426 

 

 

1,145 

 

Additional paid-in capital

 

 

43,944 

 

 

42,302 

 

Accumulated deficit

 

 

(26,125)

 

 

(16,136)

 

Total stockholders' equity

 

 

19,245 

 

 

27,311 

 

TOTAL LIABILITIES, PREFERRED STOCK AND STOCKHOLDERS' EQUITY

 

$

125,617 

 

$

132,400 

 

 

The accompanying notes are an integral part of the consolidated financial statements.

3


 

 

ESCALERA RESOURCES CO.

CONSOLIDATED STATEMENTS OF OPERATIONS 

(Amounts in thousands of dollars except share and per share data)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

    

2014

    

2013

    

2014

    

2013

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

Natural gas and oil sales

 

$

7,550 

 

$

7,599 

 

$

27,436 

 

$

23,634 

 

Transportation and gathering revenue

 

 

828 

 

 

914 

 

 

2,732 

 

 

2,751 

 

Price risk management activities

 

 

1,633 

 

 

630 

 

 

(1,634)

 

 

1,264 

 

Other income

 

 

21 

 

 

(2)

 

 

207 

 

 

506 

 

Total revenues

 

 

10,032 

 

 

9,141 

 

 

28,741 

 

 

28,155 

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Production costs

 

 

3,296 

 

 

3,150 

 

 

9,768 

 

 

9,346 

 

Production taxes

 

 

898 

 

 

886 

 

 

3,262 

 

 

2,851 

 

Exploration expenses including dry hole costs

 

 

28 

 

 

52 

 

 

84 

 

 

122 

 

Pipeline operating costs

 

 

958 

 

 

1,238 

 

 

3,268 

 

 

3,950 

 

Impairment and abandonment of equipment and properties

 

 

355 

 

 

(36)

 

 

1,435 

 

 

1,500 

 

General and administrative

 

 

1,522 

 

 

983 

 

 

5,292 

 

 

3,946 

 

Depreciation, depletion and amortization

 

 

4,946 

 

 

5,178 

 

 

15,135 

 

 

15,631 

 

Total costs and expenses

 

 

12,003 

 

 

11,451 

 

 

38,244 

 

 

37,346 

 

Loss from operations

 

 

(1,971)

 

 

(2,310)

 

 

(9,503)

 

 

(9,191)

 

Interest expense, net

 

 

592 

 

 

488 

 

 

1,397 

 

 

943 

 

Loss before income taxes

 

 

(2,563)

 

 

(2,798)

 

 

(10,900)

 

 

(10,134)

 

Benefit for deferred income taxes

 

 

42 

 

 

946 

 

 

911 

 

 

3,467 

 

Net loss

 

$

(2,521)

 

$

(1,852)

 

$

(9,989)

 

$

(6,667)

 

Preferred stock dividends

 

 

(930)

 

 

(930)

 

 

(2,792)

 

 

(2,792)

 

Net loss attributable to common stock

 

$

(3,451)

 

$

(2,782)

 

$

(12,781)

 

$

(9,459)

 

Net loss per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.24)

 

$

(0.25)

 

$

(0.96)

 

$

(0.84)

 

Diluted

 

$

(0.24)

 

$

(0.25)

 

$

(0.96)

 

$

(0.84)

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

14,262,170 

 

 

11,341,277 

 

 

13,363,747 

 

 

11,324,653 

 

Diluted

 

 

14,262,170 

 

 

11,341,277 

 

 

13,363,747 

 

 

11,324,653 

 

 

The accompanying notes are an integral part of the consolidated financial statements.

4


 

ESCALERA RESOURCES CO.

CONSOLIDATED STATEMENTS OF CASH FLOWS 

(Amounts in thousands of dollars)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

 

 

2014

 

2013

 

Cash flows from operating activities:

    

 

 

    

 

 

 

Net loss

 

$

(9,989)

 

$

(6,667)

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

Depreciation, depletion, amortization and accretion of asset retirement obligation

 

 

15,320 

 

 

15,822 

 

Amortization of loan fees

 

 

258 

 

 

60 

 

Impairment and abandonment of equipment and properties

 

 

1,435 

 

 

1,500 

 

Gain on settlement of asset retirement obligation

 

 

(80)

 

 

 

Gain on sale of corporate assets and non-producing properties

 

 

(94)

 

 

 

Settlement of asset retirement obligation

 

 

(344)

 

 

 

Benefit for deferred income taxes

 

 

(911)

 

 

(3,467)

 

Change in fair value of derivative contracts

 

 

1,305 

 

 

3,071 

 

Stock-based compensation expense

 

 

601 

 

 

570 

 

Loss on sale of producing property

 

 

 

 

12 

 

Changes in current assets and liabilities:

 

 

 

 

 

 

 

Decrease in deposit held in escrow

 

 

 

 

282 

 

Decrease in accounts receivable

 

 

503 

 

 

1,959 

 

Decrease (increase) in other current assets

 

 

(154)

 

 

223 

 

(Decrease) increase in accounts payable and accrued expenses

 

 

422 

 

 

(4,160)

 

Increase in accrued production taxes

 

 

1,282 

 

 

1,078 

 

NET CASH PROVIDED BY OPERATING ACTIVITIES

 

 

9,554 

 

 

10,283 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Sales of corporate assets and non-producing properties

 

 

361 

 

 

 

Payments to acquire and develop producing properties and equipment, net

 

 

(2,324)

 

 

(7,729)

 

Payments to acquire corporate and non-producing properties

 

 

(285)

 

 

(7)

 

Advance for gas-to-liquids plant initiative

 

 

(871)

 

 

 —

 

NET CASH USED IN INVESTING ACTIVITIES

 

 

(3,119)

 

 

(7,736)

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Net proceeds from sale of common stock

 

 

4,158 

 

 

 

Dividends paid on preferred stock

 

 

(2,792)

 

 

(2,792)

 

Payment of loan financing costs

 

 

(895)

 

 

 

Repayments on credit facility, net

 

 

(45,015)

 

 

 

Borrowing on credit facility

 

 

42,580 

 

 

 

Tax withholdings related to net share settlement of restricted stock awards

 

 

(44)

 

 

(21)

 

NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES

 

 

(2,008)

 

 

(2,813)

 

Change in cash and cash equivalents

 

 

4,427 

 

 

(266)

 

Cash and cash equivalents at beginning of period

 

 

2,799 

 

 

4,070 

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

 

$

7,226 

 

$

3,804 

 

Supplemental disclosure of cash and non-cash transactions:

 

 

 

 

 

 

 

Cash paid for interest

 

$

1,317 

 

$

1,254 

 

Interest capitalized

 

$

42 

 

$

67 

 

Additions to developed properties included in current liabilities

 

$

3,424 

 

$

2,523 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

5


 

ESCALERA RESOURCES CO.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands of dollars except share and per share data)

(Unaudited)

1.Summary of Significant Accounting Policies

Basis of presentation

The accompanying unaudited interim consolidated financial statements and related notes were prepared by Escalera Resources Co. (“Escalera Resources” or the “Company”), formerly named Double Eagle Petroleum Co., in accordance with accounting principles generally accepted in the United States of America for interim financial reporting and were prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and note disclosures normally included in the annual audited consolidated financial statements have been condensed or omitted as allowed by such rules and regulations. These consolidated financial statements include all of the adjustments, which, in the opinion of management, are necessary for a fair presentation of the financial position and results of operations. All such adjustments are of a normal recurring nature only. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full fiscal year.

Certain prior year amounts have been reclassified to conform to the current year presentation.

The accounting policies followed by the Company are set forth in Note 1 to the Company’s consolidated financial statements in its Annual Report on Form 10-K for the year ended December 31, 2013, and are supplemented in the notes to this Quarterly Report on Form 10-Q. The unaudited interim consolidated financial statements presented herein should be read in conjunction with the consolidated financial statements and notes thereto included in the Annual Report on Form 10-K for the year ended December 31, 2013 filed with the SEC on March 13, 2014, as amended on Form 10-K/A filed with the SEC on September 12, 2014.  

Recent Accounting Pronouncements

 In August 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU No. 2014-15”) that will require management to evaluate whether there are conditions and events that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the financial statements are issued on both an interim and annual basis. Management will be required to provide certain footnote disclosures if it concludes that substantial doubt exists or when its plans to alleviate substantial doubt about the Company’s ability to continue as a going concern. ASU No. 2014-15 becomes effective for annual periods beginning in 2016 and for interim reporting periods starting in the first quarter of 2017. The Company plans to adopt ASU No 2014-15 for its Annual Report on Form 10-K for the year ended December 31, 2016 and is in the process of evaluating the impact on its financial statement disclosures. 

Principles of consolidation

The unaudited interim consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Petrosearch Energy Corporation and Eastern Washakie Midstream LLC (“EWM”). The Company has an agreement with EWM under which the Company pays a fee to EWM to gather, compress and transport gas produced at the Catalina Unit, in the eastern Washakie Basin of Wyoming. This fee is eliminated in consolidation.

 

2.Earnings per share

Basic earnings per share is calculated by dividing net income (loss) attributable to common stock by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share incorporates the treasury stock method to measure the dilutive impact of potential common stock equivalents by including the

6


 

effect of outstanding vested and unvested stock options and unvested stock awards in the average number of shares of common stock outstanding during the period. Income (loss) attributable to common stock is calculated as net income (loss) less dividends paid on the Company’s Series A Preferred Stock at a quarterly rate of $0.5781 per share. The Company declared and paid cash dividends of $930 for each of the three months ended September 30, 2014 and 2013 and $2,792 for each of the nine months ended September 30, 2014 and 2013.

The following is the calculation of basic and diluted weighted average shares outstanding and earnings per share of common stock for the periods indicated:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended September 30,

 

For the Nine Months Ended September 30,

 

 

    

2014

    

2013

    

2014

    

2013

 

Net loss

 

$

(2,521)

 

$

(1,852)

 

$

(9,989)

 

$

(6,667)

 

Preferred stock dividends

 

 

(930)

 

 

(930)

 

 

(2,792)

 

 

(2,792)

 

Loss attributable to common stock

 

$

(3,451)

 

$

(2,782)

 

$

(12,781)

 

$

(9,459)

 

Weighted average shares:

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares - basic

 

 

14,262,170 

 

 

11,341,277 

 

 

13,363,747 

 

 

11,324,653 

 

Dilutive effect of stock options outstanding at the end of period

 

 

 

 

 

 

 

 

 

Weighted average shares - fully diluted

 

 

14,262,170 

 

 

11,341,277 

 

 

13,363,747 

 

 

11,324,653 

 

Net loss per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.24)

 

$

(0.25)

 

$

(0.96)

 

$

(0.84)

 

Diluted

 

$

(0.24)

 

$

(0.25)

 

$

(0.96)

 

$

(0.84)

 

 

The following options and unvested restricted shares, which could be potentially dilutive in future periods, were not included in the computation of diluted net income per share because the effect would have been anti-dilutive for the periods indicated:

 

 

 

 

 

 

 

 

 

 

 

 

 

      

For the Three Months Ended September 30,

 

For the Nine Months Ended September 30,

 

 

    

2014

    

2013

    

2014

    

2013

 

Potential common shares

 

114,245 

 

75,978 

 

116,322 

 

56,395 

 

 

3.Credit Facility

Effective August 29, 2014, the Company replaced its existing credit facility with a new $250,000 credit agreement with Societe Generale.  Under the new agreement, the Company’s borrowing base was increased to $50,000.  As of September 30, 2014, the Company had $45,015 outstanding on the facility.  The Company paid the lender and its financial advisor structuring fees and legal expenses totaling $895 in connection with facilitating the credit agreement, which will be amortized as part of interest expense over the term of the loan.  

The Company has utilized its credit facilities to fund the development of the Catalina Unit and other non-operated projects in the Atlantic Rim, development projects on the Pinedale Anticline in the Green River Basin of Wyoming, and the Company’s Niobrara exploration project in the Atlantic Rim.

The credit facility is collateralized by the Company’s natural gas and oil producing properties. Any balance outstanding on the credit facility is due August 28, 2017

Borrowings under the new credit facility bear interest daily based on the Company’s interest rate election of either the Base Rate or LIBOR Rate.  Under the Base Rate option, interest is calculated at an annual rate equal to the

7


 

highest of (a) the base rate for Dollar loans for such day, Federal Funds rate for such day, plus 0.5%, or the LIBOR for such day plus (b) a margin ranging between 0.75% and 1.75% (annualized) depending on the level of funds borrowed.  Under the LIBOR Rate option, interest is calculated at an annual rate equal to LIBOR, plus a margin ranging between 1.75% and 2.75% (annualized) depending on the level of funds borrowed. 

The average interest rate on the new facility at September 30, 2014 was 3.1%.  

For the three months ended September 30, 2014 and 2013, the Company incurred interest expense on its credit facilities of $603 and $407, respectively, and for the nine months ended September 30, 2014 and 2013, $1,427 and $1,232, respectively. Of the total interest incurred, the Company capitalized interest costs of $10 and $11 for the three months ended September 30, 2014 and 2013, respectively, and $42 and $67 for the nine months ended September 30, 2014 and 2013, respectively.

In accordance with the new credit facility, the Company is subject to both financial and non-financial covenants. The financial covenants, as defined in the credit agreement, include maintaining (i) a current ratio of 1.0 to 1.0; (ii) a ratio of earnings before interest, taxes, depreciation, depletion, amortization, exploration and other non-cash items (“EBITDAX”) to interest plus dividends of greater than 1.5 to 1.0; and (iii) a funded debt, less unencumbered cash, to EBITDAX ratio of less than 4.0 to 1.0. As of September 30, 2014, the Company was in compliance with all financial and non-financial covenants under the credit facility. If the covenants are violated and the Company is unable to negotiate a waiver or amendment thereof, the lenders would have the right to declare an event of default, terminate the remaining commitment and accelerate all principal and interest outstanding.

 

4.Derivative Instruments

Commodity Contracts

The Company’s primary market exposure is adverse fluctuations in the price of natural gas and, to a lesser extent, oil. The Company uses derivative instruments, primarily swaps and costless collars, to manage the price risk associated with its production, and the resulting impact on cash flow, net income (loss) and earnings (loss) per share. The Company does not use derivative instruments for speculative purposes.

The extent of the Company’s risk management activities is controlled through policies and procedures that involve senior management and were approved by the Company’s board of directors. Senior management is responsible for proposing hedging recommendations, executing the approved hedging plan, overseeing the risk management process including methodologies used for valuation and risk measurement and presenting policy changes to the Company’s board of directors. The Company’s board of directors is responsible for approving risk management policies and for establishing the Company’s overall risk tolerance levels. The duration of the various derivative instruments depends on senior management’s view of market conditions, available contract prices and the Company’s operating strategy.  In accordance with the Company’s current credit agreement, the Company has hedged at least 85% of its projected production through 2016 based on its third-party prepared reserve report at December 31, 2013. 

The Company accounts for its derivative instruments as mark-to-market derivative instruments. Under mark-to-market accounting, derivative instruments are recognized as either assets or liabilities at fair value on the Company’s consolidated balance sheets, and changes in fair value are recognized in the price risk management activities line on the consolidated statements of operations. Realized gains and losses resulting from the contract settlement of derivatives are also recorded in the price risk management activities line on the consolidated statements of operations.

On the consolidated statements of cash flows, the cash flows from these instruments are classified as operating activities.

8


 

Derivative instruments expose the Company to counterparty credit risk. The Company enters into these contracts with third parties and financial institutions that it considers to be creditworthy. In addition, the Company’s master netting agreements reduce credit risk by permitting the Company to net settle for transactions with the same counterparty.

As with most derivative instruments, the Company’s derivative contracts contain provisions which may allow for another party to require security from the counterparty to ensure performance under the contract. The security may be in the form of, but not limited to, a letter of credit, security interest or a performance bond. As of September 30, 2014, no party to any of the Company’s derivative contracts has required any form of security guarantee.

The Company had the following commodity volumes under derivative contracts as of September 30, 2014:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Remaining

 

 

 

 

 

 

 

 

 

Contractual

 

 

 

 

 

 

 

Type of Contract

 

Volume (Bbls)

 

Term

 

Price (1)

Fixed Price Swap

    

6,000 

    

10/14-12/14

    

$

93.20 

    

    

Fixed Price Swap

 

20,400 

 

01/15-12/15

 

$

91.44 

 

 

 

 

26,400 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Remaining

 

 

 

 

 

 

 

 

 

Contractual

 

 

 

 

 

 

 

Type of Contract

 

Volume (Mcf)

 

Term

 

Price (2)

Fixed Price Swap

 

1,210,000 

 

10/14-12/14

 

$

3.85 

 

 

Three-way Costless Collar

 

6,600,000 

 

01/15-12/15

 

$

3.25 

 

put (short)

 

 

 

 

 

 

$

3.85 

 

put (long)

 

 

 

 

 

 

$

4.08 

 

call (short)

Fixed Price Swap

 

1,830,000 

 

01/16-12/16

 

$

4.07 

 

 

Fixed Price Swap

 

3,660,000 

 

01/16-12/16

 

$

4.15 

 

 

Total

 

13,300,000 

 

 

 

 

 

 

 

 


(1)

New York Mercantile Exchange (“NYMEX”) Light Sweet Crude Oil (“WTI”).

(2)

NYMEX Henry Hub Natural Gas (“NG”).

9


 

 

The table below contains a summary of all of the Company’s derivative positions reported on the consolidated balance sheet as of September 30, 2014 presented gross of any master netting arrangements:

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance Sheet Location

 

As of September 30, 2014

 

As of December 31, 2013

 

Assets

    

 

    

 

 

    

 

 

 

Commodity derivatives

 

Assets from price risk management - current

 

$

71 

 

$

218 

 

 

 

Assets from price risk management - long-term

 

 

273 

 

 

402 

 

Total derivative assets

 

 

 

$

344 

 

$

620 

 

Liabilities

 

 

 

 

 

 

 

 

 

Commodity derivatives

 

Liabilities from price risk management - current

 

$

(1,116)

 

$

(13)

 

 

 

Assets from price risk management - long-term

 

 

(12)

 

 

 —

 

 

 

Liabilities from price risk management -long-term

 

 

(323)

 

 

(97)

 

Interest rate swap

 

Other current liabilities

 

 

 —

 

 

(222)

 

 

 

Other long-term liabilities

 

 

 —

 

 

(90)

 

Total derivative liabilities

 

 

 

$

(1,451)

 

$

(422)

 

 

 

The before-tax effect of derivative instruments not designated as hedging instruments on the consolidated statements of operations for the three and nine months ended September 30, 2014 and 2013 was as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2014

    

2013

    

2014

    

2013

 

Unrealized gain (loss) on commodity contracts 1

 

$

175 

 

$

(1,028)

 

$

(1,617)

 

$

(3,299)

 

Realized gain (loss) on commodity contracts 1

 

 

1,458 

 

 

1,658 

 

 

(17)

 

 

4,563 

 

Unrealized gain (loss) on interest rate swap 2

 

 

315 

 

 

(92)

 

 

312 

 

 

228 

 

Realized loss on interest rate swap 2

 

 

(360)

 

 

(68)

 

 

(495)

 

 

(197)

 

Total activity for derivatives not designated as hedging instruments

 

$

1,588 

 

$

470 

 

$

(1,817)

 

$

1,295 

 

 


(1)Included in price risk management activities on the consolidated statements of operations. Price risk management activities totaled $1,633 and $630 for the three months ended September 30, 2014 and 2013, respectively and $(1,634) and $1,264 for the nine months ended September 30, 2014 and 2013, respectively.

(2)

Included in interest expense, net on the consolidated statements of operations.

 

In conjunction with the Company entering into a new credit agreement, the Company closed out its commodity and interest rate derivative positions held with its former lender on August 29, 2014.  The Company realized a gain of $1,343 on its commodity derivatives and a $315 loss on its interest rate swap.  These settlements are included in the table above. 

Refer to Note 5 for additional information regarding the valuation of the Company’s derivative instruments.

10


 

 

5.Fair Value of Financial Instruments

Assets and Liabilities Measured on a Recurring Basis

The Company’s financial instruments, including cash and cash equivalents, accounts receivable and accounts payable are carried at cost, which approximates fair value due to the short-term maturity of these instruments. The recorded value of the Company’s credit facility also approximates fair value as it bears interest at a floating rate.

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). A three-level valuation hierarchy has been established to allow readers to understand the transparency of inputs in the valuation of an asset or liability as of the measurement date. The three levels are defined as follows:

 

·

Level 1—Quoted prices (unadjusted) for identical assets or liabilities in active markets.

 

·

Level 2—Quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and model-derived valuations whose inputs or significant value drivers are observable.

 

·

Level 3—Unobservable inputs that reflect the Company’s own assumptions.

 

The following table provides a summary as of September 30, 2014 of assets and liabilities measured at fair value on a recurring basis:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements as of September 30, 2014

 

 

    

Level 1

    

Level 2

    

Level 3

    

Total

  

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative instruments - Commodity forward contracts

 

$

 —

 

$

332 

 

$

 —

 

$

332 

 

Total assets at fair value

 

$

 —

 

$

332 

 

$

 —

 

$

332 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative instruments - Commodity forward contracts

 

$

 —

 

$

1,439 

 

$

 —

 

$

1,439 

 

Total liabilities at fair value

 

$

 —

 

$

1,439 

 

$

 —

 

$

1,439 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements as of December 31, 2013

 

 

Level 1

    

Level 2

    

Level 3

    

Total

  

Assets

 

 

 

 

 

 

 

 

 

 

 

 

Derivative instruments - Commodity forward contracts

$

 —

 

$

607 

 

$

 —

 

$

607 

 

Total assets at fair value

$

 —

 

$

607 

 

$

 —

 

$

607 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

Derivative instruments - Commodity forward contracts

$

 —

 

$

97 

 

$

 —

 

$

97 

 

Derivative instruments - Interest rate swap

 

 —

 

 

312 

 

 

 —

 

 

312 

 

Total liabilities at fair value

$

 —

 

$

409 

 

$

 —

 

$

409 

 

 

11


 

The Company did not have any transfers of assets or liabilities between Level 1, Level 2 or Level 3 of the fair value measurement hierarchy during the nine months ended September 30, 2014.

Derivative instruments

The Company determines its estimates of the fair values of derivative instruments using a market approach based on several factors, including quoted prices in active markets, market-corroborated inputs, such as NYMEX forward-strip pricing, the credit rating of each counterparty, and the Company’s own credit rating.

In consideration of counterparty credit risk, the Company assessed the possibility of whether each counterparty to the derivative would default by failing to make any contractually required payments. Additionally, the Company considers that it is of sufficient credit quality and has the financial resources and willingness to meet its potential repayment obligations associated with the derivative transactions.

At September 30, 2014, the Company had various types of derivative instruments, which included swaps and costless collars. The natural gas and oil derivative markets are highly active. Although the Company’s economic hedges are valued using public indices, the instruments themselves are traded with third party counterparties and are not openly traded on an exchange. As such, the Company has classified these instruments as Level 2.

Refer to Note 4 for additional information regarding the Company’s derivative instruments.

Concentration of credit risk

Financial instruments that potentially subject the Company to credit risk consist of accounts receivable and derivative financial instruments. Substantially all of the Company’s receivables are within natural gas and oil industry, including those from a third party gas marketing company. Collectability is dependent upon the financial wherewithal of each counterparty as well as the general economic conditions of the industry. The receivables are not collateralized.

The Company currently uses two counterparties for its derivative financial instruments. The Company continually reviews the credit worthiness of its counterparties, which are generally other energy companies or major financial institutions. In addition, the Company uses master netting agreements which allow the Company, in the event of default, to elect early termination of all contracts with the defaulting counterparty. If the Company chooses to elect early termination, all asset and liability positions with the defaulting counterparty would be “net settled” at the time of election. “Net settlement” refers to a process by which all transactions between counterparties are resolved into a single amount owed by one party to the other.

6.Impairment of Long-Lived Assets

The Company reviews the carrying values of its long-lived assets annually or whenever events or changes in circumstances indicate that such carrying values may not be recoverable. If, upon review, the sum of the undiscounted pretax cash flows is less than the carrying value of the asset group, the carrying value is written down to estimated fair value. Individual assets are grouped for impairment purposes at the lowest level for which there are identifiable cash flows that are largely independent of the cash flows of other groups of assets, generally on a field-by-field basis. The fair value of impaired assets is determined based on quoted market prices in active markets, if available, or upon the present values of expected future cash flows using discount rates commensurate with the risks involved in the asset group. The impairment analysis performed by the Company may utilize Level 3 inputs. The long-lived assets of the Company consist primarily of proved natural gas and oil properties and undeveloped leaseholds.

Proved property impairment expense in the three months ended September 30, 2014 and 2013 totaled $0, and $(36), respectively, and $765 and $1,379 in the nine months ended September 30, 2014 and 2013, respectively. In the first quarter of 2014, the Company wrote-off a non-operated property in the Atlantic Rim. Production from the wells at this property has been limited and the operator has indicated that it intends to plug and abandon wells in

12


 

this area beginning in 2014. Impairment expense in the three and nine months ended September 30, 2013 was primarily related to the write-off of capital costs incurred on its Niobrara exploration well.

The Company also expensed $355 and $0 during the three months ended September 30, 2014 and 2013, respectively, and $670 and $121 during the nine months ended September 30, 2014 and 2013, respectively, related to undeveloped leaseholds. The 2014 write-off primarily related to expiring undeveloped acreage in Nebraska and Wyoming.

7.Compensation Plans

The Company recognized stock-based compensation expense totaling $218 and $601 for the three and nine months ended September 30, 2014, respectively, and $54 and $570, for the three and nine months ended September 30, 2013, respectively.

Compensation expense related to stock options is calculated using the Black-Scholes valuation model. Expected volatilities are based on the historical volatility of the Company’s common stock over a period consistent with that of the expected terms of the options. The expected terms of the options are estimated based on factors such as vesting periods, contractual expiration dates, historical trends in the Company’s common stock price and historical exercise behavior. The risk-free rates for periods within the contractual life of the options are based on the yields of U.S. Treasury instruments with terms comparable to the estimated option terms.

A summary of stock option activity under the Company’s various stock option plans as of September 30, 2014 and changes during the nine months ended September 30, 2014 is presented below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-

 

 

 

 

 

 

 

 

Weighted-

 

Average

 

 

 

 

 

 

 

 

Average

 

Remaining

 

Aggregate

 

 

 

 

 

Exercise

 

Contractual

 

Intrinsic

 

 

 

Shares

 

Price

 

Term (in years)

 

Value

 

Options:

    

    

    

 

    

    

    

    

 

    

 

Outstanding at January 1, 2014

 

276,854 

 

$

11.19 

 

2.7 

 

$

 

Granted

 

288,847 

 

$

2.56 

 

 

 

 

 

 

Exercised

 

 

 

 

 

 

 

 

 

 

Cancelled/expired

 

(240,799)

 

$

11.43 

 

 

 

 

 

 

Outstanding at September 30, 2014

 

324,902 

 

$

3.35 

 

2.4 

 

$

 

Exercisable at September 30, 2014

 

101,424 

 

$

8.75 

 

1.6 

 

$

 

 

The Company measures the fair value of stock awards based upon the fair market value of its common stock on the date of grant and recognizes the resulting compensation expense ratably over the associated service period, which is generally the vesting term of the stock awards. The Company recognizes the compensation expenses, net of an estimated forfeiture rate, for only those shares expected to vest. The Company typically estimates forfeiture rates based on historical experience, while also considering the duration of the vesting term of the award.

13


 

Nonvested stock awards as of September 30, 2014 and changes during the nine months ended September 30, 2014 were as follows:

 

 

 

 

 

 

 

 

 

    

Weighted-

 

 

 

 

Average

 

 

 

 

Grant Date

 

 

Shares

 

Fair Value

 

Outstanding at January 1, 2014

40,915 

 

$

4.12 

 

Granted

1,132,727 

 

$

2.37 

 

Vested

(136,661)

 

$

2.68 

 

Forfeited/returned

(170,552)

 

$

2.33 

 

Nonvested at September 30, 2014

866,429 

 

$

2.39 

 

 

In March 2014, the Company’s board of directors granted long-term incentive shares to its chief executive officer (“CEO”) in conjunction with his appointment as an officer. The Compensation Committee of the Board approved two restricted stock awards, under which the Company granted the CEO an aggregate of 528,634 shares of restricted stock, which are included in the table above. One-third of the shares awarded will vest at the end of three years if the CEO is continuously employed by the Company during such period, and the remaining two-thirds of the shares awarded will vest at the end of three years if the CEO is continuously employed by the Company during such period and certain performance goals related to reserve growth and the Company’s common stock price are achieved, as defined for purposes of the awards. The Company used a simplified binomial model to estimate the fair value of the performance and market based component of the award. If the CEO ultimately achieves the service requirements and full performance objectives determined by the agreement, the associated total stock-based compensation expense would be approximately $881, based on the grant date fair value. The Company’s stock-based compensation expense for the three and nine months ended September 30, 2014 includes approximately $58 and $122, respectively, related to these plans.

8.Income Taxes

The Company is required to record income tax expense for financial reporting purposes and applies an estimated effective tax rate (“ETR”) for calculating income tax provisions for interim periods. For the nine months ended September 30, 2014 the Company used an ETR of 8.4%. The Company’s ETR for the nine months ended September 30, 2014 differs from the U.S. federal statutory tax rate of 35% primarily as a result of the impact of recording a valuation allowance on its net deferred tax assets.

The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. As of September 30, 2014, the Company made no provision for interest or penalties related to uncertain tax positions. The Company files income tax returns in the U.S. federal jurisdiction and various states. There are currently no federal or state income tax examinations of the Company underway for these jurisdictions. Furthermore, the Company is no longer subject to U.S. federal income tax examinations by the Internal Revenue Service for tax years before 2011 and for state and local tax authorities for tax years before 2010.  

 

9.Equity

Preferred stock

In 2007, the stockholders of the Company approved an amendment to the Company’s Articles of Incorporation to provide for the issuance of 10,000,000 shares of preferred stock, and the Company subsequently completed a public offering of 1,610,000 shares of 9.25% Series A Cumulative Preferred Stock (the “Series A Preferred Stock”) at a price of $25.00 per share.

14


 

Holders of the Series A Preferred Stock are entitled to receive, when and as declared by the Company’s Board of Directors, dividends at a rate of 9.25% per annum ($2.3125 per annum per share)(the “Dividend Rate”). The Series A Preferred Stock does not have any stated maturity date and will not be subject to any sinking fund or mandatory redemption provisions except, under certain circumstances, upon a change of ownership or control. The Company may redeem the Series A Preferred Stock for cash at its option, in whole or from time to time in part, at a redemption price of $25.00 per share, plus accrued and unpaid dividends (whether or not earned or declared) to the redemption date.

The shares of Series A Preferred Stock are classified as other than of permanent equity on the consolidated balance sheets due to the change of control redemption provision applicable to such shares. Following a change of ownership or control of the Company by a person or entity in which the common stock of the Company is no longer traded on a national exchange, the Company will be required to redeem the Series A Preferred Stock within 90 days after the date on which the change of ownership or control occurred for cash. In the event of liquidation, the holders of the Series A Preferred Stock will have the right to receive $25.00 per share, plus all accrued and unpaid dividends, before any payments are made to the holders of the Company’s common stock. 

Private placement of common stock

On March 24, 2014, the Company accepted subscription agreements for a private offering of its common stock. The gross proceeds from the private offering were $4,825, or $4,158 net of placement agent and legal fees. The offering was effected through a private placement transaction with accredited investors. The Company plans to use the net proceeds of the private offering to fund working capital needs, capital expenditures, acquisitions of interests in natural gas and oil assets, and for general corporate purposes. On April 7, 2014, the Company issued a total of 2,018,826 shares of common stock at a price of $2.39 per share to investors in such private placement transaction.

Three related parties to the Company purchased $775 of common stock through this private offering, including $350 by its chief executive officer prior to becoming an officer of the Company. The Company also reimbursed the CEO for $118 of costs he incurred related to the offering and business development as part of the private placement agreement.

10.Commitments and Contingencies

Commitments

In May 2014, the Company entered into a letter agreement to jointly initiate the development, construction and operations of a gas-to-liquids ("GTL") plant to be located in Wyoming (the "GTL Plant").  If a definitive agreement is reached, the Company will jointly own Escalera GTL, LLC (“EGTL”) with Wyoming GTL, LLC ("WYGTL"), through which the initial phase of the GTL Plant will be executed. Under the Letter Agreement, WYGTL assigned all development and engineering plans, contracts, rights, technical relationships, among other rights (collectively, the "Rights") to EGTL, and the Company will advance up to $2,000 to EGTL. EGTL will use the funds for feasibility studies and completion of the initial engineering and development plans for the GTL Plant.

The Letter Agreement will terminate on November 26, 2014 if a definitive agreement between the Company and WYGTL has not been completed. In the event a definitive agreement is not executed within the required period, WYGTL will reimburse the Company for any portion of the $2,000 funded to EGTL, and EGTL will assign all rights back to WYGTL. Under the letter agreement, WYGTL will initially own 90% of the GTL plant, with the Company owning the remaining 10%.

For the Company’s participation in EGTL, the Company anticipates being granted the right to supply up to 75% of the natural gas feedstock for the GTL Plant once it is operational, which is not expected for at least five years. Based on WYGTL's plans for the GTL Plant, the estimated amount of gas to be supplied by us would be up to approximately 35-38 Bcf annually. Additionally, the Company intends to participate in the net margin generated from the conversion of the gas it supplies to the GTL Plant in return for entering into a long-term gas supply contract.

15


 

As of September 30, 2014, the Company had advanced $871 under the agreement, which is included in other current assets on the consolidated statement of operations.  To the extent that a definitive agreement is not executed with WYGTL, the Company believes that the reimbursement by WYGTL for amounts advanced under the letter agreement is fully collectible.

Legal proceedings

From time to time, the Company is involved in various legal proceedings, which are subject to the uncertainties inherent in any litigation. The Company is defending itself vigorously in all such matters, and while the ultimate outcome and impact of any proceeding cannot be predicted with certainty, management believes that the resolution of any proceeding will not have a material adverse effect on the Company’s financial condition or results of operations.

 

 

16


 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The terms “Escalera Resources,” “Company,” “we,” “our,” and “us” refer to Escalera Resources Co. and its subsidiaries, as a consolidated entity, unless the context suggests otherwise. Unless the context suggests otherwise, the amounts set forth herein are in thousands, except units of production, dollar per unit of production, ratios, and share or per share amounts.

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q and other publicly available documents, including those incorporated herein and therein by reference, contain, and our management may from time to time make “forward-looking statements” within the meaning of the U.S. Private Securities Litigation Reform Act of 1995 (“PSLRA”). We make these forward-looking statements in reliance on the safe harbor protections provided under Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended, and the PSLRA. All statements, other than statements of historical facts, included in this Quarterly Report on Form 10-Q that address activities, events or developments that we expect, believe or anticipate will or may occur in the future are forward-looking statements. When used in this report, the words “anticipate,” “believe,” “could,” “estimate,” “expect,” “forecast,” “intend,” “may,” “plan,” “project,” “should,” and words or phrases of similar import, as they relate to the Company or its subsidiaries or management, are intended to identify forward-looking statements. These forward-looking statements are based on assumptions which we believe are reasonable based on current expectations and projections about future events and industry conditions and trends affecting our business. However, whether actual results and developments will conform to our expectations and predictions is subject to a number of risks and uncertainties that, among other things, could cause actual results to differ materially from those contained in the forward-looking statements, including without limitation the Risk Factors set forth in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K and amended Form 10-K/A for the year ended December 31, 2013 and the following factors:

·

A decline in natural gas prices;

·

Our ability to increase our natural gas and oil reserves;

·

Our ability to obtain, or a decline in, oil or gas production;

·

Our future capital requirements and availability of capital resources to fund capital expenditures;

·

The changing political and regulatory environment in which we operate;

·

The actions of third party co-owners of interests in properties in which we also own an interest, and in particular those which we do not operate or control;

·

Our ability to maintain adequate liquidity in connection with current natural gas prices;

·

Our ability to maintain sufficient liquidity to continue to fund dividend payments on our Series A Preferred Stock;

·

Our preliminary investment in a proposed gas-to-liquids plant in Wyoming, and, along with any current  or future financial, strategic and operational partners, the ability to obtain financing, develop and operate such plant;

·

The shortage or high cost of equipment, qualified personnel and other oil field services;

·

General economic conditions, tax rates or policies, interest rates and inflation rates;

·

Incorrect estimates of required capital expenditures;

·

The amount and timing of capital deployment in new investment opportunities;

·

Changes in or compliance with laws and regulations, particularly those relating to drilling, derivatives, and safety and protection of the environment such as initiatives related to drilling and well completion techniques including hydraulic fracturing;

17


 

·

The volumes of production from our natural gas and oil development properties, which may be dependent upon issuance by federal and state governments, or agencies thereof, of drilling, environmental and other permits;

·

Our ability to market and find reliable and economic transportation for our gas;

·

Our ability to successfully identify, execute, integrate and profitably operate any future acquisitions;

·

Industry and market changes, including the impact of consolidations and changes in competition;

·

Our ability to manage the risk associated with operating in one major geographic area;

·

Weather, changes in climate conditions and other natural phenomena;

·

Our ability and the ability of our partners to continue to develop the Atlantic Rim project;

·

The credit worthiness of third parties with which we enter into hedging and business agreements;

·

Our ability to interpret 2-D and 3-D seismic data;

·

Numerous uncertainties inherent in estimating quantities of proved natural gas and oil reserves and actual future production rates and associated costs;

·

The volatility of our stock price; and

·

The outcome of any future litigation or similar disputes and the impact on any such outcome or related settlements.

We may also make material acquisitions or divestitures or enter into financing or other transactions. None of these events can be predicted with certainty, and the possibility of such events occurring is not taken into consideration in the forward-looking statements.

New factors that could cause actual results to differ materially from those described in forward-looking statements emerge from time to time, and it is not possible for us to predict all such factors, or the extent to which any such factor or combination of factors may cause actual results to differ from those contained in any forward-looking statement. We assume no obligation to publicly update or revise any such forward-looking statements, whether as a result of new information, future events, or otherwise.

Company Overview

We are an independent energy company currently engaged in the exploration, development, production and sale of natural gas and crude oil, primarily in the Rocky Mountain Basins of the western United States. We were incorporated in Wyoming in 1972 and reincorporated in Maryland in 2001. Our board of directors appointed a new chief executive officer, Charles F. Chambers, effective April 1, 2014, and in conjunction with this change, we changed our name to Escalera Resources Co. from Double Eagle Petroleum Co. Our common stock and Series A Cumulative Preferred are both publicly traded on the NASDAQ Global Select Market under the symbols “ESCR” and “ESCRP”, respectively. Our corporate offices are located at 1675 Broadway, Suite 2200, Denver, Colorado 80202, telephone number (303) 794-8445. Our executive offices are located at 675 Bering, Suite 850, Houston, TX 77057. Our website is www.escaleraresources.com.

Our objective is to increase long-term shareholder value by profitably growing our reserves, production, revenues, and cash flow. To meet this objective, we primarily focus on: (i) selectively pursuing strategic acquisitions of abundant, low cost natural gas assets that are currently undervalued or underutilized; (ii) identifying alternative ways to enhance the value of our natural gas reserves; (iii) investment in and enhancement of existing production wells and field facilities on operated and non-operated properties in the Atlantic Rim; (iv) continued participation in the development of tight sands gas wells at the Mesa Units on the Pinedale Anticline; and (v) pursuit of high quality exploration and strategic development projects with potential for providing long-term drilling inventories that we believe will generate above average returns.

18


 

Our current production primarily consists of natural gas from our two core properties in Wyoming. We have coalbed methane (“CBM”) reserves and production in the Atlantic Rim area of the eastern Washakie Basin and tight gas reserves and production on the Pinedale Anticline in the Green River Basin

Our Atlantic Rim and Pinedale Anticline assets operate under federal exploratory unit agreements among the working interest partners. Unitization is a type of sharing arrangement by which owners of operating and non-operating working interests pool their property interests in a producing area to form a single operating unit. Units are designed to improve efficiency and economics of developing and producing an area. The share that each interest owner receives is based upon the respective acreage contributed by each owner in the participating area (“PA”) that surround the producing wells as a percentage of the entire acreage of the PA.

In May 2014, we entered into a letter agreement to jointly initiate the development, construction and operations of a gas-to-liquids ("GTL") plant to be located in Wyoming (the "GTL Plant"). If a definitive agreement is reached, we will jointly own Escalera GTL, LLC (“EGTL”) with Wyoming GTL, LLC ("WYGTL"), through which the initial phase of the GTL Plant will be executed. Under the letter agreement, WYGTL assigned all development and engineering plans, contracts, rights, technical relationships, among other rights (collectively, the "Rights") to EGTL, and we will advance up to $2,000 to EGTL.  EGTL will use the funds for feasibility studies and completion of the initial engineering and development plans for the GTL Plant.

Currently the letter agreement will terminate on November 26, 2014 if a definitive agreement between us and WYGTL has not been completed. We are in the process of negotiating an extension on the letter agreement to January 31, 2015. In the event a definitive agreement is not executed within the required period, WYGTL will reimburse us for any portion of the $2,000 funded to EGTL, and EGTL will assign all rights back to WYGTL.  Under the letter agreement, WYGTL will initially own 90% of the GTL plan and we will own the remaining 10%.

For our participation in EGTL, we anticipate being granted the right to supply up to 75% of the natural gas feedstock for the GTL Plant once it is operational, which is not expected for at least for five years.  Based on WYGTL's plans for the GTL Plant, the estimated amount of gas to be supplied by us would be up to approximately 35-38 Bcf annually. Additionally, we intend to participate in the net margin generated from the conversion of the gas we supply to the GTL Plant in return for entering into a long-term gas supply contract.

Management believes this arrangement provides significant opportunity for the Company to enhance the pricing ultimately realized from its natural gas production.  As of September 30, 2014, $871 of the $2,000 commitment had been advanced.  To the extent that a definitive agreement is not executed with WYGTL, we believe that the reimbursement by WYGTL for amounts advanced under the letter agreement is fully collectible.

Recent Developments

On August 29, 2014, we replaced our existing credit facility with a $250 million credit facility with Societe Generale.  The new credit facility increased our borrowing base to $50 million and extended the maturity date to August 2017.   The new facility also has a more flexible covenant structure than our previous credit facility, which management believes to be essential as we expand our business. 

RESULTS OF OPERATIONS

Three Months Ended September 30, 2014 Compared to the Three Months Ended September 30, 2013

The following analysis provides comparison of the three months ended September 30, 2014 and the three months ended September 30, 2013.

Natural gas and oil sales

Natural gas and oil sales decreased 1% to $7,550, due to an 11% decrease in natural gas production, primarily at our Atlantic Rim and Pinedale Anticline properties.  The decrease in production volumes was partially offset by a  12% increase in the Colorado Interstate Gas (“CIG”) market price, which is the index on which most of our natural gas volumes are sold. 

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As shown in the table below, our average realized natural gas price decreased 6% to $3.61 per Mcf.  We calculate our average realized natural gas price by summing (1) production revenues received from third parties for the sale of our gas, which is included within natural gas and oil sales on the consolidated statements of operations, and (2) realized gain on our commodity derivatives, which is included within price risk management activities, net on the consolidated statements of operations, totaling $115 and $1,658 for the three months ended September 30, 2014 and 2013, respectively. The 2014 net realized gain on commodity contracts considered in the average realized price calculation, excluded the $1,343 gain realized on the settlement of our commodity contracts with the prior lender on our credit facility. 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

 

 

 

 

 

 

2014

 

2013

 

Percent

 

Percent

 

Product:

    

 

    

 

Average

    

 

    

 

Average

    

Volume

    

Price

 

 

 

Volume

 

 

Price

 

Volume

 

 

Price

 

Change

 

Change

 

Gas (Mcf)

 

1,964,356 

 

$

3.61 

 

2,214,855 

 

$

3.83 

 

(11)

%

(6)

%

Oil (Bbls)

 

6,629 

 

$

86.91 

 

7,976 

 

$

96.6 

 

(17)

%

(10)

%

Mcfe

 

2,004,130 

 

$

3.82 

 

2,262,711 

 

$

4.09 

 

(11)

%

(7)

%

 

Our total net production decreased 11% to 2.0 Bcfe for the three months ended September 30, 2014 primarily due to lower production from our non-operated properties at the Spyglass Hill Unit and on the Pinedale Anticline.

Our total average daily net production at the Atlantic Rim decreased 10% to 16,414 Mcfe. Our Atlantic Rim production comes from two operating units: the Catalina Unit and the Spyglass Hill Unit (which includes the Sun Dog, Doty Mountain, and Grace Point PAs). We operate the Catalina Unit and have non-operated working interests in the Spyglass Hill Unit.

Average daily net production at our Catalina Unit decreased 11% to 11,462 Mcfe.   During the third quarter 2014, we experienced a power outage and equipment interruption due to a lightning strike and as a result certain wells were briefly shut-in.  CBM wells are highly sensitive to water build-up when shut-in, even for short periods of time.  We are currently in the process of dewatering these wells and expect normal production to resume by the end of the first quarter of 2015.  We also realized a decrease in production due to the normal field production decline. 

Average daily production, net to our interest, at the Spyglass Hill Unit decreased 8% to