arena_10q93009.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
(Mark
One)
[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE
ACT
OF 1934
For
the Quarterly Period Ended September 30, 2009
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 001-31657
ARENA RESOURCES,
INC.
(Exact
name of registrant as specified in its charter)
| Nevada |
|
73-1596109 |
|
(State or
other jurisdiction of
incorporation or organization)
|
|
(I.R.S.
Employer Identification No.) |
6555 S.
Lewis Ave.
Tulsa, Oklahoma
74136
(Address
of principal executive offices)
(918)
747-6060
(Registrant’s
telephone number)
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 past 12 months, and (2) has been subject to such
filing requirements for the past 90 days. [X] 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 [X] Not Applicable
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 definitions of “large accelerated filer,” “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act:
| Large accelerated
filer [X] |
Accelerated
filer [ ] |
| Non-accelerated
filer [ ] |
Smaller reporting
company [ ] |
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act):
[
] Yes [X] No
Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practical date:
As of
November 3, 2009, the Company had outstanding 38,423,789 shares of common stock
($0.001 par value).
INDEX
Arena
Resources, Inc.
For the
Quarter Ended September 30, 2009
| |
|
|
|
Page |
| Part
I. Financial Information |
|
|
| |
|
|
| |
Item
1. Financial Statements (Unaudited) |
|
3 |
| |
|
|
|
|
| |
|
Condensed
Consolidated Balance Sheets as of September 30, 2009 and December 31, 2008
(Unaudited) |
|
4 |
| |
|
|
|
|
| |
|
Condensed
Consolidated Statements of Operations for the Three and Nine
Months Ended
September 30, 2009 and 2008 (Unaudited) |
|
5 |
| |
|
|
|
|
| |
|
Condensed
Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 2009 and 2008 (Unaudited) |
|
6 |
| |
|
|
|
|
| |
|
Notes to Condensed
Consolidated Financial Statements (Unaudited) |
|
7 |
| |
|
|
|
|
| |
Item
2. Management’s Discussion and Analysis of Financial Condition
and Results
of Operations |
|
16 |
| |
|
|
|
|
| |
Item
3. Quantitative and Qualitative Disclosures About Market
Risk |
|
20 |
| |
|
|
|
|
| |
Item
4. Controls and Procedures |
|
21 |
| |
|
|
|
|
| Part
II. Other Information |
|
|
| |
|
|
|
|
| |
Item 1. Legal
Proceedings |
|
21 |
| |
|
|
|
|
| |
Item 1A. Risk
Factors |
|
21 |
| |
|
|
|
|
| |
Item 2. Unregistered
Sales of Equity Securities and Use of Proceeds |
|
21 |
| |
|
|
|
|
| |
Item 3. Defaults
Upon Senior Securities |
|
21 |
| |
|
|
|
|
| |
Item 4. Submission
of Matters to a Vote of Security Holders |
|
22 |
| |
|
|
|
|
| |
Item 5. Other
Information |
|
22 |
| |
|
|
|
|
| |
Item 6.
Exhibits |
|
22 |
| |
|
|
|
|
| Signatures |
|
|
|
23 |
| |
|
|
|
|
Forward-Looking
Information
Certain
statements in this Section and elsewhere in this report are forward-looking in
nature and relate to trends and events that may affect the Company’s future
financial position and operating results. Such statements are made
pursuant to the safe harbor provision of the Private Securities Litigation Reform
Act of 1995. The terms “expect,” ”anticipate,” ”intend,” and
“project” and similar words or expressions are intended to identify
forward-looking statements. These statements speak only as of the
date of this report. The statements are based on current
expectations, are inherently uncertain, are subject to risks, and should be
viewed with caution. Actual results and experience may differ
materially from the forward-looking statements as a result of many factors,
including changes in economic conditions in the markets served by the company,
increasing competition, fluctuations in raw materials and energy prices, and
other unanticipated events and conditions. It is not possible to
foresee or identify all such factors. The company makes no commitment
to update any forward-looking statement or to disclose any facts, events, or
circumstances after the date hereof that may affect the accuracy of any
forward-looking statement.
Part
I – Financial Information
Item
1. Financial Statements:
The
condensed consolidated financial statements included herein have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been condensed or omitted pursuant to such
rules and regulations, although the Company believes that the disclosures are
adequate to make the information presented not misleading.
In the
opinion of the Company, all adjustments, consisting of only normal recurring
adjustments, necessary to present fairly the consolidated financial position of
the Company and the consolidated results of its operations and its cash flows
have been made. The results of its operations and its cash flows for the nine
months ended September 30, 2009 are not necessarily indicative of the results to
be expected for the year ending December 31, 2009.
|
ARENA
RESOURCES, INC.
|
|
CONDENSED
BALANCE SHEETS
|
|
(UNAUDITED)
|
|
|
|
September
30,
|
|
|
December
31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
Current
Assets
|
|
|
|
|
|
|
|
Cash
|
|
$ |
67,779,486 |
|
|
$ |
58,489,574 |
|
|
Accounts
receivable
|
|
|
12,716,863 |
|
|
|
8,637,308 |
|
|
Joint
interest billing receivable
|
|
|
2,352,537 |
|
|
|
2,836,948 |
|
|
Receivable
from oil derivative
|
|
|
- |
|
|
|
2,508,396 |
|
|
Fair
value of oil derivative
|
|
|
- |
|
|
|
16,210,478 |
|
|
Prepaid
expenses
|
|
|
1,554,886 |
|
|
|
847,433 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
Current Assets
|
|
|
84,403,772 |
|
|
|
89,530,137 |
|
|
|
|
|
|
|
|
|
|
|
|
Property
and Equipment
|
|
|
|
|
|
|
|
|
|
Oil
and gas properties subject to amortization
|
|
|
620,132,699 |
|
|
|
548,714,235 |
|
|
Inventory
for property development
|
|
|
1,015,769 |
|
|
|
1,670,067 |
|
|
Drilling
rigs
|
|
|
7,235,008 |
|
|
|
6,899,433 |
|
|
Land,
buildings, equipment and leasehold improvements
|
|
|
5,828,348 |
|
|
|
5,799,045 |
|
|
Total
Property and Equipment
|
|
|
634,211,824 |
|
|
|
563,082,780 |
|
|
Less: Accumulated
depreciation and amortization
|
|
|
(84,971,991 |
) |
|
|
(60,928,142 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net
Property and Equipment
|
|
|
549,239,833 |
|
|
|
502,154,638 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$ |
633,643,605 |
|
|
$ |
591,684,775 |
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
11,057,376 |
|
|
$ |
12,877,084 |
|
|
Deferred
income taxes
|
|
|
- |
|
|
|
6,046,508 |
|
|
Accrued
liabilities
|
|
|
1,782,036 |
|
|
|
865,955 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
Current Liabilities
|
|
|
12,839,412 |
|
|
|
19,789,547 |
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term
Liabilities
|
|
|
|
|
|
|
|
|
|
Asset
retirement liability
|
|
|
6,091,856 |
|
|
|
5,066,348 |
|
|
Deferred
income taxes
|
|
|
103,901,036 |
|
|
|
84,533,419 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
Long-Term Liabilities
|
|
|
109,992,892 |
|
|
|
89,599,767 |
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders'
Equity
|
|
|
|
|
|
|
|
|
|
Preferred
stock - $0.001 par value; 10,000,000 shares authorized;
|
|
|
|
|
|
|
|
|
|
no
shares issued or outstanding
|
|
|
- |
|
|
|
- |
|
|
Common
stock - $0.001 par value; 100,000,000 shares authorized;
|
|
|
|
|
|
|
|
|
|
38,423,789
shares and 38,210,187 shares outstanding, respectively
|
|
|
38,424 |
|
|
|
38,210 |
|
|
Additional
paid-in capital
|
|
|
324,415,070 |
|
|
|
318,701,383 |
|
|
Retained
earnings
|
|
|
186,357,807 |
|
|
|
153,343,267 |
|
|
Accumulated
other comprehensive income (loss)
|
|
|
- |
|
|
|
10,212,601 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
Stockholders' Equity
|
|
|
510,811,301 |
|
|
|
482,295,461 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities and Stockholders' Equity
|
|
$ |
633,643,605 |
|
|
$ |
591,684,775 |
|
|
|
|
|
|
|
|
|
|
|
See the
accompanying notes to unaudited condensed consolidated financial
statements.
ARENA RESOURCES,
INC.
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
|
|
|
For
the Three Months Ended
|
|
|
For
the Nine Months Ended
|
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil
and Gas Revenues
|
|
$ |
36,060,878 |
|
|
$ |
68,412,686 |
|
|
$ |
83,890,733 |
|
|
$ |
175,884,359 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs
and Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil
and gas production costs
|
|
|
3,137,035 |
|
|
|
5,790,236 |
|
|
|
10,614,882 |
|
|
|
12,979,837 |
|
|
Oil
and gas production taxes
|
|
|
1,904,924 |
|
|
|
3,629,326 |
|
|
|
4,455,164 |
|
|
|
8,942,914 |
|
|
Realized
loss (gain) on oil derivatives
|
|
|
- |
|
|
|
3,462,283 |
|
|
|
(15,870,007 |
) |
|
|
9,008,822 |
|
|
Depreciation,
depletion and amortization
|
|
|
8,994,389 |
|
|
|
9,841,972 |
|
|
|
23,634,894 |
|
|
|
23,556,695 |
|
|
Accretion
expense
|
|
|
102,499 |
|
|
|
79,502 |
|
|
|
294,189 |
|
|
|
222,119 |
|
|
General
and administrative expense
|
|
|
2,967,852 |
|
|
|
3,420,589 |
|
|
|
9,106,731 |
|
|
|
9,696,477 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Costs and Operating Expenses
|
|
|
17,106,699 |
|
|
|
26,223,908 |
|
|
|
32,235,853 |
|
|
|
64,406,864 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Income (Expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
202,340 |
|
|
|
546,089 |
|
|
|
678,646 |
|
|
|
835,755 |
|
|
Interest
expense
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(1,145,456 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Other Income (Expense)
|
|
|
202,340 |
|
|
|
546,089 |
|
|
|
678,646 |
|
|
|
(309,701 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
Before Provision for Income Taxes
|
|
|
19,156,519 |
|
|
|
42,734,867 |
|
|
|
52,333,526 |
|
|
|
111,167,794 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for Deferred Income Taxes
|
|
|
(7,043,493 |
) |
|
|
(15,811,901 |
) |
|
|
(19,318,986 |
) |
|
|
(41,132,084 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
$ |
12,113,026 |
|
|
$ |
26,922,966 |
|
|
$ |
33,014,540 |
|
|
$ |
70,035,710 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
Net Income Per Common Share
|
|
$ |
0.32 |
|
|
$ |
0.71 |
|
|
$ |
0.86 |
|
|
$ |
1.93 |
|
|
Diluted
Net Income Per Common Share
|
|
|
0.31 |
|
|
|
0.69 |
|
|
|
0.85 |
|
|
|
1.87 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Other
Comprehensive Income (Loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
12,113,026 |
|
|
$ |
26,922,966 |
|
|
$ |
33,014,540 |
|
|
$ |
70,035,710 |
|
|
Realized
loss (gain) on hedge derivative contract
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
settlements
reclassified from other comprehensive
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
loss
(income), net of tax
|
|
|
- |
|
|
|
4,940,665 |
|
|
|
(10,222,546 |
) |
|
|
6,950,305 |
|
|
Change
in unrealized deferred hedging gains
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(losses),
net of tax
|
|
|
44,281 |
|
|
|
2,863,848 |
|
|
|
9,945 |
|
|
|
(1,979,521 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Comprehensive Income
|
|
$ |
12,157,307 |
|
|
$ |
34,727,479 |
|
|
$ |
22,801,939 |
|
|
$ |
75,006,494 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See the
accompanying notes to unaudited condensed consolidated financial
statements.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
For
the Nine Months Ended September 30,
|
|
2009
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
Cash
Flows From Operating Activities
|
|
|
|
|
|
|
|
Net income |
|
$ |
33,014,540 |
|
$ |
|
70,035,710 |
|
|
Adjustments
to reconcile net income to net cash
|
|
|
|
|
|
|
|
|
|
provided
by operating activities:
|
|
|
|
|
|
|
|
|
|
Depreciation,
depletion and amortization
|
|
|
23,634,894 |
|
|
|
23,556,695 |
|
|
Provision
for income taxes
|
|
|
19,318,986 |
|
|
|
41,132,084 |
|
|
Stock
based compensation
|
|
|
3,648,020 |
|
|
|
5,095,580 |
|
|
Accretion
of asset retirement obligation
|
|
|
294,189 |
|
|
|
222,119 |
|
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts,
joint interest and oil derivative receivable
|
|
|
(1,086,748 |
) |
|
|
388,103 |
|
|
Income
taxes payable
|
|
|
- |
|
|
|
(612,480 |
) |
|
Prepaid
expenses
|
|
|
(707,453 |
) |
|
|
(732,837 |
) |
|
Accounts
payable and accrued liabilities
|
|
|
(903,627 |
) |
|
|
3,373,813 |
|
|
|
|
|
|
|
|
|
|
|
|
Net
Cash Provided by Operating Activities
|
|
|
77,212,801 |
|
|
|
142,458,787 |
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows from Investing Activities
|
|
|
|
|
|
|
|
|
|
Purchase
and development of oil and gas properties
|
|
|
(65,362,425 |
) |
|
|
(151,469,679 |
) |
|
Purchase
of inventory for property development
|
|
|
(4,261,467 |
) |
|
|
(1,392,728 |
) |
|
Purchase
of buildings, drilling rigs & equipment
|
|
|
(364,878 |
) |
|
|
(1,350,237 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net
Cash Used in Investing Activities
|
|
|
(69,988,770 |
) |
|
|
(154,212,644 |
) |
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows From Financing Activities
|
|
|
|
|
|
|
|
|
|
Proceeds
from issuance of common stock, net
|
|
|
- |
|
|
|
116,130,189 |
|
|
Proceeds
from exercise of warrants
|
|
|
537,341 |
|
|
|
236,179 |
|
|
Proceeds
from exercise of options
|
|
|
1,528,540 |
|
|
|
4,417,260 |
|
|
Proceeds
from issuance of notes payable
|
|
|
- |
|
|
|
11,000,000 |
|
|
Payment
of notes payable
|
|
|
- |
|
|
|
(46,000,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net
Cash Provided by Financing Activities
|
|
|
2,065,881 |
|
|
|
85,783,628 |
|
|
|
|
|
|
|
|
|
|
|
|
Net
Increase in Cash
|
|
|
9,289,912 |
|
|
|
74,029,771 |
|
|
|
|
|
|
|
|
|
|
|
|
Cash
at Beginning of Period
|
|
|
58,489,574 |
|
|
|
5,213,459 |
|
|
|
|
|
|
|
|
|
|
|
|
Cash
at End of Period
|
|
$ |
67,779,486 |
|
|
$ |
79,243,230 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
Cash Flow Information
|
|
|
|
|
|
|
|
|
|
Cash
paid for income taxes
|
|
$ |
- |
|
|
$ |
612,480 |
|
|
Cash
paid for interest
|
|
|
- |
|
|
|
1,280,122 |
|
|
|
|
|
|
|
|
|
|
|
|
Non-Cash
Investing and Financing Activities
|
|
|
|
|
|
|
|
|
|
Asset
retirement obligation incurred in property development
|
|
|
731,319 |
|
|
|
1,076,648 |
|
|
Depreciation
on drilling rigs capitalized as oil and gas properties
|
|
|
408,955 |
|
|
|
480,380 |
|
|
Use
of inventory in property development
|
|
|
4,915,765 |
|
|
|
- |
|
See the
accompanying notes to unaudited condensed consolidated financial
statements.
ARENA
RESOURCES, INC.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009
NOTE
1 – BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Condensed
Consolidated Financial Statements – The accompanying condensed
consolidated financial statements have been prepared by the Company and are
unaudited. In the opinion of management, the accompanying unaudited
financial statements contain all adjustments necessary for fair presentation,
consisting of normal recurring adjustments, except as disclosed
herein.
The
accompanying unaudited interim financial statements have been condensed pursuant
to the rules and regulations of the Securities and Exchange Commission;
therefore, certain information and disclosures generally included in financial
statements have been condensed or omitted. The condensed financial
statements should be read in conjunction with the Company’s annual financial
statements included in its annual report on Form 10-K as of December 31,
2008. The financial position and results of operations for the three
and nine months ended September 30, 2009 are not necessarily indicative of the
results to be expected for the full year ending December 31, 2009.
Nature of
Operations – Arena Resources, Inc. (the “Company”) owns interests in oil
and gas properties located in Oklahoma, Texas, Kansas and New
Mexico. The Company is engaged primarily in the acquisition,
exploration and development of oil and gas properties and the production and
sale of oil and gas. The accompanying statements of operations and
cash flows include the operations of their wholly owned subsidiaries from the
date of acquisition/formation.
Use of
Estimates – The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, disclosure of contingent assets and
liabilities and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates.
Fair Values of
Financial Instruments — The carrying amounts reported in the balance
sheets for joint interest billings receivable, prepaid expenses and accrued
liabilities approximate fair value because of the immediate or short-term
maturity of these financial instruments. The carrying amounts reported for notes
payable and long-term debt approximate fair value because the underlying
instruments are at interest rates which approximate current market
rates. The fair value estimates for oil derivatives are derived from
published market prices for the underlying commodities to determine discounted
expected future cash flows as of the date of the estimate. See Note 8—Derivative
Instruments.
Consolidation
– The accompanying consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in
consolidation.
Concentration of
Credit Risk and Major Customer – The Company has cash in excess of
federally insured limits at September 30, 2009. During the nine
months ended September 30, 2009, sales to two customers represented 76% and 12%,
respectively, of oil and gas revenues. At September 30, 2009, these
customers made up 71% and 18%, respectively, of accounts
receivable.
Oil and Gas
Properties – The Company uses the full cost method of accounting for oil
and gas properties. Under this method, all costs associated with
acquisition, exploration, and development of oil and gas reserves are
capitalized. Costs capitalized include acquisition costs, geological and
geophysical expenditures, lease rentals on undeveloped properties and costs of
drilling and equipping productive and non-productive wells. Drilling costs
include directly related overhead costs. Capitalized costs are
categorized either as being subject to amortization or not subject to
amortization.
ARENA
RESOURCES, INC.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009
All
capitalized costs of oil and gas properties, including the estimated future
costs to develop proved reserves and estimated future costs of abandonment and
site restoration, are amortized on the unit-of-production method using estimates
of proved reserves as determined by independent engineers. Investments in
unproved properties and major development projects are not amortized until
proved reserves associated with the projects can be determined. The Company
evaluates oil and gas properties for impairment at least annually. Amortization
expense for the three and nine months ended September 30, 2009 was $8,994,389
and $23,634,894, respectively, based on depletion at the rate of $13.55 per
barrel of oil equivalent compared to $9,841,972 and $23,556,695, respectively,
for the three and nine months ended September 30, 2008, based on depletion at
the rate of $13.81 per barrel of oil equivalent. These amounts include $74,740
and $222,263 of depreciation for the three and nine months ended September 30,
2009, respectively, compared to $55,723 and $165,427 of depreciation for the
three and nine months ended September 30, 2008, respectively.
In addition, capitalized costs are subject to a ceiling test which
limits such costs to the estimated present value of future net revenues from
proved reserves, discounted at a 10-percent interest rate, based on current
economic and operating conditions, plus the lower of cost or fair market value
of unproved properties. Consideration received from sales or transfers of oil
and gas property is accounted for as a reduction of capitalized costs. Revenue
is not recognized in connection with contractual services performed on
properties in which the Company holds an ownership interest.
Drilling Rigs –
Drilling rigs are valued at historical cost adjusted for impairment loss
less accumulated depreciation. Historical costs include all direct
costs associated with the acquisition of drilling rigs and placing them in
service. Drilling rigs are depreciated over 10 years and the
depreciation is capitalized as part of oil and gas properties subject to
amortization. For the three and nine months ended September 30, 2009
the Company had depreciation of $176,426 and $408,955, respectively, on the
Company owned drilling rigs, compared to $160,597 and $480,380 for the three and
nine months ended September 30, 2008.
Land, Buildings,
Equipment and Leasehold Improvements – Land, buildings, equipment and
leasehold improvements are valued at historical cost adjusted for impairment
loss less accumulated depreciation. Historical costs include all
direct costs associated with the acquisition of land, buildings, equipment and
leasehold improvements and placing them in service.
Depreciation
of buildings and equipment is calculated using the straight-line method based
upon the following estimated useful lives:
|
Buildings
and improvements
|
|
30
years |
|
|
Office
equipment and software
|
5-7
years |
|
|
Machinery
and equipment
|
|
5-7
years |
|
Inventory for
Property Development – Inventories consist primarily of tubular goods
used in development and are stated at the lower of specific cost of each
inventory item or market value.
Basic and Diluted
Income Per Common Share – Basic income per common share is computed by
dividing net income by the weighted-average number of common shares outstanding
during the period. Diluted income per share reflects the potential
dilution that could occur if all contracts to issue common stock were converted
into common stock, except for those that are anti-dilutive. The
dilutive effect of stock options and other share based compensation is
calculated using the treasury method with an offset from expected proceeds upon
exercise of the stock options and unrecognized compensation
expense.
ARENA
RESOURCES, INC.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009
Recent Accounting
Pronouncements – In December 2008, the SEC announced that it
had approved revisions to modernize the oil and gas reserve reporting
disclosures. The new disclosure requirements include provisions
that:
|
·
|
Introduce
a new definition of oil and gas producing activities. This new definition
allows companies to include in their reserve base volumes from
unconventional resources. Such unconventional resources include bitumen
extracted from oil sands and oil and gas extracted from coal beds and
shale formations.
|
|
·
|
Report
oil and gas reserves using an unweighted average price using the prior
12-month period, based on the closing prices on the first day of each
month, rather than year-end prices. The SEC indicated that they will
continue to communicate with the FASB staff to align their accounting
standards with these rules. The FASB currently requires a single-day,
year-end price for accounting
purposes.
|
|
·
|
Permit
companies to disclose their probable and possible reserves on a voluntary
basis. In the past, proved reserves were the only reserves allowed in the
disclosures.
|
|
·
|
Requires
companies to provide additional disclosure regarding the aging of proved
undeveloped reserves.
|
|
·
|
Permit
the use of reliable technologies to determine proved reserves if those
technologies have been demonstrated empirically to lead to reliable
conclusions about reserves volumes.
|
|
·
|
Replace
the existing “certainty” test for areas beyond one offsetting drilling
unit from a productive well with a “reasonable certainty”
test.
|
|
·
|
Require
additional disclosures regarding the qualifications of the chief technical
person who oversees the company’s overall reserve estimation process.
Additionally, disclosures regarding internal controls over reserve
estimation, as well as a report addressing the independence and
qualifications of its reserves preparer or auditor will be
mandatory.
|
The
Company will begin complying with the disclosure requirements in our annual
report on Form 10-K for the year ending December 31, 2009. The new rules
may not be applied to disclosures in quarterly reports prior to the first annual
report in which the revised disclosures are required.
The SEC
is coordinating with the FASB to obtain the revision necessary to US GAAP
concerning financial accounting and reporting by oil and gas producing companies
and disclosures about oil and gas producing activities to provide consistency
with the new rules. During September 2009, the FASB issued an
exposure draft of a proposed Accounting Standards Update, “Oil and Gas Reserves
Estimation and Disclosures”. The proposed Update would amend existing standards
to align the reserves calculation and disclosure requirements under US GAAP with
the requirements in the SEC rules. As proposed, the Update would be
effective for annual reporting periods ending on or after December 31, 2009, and
would be applied prospectively as a change in estimate.
We are
currently in the process of evaluating the new requirements.
In June
2009, the FASB established the FASB Accounting Standards Codification
(Codification), which officially commenced July 1, 2009, to become the source of
authoritative US GAAP recognized by the FASB to be applied by nongovernmental
entities. Rules and interpretive releases of the SEC under authority
of federal securities laws are also sources of authoritative US GAAP for SEC
registrants. Generally, the Codification is not expected to change US
GAAP. All other accounting literature excluded from the Codification
will be considered nonauthoritative. The Codification is effective
for financial statements issued for interim and annual periods ending after
September 15, 2009. We adopted the new standards for our quarter
ending September 30, 2009. All references to authoritative accounting
literature are now referenced in accordance with the Codification.
ARENA
RESOURCES, INC.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009
In May
2009, the FASB issued new standards which establish the accounting for and
disclosure of events that occur after the balance sheet date but before
financial statements are issued. In particular, the new standards set
forth:
|
|
the
period after the balance sheet date during which management of a reporting
entity should evaluate events or transactions that may occur for potential
recognition or disclosure in the financial statements (through the date
that the financial statements are issued or are available to be
issued);
|
|
|
the
circumstances under which an entity should recognize events or
transactions occurring after the balance sheet date in its financial
statements; and
|
|
|
the
disclosures that an entity should make about events or transactions that
occurred after the balance sheet
date.
|
We
adopted the new standards as of June 30, 2009. We have evaluated subsequent
events after the balance sheet date of September 30, 2009 through the time of
filing with the Securities and Exchange Commission (SEC) on November 4, 2009
which is the date the financial statements were issued. See Note 10 – Subsequent
Events.
NOTE
2 – EARNINGS PER SHARE INFORMATION
|
|
|
For
the Three Months Ended
|
|
|
For
the Nine Months Ended
|
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Net
Income
|
|
$ |
12,113,026 |
|
|
$ |
26,922,966 |
|
|
$ |
33,014,540 |
|
|
$ |
70,035,710 |
|
|
Basic
Weighted-Average Common Shares Outstanding
|
|
|
38,385,073 |
|
|
|
37,976,326 |
|
|
|
38,281,141 |
|
|
|
36,251,182 |
|
|
Effect
of dilutive securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
|
|
|
43,972 |
|
|
|
209,236 |
|
|
|
100,626 |
|
|
|
221,063 |
|
|
Stock
options
|
|
|
563,213 |
|
|
|
792,439 |
|
|
|
519,752 |
|
|
|
1,027,044 |
|
|
Diluted
Weighted-Average Common Shares Outstanding
|
|
|
38,992,258 |
|
|
|
38,978,001 |
|
|
|
38,901,519 |
|
|
|
37,499,289 |
|
|
Basic
Income Per Common Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
0.32 |
|
|
$ |
0.71 |
|
|
$ |
0.86 |
|
|
$ |
1.93 |
|
|
Diluted
Income Per Common Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
|
0.31 |
|
|
|
0.69 |
|
|
|
0.85 |
|
|
|
1.87 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
three and nine months ended September 30, 2009, 700,000 stock options were not
included in the computation of diluted income per share as their effects are
anti-dilutive.
NOTE
3 – NOTES PAYABLE
Credit facility
- Effective as of June 30, 2009, the Company entered into a new agreement
that provides for a credit facility of $150 million with a borrowing base of $75
million with the structure in place to increase that borrowing base an
additional $75 million. The new facility has an interest rate grid
with a range of LIBOR plus 2.25% to 3.25%, depending upon our level of
utilization of the credit facility with the total interest rate to be charged
being no less than 4.00%. As of September 30, 2009, we were in
compliance with all covenants and did not have any amount outstanding under this
credit facility.
ARENA
RESOURCES, INC.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009
NOTE
4 – ASSET RETIREMENT OBLIGATION
The Company provides for the obligation to plug and abandon oil
and gas wells at the dates properties are either acquired or the wells are
drilled. The asset retirement obligation is adjusted each quarter for
any liabilities incurred or settled during the period, accretion expense and any
revisions made to the estimated cash flows. The reconciliation of the asset
retirement obligation for the nine months ended September 30, 2009 is as
follows:
|
Balance,
January 1, 2009
|
|
$ |
5,066,348 |
|
|
Liabilities
incurred
|
|
|
731,319 |
|
|
Accretion
expense
|
|
|
294,189 |
|
|
Balance,
September 30, 2009
|
|
$ |
6,091,856 |
|
|
|
|
|
|
|
NOTE
5 – STOCKHOLDERS’ EQUITY
Warrants
exercised – During the nine months ended September 30, 2009, the Company
issued 126,602 shares of common stock from the exercise of
warrants. Of these warrants, 42,772 had an exercise price of $3.74
per share and 83,830 had an exercise price of $4.50 per share, for total
proceeds of $537,341.
Options
exercised – During the nine months ended September 30, 2009, the Company
issued 87,000 shares of common stock from the exercise of options for proceeds
of $1,528,540. Of these options, 20,000 had an exercise price of
$4.15 per share, 20,000 had an exercise price of $13.70 per share, 27,000 had an
exercise price of $23.42 per share and 20,000 had an exercise price of $26.96
per share.
NOTE
6 – EMPLOYEE STOCK OPTIONS
Compensation
expense charged against income for stock based awards during the three and nine
months ended September 30, 2009 was $1,098,081 and $3,648,020, respectively, as
compared to $1,845,863 and $5,095,580 for the three and nine months ended
September 30, 2008, respectively, and is included in general and administrative
expense in the accompanying financial statements.
The
Company did not grant any nonqualified stock options to directors and employees
during the three or nine months ended September 30,
2009. Additionally, there were no forfeitures during the three or
nine months ended September 30, 2009. However, a total of 87,000
options were exercised to purchase shares. Of these options, 20,000
had an exercise price of $4.15 per share, 20,000 had an exercise price of $13.70
per share, 27,000 had an exercise price of $23.42 per share and 20,000 had an
exercise price of $26.96 per share. A summary of the status of the
stock options as of September 30, 2009 is as follows:
|
|
|
Options
|
|
|
Weighted-Average
Exercise Price
|
|
|
Outstanding
at December 31, 2008
|
|
|
2,252,000 |
|
|
$ |
22.12 |
|
|
Exercised
|
|
|
(87,000 |
) |
|
$ |
17.57 |
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at September 30, 2009
|
|
|
2,165,000 |
|
|
|
22.30 |
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
at September 30, 2009
|
|
|
840,000 |
|
|
$ |
15.04 |
|
ARENA
RESOURCES, INC.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009
As of
September 30, 2009, there was approximately $5,813,352 of unrecognized
compensation cost related to stock options that will be recognized over a
weighted average period of 2.19 years. The aggregate intrinsic value
of options expected to vest at September 30, 2009 was
$30,779,450. The aggregate intrinsic value of options exercisable at
September 30, 2009 was $17,186,100. The intrinsic value is based on a
September 30, 2009 closing price of the Company’s common stock of
$35.50. The 87,000 options exercised during the nine months ended
September 30, 2009 had an intrinsic value of $1,295,020 on the dates of
exercise.
NOTE
7 – CONTINGENCIES AND COMMITMENTS
Standby Letters
of Credit – A commercial bank has issued standby letters of credit on
behalf of the Company to the states of Texas, Oklahoma, New Mexico and Kansas
totaling $686,969 to allow the Company to do business in those
states. The standby letters of credit are valid until cancelled or
matured and are collateralized by the revolving credit facility with the bank.
Letter of credit terms range from one to five years. The Company
intends to renew the standby letters of credit for as long as the Company does
business in those states. No amounts have been drawn under the standby letters
of credit.
NOTE
8 – DERIVATIVE INSTRUMENTS
The
Company uses commodity–based derivative contracts to manage exposures to
commodity price fluctuations. The Company does not enter into these arrangements
for speculative or trading purposes. These contracts consist of costless
collars. The Company does not utilize complex derivatives such as swaptions,
knockouts or extendable swaps. During the nine months ended September 30, 2009,
the Company monetized a costless collar for 1,000 barrels of oil per day for the
period June 2009 through December 2009 with a floor of $100 and a ceiling of
$197, thereby eliminating that hedge. At September 30, 2009, the
Company had three costless collar contracts. The fair value of all
hedges, represented by the estimated amount that would be realized upon
termination, based on a comparison of the contract prices and the reference
price, on September 30, 2009, was zero.
The
following table sets forth our derivative volumes as of September 30,
2009:
| Commodity |
Remaining
Period |
Volume (Bbls) |
Floor |
Ceiling |
| WTI
Crude Oil |
October
2009 - December 2009 |
276,000 |
$ 50.00 |
$ 72.60 |
| WTI
Crude Oil |
January
2010 - December 2010 |
730,000 |
$ 65.00 |
$ 93.00 |
| |
|
|
|
|
| Commodity |
Remaining
Period |
Volume (MMBTU) |
Floor |
Ceiling |
| El
Paso Permian Gas |
January
2010 - December 2010 |
1,825,000 |
$
4.00 |
$ 7.87 |
Every
derivative instrument is required to be recorded on the balance sheet as either
an asset or a liability measured at its fair value. Fair value is generally
determined based on the difference between the fixed contract price and the
underlying estimated market price at the determination date. Changes in the fair
value of effective cash flow hedges are recorded as a component of “Accumulated
other comprehensive income (loss),” (“AOCI”) which is later transferred to
earnings when the underlying physical transaction occurs. As of
September 30, 2009, there was no unrealized gain or loss on derivative
recorded in AOCI.
For those
derivative instruments that qualify for hedge accounting, settled transaction
gains and losses are determined monthly, and are included in the operating
section of our income statement as “Realized loss (gain) on oil derivatives” in
the period the hedged production is sold. During the nine months ended September
30, 2009, the Company monetized an existing costless collar, resulting in our
realizing a gain during the period of $7,992,900, part of which would not have
been realized until later in 2009. As a result of this monetization,
our realized gain on oil derivatives includes $0 million and $15.9 million
of gains in the three and nine months ended September 30, 2009,
respectively, compared to losses of $3.5 million and $9.0 million in the
three and nine months ended September 30, 2008. Any ineffectiveness
associated with these hedges would be reflected in the income statement caption
called “Derivative fair value income (loss).” Our hedging contracts are all
fully effective.
ARENA
RESOURCES, INC.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009
To
designate a derivative as a cash flow hedge, the Company documents at the
hedge’s inception our assessment that the derivative will be highly effective in
offsetting expected changes in cash flows from the item hedged. This assessment,
which is updated at least quarterly, is generally based on the most recent
relevant historical correlation between the derivative and the item hedged. The
ineffective portion of the hedge is calculated as the difference between the
change in fair value of the derivative and the estimated change in cash flows
from the item hedged. If, during the derivative’s term, the Company determines
the hedge is no longer highly effective, hedge accounting is prospectively
discontinued and any remaining unrealized gains or losses, based on the
effective portion of the derivative at that date, are reclassified to earnings
as realized gain or loss on oil derivatives when the underlying transaction
occurs. If it is determined that the designated hedge transaction is not
probable to occur, any unrealized gains or losses are recognized immediately in
the statement of operations as a “Derivative fair value income or loss.” Our
hedges are considered to be effective and therefore no amounts have been
recorded for ineffectiveness.
Derivative
Fair Value Income (Loss)
The
following table presents information about the components of derivative fair
value income (loss) in the three and nine months ended September 30,
2009 and 2008:
|
|
|
For
the Three Months Ended
|
|
|
For
the Nine Months Ended
|
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Realized
loss (gain) on oil derivatives
|
|
|
- |
|
|
|
(3,462,283 |
) |
|
|
15,870,007 |
|
|
|
(9,008,822 |
) |
The
combined fair value of derivatives included in our consolidated balance sheets
as of September 30, 2009 and December 31, 2008 is summarized below. The
Company conducts derivative activities with two corporations. The Company
believes these corporations are an acceptable credit risk. The credit
worthiness of our counterparties is subject to periodic review.
|
|
|
September
30, 2009
|
|
|
December
31, 2008
|
|
|
Derivative
assets, crude oil collars
|
|
$ |
- |
|
|
$ |
16,210,478 |
|
|
Derivative
liabilities, crude oil collars
|
|
$ |
- |
|
|
$ |
- |
|
The
Company does not have any derivatives that do not qualify for hedge
accounting. The table below provides data about the carrying values
of derivatives that qualify for hedge accounting:
| |
September
30, 2009 |
|
December 31,
2008 |
| |
Asset
Carrying
value
|
(Liabilities)
Carrying
value
|
Net
Carrying
value
|
|
Asset
Carrying
value
|
(Liabilities)
Carrying
value
|
Net
Carrying
value
|
| |
|
|
|
|
|
|
|
|
Derivative
that qualify for
cash
flow
hedge accounting
|
|
|
|
|
|
|
|
| Collars |
- |
- |
- |
|
16,210,478 |
- |
16,210,478 |
ARENA
RESOURCES, INC.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009
The
tables below provides data about the amount of gains and losses related to cash
flow derivatives that qualify for hedge accounting included in the balance sheet
caption “Accumulated other comprehensive income” (AOCI) and in our
statement of operations:
|
|
|
|
|
|
|
|
|
|
|
| |
|
Amount
of Gain/(Loss) recognized in AOCI |
|
|
Amount
of Gain/(Loss) reclassified from AOCI to Operations |
|
| |
|
|
|
|
Nine
Months ended |
|
|
|
|
As
of September 30,
|
|
|
September
30,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Collar
|
|
$ |
- |
|
|
$ |
4,545,791 |
|
|
$ |
16,226,263 |
|
|
$ |
(11,032,230 |
) |
|
Income
taxes
|
|
|
44,281 |
|
|
|
(1,681,943 |
) |
|
|
(6,003,717 |
) |
|
|
4,081,925 |
|
|
Total
|
|
$ |
44,281 |
|
|
$ |
2,863,848 |
|
|
$ |
10,222,546 |
|
|
$ |
(6,950,305 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE
9 – FAIR VALUE MEASUREMENTS
The
FASB’s fair value measurement standards establish a single authoritative
definition of fair value based upon the assumptions market participants would
use when pricing and asset or liability and create a fair value hierarchy that
prioritizes the information used to develop those assumptions. The
standards require additional disclosures, including disclosures of fair value
measurements by level within the fair value hierarchy. As of January 1, 2008, we
adopted the new standards as they related to our financial assets and
liabilities. The initial adoption of the FASB’s new fair value measurement
standards had no material impact on the Company’s Consolidated Financial
Statements As of January 1, 2009, we adopted the new standards
as they related to our nonfinancial assets and liabilities, including
nonfinancial assets and liabilities measured at fair value in a business
combination; impaired property, plant and equipment; goodwill impairment
assessments; and initial recognition of asset retirement
obligations. Upon adopting the new fair value measurement standards,
the Company applied a prospective transition as it did not have financial
instrument transactions that required a cumulative-effect adjustment to
beginning retained earnings.
Fair
value is the price that would be received to sell an asset or the amount paid to
transfer a liability in an orderly transaction between market participants (an
exit price) at the measurement date. Fair value is a market based measurement
considered from the perspective of a market participant. The Company uses market
data or assumptions that market participants would use in pricing the asset or
liability, including assumptions about risk and the risks inherent in the inputs
to the valuation. These inputs can be readily observable, market corroborated,
or unobservable. The Company primarily applies a market approach for recurring
fair value measurements using the best available information while utilizing
valuation techniques that maximize the use of observable inputs and minimize the
use of unobservable inputs.
Generally
accepted accounting principals establish a fair value hierarchy that prioritizes
the inputs used to measure fair value. The hierarchy gives the highest priority
to quoted prices in active markets for identical assets or liabilities (Level 1
measurement) and the lowest priority to unobservable inputs (Level 3
measurement). The Company’s fair value balances are based on the observability
of those inputs. The three levels of the fair value hierarchy are as
follows:
|
|
•
|
|
Level
1 — Quoted prices in active markets for identical assets or liabilities
that the Company has the ability to access. Active markets are those in
which transactions for the asset or liability occur in sufficient
frequency and volume to provide pricing information on an ongoing
basis. The Company does not have any fair value balances
classified as Level 1.
|
ARENA
RESOURCES, INC.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009
|
|
|
|
|
|
|
•
|
|
Level
2 — Inputs are other than quoted prices in active markets included in
Level 1, that are either directly or indirectly observable. These inputs
are either directly observable in the marketplace or indirectly observable
through corroboration with market data for substantially the full
contractual term of the asset or liability being measured. The Company’s
Level 2 items consist of a costless collar.
|
|
|
|
|
|
|
|
•
|
|
Level
3 — Includes inputs that are not observable for which there is little, if
any, market activity for the asset or liability being measured. These
inputs reflect management’s best estimate of the assumptions market
participants would use in determining fair value. Level 3 would include
instruments valued using industry standard pricing models and other
valuation methods that utilize unobservable pricing inputs that are
significant to the overall fair value. The Company does not have any fair
value balances classified as Level
3.
|
In
valuing certain contracts, the inputs used to measure fair value may fall into
different levels of the fair value hierarchy. For disclosure purposes, assets
and liabilities are classified in their entirety in the fair value hierarchy
level based on the lowest level of input that is significant to the overall fair
value measurement. Our assessment of the significance of a particular input to
the fair value measurement requires judgment and may affect the placement within
the fair value hierarchy levels.
The
following table sets forth by level within the fair value hierarchy the
Company’s liability that is measured at fair value on a recurring
basis:
|
Fair
Value Measurements at September 30, 2009 Using:
|
|
|
|
|
Quoted
Prices in
Active
Markets for
Identical
Liabilities:
(Level
1)
|
|
|
Significant
Other
Observable
Inputs
(Level
2)
|
|
|
Significant
Unobservable
Inputs
(Level
3)
|
|
|
Total
|
|
|
Assets/(Liabilities):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
- $50 - $72.60 oil hedge
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
2010
- $65 - $93 oil hedge
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
- $4 - 7.87 gas hedge
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
NOTE
10 – SUBSEQUENT EVENTS
Subsequent
to September 30, 2009, the Company entered into an agreement for zero-cost
collars on a portion of oil production, equal to 1,000 barrels of oil per day,
beginning in January 2010 and continuing through December 2010. Under
the collar agreements, the floor price is $70.00 and the ceiling price is $92.85
based on the WTI index price.
Item
2. Management’s Discussion and Analysis of Financial Condition and
Results of Operations
Results
of Operations – For the Three Months Ended September 30, 2009
Oil and natural gas
sales. For the three months ended September 30, 2009, oil and
natural gas sales revenue decreased $32,351,808 to $36,060,878, compared to
$68,412,686 for the same period during 2008. Oil sales decreased
$28,153,050 and natural gas sales decreased $4,198,758. The decreases
were the result of significantly lower oil and gas prices between periods and
lower oil production. For the three months ended September 30, 2009,
oil sales volume decreased 16,940 barrels to 511,104 barrels, compared to
528,044 barrels for the same period in 2008. The average realized per
barrel oil price decreased 44% from $115.41 for the three months ended September
30, 2008 to $64.16 for the three months ended September 30, 2009. For
the three months ended September 30, 2009, gas sales volume increased 64,283
thousand cubic feet (MCF) to 609,030 MCF, compared to 544,746 MCF for the same
period in 2008. The average realized natural gas price per MCF
decreased 61% from $13.71 for the three months ended September 30, 2008 to $5.37
for the three months ended September 30, 2009.
Oil and gas production costs.
Our lease operating expenses (LOE) decreased from $5,790,236 or $9.36 per
barrel of oil equivalent (BOE) for the three months ended September 30, 2008 to
$3,137,035 or $5.12 per BOE for the three months ended September 30,
2009. The decreases in total LOE and on a per BOE basis were the
result of lower costs for services and equipment.
Production
taxes. Production taxes as a percentage of oil and natural gas
sales were 5% during the three months ended September 30, 2008 and remained
steady at 5% for the three months ended September 30,
2009. Production taxes vary from state to
state. Therefore, these taxes may vary in the future depending on the
mix of production we generate from various states, as well as the possibility
that any state may raise its production tax rate.
Depreciation, depletion and
amortization. Our depreciation, depletion and amortization expense
decreased by $847,583 to $8,994,389 for the three months ended September 30,
2009, compared to the same period in 2008. The decrease was primarily a result
of slightly lower production volume and a decrease in the average depletion rate
from $13.81 per BOE during the three months ended September 30, 2008 to $13.55
per BOE during the three months ended September 30, 2009.
General and administrative
expenses. General and administrative expenses decreased by
$452,737 to $2,967,852 for the three months ended September 30, 2009, compared
to the same period in 2008. The decrease was primarily the result of
a decrease in stock-based compensation expense from $1,845,863 for the three
months ended September 30, 2008 to $1,098,081 for the three months ended
September 30, 2009 partially offset by higher overall compensation expense
between periods.
Interest income. Interest
income was $202,340 for the three months ended September 30, 2009, compared to
$546,089 for the three months ended September 30, 2008. The decrease
was due to lower interest rates and a lower cash balance in 2009.
Income tax
expense. Our effective tax rate was 37% during the three
months ended September 30, 2008 and remained steady at 37% for the three months
ended September 30, 2009.
Net income. Net income
decreased from $26,922,966 for the three months ended September 30, 2008 to
$12,113,026 for the same period in 2009. The primary reason for this decrease is
the lower commodity prices between periods.
Results
of Operations – For the Nine Months Ended September 30, 2009
Oil and natural gas
sales. For the nine months ended September 30, 2009, oil and
natural gas sales revenue decreased $91,993,626 to $83,890,733, compared to
$175,884,359 for the same period during 2008. Oil sales decreased
$83,266,046 and natural gas sales decreased $8,727,580. The decreases
were the result of significantly lower oil and gas prices between periods
partially offset by higher production. For the nine months ended
September 30, 2009, oil sales volume increased 3,314 barrels to 1,461,844
barrels, compared to 1,458,530 barrels for the same period in
2008. The average realized per barrel oil price decreased 52% from
$109.42 for the nine months ended September 30, 2008 to $52.21 for the nine
months ended September 30, 2009. For the nine months ended September
30, 2009, gas sales volume increased 184,155 thousand cubic feet (MCF) to
1,599,142 MCF, compared to 1,414,987 MCF for the same period in
2008. The average realized natural gas price per MCF decreased 59%
from $11.51 for the nine months ended September 30, 2008 to $4.73 for the nine
months ended September 30, 2009.
Oil and gas production costs.
Our lease operating expenses (LOE) decreased from $12,979,837 or $7.66
per barrel of oil equivalent (BOE) for the nine months ended September 30, 2008
to $10,614,882 or $6.14 per BOE for the nine months ended September 30,
2009. The decrease in total LOE was the result of variations in costs
for services and equipment between periods.
Production
taxes. Production taxes as a percentage of oil and natural gas
sales were 5% during the nine months ended September 30, 2008 and remained
steady at 5% for the nine months ended September 30, 2009. Production
taxes vary from state to state. Therefore, these taxes may vary in
the future depending on the mix of production we generate from various states,
as well as the possibility that any state may raise its production tax
rate.
Depreciation, depletion and
amortization. Our depreciation, depletion and amortization expense
increased by $78,199 to $23,634,894 for the nine months ended September 30,
2009, compared to the same period in 2008. The increase was primarily a result
of higher production volume, partially offset by a decrease in the average
depletion rate from $13.81 per BOE during the nine months ended September 30,
2008 to $13.55 per BOE during the nine months ended September 30,
2009.
General and administrative
expenses. General and administrative expenses decreased by
$589,746 to $9,106,731 for the nine months ended September 30, 2009, compared to
the same period in 2008. The decrease was primarily the result of a
decrease in stock-based compensation expense from $5,095,580 for the nine months
ended September 30, 2008 to $3,648,020 for the nine months ended September 30,
2009 partially offset by higher overall compensation expense between
periods.
Interest income. Interest
income was $678,646 for the nine months ended September 30, 2009, compared to
$835,755 for the nine months ended September 30, 2008. The decrease
was due to lower interest rates and a lower cash balance in 2009.
Interest expense. Interest
expense was zero for the nine months ended September 30, 2009, compared to
$1,145,456 for the nine months ended September 30, 2008. The decrease
was due to no amounts being outstanding on our credit facility during the nine
months ended September 30, 2009 while there were amounts outstanding on our
credit facility during the nine months ended September 30, 2008.
Income tax
expense. Our effective tax rate was 37% during the nine months
ended September 30, 2008 and remained steady at 37% for the nine months ended
September 30, 2009.
Net income. Net income
decreased from $70,035,710 for the nine months ended September 30, 2008 to
$33,014,540 for the same period in 2009. The primary reason for this decrease is
the lower commodity prices between periods.
Revenues
Year to Date by Geographic section
Arena reports its net oil and gas revenues for the year to date as
applicable to the following geographic sectors:
OIL
| |
Net Production
Volume |
Net
Revenue |
| Texas
Leases |
1,276,351
BBLS |
$ 66,657,204 |
| Oklahoma
Leases |
28,248
BBLS |
$ 1,565,549 |
| New Mexico
Leases |
157,245
BBLS |
$ 8,102,127 |
GAS
| |
Net Production
Volume |
Net
Revenue |
| Texas
Leases |
1,232,259 MCF |
$ 6,030,302 |
| Oklahoma
Leases |
14,468 MCF |
$ 43,201 |
| New Mexico
Leases |
243,586 MCF |
$ 1,207,858 |
| Kansas
Leases |
108,829 MCF |
$ 284,492 |
Significant
Subsequent Events occurring after September 30, 2009:
Subsequent
to September 30, 2009, the Company entered into an agreement for zero-cost
collars on a portion of oil production, equal to 1,000 barrels of oil per day,
beginning in January 2010 and continuing through December 2010. Under
the collar agreements, the floor price is $70.00 and the ceiling price is $92.85
based on the WTI index price.
Capital
Resources and Liquidity
As shown
in the financial statements for the nine months ended September 30, 2009, the
Company had cash on hand of $67,779,486, compared to $58,489,574 as of December
31, 2008. The Company had net cash provided by operating activities
for the nine months ended September 30, 2009 of $77,212,801, compared to
$142,458,787 for the same period 2008. Other significant sources of
cash inflow include proceeds from option and warrant exercises of $2,065,881 and
$4,653,439 for 2009 and 2008, respectively, and proceeds from issuance of common
stock of $116,130,189 and $11,000,000 drawn down on the Company’s credit
facility in 2008. The most significant cash outflows during the nine
months ended September 30, 2009 and 2008 were capital expenditures of
$69,988,770 and $154,212,644, respectively, and $46,000,000 payment on notes
payable in 2008.
Effective
as of June 30, 2009, we entered into a new agreement that provides for a credit
facility of $150 million with a borrowing base of $75 million with the structure
in place to increase that borrowing base an additional $75
million. The new facility has an interest rate grid with a range of
LIBOR plus 2.25% to 3.25%, depending upon our level of utilization of the credit
facility with the total interest rate to be charged being no less than
4.00%. As of September 30, 2009, we were in compliance with all
covenants and did not have any amount outstanding under this credit
facility.
Disclosures
About Market Risks
Like
other natural resource producers, Arena faces certain unique market
risks. The two most salient risk factors are the volatile prices of
oil and gas and certain environmental concerns and obligations.
Oil and Gas Prices
Current
competitive factors in the domestic oil and gas industry are
unique. The actual price range of crude oil is largely established by
major international producers. Pricing for natural gas is more
regional. Because domestic demand for oil and gas exceeds supply,
there is little risk that all current production will not be sold at relatively
fixed prices. To this extent Arena does not see itself as directly
competitive with other producers, nor is there any significant risk that the
Company could not sell all production at current prices with a reasonable profit
margin. The risk of domestic overproduction at current prices is not
deemed significant. The primary competitive risks would come from
falling international prices which could render current production
uneconomical.
Secondarily,
Arena is presently committed to use the services of the existing gatherers in
its present areas of production. This gives to such gatherers certain
short term relative monopolistic powers to set gathering and transportation
costs, because obtaining the services of an alternative gathering company would
require substantial additional costs since an alternative gatherer would be
required to lay new pipeline and/or obtain new rights-of-way in the
lease.
It is
also significant that more favorable prices can usually be negotiated for larger
quantities of oil and/or gas product, such that Arena views itself as having a
price disadvantage to larger producers. Large producers also have a
competitive advantage to the extent they can devote substantially more resources
to acquiring prime leases and resources to better find and develop
prospects.
Environmental
Oil and
gas production is a highly regulated activity which is subject to significant
environmental and conservation regulations both on a federal and state
level. Historically, most of the environmental regulation of oil and
gas production has been left to state regulatory boards or agencies in those
jurisdictions where there is significant gas and oil production, with limited
direct regulation by such federal agencies as the Environmental Protection
Agency. However, while the Company believes this generally to be the
case for its production activities in Texas, Oklahoma, Kansas and New Mexico, it
should be noticed that there are various Environmental Protection Agency
regulations which would govern significant spills, blow-outs, or uncontrolled
emissions.
In
Oklahoma, Texas, Kansas and New Mexico specific oil and gas regulations exist
related to the drilling, completion and operations of wells, as well as disposal
of waste oil. There are also procedures incident to the plugging and
abandonment of dry holes or other non-operational wells, all as governed by the
Oklahoma Corporation Commission, Oil and Gas Division, the Texas Railroad
Commission, Oil and Gas Division, the Kansas Corporation Commission, Oil and Gas
Division or the New Mexico Oil Conservation Division.
Compliance
with these regulations may constitute a significant cost and effort for
Arena. No specific accounting for environmental compliance has been
maintained or projected by Arena to date. Arena does not presently
know of any environmental demands, claims, or adverse actions, litigation or
administrative proceedings in which it or the acquired properties are involved
or subject to or arising out of its predecessor operations.
In the
event of a breach of environmental regulations, these environmental regulatory
agencies have a broad range of alternative or cumulative remedies to
include: ordering a cleanup of any spills or waste material and
restoration of the soil or water to conditions existing prior to the
environmental violation; fines; or enjoining further drilling, completion or
production activities. In certain egregious situations the agencies
may also pursue criminal remedies against the Company or its
principals.
Item
3. Quantitative and Qualitative Disclosures About Market
Risk
Interest
Rate Risk
The
Company is subject to interest rate risk on its revolving credit facility, which
bears variable interest based upon a LIBOR rate. Changes in interest
rates affect the interest earned on the Company’s cash and cash equivalents and
the interest rate paid on borrowings under its bank credit facility. Currently,
the Company does not use interest rate derivative instruments to manage exposure
to interest rate changes.
Commodity
Price Risk
The
Company’s revenues, profitability and future growth depend substantially on
prevailing prices for oil and natural gas. Prices also affect the
amount of cash flow available for capital expenditures and Arena’s ability to
borrow and raise additional capital. The amount the Company can borrow under its
bank credit facility is subject to periodic redetermination based in part on
changing expectations of future prices. Lower prices may also reduce the amount
of oil and natural gas that the Company can economically produce. Arena
currently sells all of its oil and natural gas production under price sensitive
or market price contracts.
In 2008
and 2009 the Company entered into derivative contracts in order to manage the
commodity price risk for a portion of production through 2010. The
Company’s current derivative contracts are costless collars. A collar
is a contract which combines both a put option or “floor” and a call option or
“ceiling.” The Company receives the excess, if any, of the floor
price over the reference price, based on NYMEX quoted prices, and pays the
excess, if any, of the reference price over the ceiling price. The
following is information relating to the Company’s collar positions as of
September 30, 2009.
| Commodity |
Remaining
Period |
Volume (Bbls) |
Floor |
Ceiling |
| WTI
Crude Oil |
October
2009 - December 2009 |
276,000 |
$ 50.00 |
$ 72.60 |
| WTI
Crude Oil |
January
2010 - December 2010 |
730,000 |
$ 65.00 |
$ 93.00 |
| |
|
|
|
|
| Commodity |
Remaining
Period |
Volume (MMBTU) |
Floor |
Ceiling |
| El
Paso Permian Gas |
January
2010 - December 2010 |
1,825,000 |
$
4.00 |
$ 7.87 |
The
change in fair value of the oil hedging contracts in place at September 30,
2009, resulted in a decrease in the liability from $70,287 to
zero. The after tax impact of the change in the fair value of the
hedge of $44,281 is reflected in other comprehensive loss. During the
nine months ended September 30, 2009, the Company monetized an existing costless
collar, resulting in a larger decrease in the asset as the gain on that hedge
was realized during the three months ended June 30, 2009, rather than over the
remaining life of the hedge, running through December 2009. Changes in the fair
value of derivative instruments designated as cash flow hedges, to the extent
they are effective in offsetting cash flows attributable to the hedged risk, are
recorded in “Other Comprehensive Income” until the hedged item is recognized in
earnings. Any change in fair value from ineffectiveness is recognized
currently in unrealized derivative gain or loss in the consolidated statements
of operations.
Cash
settlements of cash flow hedges are recorded as a gain on derivatives in the
operating section of the Company’s statement of operations. During
the nine months ended September 30, 2009, the Company monetized an existing
costless collar, resulting in our realizing a gain during the period of
$7,992,900, part of which would not have been realized until later in
2009. As a result of this monetization, our statement of operations
for the three and nine months ended September 30, 2009 include gain on
derivative instrument of zero and $15,870,007, respectively, as compared to a
loss of $3,462,283 and $9,008,822 for the three and nine months ended September
30, 2008, respectively.
Additionally,
to the extent we hedge our commodity price exposure, we will forego the benefits
we would have otherwise experienced if commodity prices were to change in our
favor.
Currency
Exchange Rate Risk
Foreign
sales accounted for none of the Company’s sales; further, the Company accepts
payment for its commodity sales only in U.S. dollars; hence, Arena is not
exposed to foreign currency exchange rate risk on these sales.
Item
4. Controls and Procedures
Evaluation
of Disclosure Controls and Procedures
The
Company maintains controls and procedures designed to ensure that information
required to be disclosed by the Company in the reports it files or submits under
the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods specified in the rules and forms of the
Securities and Exchange Commission. At the end of the period covered
by this Quarterly Report on Form 10-Q, the Company's management, under the
supervision and with the participation of the Company's Chief Executive Officer
and Chief Financial Officer, evaluated the effectiveness of the design and
operation of the Company's disclosure controls and procedures. Based
on that evaluation, the Company's Chief Executive Officer and Chief Financial
Officer concluded that as of the end of such period the Company’s disclosure
control and procedures are effective in alerting them to material information
that is required to be included in the reports the Company files or submits
under the Securities Exchange Act of 1934.
Changes
in Internal Controls Over Financial Reporting
There
have been no changes in the Company's internal control over financial reporting
during the most recent fiscal quarter that have materially affected, or are
reasonably likely to materially affect, the Company’s internal control over
financial reporting.
Part
II - Other Information
Item
1. Legal Proceedings
None.
Item
1A. Risk Factors
There
have been no material changes from risk factors as previously disclosed in our
Form 10-K in response to Item 1A to Part I of Form 10-K.
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
None.
Item
3. Defaults Upon Senior Securities
None.
Item
4. Submission of Matters to a Vote of Security Holders
None.
Item
5. Other Information
None.
Item
6. Exhibits
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, Registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
REGISTRANT: ARENA RESOURCES,
INC.
|
Dated:
November 4, 2009
|
By:
/s/ Phillip W.
Terry
|
|
President, Chief Executive
Officer
|
Dated:
November 4, 2009
|
By:
/s/ William R.
Broaddrick
|
|
William R. Broaddrick
Vice President, Chief Financial
Officer