Company Quick10K Filing
Quick10K
Isramco
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$115.00 3 $313
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
8-K 2019-05-20 Enter Agreement, Other Events, Exhibits
8-K 2019-02-01 Other Events, Exhibits
8-K 2018-06-22 Shareholder Vote
TAL TAL Education Group 20,520
CINF Cincinnati Financial 15,520
BSMX Banco Santander 10,720
HTA Healthcare Trust of America 5,590
PD PagerDuty 3,620
PSEC Prospect Capital 2,470
STC Stewart Information Services 1,000
MKRS Mikros Systems 0
LOVV Love International Group 0
EGLT Egalet 0
ISRL 2019-03-31
Part I - Financial Information
Item 1. Financial Statements
Note 1 - Financial Statement Presentation
Note 2 - Supplemental Cash Flow Information
Note 3 - Revenue From Contracts with Customers
Note 4 - Financial Instruments and Fair Value
Note 5 - Long-Term Debt and Interest Expense
Note 6 - Tamar Field Proceeds
Note 7 - Segment Information
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II - Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Change in Securities & Use of Proceeds
Item 3. Default Upon Senior Securities
Item 4. Removed and Reserved
Item 5. Other Information
Item 6. Exhibits
EX-31.1 ex_143640.htm
EX-31.2 ex_143641.htm
EX-31.3 ex_143642.htm
EX-32.1 ex_143643.htm
EX-32.2 ex_143644.htm
EX-32.3 ex_143645.htm

Isramco Earnings 2019-03-31

ISRL 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 isramco20190331_10q.htm FORM 10-Q isramco20190331_10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549 

 


 

FORM 10-Q

 


 

Check One

 

Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended March 31, 2019

 

 

 

or

 

 

Transition report under Section 13 or 15(d) of the Securities Exchange Act of 1934

 

Commission File Number 0-12500

 

ISRAMCO, INC

(Exact Name of registrant as Specified in its Charter)

 

Delaware

 

13-3145265

(State or other Jurisdiction of Incorporation or Organization)

 

I.R.S. Employer Number

 

1001 West Loop South, Suite 750, HOUSTON, TX 77027

(Address of Principal Executive Offices)

 

713-621-5946

(Registrant’s Telephone Number, Including Area Code)

 

Indicate by check whether the registrant: (1) filed all reports required to be filed by Section 13 or 15(d) of the 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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes ☒    No ☐

 

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

 

Large accelerated filer ☐

 

Accelerated filer ☒

 

 

 

Non-accelerated filer ☐

 

Smaller Reporting Company ☒

 

 

 

Emerging growth company  ☐

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

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

 

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, $0.01 par value per share

ISRL

The Nasdaq Stock Market LLC

 

As of May 10, 2019, Isramco, Inc., had 2,717,648 outstanding shares of common stock, par value $0.01 per share. 

 

 

TABLE OF CONTENTS

 

 

 

Page

PART I. FINANCIAL INFORMATION

 

 

 

 

Item 1.

Consolidated Financial Statements (unaudited)

4

 

Consolidated Balance Sheets at March 31, 2019 and December 31, 2018

4

 

Consolidated Statements of Operations for the three months ended March 31, 2019 and 2018

5

  Consolidated Statements of Changes in Shareholders’ Deficit for the three months ended March 31, 2019 and 2018 6

 

Consolidated Statements of Cash Flows for the three months ended March 31, 2019 and 2018

7

 

Notes to Consolidated Financial Statements

8

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

21

Item 3.  

Quantitative and Qualitative Disclosures about Market Risk

29

Item 4.

Controls and Procedures

29

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

30

Item 1A.

Risk Factors

30

Item 2.

Changes in Securities and Use of Proceeds and Issuer Purchases of Equity Securities

30

Item 3.

Defaults Upon Senior Securities

30

Item 4.

(Removed and Reserved)

30

Item 5.

Other Information

30

Item 6.

Exhibits

31

 

Signatures

32

 

 

Forward Looking Statements

 

CERTAIN STATEMENTS MADE IN THIS QUARTERLY REPORT ON FORM 10-Q ARE “FORWARD-LOOKING STATEMENTS” WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. FORWARD-LOOKING STATEMENTS CAN BE IDENTIFIED BY TERMINOLOGY SUCH AS “MAY”, “WILL”, “SHOULD”, “EXPECTS”, “INTENDS”, “ANTICIPATES”, “BELIEVES”, “ESTIMATES”, “PREDICTS”, OR “CONTINUE” OR THE NEGATIVE OF THESE TERMS OR OTHER COMPARABLE TERMINOLOGY AND INCLUDE, WITHOUT LIMITATION, STATEMENTS BELOW REGARDING EXPLORATION AND DRILLING PLANS, FUTURE GENERAL AND ADMINISTRATIVE EXPENSES, FUTURE GROWTH, FUTURE EXPLORATION, FUTURE GEOPHYSICAL AND GEOLOGICAL DATA, GENERATION OF ADDITIONAL PROPERTIES, RESERVES, NEW PROSPECTS AND DRILLING LOCATIONS, FUTURE CAPITAL EXPENDITURES, SUFFICIENCY OF WORKING CAPITAL, ABILITY TO RAISE ADDITIONAL CAPITAL, PROJECTED CASH FLOWS FROM OPERATIONS, OUTCOME OF ANY LEGAL PROCEEDINGS, DRILLING PLANS, THE NUMBER, TIMING OR RESULTS OF ANY WELLS, INTERPRETATION AND RESULTS OF SEISMIC SURVEYS OR SEISMIC DATA, FUTURE PRODUCTION OR RESERVES, LEASE OPTIONS OR RIGHTS, PARTICIPATION OF OPERATING PARTNERS, CONTINUED RECEIPT OF ROYALTIES, AND ANY OTHER STATEMENTS REGARDING FUTURE OPERATIONS, FINANCIAL RESULTS, OPPORTUNITIES, GROWTH, BUSINESS PLANS AND STRATEGY. BECAUSE FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTIES, THERE ARE IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE EXPRESSED OR IMPLIED BY THESE FORWARD-LOOKING STATEMENTS. ALTHOUGH THE COMPANY BELIEVES THAT EXPECTATIONS REFLECTED IN THE FORWARD-LOOKING STATEMENTS ARE REASONABLE, IT CANNOT GUARANTEE FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS. MOREOVER, NEITHER THE COMPANY NOR ANY OTHER PERSON ASSUMES RESPONSIBILITY FOR THE ACCURACY AND COMPLETENESS OF THESE FORWARD-LOOKING STATEMENTS. THE COMPANY IS UNDER NO DUTY TO UPDATE ANY FORWARD-LOOKING STATEMENTS AFTER THE DATE OF THIS REPORT TO CONFORM SUCH STATEMENTS TO ACTUAL RESULTS.

  

 

PART I - Financial Information 

 

ITEM 1. Financial Statements 

ISRAMCO INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

 (Unaudited)

 

   

As of

March 31, 2019

   

As of

December 31, 2018

 

ASSETS

 

Current Assets:

               

Cash and cash equivalents

  $ 9,033     $ 13,857  

Accounts receivable, net of allowances for doubtful accounts of $2,563 and $2,553

    20,314       18,920  

Restricted and designated cash

    831       830  

Inventories

    559       563  

Derivative asset

    257       293  

Prepaid expenses and other

    1,897       2,956  

Total Current Assets

    32,891       37,419  
                 

Property and Equipment, at cost – successful efforts method:

               

Oil and Gas properties

    244,507       244,450  

Advanced payment for equipment

    662       569  

Production service equipment and other equipment and property

    68,280       66,929  

Total Property and Equipment

    313,449       311,948  

Accumulated depreciation, depletion, amortization and impairment

    (259,080

)

    (257,706

)

Net Property and Equipment

    54,369       54,242  
                 

Derivative asset

    53       388  

Restricted cash – long term

    23,366       19,304  

Investments

    261       261  

Total Assets

  $ 110,940     $ 111,614  
                 

LIABILITIES AND SHAREHOLDERS’ DEFICIT

 

Current Liabilities:

               

Accounts payable and accrued expenses

  $ 14,794     $ 13,976  

Short term debt and current maturities of long-term debt, net of discount of $684 and $724

    21,237       21,739  

Payables due to related party

    4,502       3,836  

Accrued interest

    1,012       1,057  

Total Current Liabilities

    41,545       40,608  
                 

Long term debt, net of discount of $1,250 and $1,407

    50,951       56,193  
                 

Other Long-term Liabilities:

               

Asset retirement obligations

    22,179       22,172  

Total Liabilities

    114,675       118,973  
                 

Commitments and contingencies

               
                 

Shareholders’ Deficit:

               

Common stock $0.01 par value; authorized 7,500,000 shares; issued 2,746,915 shares; outstanding 2,717,648 shares

    27       27  

Additional paid-in capital

    23,853       23,853  

Accumulated deficit

    (19,005

)

    (23,036

)

Treasury stock, 29,267 shares at cost

    (164

)

    (164

)

Total Isramco, Inc. Shareholders’ Deficit

    4,711       680  

Non-controlling interest

    (8,446

)

    (8,039

)

Total Deficit

    (3,735

)

    (7,359

)

Total Liabilities and Shareholders’ Deficit

  $ 110,940     $ 111,614  

 

See notes to the unaudited consolidated financial statements.

 

 

ISRAMCO INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except share and per share amounts)

(Unaudited)

 

   

Three Months Ended March 31

 
   

2019

   

2018

 

Revenues and other

               

Oil and gas sales

  $ 11,318     $ 10,984  

Production services

    9,432       5,763  

Office services

    131       136  

Gain on divestiture

    -       472  

Other

    135       138  

Total revenues and other

    21,016       17,493  
                 

Operating expenses

               

Lease operating expense, transportation and taxes

    2,429       2,300  

Depreciation, depletion and amortization

    1,330       1,291  

Accretion expense

    215       230  

Production services

    8,514       5,585  

Loss from plug and abandonment

    62       58  

General and administrative

    1,454       1,365  

Total operating expenses

    14,004       10,829  

Operating income

    7,012       6,664  
                 

Other expenses

               

Interest expense, net

    1,184       1,217  

Loss (gain) from derivative contracts, net

    333       (865

)

Gain on sale of equipment

    (2

)

    -  

Total other expenses

    1,515       352  
                 

Income before income taxes

    5,497       6,312  

Income tax expense

    1,863       1,658  
                 

Net income

  $ 3,634     $ 4,654  

Net loss attributable to non-controlling interests

    (397

)

    (381

)

Net income attributable to Isramco

  $ 4,031     $ 5,035  
                 

Earnings per share – basic:

  $ 1.48     $ 1.85  
                 

Earnings per share – diluted:

  $ 1.48     $ 1.85  
                 

Weighted average number of shares outstanding basic:

    2,717,648       2,717,648  

Weighted average number of shares outstanding diluted:

    2,717,648       2,717,648  

 

See notes to the unaudited consolidated financial statements.

 

 

ISRAMCO INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ DEFICIT

FOR THE THREE MONTHS ENDED MARCH 31, 2019 and 2018

(in thousands, except share amounts)

(Unaudited)

 

   

Common stock

                                         
   

Number of shares

   

Amount

   

Additional Paid-In

Capital

   

Accumulated

Deficit

   

Treasury

stock

   

Non-controlling

interests

   

Total

Shareholders’

Deficit

 
                                                         

Balance of December 31, 2017

    2,717,648     $ 27     $ 23,853     $ (40,970

)

  $ (164

)

  $ (6,564

)

  $ (23,818

)

                                                         

Net income (loss)

                            5,035               (381

)

    4,654  
                                                         

Balance of March 31, 2018

    2,717,648     $ 27     $ 23,853     $ (35,935

)

  $ (164

)

  $ (6,945

)

  $ (19,164

)

                                                         

Balance of December 31, 2018

    2,717,648     $ 27     $ 23,853     $ (23,036

)

  $ (164

)

  $ (8,039

)

  $ (7,359

)

                                                         

Distribution to non-controlling interests

                                            (10

)

    (10

)

                                                         

Net income (loss)

                            4,031               (397

)

    3,634  
                                                         

Balance of March 31, 2019

    2,717,648     $ 27     $ 23,853     $ (19,005

)

  $ (164

)

  $ (8,446

)

  $ (3,735

)

 

See notes to the unaudited consolidated financial statements.

 

 

ISRAMCO INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

   

Three months Ended

March 31,

 
   

2019

   

2018

 
                 

Cash Flows From Operating Activities:

               

Net income

  $ 3,634     $ 4,654  

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

               

Depreciation, depletion, and amortization

    1,330       1,291  

Bad debt expense

    10       58  

Accretion expense

    215       230  

Gain on divestiture

    -       (472

)

Gain on sale of equipment

    (2

)

    -  

Net unrealized (gain) loss on derivative contracts

    371       (1,060

)

Amortization of debt cost

    197       191  

Changes in components of working capital and other assets and liabilities

               

Accounts receivable

    (1,404

)

    (1,546

)

Prepaid expenses, and other

    1,059       596  

Due to related party

    66       (10

)

Inventories

    4       56  

Accounts payable and accrued expenses

    101       (255

)

Net cash provided by operating activities

    5,581       3,733  
                 

Cash flows from investing activities:

               

Addition to property and equipment, net

    (990

)

    (2,992

)

Proceeds from sale of oil and gas properties and equipment

    -       454  

Net cash used in investing activities

    (990

)

    (2,538

)

                 

Cash flows from financing activities:

               

Distributions to non-controlling interests

    (10

)

    -  

Borrowings short-term debt – related parties

    600       -  

Repayment of long term debt

    (5,700

)

    (2,400

)

Repayments of short - term debt, net

    (242

)

    (172

)

Net cash used in financing activities

    (5,352

)

    (2,572

)

                 

Net decrease in cash, cash equivalents, and restricted cash

    (761

)

    (1,377

)

Cash, cash equivalents, and restricted cash at beginning of period

    33,991       40,485  

Cash, cash equivalents, and restricted cash at end of period

  $ 33,230     $ 39,108  

 

See notes to the unaudited consolidated financial statements.

 

 

Isramco Inc.

Notes to Consolidated Financial Statements

(Unaudited)

 

Note 1 - Financial Statement Presentation

 

Isramco, Inc. and its subsidiaries and affiliated companies (together referred to as “We”, “Our”, “Isramco” or the “Company”) is predominately an independent oil and natural gas company engaged in the exploration, development and production of oil and natural gas properties located onshore in the United States and ownership of various royalty interests in oil and gas concessions located offshore Israel. The Company also operates a production services company that provides well maintenance and workover services, well completion, and recompletion services.

 

The accompanying unaudited financial statements and notes of Isramco have been prepared pursuant to the rules and regulations of the United States Securities and Exchange Commission (the “Commission”). Pursuant to such rules and regulations, certain disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted. The accompanying financial statements and notes should be read in conjunction with the accompanying financial statements and notes included in Isramco’s Annual Report on Form 10-K for the year ended December 31, 2018.

 

The accompanying unaudited interim financial statements furnished in this report reflect all adjustments that are, in the opinion of management, necessary to fairly present Isramco’s results of operations and cash flows for the three-month periods ended March 31, 2019 and 2018 and Isramco’s financial position as of March 31, 2019.

 

Use of Estimates

 

In preparing financial statements in accordance with accounting principles generally accepted in the United States, management makes informed judgments and estimates that affect the reported amounts of assets, liabilities, revenues, and expenses. Management evaluates its estimates and related assumptions regularly, including those related to the value of properties and equipment; proved reserves; intangible assets; asset retirement obligations; litigation reserves; environmental liabilities; liabilities, and costs; income taxes; and fair values. Changes in facts and circumstances or additional information may result in revised estimates, and actual results may differ from these estimates.

 

Consolidated interim period results are not necessarily indicative of results of operations or cash flows for the full year and accordingly, certain information normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States has been condensed or omitted. The Company has evaluated events or transactions through the date of issuance of these consolidated financial statements. 

 

Concentrations of Credit Risk

 

Financial instruments, which potentially expose Isramco to concentrations of credit risk, consist primarily of interest rate swaps, cash equivalents, trade and joint interest accounts receivable. Isramco’s customer base includes several of the major United States oil and gas operating and production companies as well as major power companies in Israel. Although Isramco is directly affected by the well-being of the oil and gas production industry, management does not believe a significant credit risk existed as of March 31, 2019. Isramco continues to monitor and review credit exposure of its marketing counter-parties.

 

Tamar Royalties LLC, a wholly owned subsidiary of Isramco Inc., entered into certain swap and cap agreements with Deutsche Bank AG London Branch to hedge the risk of interest rate volatility. See Note 4 for details.

 

Our production services segment customers include major oil and natural gas production companies and independent oil and natural gas production companies. We perform ongoing credit evaluations of our customers and usually do not require material collateral. We maintain reserves for potential credit losses when necessary. Our results of operations and financial position should be considered in light of the fluctuations in demand experienced by oilfield service companies as changes in oil and gas producers’ expenditures and budgets occur. These fluctuations can impact our results of operations and financial position as supply and demand factors directly affect utilization and hours which are the primary determinants of our net cash provided by operating activities.

 

Isramco maintains deposits in banks, which may exceed the amount of federal deposit insurance available. Management periodically assesses the financial condition of the institutions and believes that any possible deposit loss is minimal.

 

 

Risk Management Activities

 

The Company follows Accounting Standards Codification (ASC) 815, Derivatives and Hedging. From time to time, the Company may hedge a portion of its forecasted oil and natural gas production or may hedge interest rates on variable interest rate loans. Derivative contracts entered into by the Company have consisted of transactions in which the Company hedges the variability of cash flow related to a forecasted transaction. The Company has elected not to designate any of its positions for hedge accounting. Accordingly, the Company records the net change in the mark-to-market valuation of these positions, as well as payments and receipts on settled contracts, in “Net loss (gain) on derivative contracts” in the consolidated statements of operations. Currently, the Company has no derivative contracts in place to hedge against fluctuations in oil and natural gas prices.

 

Fair Value

 

Fair value accounting applies to reported balances that are required or permitted to be measured at fair value under existing accounting pronouncements. Fair value measurements are determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, these accounting requirements establish a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).

 

Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that we have the ability to access.

 

Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs might include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability (other than quoted prices), such as interest rates, foreign exchange rates, and yield curves that are observable at commonly quoted intervals.

 

Level 3 inputs are unobservable inputs for the asset or liability, and are typically based on an entity’s own assumptions, as there is little, if any, related market activity.

 

In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability. We utilize the fair value hierarchy in our accounting for interest rate swaps (Level 2).

 

Related party consulting agreement

 

The Company and Goodrich entered into a Consulting Agreement dated effective June 1, 2014 (the “2014 Consulting Agreement”). The 2014 Consulting Agreement will pay Goodrich $360,000 per annum in installments of $30,000 per month, in addition to reimbursing Goodrich for all reasonable business expenses, including automobile expenses, incurred by Mr. Tsuff in connection with services rendered on behalf of the Company, in exchange for management services performed by Mr. Tsuff as the Company’s Chairman, Co-Chief Executive Officer and President. These payments of $360,000 constitute the salary of Mr. Tsuff. The 2014 Consulting Agreement had an initial term through May 31, 2017, and was automatically extended by its terms for an additional three-years. The Consulting Agreement also contains certain customary confidentiality and non-compete provisions which are identical to those contained in the Goodrich Agreement.

 

Consolidation

 

The consolidated financial statements include the accounts of Isramco and its subsidiaries. Inter-company balances and transactions have been eliminated in consolidation.

 

 

Cash, cash equivalents and restricted cash

 

The Company considers highly liquid investments purchased with a maturity period of three months or less at the date of purchase to be cash equivalents. Restricted and designated cash and restricted cash – long term are included with cash, cash equivalents, and restricted cash on the Company’s consolidated statements of cash flows.

 

Consolidated balance sheets amount included as cash, cash equivalents, and restricted cash on the Company’s consolidated statements of cash flows:

 

   

As of

March 31, 2019

   

As of

December 31, 2018

 
                 

Cash and cash equivalents

  $ 9,033     $ 13,857  

Restricted and designated cash

    831       830  

Restricted cash – long term

    23,366       19,304  

Total cash, cash equivalents, and restricted cash

  $ 33,230     $ 33,991  

Leases

 

In February 2016, the FASB issued ASU 2016-02, "Leases" (Topic 842) The new standard requires lessees to recognize leases on-balance sheet and disclose key information about leasing arrangements. The new standard establishes a right-of-use (“ROU”) model that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement. The standard is effective on January 1, 2019, with early adoption permitted. The Company adopted the new standard on January 1, 2019 using the modified retrospective method. As part of the adoption, the Company elected to utilize the package of practical expedients included in this guidance, which permitted the Company to not reassess (i) whether any expired or existing contracts contain leases; (ii) the lease classification for any expired or existing leases; and (iii) the initial direct costs for existing leases. In conjunction with the adoption of the new lease standard, the Company adopted the following policy; an election not to recognize short-term leases (i.e., a lease that is less than 12 months and contains no purchase option) within the unaudited Consolidated Balance Sheets, with the expense related to these short-term leases recorded within total operating expenses within the unaudited Consolidated Statements of Operations. The adoption of the new standard did not materially impact the financial statements.

 

Impairment

 

We review our property and equipment in accordance with Accounting Standards Codification (ASC) 360, Property, Plant, and Equipment (ASC 360). ASC 360 requires us to evaluate property and equipment as an event occurs or circumstances change that would more likely than not reduce the fair value of the property and equipment below the carrying amount. If the carrying amount of property and equipment is not recoverable from its undiscounted cash flows, then we would recognize an impairment loss for the difference between the carrying amount and the current fair value. Further, we evaluate the remaining useful lives of property and equipment at each reporting period to determine whether events and circumstances warrant a revision to the remaining depreciation periods.

 

 

Asset Retirement Obligation

 

ASC 410, Asset Retirement and Environmental Obligations (ASC 410) requires that the fair value of an asset retirement cost, and corresponding liability, should be recorded as part of the cost of the related long-lived asset and subsequently allocated to expense using a systematic and rational method. The Company records asset retirement obligations to reflect the Company’s legal obligations related to future plugging and abandonment of its oil and natural gas wells and gas gathering systems. The Company estimates the expected cash flow associated with the obligation and discounts the amounts using a credit-adjusted, risk-free interest rate. At least annually, the Company reassesses the obligation to determine whether a change in the estimated obligation is necessary. The Company evaluates whether there are indicators that suggest the estimated cash flows underlying the obligation have materially changed. Should those indicators suggest the estimated obligation may have materially changed on an interim basis (quarterly), the Company will accordingly update its assessment.

 

Gain on divestiture

 

In February 2018, the Company sold an oil and gas property for a net gain of $472,000. The gain consisted of $454,000 cash plus $19,000 in relieved asset retirement obligation offset by a net book value of $1,000. The Company had no such sales in the first quarter of 2019.

 

Commitments and Contingencies

 

As is common within the oil and natural gas industry, we have entered into various commitments and operating agreements related to the exploration and development of and production from proved oil and natural gas properties. It is our belief that such commitments will be met without a material adverse effect on our financial position, results of operations or cash flows.

 

Aggregate maturities of contractual obligations at March 31, 2019, are due in future years as follows (in thousands):

 

Principal Payments on Long-term debt:

 

2019

  $ 16,200  

2020

    17,100  

2021

    14,700  

2022

    14,400  

2023

    11,400  

Total

  $ 73,800  

 

Note 2 - Supplemental Cash Flow Information

 

The Israeli taxing authority withheld taxes of $1,863,000 and $1,658,000 during the three months ended March 31, 2019 and 2018 respectively.

 

Cash payments for interest were $1,057,000 and $1,027,000 for the three months ended March 31, 2019 and 2018 respectively.

 

The consolidated statement of cash flows for the three months ended March 31, 2019 excludes the following non-cash transaction:

 

 

Increase in property and equipment of $465,000 included in accounts payable.

 

The consolidated statement of cash flows for the three-month period ended March 31, 2018 excludes the following non-cash transactions:

 

 

Increase in property and equipment of $112,000 included in accounts payable.

 

Asset retirement obligation of $19,000 relieved in sale of oil and gas properties.

 

 

Note 3 – Revenue from Contracts with Customers

 

Below is a discussion of the nature, timing, and presentation of revenues arising from the Company’s major revenue-generating arrangements:

 

Oil and Gas Sales United Sates – Revenues on sales of oil, natural gas liquids (“NGLs”), gas and purchased oil and gas are recognized when control of the product is transferred to the purchaser and payment can be reasonably assured. Sales prices for oil, NGL and gas production are negotiated based on factors normally considered in the industry, such as an index or spot price, distance from the well to the pipeline or market, commodity quality and prevailing supply and demand conditions. As such, the prices of oil, NGLs and gas generally fluctuate based on the relevant market index rates. Sales under the Company’s oil contracts are generally considered performed when the Company sells oil production at the wellhead and receives an agreed-upon index price, net of any price differentials. The Company recognizes revenue when control transfers to the purchaser at the wellhead based on the net price received. Sales under the Company’s gas processing contracts are recognized when the Company delivers gas to a midstream processing entity at the wellhead or the inlet of the midstream processing entity’s system. The midstream processing entity gathers and processes the gas and remits proceeds to the Company for the resulting sales of NGLs and gas.

 

In a few cases, the Company elects to take its NGLs and residue gas in-kind at the tailgate of the midstream entity’s processing plant and subsequently market the products itself. When the Company elects to take-in-kind, it delivers NGLs and gas to a third-party purchaser at a contractually agreed-upon delivery point and receives a specified index price from the purchaser.

 

Natural Gas Sales Israel – We own all ownership units in Tamar Royalties LLC, a Delaware limited liability company. Tamar Royalties LLC owns an overriding royalty interest of 1.5375% before payout, which increases to 2.7375% after payout, in the Tamar Field (collectively the “Tamar Royalty”) offshore Israel. An overriding royalty interest is an ownership interest in the oil and gas leasehold estate equating to a certain percentage of production or production revenues, calculated free of the costs of production and development of the underlying lease(s), but subject to its proportionate share of certain post production costs. An overriding royalty interest is a non-possessory interest in the oil and gas leasehold estate and, accordingly, we have no control over the operations, drilling, expenses, timing, production, sales, or any other aspect of development or production of the Tamar Field.

 

Natural gas from the Tamar Field is currently sold to the Israel Electric Corporation (“IEC”) and numerous other Israeli purchasers, including independent power producers, cogeneration facilities, local distribution companies and certain industrial companies. Currently, many of the Tamar’s gas purchase and sale agreements provide for sales at a 7 to 15-year term, while some contracts have extension options of up to 2 years. Depending on the specific contract, prices may vary and are based on an initial base price subject to price adjustment provisions, including price indexation and a price floor. The IEC contract provides for price reopeners (sometimes referred to as “price review” clauses) in the eighth and eleventh years of the contract, subject to limits on the amount of increase or decrease from the existing contractual price.

 

Revenues from natural gas sales in Israel are recognized when control of the product is transferred to a purchaser and payment can reasonably be assured. The Company receives monthly overriding royalty payments from Isramco Negev 2 Limited Partnership, a related party. We generally receive payment two months after the hydrocarbons have been produced. The revenue is recognized in the month that the hydrocarbons are produced.

 

Production Services – Our production services business earns revenues for well servicing, plugging and abandonment services, workover, and fluid hauling services pursuant to master service agreements based on purchase orders or other contractual arrangements with the customer. Production services jobs are generally short-term (less than 30 days) and are charged at current market rates for the labor, equipment and materials necessary to complete the job. Production services jobs are varied in nature, but typically represent a single performance obligation, either for a particular job, a series of distinct jobs, or a period of time during which we stand ready to provide services as our customer needs them. Generally, the Company accounts for production services as a single performance obligation satisfied at a certain point in time. Revenue for certain jobs spanning multiple days is recognized upon the completion of each day’s work based upon a completed field ticket, which includes the charges for the services performed, mobilization of the equipment to the location and personnel. Additional revenue is generated through labor charges and the sale of consumable supplies that are incidental to the service being performed. Such amounts are recognized ratably over the period during which the corresponding goods and services are consumed.

 

 

Disaggregation of revenues (in thousands):

 

   

Three Months Ended March 31,

 
   

2019

   

2018

 

Oil and Gas sales

               

United States

  $ 3,217     $ 3,775  

Israel

    8,101       7,209  

Production Services

    9,432       5,763  

Total revenues from contracts with customers

  $ 20,750     $ 16,747  

 

Performance obligations

 

The Company satisfies the performance obligations under its crude oil and natural gas sales contracts upon delivery of its production and related transfer of title to customers. Upon delivery of production, the Company has a right to receive consideration from its customers in amounts that correspond with the value of the production transferred. The Company satisfies the performance obligations under production services arrangements by completing the contracted job, at which time the Company as the right to receive consideration from its customers in agreed upon amounts.

 

All of the Company’s outstanding production services and crude oil sales contracts at March 31, 2019 are short-term in nature with contract terms of less than one year. For such contracts, the Company has utilized the practical expedient in Accounting Standards Codification (“ASC”) 606-10-50-14 exempting the Company from disclosure of the transaction price allocated to remaining performance obligations, if any, if the performance obligation is part of a contract that has an original expected duration of one year or less.

 

Most of the Company’s operated natural gas production is sold at lease locations to midstream customers under multi-year term contracts. For such contracts having a term greater than one year, the Company has utilized the practical expedient in ASC 606-10-50-14A which indicates an entity is not required to disclose the transaction price allocated to remaining performance obligations, if any, if variable consideration is allocated entirely to a wholly unsatisfied performance obligation. Under our sales contracts, whether for crude oil or natural gas, each unit of production delivered to a customer represents a separate performance obligation; therefore, future volumes to be delivered are wholly unsatisfied at period-end and disclosure of the transaction price allocated to remaining performance obligations is not applicable.

 

Contract balances

 

Under the Company’s crude oil and natural gas sales contracts or arrangements that give rise to service revenues, the Company recognizes revenue after its performance obligations have been satisfied, at which point the Company has an unconditional right to receive payment. Accordingly, the Company’s commodity sales contracts and service arrangements generally do not give rise to contract assets or contract liabilities under ASC Topic 606. Instead, the Company’s unconditional rights to receive consideration are presented as a receivable within “Accounts receivable, net of allowances for doubtful accounts,” in its consolidated balance sheets.

 

Revenues from previously satisfied performance obligations

 

To record revenues for commodity sales in the United States and Israel, at the end of each period the Company estimates the amount of production delivered and sold to customers and the prices to be received for such sales. Differences between estimated revenues and actual amounts received for all prior months are recorded in the month payment is received from the customer and are reflected in our consolidated financial statements within the caption “Oil and gas sales.” Revenues recognized during the three months ended March 31, 2019 related to performance obligations satisfied in prior reporting periods were not material.

 

To record revenues for unbilled production services, at the end of each period the Company estimates the services rendered. Differences between estimated revenues and actual amounts received for all prior months are recorded in the month invoices are created and reflected in our consolidated financial statement with the caption “Production services.” The Company believes that revenues recognized during the three months ended March 31, 2019 related to performance obligations satisfied in prior reporting periods were not material.

 

 

Note 4 - Financial Instruments and Fair Value

 

Pursuant to ASC 820, Fair Value Measurements and Disclosures (ASC 820) the Company’s determination of fair value incorporates not only the credit standing of the counterparties involved in transactions with the Company resulting in receivables on the Company’s consolidated balance sheets, but also the impact of the Company’s non-performance risk on its own liabilities. ASC 820 defines fair value 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). The Company believes that it utilizes 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 technique. These inputs can be readily observable, market corroborated, or generally unobservable. The Company classifies fair value balances based on the observability of those inputs.

 

On June 16, 2015, Tamar Royalties LLC (“Tamar Royalties”), a wholly owned subsidiary of the Company, engaged in an interest rate swap agreement (“IRS Agreement”) with the Deutsche Bank AG London Branch (“DBAG”). An interest rate swap is an agreement between two parties (known as counterparties) where one stream of future interest payments is exchanged for another based on a specified notional principal amount. Interest rate swaps often exchange fixed interest payments for floating interest payments that are linked to interest rates.

 

As previously disclosed on the Company’s Form 8-K filed May 22, 2015, Tamar Royalties entered into a $120,000,000 credit facility with Deutsche Bank, which facility is discussed further in Note 5 “Long-Term Debt and Interest Expense”. Under the terms of this facility, Tamar Royalties, is required to hedge at least seventy-five percent (75%) of the outstanding balance under this facility against fluctuations in LIBOR, with at least thirty-seven and one-half percent (37.5%) of the outstanding balance being hedged through swaps. The notional value of these hedges corresponds to the amortization schedule covering the facility and previously disclosed in the aforementioned Form 8-K. Accordingly, on June 16, 2015, Tamar Royalties and DBAG entered into the IRS Agreement whereby the Company hedged $119,250,000 of the $120,000,000 initial borrowing as follows:

 

(a)    Tamar Royalties hedged 37.5% of the perpetual outstanding balance under the facility, being an initial notional amount of $45,000,000, with a fixed rate swap whereby the Company will pay DBAG a fixed interest rate of 4.63%, and DBAG will pay the Company a monthly floating interest rate of USD-LIBOR-BBA plus a spread of 2.75%.

 

(b)   Tamar Royalties hedged the remaining 62.5% of the perpetual outstanding balance less $750,000, being an initial notional amount of $74,250,000, against fluctuations in LIBOR by capping the fluctuations in LIBOR at 1.50%. Pursuant to the IRS Agreement, the Company will pay DBAG a fixed interest rate of 0.91%, and DBAG will pay the Company the greater of (i) USD-LIBOR-BBA minus a cap strike of 1.5% and (ii) zero.

 

As a result of these financial instruments, the Company recorded a net loss from derivative contracts in the amount of $333,000, consisting of $371,000 of unrealized loss and $38,000 gain in cash settlements for the three months ended March 31, 2019. The Company recorded a net gain from derivative contracts in the amount of $865,000 consisting of $1,060,000 of unrealized gain and $195,000 loss in cash settlements for the three months ended March 31, 2018.

 

Financial Instruments as of March 31, 2019 and December 31, 2018 consisted of the following (in thousands): 

 

       

March 31, 2019

   

December 31, 2018

 

Financial Instrument

 

Fair Value Input Level

 

Carrying

   

Fair

   

Carrying

   

Fair

 
       

Value

   

Value

   

Value

   

Value

 
                                     

ST Assets:

                                   

Interest rate swaps

 

Level 2

  $ 257     $ 257     $ 293     $ 293  
                                     

LT Assets:

                                   

Interest rate swaps

 

Level 2

    53       53       388       388  
                                     
        $ 310     $ 310     $ 681     $ 681  

 

 

Level 2 Financial Instruments

 

Our interest rate swaps are measured at fair value using Level 2 inputs. The fair of our interest rate swaps is based on the net present value of expected future cash flows related to both variable and fixed-rate legs of the swap agreement. This measurement is computed using the forward London Interbank Offered Rate (“LIBOR”) yield curve, a market-based observable input. 

 

Note 5 - Long-Term Debt and Interest Expense

 

Long-term debt as of March 31, 2019 and December 31, 2018, consisted of the following (in thousands):

 

   

As of

March 31, 2019

   

As of

December 31, 2018

 

Bank loan

               

Principal amount

  $ 73,800     $ 79,500  

Less: unamortized discount and debt costs

    (1,934

)

    (2,131

)

Total long-term debt

    71,866       77,369  

Less: current maturities, net of current unamortized discount

    (20,915

)

    (21,176

)

                 

Long-term debt, net of current maturities

  $ 50,951     $ 56,193  

 

Bank Loan

 

The Deutsche Bank Facility

 

On May 18, 2015, Tamar Royalties, a newly formed, wholly-owned, special purpose subsidiary of the Company, entered into a term loan credit agreement (the “DB Facility”) with Deutsche Bank Trust Company Americas (“Deutsche Bank”), as facility agent for the lenders and as collateral agent for the secured parties, and with the lenders party thereto. The DB Facility provides for borrowings in the amount of $120,000,000 on a committed basis and is secured by, among other things, an overriding royalty interest in the Tamar Field, a natural gas field in the Mediterranean Sea, equal to 1.5375%, but is subject to increase to 2.7375% upon the Tamar project payout (the “Royalty Interest”). In connection with the DB Facility, and pursuant to a royalties sale and contribution agreement, the Company contributed the Royalty Interest to Tamar Royalties in exchange for all of the ownership units of Tamar Royalties. Pursuant to the terms of its governing documents, Tamar Royalties is managed by N.M.A. Energy Resources Ltd, a related party of the Company, and an independent manager, Donald J. Puglisi.

 

Pursuant to the terms of the DB Facility, Tamar Royalties borrowed $120,000,000 in its initial borrowing under this facility. The initial borrowing under the DB Facility bears annual interest based on the LIBOR for a three-month interest period plus a spread of 2.75%. The $120,000,000 initial borrowing under the DB Facility will be repaid over eight (8) years commencing July 1, 2015, in accordance with an amortization profile based on projected cash flows from the Royalty Interest. Tamar Royalties’ obligations under the DB Facility are secured by a first ranking pledge of the shares of Tamar Royalties, first ranking pledge of all rights under the agreements creating the Royalty Interest, and a first priority security interest over the accounts created under the DB Facility.

 

So long as any amounts remain outstanding to the Lenders under the DB Facility, Tamar Royalties must, from and after the end of the Availability Period (as defined in the DB Facility), have a Historical Debt Service Coverage Ratio (as defined in the DB Facility) of not less than 1.00:1.00, a Loan Life Coverage Ratio (as defined in the DB Facility) of at least 1.1:1.00, and maintain a Required Reserve Amount (as defined in the DB Facility). The initial Required Reserve Amount was $4,680,000. In addition, Tamar Royalties is required under the DB Facility to hedge against fluctuations in LIBOR as reflected in Note 4 “Financial Instruments and Fair Value”.

 

The amortization schedule under the DB Facility was based on the projection that the Investment Repayment Date (as defined therein) would occur at some point before the end of the first quarter of 2018 and therefore, commencing from the Payment Date occurring on 1st April 2018, the amounts to be repaid on each payment date under the credit agreement increase to reflect the expected increase in the Royalties Receivables (as defined therein) as a result of the increase in the royalty percentage following the Investment Repayment Date.

 

 

As noted above with regard to the payout of the Tamar Field, a disagreement between Tamar Royalties and Isramco Negev 2 Limited Partnership has emerged as to whether certain items may be included in the calculation of payout. At the time of initiating arbitration, the Company believed that the total scope of the claim was approximately forty-five million dollars ($45,000,000); however, this amount increases each month based on Isramco Negev 2 Limited Partnership’s failure to pay the increased, post-payout overriding royalty to the Company. Under the terms of the agreements creating the Tamar Royalty, the dispute is subject to arbitration in Israel. The Company expects that the matter will be resolved through this arbitration process. However, the Company cannot be assured of a favorable result resulting from this arbitration process.  Accordingly, the Company continues to receive royalty payments at the lower rates as if the Investment Repayment Date has not occurred.

 

Therefore, as a result of the dispute with the Isramco Negev 2, Tamar Royalties had a shortfall in its Royalties Receivables for the period (or part of the period) between 1st April 2018 and 1st April 2019.

 

As a result, the Company believed Tamar Royalites required an additional $15,600,000 USD to cover payments under the amortization schedule of the DB Facility (the “Shortfall”), and the Company believed that curing the Shortfall was in the best interest of both Isramco Inc. and Tamar Royalties.  Therefore, Isramco Inc. contributed the expected amount of the Shortfall, being $15,600,000 USD, to Tamar Royalties as an additional capital contribution and such contribution was made pursuant to the terms and conditions of that certain Consent and Agreement dated February 27, 2018, between and among Tamar Royalties, as Borrower, Deutsche Bank Trust Company Americas, as Facility Agent and Collateral Agent, and the Lenders party thereto.  As a result of the aforementioned contribution, together with the terms and conditions of the aforementioned consent and assignment, Tamar Royalties remains in compliance with all covenants of the DB Facility.

 

On January 2, 2019, the Company made a payment in the amount of $6,757,000 consisting of $5,700,000 and $1,057,000 in principal and interest respectively.

 

On April 2, 2019, the Company made a payment in the amount of $6,412,000 consisting of $5,400,000 and $1,012,000 in principal and interest respectively.

 

The Company incurred debt costs in obtaining the facility in the amount of $2,011,000. Additionally the lenders retained $2,959,000 in fees. These costs, totaling $4,970,000, are recorded as a reduction of the principal loan balance and are being amortized over the life of the loan using the effective interest method. Amortization of these costs for the three-month period ended March 31, 2019 and 2018 totaled $197,000 and $191,000 respectively.

 

Short-term related party debt

 

In September 2018 the Company issued an unsecured promissory note dated effective September 11, 2018, to I.O.C - Israel Oil Company LTD (“IOC”) a related party in which the company may borrow up to $7,000,000 at a rate of interest equal to seven and one-half percent (7.5%) and with a maturity date of September 2019. The company received $3,600,000 under this related party note in 2018 attendant with the creation of a new subsidiary, Arrow Midstream LLC. In January 2019 the Company received and additional $600,000 under this related party note. The principal balance outstanding as of March 31, 2019 and December 31, 2018 was $4,200,000 and $3,600,000 respectively. The accrued interest related to this promissory note as of March 31, 2019 and December 31, 2018 was $146,000 and $70,000 respectively.

 

Amounts received under the aforementioned promissory note are dedicated to working capital and the purchase of equipment for Arrow Midstream LLC, a new wholly owned subsidiary of Isramco Inc. Arrow Midstream is focused on the transportation of liquefied petroleum products including, but not limited to, butane, propane, and similar products.

 

Mr. Haim Tsuff, Isramco’s Co-Chief Executive Officer and Chairman and is a controlling shareholder of IOC.

 

 

As of March 31, 2019, Tamar Royalties was in compliance with the financial covenants required under the DB Facility.

 

Short-Term Debt

 

As of March 31, 2019, and December 31, 2018, outstanding debt from short-term insurance financing agreements totaled $321,000 and $563,000 respectively. During the three months ended March 31, 2019, the Company made cash payments totaling $242,000.

 

Interest Expense

 

The following table summarizes the amounts included in interest expense for the three months ended March 31, 2019, and 2018:

 

   

Three Months Ended March 31,

 
   

2019

   

2018

 
   

(In thousands)

 

Current debt, long-term debt and other - banks

  $ 1,108     $ 1,217  

Long-term debt – related parties

    76       -  
    $ 1,184     $ 1,217  

 

Note 6 - Tamar Field Proceeds

 

We own an overriding royalty interest of 1.5375% in the Tamar Field, which will increase to 2.7375% after payout (collectively the “Tamar Royalty”).  An overriding royalty interest is an ownership interest in the oil and gas leasehold estate equating to a certain percentage of production or production revenues, calculated free of the costs of production and development of the underlying lease(s), but subject to its proportionate share of certain post production costs.  An overriding royalty interest is a non-possessory interest in the oil and gas leasehold estate and, accordingly, we have no control over the operations, drilling, expenses, timing, production, sales, or any other aspect of development or production of the Tamar Field. For additional information, please see the disclosure related to the Tamar Royalty set forth in the ITEM 1. BUSINESS section included in our Annual Report on Form 10-K for the year ended December 31, 2018, which disclosure is hereby incorporated herein by reference thereto.

 

In 2009, two natural gas discoveries, known as “Tamar” and “Dalit”, were made within the area covered by the Michal and Matan Licenses, respectively. In December 2009, the Israeli Petroleum Commissioner granted Noble Energy, Inc. (“Noble”) and its partners, Isramco Negev 2-LP, Delek Drilling, Avner Oil & Gas, and Dor Gas (the “Tamar Consortium”), two leases (the “Leases”). The Leases are scheduled to expire in December 2038 and cover the Tamar and Dalit gas fields (collectively the “Tamar Field”). The Tamar Field is approximately 95 kilometers off the coast of the Israel, in the Israel exclusive economic zone of the Eastern Mediterranean, with a water depth of approximately 1,700 meters. On March 31, 2013 the Tamar Field commenced its initial production of the natural gas.

 

Since Isramco’s interest in the Tamar Field is an overriding royalty interest, there are no amounts capitalized with respect to Tamar Field.

 

During the three months ended March 31, 2019, Tamar Field net sales attributable to Isramco amounted to 1,451,305 Mcf of natural gas and 1,847 Bbl of condensate with prices of $5.54 per Mcf and $58.25 per Bbl of condensate. Total revenues net of marketing and transportation expenses were $8,101,000. The Israeli Tax Authority withheld $1,863,000 of this revenue.

 

During the three months ended March 31, 2018, Tamar Field net sales attributable to Isramco amounted to 1,316,631 Mcf of natural gas and 1,669 Bbl of condensate with prices of $5.43 per Mcf and $58.53 per Bbl of condensate. Total revenues net of marketing and transportations expenses were $7,209,000. The Israeli Tax Authority withheld $1,658,000 of this revenue.

 

 

With regard to the payout of the Tamar Field, a disagreement between the Company and Isramco Negev 2 Limited Partnership has emerged as to what costs should be included in the calculation of payout. In addition to actual costs for the development of the Tamar Field, Isramco, Negev 2 Limited Partnership has asserted that the following costs should be included in the calculation of payout: (i) Isramco Negev 2 Limited Partnership’s financing costs; (ii) the general and administrative expenses of Isramco Negev 2 Limited Partnership; (iii) the expected decommissioning costs of the Tamar Field; and (iv) expected future payments to be made in respect of the “Sheshinsky Levy” under Israeli law. In addition to the claim asserted by Isramco Negev 2 Limited Partnership, the Company has asserted counterclaims related to Isramco Negev 2 Limited Partnership’s inclusion into the payout calculation of its expenses related to gathering and transportation infrastructure. At the time of initiating arbitration, the Company believed that the total scope of the claim was approximately forty-five million dollars ($45,000,000); however, this amount increases each month based on Isramco Negev 2 Limited Partnership’s failure to pay the increased, post-payout overriding royalty to the Company. In addition, certain claims asserted by the Company related to post production costs and pipeline infrastructure have not been quantified. Under the terms of the agreements creating the Tamar Royalty, the dispute is subject to arbitration in Israel. The Company believes that the claims of Isramco Negev 2 Limited Partnership are erroneous and contrary to generally accepted industry practice. The Company expects that the matter will be favorably resolved through this arbitration process; however, the Company cannot be assured of a favorable result in this arbitration process.

 

Note 7 - Segment Information

 

Isramco’s primary business segments are vertically integrated within the oil and gas industry. These segments are separately managed due to distinct operational differences, unique technology, distribution and marketing requirements. The Company’s two reporting segments are oil and gas exploration and production and production services. The oil and gas exploration and production segment explores for and produces natural gas, crude oil, condensate, and natural gas liquids (“NGLs”). The production services segment is engaged in rig-based and workover services, well completion and recompletion services, plugging and abandonment of wells and other ancillary oilfield services.

 

Oil and Gas Exploration and Production Segment

 

Our Oil and Gas segment is engaged in the exploration, development and production of oil and natural gas properties located onshore in the United States and ownership of various royalty interests in oil and gas concessions located offshore Israel. We own varying working interests in oil and gas wells in Louisiana, Texas, New Mexico, Oklahoma, Wyoming, Utah and Colorado and currently serve as operator of approximately 422 producing wells located mainly in Texas in New Mexico.

 

Production Services Segment

 

The Company began production services operations in October 2011. Our production servicing rig and truck fleet provides a range of production services, including the completion of newly-drilled wells, maintenance and workover of existing wells, fluid transportation, related oilfield services and plugging and abandonment of wells at the end of their useful lives to a diverse group of oil and gas exploration and production companies.

 

●  

Completion Service. Newly drilled wells require completion services to prepare the well for production. Production servicing rigs are frequently used to complete newly drilled wells to minimize the use of higher cost drilling rigs in the completion process. The completion process may involve selectively perforating the well casing in the productive zones to allow oil or gas to flow into the well bore, stimulating and testing these zones, and installing the production string and other downhole equipment. The completion process typically ranges from a few days to several weeks, depending on the nature and type of the completion, and generally requires additional auxiliary equipment in addition to a production services rigs. The demand for completion services is directly related to drilling activity levels, which are sensitive to fluctuations in oil and gas prices.

 

●  

Well-servicing/Maintenance Services. We provide maintenance services on the mechanical apparatus used to pump or lift oil from producing wells. These services include, among other activities, repairing and replacing pumps, sucker rods and tubing. We provide the rigs, equipment and crews for these tasks, which are performed on both oil and natural gas wells, but which are more commonly required on oil wells. Maintenance services typically take less than 48 hours to complete. Rigs generally are provided to customers on a call-out basis.

 

 

●  

Workover Services. Producing oil and natural gas wells occasionally require major repairs or modifications, called “workovers.” Workovers may be required to remedy failures, modify well depth and formation penetration to capture hydrocarbons from alternative formations, clean out and recomplete a well when production has declined, repair leaks or convert a depleted well to an injection well for secondary or enhanced recovery projects. Workovers normally are carried out with pumps and tanks for drilling fluids, blowout preventers, and other specialized equipment for servicing rigs. A workover may last anywhere from a few days to several weeks.

 

●  

Fluid Services.  We own and operate 35 fluid service trucks equipped with an average fluid hauling capacity of up to 130 barrels a piece. Each fluid service truck is equipped to pump fluids from or into wells, pits, tanks and other storage facilities. The majority of our fluid service trucks are also used to transport water to fill frac tanks on well locations, to transport produced salt water to disposal wells, and to transport drilling and completion fluids to and from well locations.

 

●  

Plugging Services. Production servicing rigs are also used in the process of permanently closing oil and gas wells that are no longer capable of producing in economically viable quantities. Many well operators bid for this work on a “turnkey” basis, requiring the service company to perform the entire job, including the sale or disposal of equipment salvaged from the well as part of the compensation received, and complying with state regulatory requirements. Plugging and abandonment work can provide favorable operating margins and is less sensitive to oil and gas pricing than drilling and workover activity since well operators must plug a well in accordance with state regulations when it is no longer productive. We perform plugging and abandonment work throughout our core areas of operation in conjunction with equipment provided by us or by other service companies.

 

We typically bill clients for our production servicing on an hourly basis for the period that the rig is actively working. As of March 31, 2019, our fleet of production servicing rigs totaled 33 rigs, which we operate through 5 locations in Texas and New Mexico.

 

(in thousands)

 

Oil and Gas

Exploration

& Production

   

Production Services

   

Eliminations

   

Total

 

Three Months Ended March 31, 2019:

                               

Sales revenues

                               

United States

  $ 3,217     $ 9,432     $ -     $ 12,649  

Israel

    8,101       -       -       8,101  

Intersegment revenues

    -       173       (173

)

    -  

Office services and other

    296       -       (30

)

    266  
                                 

Total revenues and other

    11,614       9,605       (203

)

    21,016  
                                 

Operating costs and expenses

    4,055       8,822       (203

)

    12,674  

Depreciation, depletion, and amortization

    385       945       -       1,330  

Interest expenses, net

    (261

)

    1,445       -       1,184  

Gain on derivative contracts

    333       -       -       333  

Other income, net

    (2

)

    -       -       (2

)

                                 

Total expenses and other

    4,510       11,212       (203

)

    15,519  
                                 

Income (loss) before income taxes

  $ 7,104     $ (1,607

)

  $ -     $ 5,497  

Net Income (loss)

    4,859       (1,225

)

    -       3,634  

Net loss attributable to non-controlling interests

    -       (397

)

    -       (397

)

Net income (loss) attributable to Isramco

    4,859       (828

)

    -       4,031  

Total Assets

  $ 62,343     $ 48,597     $ -     $ 110,940  

Expenditures for Long-lived Assets

  $ 73     $ 917     $ -     $ 990  

 

 

(in thousands)

 

Oil and Gas

Exploration

& Production

   

Production Services

   

Eliminations

   

Total

 

Three Months Ended March 31, 2018:

                               

Sales revenues

                               

United States

  $ 3,775     $ 5,763     $ -     $ 9,538  

Israel

    7,209       -       -       7,209  

Office services and other

    776       -       (30

)

    746  
                                 

Total revenues and other

    11,760       5,763       (30

)

    17,493  
                                 

Operating costs and expenses

    3,775       5,793       (30

)

    9,538  

Depreciation, depletion, and amortization

    470       821       -       1,291  

Interest expenses, net

    120       1,097       -       1,217  

Gain on derivative contracts

    (865

)

    -       -       (865

)

                                 

Total expenses and other

    3,500       7,711       (30

)

    11,181  
                                 

Income (loss) before income taxes

  $ 8,260     $ (1,948

)

  $ -     $ 6,312  

Net Income (loss)

    6,214       (1,560

)

    -       4,654  

Net loss attributable to non-controlling interests

    -       (381

)

    -       (381

)

Net income (loss) attributable to Isramco

    6,214       (1,179

)

    -       5,035  

Total Assets

  $ 67,768     $ 42,950     $ -     $ 110,718  

Expenditures for Long-lived Assets

  $ 133     $ 2,859     $ -     $ 2,992  

 

 

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

 

THE FOLLOWING COMMENTARY SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES CONTAINED ELSEWHERE IN THIS REPORT ON FORM 10-Q. THE DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THESE STATEMENTS RELATE TO FUTURE EVENTS OR OUR FUTURE FINANCIAL PERFORMANCE. IN SOME CASES, YOU CAN IDENTIFY THESE FORWARD-LOOKING STATEMENTS BY TERMINOLOGY SUCH AS “MAY,” “WILL,” “SHOULD,” “EXPECT,” “PLAN,” “ANTICIPATE,” “BELIEVE,” “ESTIMATE,” “PREDICT,” “POTENTIAL,” “INTEND,” OR “CONTINUE,” AND SIMILAR EXPRESSIONS. THESE STATEMENTS ARE ONLY PREDICTIONS. OUR ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF A VARIETY OF FACTORS, INCLUDING, BUT NOT LIMITED TO, THOSE SET FORTH UNDER “RISK FACTORS” AND ELSEWHERE IN THIS REPORT ON FORM 10-Q. ISRAMCO INC. DISCLAIMS ANY OBLIGATION TO UPDATE SUCH FORWARD LOOKING STATEMENTS.

 

Overview

 

Isramco is predominately an independent oil and natural gas company engaged in the exploration, development and production of oil and natural gas properties located onshore in the United States and ownership of various royalty interests in oil and gas concessions located offshore Israel. The Company also operates a production services company that provides well maintenance, workover services, well completion and recompletion services. Our properties are primarily located in Texas, New Mexico and Oklahoma. We also act as the operator of a certain number of these properties. Historically, we have grown through acquisitions, with a focus on properties within our core operating areas that we believe have significant development and exploration opportunities and where we can apply our technical experience and economies of scale to increase production and proved reserves, while lowering lease operating costs.

 

We own an overriding royalty interest of 1.5375% in the Tamar Field, which will increase to 2.7375% after payout (collectively the “Tamar Royalty”).  An overriding royalty interest is an ownership interest in the oil and gas leasehold estate equating to a certain percentage of production or production revenues, calculated free of the costs of production and development of the underlying lease(s), but subject to its proportionate share of certain post production costs.  An overriding royalty interest is a non-possessory interest in the oil and gas leasehold estate and, accordingly, we have no control over the operations, drilling, expenses, timing, production, sales, or any other aspect of development or production of the Tamar Field. For additional information, please see the disclosure related to the Tamar Royalty set forth in the ITEM 1. BUSINESS section included in our Annual Report on Form 10-K for the year ended December 31, 2018, which is incorporated by reference herein.

 

As noted above in Note 6 to the Company’s consolidated financial statements, in 2009 two natural gas discoveries known as “Tamar” and “Dalit” were made within the area covered by the Michal and Matan Licenses respectively and are known as the Tamar Field. In December 2009 the Israeli Petroleum Commissioner granted Noble Energy, Inc. (“Noble”) and its partners, Isramco Negev 2-LP, Delek Drilling, Avner Oil & Gas, and Dor Gas (the “Tamar Consortium”), two leases (the “Leases”). The Leases are scheduled to expire in December 2038. The Tamar Field is approximately 95 kilometers off the coast of the Israel in the Israel exclusive economic zone of the Eastern Mediterranean with a water depth of approximately 1,700 meters. On March 31, 2013, the Tamar Field began its initial production of the natural gas.

 

During the three months ended March 31, 2019, Tamar Field net sales attributable to Isramco amounted to 1,451,305 Mcf of natural gas and 1,847 Bbl of condensate with prices of $5.54 per Mcf and $58.25 per Bbl of condensate. Total revenues net of marketing and transportation expenses were $8,101,000. The Israeli Tax Authority withheld $1,863,000 of this revenue.

 

During the three months ended March 31, 2018, Tamar Field net sales attributable to Isramco amounted to 1,316,631 Mcf of natural gas and 1,669 Bbl of condensate with prices of $5.43 per Mcf and $58.53 per Bbl of condensate. Total revenues net of marketing and transportations expenses were $7,209,000. The Israeli Tax Authority withheld $1,658,000 of this revenue.

 

Our financial results depend upon many factors, but are largely driven by the volume of our oil and natural gas production and the prices received for that production. Our production volumes will decline as reserves are depleted unless we expend capital in successful development and exploration activities or acquire additional properties with existing production. The amount we realize for our production depends predominantly upon commodity prices, which are affected by changes in market demand and supply, as impacted by overall economic activity, weather, pipeline capacity constraints, inventory storage levels, basis differentials and other factors, and secondarily upon our commodity price hedging activities. Accordingly, finding and developing oil and natural gas reserves at economical costs is critical to our long-term success. Our future drilling plans are subject to change based upon various factors, some of which are beyond our control, including drilling results, oil and natural gas prices, the availability and cost of capital, drilling and production costs, availability of drilling services and equipment, gathering system and pipeline transportation constraints and regulatory approvals. To the extent these factors lead to reductions in our drilling plans and associated capital budgets in future periods, our financial position, cash flows and operating results could be adversely impacted. 

 

 

With regard to the payout of the Tamar Field, a disagreement between the Company and Isramco Negev 2 Limited Partnership has emerged as to what costs should be included in the calculation of payout. In addition to actual costs for the development of the Tamar Field, Isramco, Negev 2 Limited Partnership has asserted that the following costs should be included in the calculation of payout: (i) Isramco Negev 2 Limited Partnership’s financing costs; (ii) the general and administrative expenses of Isramco Negev 2 Limited Partnership; (iii) the expected decommissioning costs of the Tamar Field; and (iv) expected future payments to be made in respect of the “Sheshinsky Levy” under Israeli law. In addition to the claim asserted by Isramco Negev 2 Limited Partnership, the Company has asserted counterclaims related to Isramco Negev 2 Limited Partnership’s inclusion into the payout calculation of its expenses related to gathering and transportation infrastructure. At the time of initiating arbitration, the Company believed that the total scope of the claim was approximately forty-five million dollars ($45,000,000); however, this amount increases each month based on Isramco Negev 2 Limited Partnership’s failure to pay the increased, post-payout overriding royalty to the Company. In addition, certain claims asserted by the Company related to post production costs and pipeline infrastructure have not been quantified. Under the terms of the agreements creating the Tamar Royalty, the dispute is subject to arbitration in Israel. The Company believes that the claims of Isramco Negev 2 Limited Partnership are erroneous and contrary to generally accepted industry practice. The Company expects that the matter will be favorably resolved through this arbitration process; however, the Company cannot be assured of a favorable result in this arbitration process.

 

Concentrations of Credit Risk

 

Our production services segment customers include major oil and natural gas production companies and independent oil and natural gas production companies. We perform ongoing credit evaluations of our customers and usually do not require material collateral. We maintain reserves for potential credit losses when necessary. Our results of operations and financial position should be considered in light of the fluctuations in demand experienced by oilfield service companies as changes in oil and gas producers’ expenditures and budgets occur. These fluctuations can impact our results of operations and financial position as supply and demand factors directly affect utilization and hours which are the primary determinants of our net cash provided by operating activities.

 

Isramco maintains deposits in banks, which may exceed the amount of federal deposit insurance available. Management periodically assesses the financial condition of the institutions and believes that any possible deposit loss is minimal.

 

Liquidity and Capital Resources

  

Our primary source of cash during the three months ended March 31, 2019 was cash flow from operating activities. We continuously monitor our liquidity and evaluate our development plans in light of a variety of factors, including, but not limited to, our cash flows, capital resources and drilling success.

 

Our future capital resources and liquidity may depend, in part, on our success in developing the leasehold interests that we have acquired. Cash is required to fund capital expenditures necessary to offset inherent declines in production and proven reserves, which is typical in the capital-intensive oil and gas industry. Future success in growing reserves and production will be highly dependent on the capital resources available and our success in finding and acquiring additional reserves. Our production services subsidiary also requires capital resources to acquire and maintain equipment and continue growth. We expect to fund our future capital requirements through internally generated cash flows, borrowings under loans from related parties, and a future credit facility. Long-term cash flows are subject to a number of variables, including the level of production, prices, amount of work orders received, and our commodity price hedging activities, as well as various economic conditions that have historically affected the oil and natural gas industry.

 

On May 18, 2015, the Company entered into a term loan credit agreement with Deutsche Bank Trust Company Americas (“Deutsche Bank”) in the amount of $120,000,000 secured by the Company’s interest in the Tamar Field. Interest on the borrowing is variable. The Company entered into interest rate swap agreements in relation to this borrowing. The terms of the agreement and swaps are disclosed in Notes 4 and 5 to the Company’s consolidated financial statements.

 

In September 2018, the Company issued an unsecured promissory note (the “Arrow Note”) dated effective September 11, 2018, to I.O.C - Israel Oil Company LTD (“IOC”), a related party. The Company received $3,600,000 under this related party note in 2018 attendant with the creation of a new subsidiary, Arrow Midstream LLC. The Company received an additional $600,000 under this note in the first quarter of 2019. Amounts received under the promissory note are dedicated to working capital and the purchase of equipment for Arrow Midstream LLC, a new wholly owned subsidiary of Isramco Inc. The terms of the agreement are disclosed in Note 5 to the Company’s consolidated financial statements.

 

 

During the three months ended March 31, 2019, our cash decreased by $0.8 million. Specifically, the net cash provided by operating activities of $5.6 million and proceeds from the Arrow Note of $0.6 million were offset by an investment of $1.0 million in production services equipment and oil and gas properties, $5.7 million in repayments of long term debt, and $0.3 million in repayments of short-term debt and distribution to non-controlling interests.

 

Debt:

 

   

As of

March 31,

   

As of

December 31,

 

In thousands

 

2019

   

2018

 

Long – term debt net of discount and bank fees

  $ 50,951     $ 56,193  
                 

Current maturities of long-term debt, short-term debt, short-term debt related party, and current portion of discount and debt cost

    25,584       25,410  

Total debt

  $ 76,535     $ 81,603  
                 

Stockholders’ deficit

  $ (3,735

)

  $ (7,359

)

                 

Debt to capital ratio

    105

%

    110

%

 

As of March 31, 2019, our total debt was $76,535,000 compared to total debt of $81,603,000 at December 31, 2018.

 

Contractual Obligations

 

Aggregate maturities of contractual obligations at March 31, 2019 are due in future years as follows (in thousands):

 

Principal Payments on Long-term debt:

 

2019

  $ 16,200  

2020

    17,100  

2021

    14,700  

2022

    14,400  

2023

    11,400  

Total

  $ 73,800  

 

Cash Flow

 

Our primary source of cash during the three months ended March 31, 2019 was cash flow from operating activities. In the first three months of 2018, cash received from operations was primarily used for investments in production services equipment, oil and gas properties and repayment of short term and long-term loans. In the first three months of 2018, cash received from operations and proceeds from sale of oil and gas properties was primarily used for repayment of long-term debt, short-term debt, and investments in equipment.

 

Operating cash flow fluctuations were substantially driven by changes in commodity prices and changes in our production volumes. Working capital was substantially influenced by these variables. Fluctuation in commodity prices and our overall cash flow may result in an increase or decrease in our future capital expenditures. Prices for oil and natural gas have historically been subject to seasonal fluctuations characterized by peak demand and higher prices in the winter heating season; however, the impact of other risks and uncertainties have influenced prices throughout recent years. See Results of Operations below for a review of the impact of prices and volumes on sales. 

 

   

Three Months Ended

March 31,

 
   

2019

   

2018

 
   

(In thousands)

 

Cash flows provided by operating activities

  $ 5,581     $ 3,733  

Cash flows used in investing activities

    (990

)

    (2,538

)

Cash flows used in financing activities

    (5,352

)

    (2,572

)

Net decrease in cash and restricted cash

  $ (761

)

  $ (1,377

)

 

 

Operating Activities.  During the three months ended March 31, 2019, compared to the same period in 2018, net cash flow provided by operating activities increased by $1,848,000 to $5,581,000. The increase was primarily attributable to increased revenues from our well services segment and proceeds from the Tamar Royalty.

 

Investing Activities.  Net cash flows used in investing activities for the three months ended March 31, 2019 and 2018 were $990,000 and $2,538,000, respectively. During the first three months of 2019, the Company invested $73,000 in oil and gas properties and $917,000 in production services equipment. During the first three months of 2018, the Company invested $133,000 in oil and gas properties and $2,859,000 in production services equipment. The Company also received $454,000 from divestiture of oil and gas assets in the first three months of 2018.

 
Financing Activities.  Net cash flows used in financing activities were $5,352,000 and $2,572,000 for the three months ended March 31, 2019 and 2018, respectively. During the first three months of 2019 the Company made payments on long term debt of $5,700,000, made payments on short term debt in the amount of $242,000, received $600,000 in short-term financing from a related party under the Arrow Note, and distributed $10,000 to non-controlling interests. During the first three months of 2018 the Company made payments on long term debt of $2,400,000, made payments on short term debt in the amount of $172,000.

 

Results of Operations

 

Three Months Ended March 31, 2019 Compared to Three Months Ended March 31, 2018

 

Selected Data

 
   

Three Months Ended March 31,

 
   

2019

   

2018

 
   

(In thousands except per share

and BOE amounts)

 

Financial Results

               

Oil and Gas sales

               

United States

  $ 3,217     $ 3,775  

Israel

    8,101       7,209  

Production Services

    9,432       5,763  

Gain on divestiture

    -       472  

Other

    266       274  

Total revenues and other

    21,016       17,493  
                 

Cost and expenses

    14,004       10,829  

Other expenses

    1,515       352  

Income tax expense

    1,863       1,658  

Net income attributable to common shareholders

    3,634       4,654  

Net loss attributable to non-controlling interests

    (397

)

    (381

)

Net income attributable to Isramco

    4,031       5,035  

Earnings per common share – basic

  $ 1.48     $ 1.85  

Earnings per common share – diluted

  $ 1.48     $ 1.85  
                 

Weighted average number of shares outstanding- basic

    2,717,648       2,717,648  

Weighted average number of shares outstanding- diluted

    2,717,648       2,717,648  
                 

Operating Results

               

Adjusted EBITDAX (1)

  $ 8,597     $ 7,991  

Sales volumes United States (MBOE)

    107       100  

Sales volumes Israel (MBOE)

    244       221  
                 

Average cost per BOE United States: (2)

               

Production (excluding transportation and taxes)

  $ 18.72     $ 18.32  

General and administrative (oil and gas production segment)

  $ 12.65     $ 11.82  

Depletion

  $ 3.61     $ 4.69  

 

 

(1)  

See Adjusted EBITDAX for a description of Adjusted EBITDAX, which is not a Generally Accepted Accounting Principles (GAAP) measure, and a reconciliation of Adjusted EBITDAX to income from operations before income taxes, which is presented in accordance with GAAP.

 

(2)  

There are no costs associated with revenues from Israeli operations since the Company owns the Tamar Royalty, which is an overriding royalty free of operating expenses.

 

Financial Results

 

Net income in the first quarter of 2019 was $4,031,000 or $1.48 per share. This compares to net income in the first quarter of 2018 of $5,035,000 or $1.85 per share.

 

This decrease in income was primarily due to a loss on derivative contracts of $333,000 in the first quarter of 2019 compared to a gain on derivative contracts of $865,000 for the same period in 2018. Decrease in revenues from United States oil and gas sales, and a decrease in amounts received under divestitures of oil and gas properties.

 

Revenues, Volumes and Average Prices Oil and Gas Segment - Israel

 

During the three months ended March 31, 2019, Tamar Field net sales attributable to Isramco amounted to 1,451,305 Mcf of natural gas and 1,847 Bbl of condensate with prices of $5.54 per Mcf and $58.25 per Bbl of condensate. Total revenues net of marketing and transportation expenses were $8,101,000. The Israeli Tax Authority withheld $1,863,000 of this revenue.

 

During the three months ended March 31, 2018, Tamar Field net sales attributable to Isramco amounted to 1,316,631 Mcf of natural gas and 1,669 Bbl of condensate with prices of $5.43 per Mcf and $58.53 per Bbl of condensate. Total revenues net of marketing and transportations expenses were $7,209,000. The Israeli Tax Authority withheld $1,658,000 of this revenue.

 

Revenues, Volumes and Average Prices Oil and Gas Segment – United States

 

Sales Revenues

 

   

Three Months Ended March 31,

 

In thousands except percentages

 

2019

   

2018

   

 

 vs. 2018

 

Gas sales

  $ 633     $ 750       (16

)%

Oil sales

    2,296       2,670       (14

)

Natural gas liquid sales

    288       355       (19

)

Total

  $ 3,217     $ 3,775       (15

)%

 

The Company’s sales revenues from United States based oil and gas operations for the first quarter of 2019 decreased by 15% when compared to same period in 2018 due to a decrease in prices for crude oil, natural gas, and NGLs. This decrease was partially offset by higher production volumes for crude oil, natural gas, and NGLs in the United States.

 

Volumes and Average Prices

 

   

Three Months Ended March 31,

 
   

2019

   

2018

   

▲ vs. 2018

 

Natural Gas

                       

Sales volumes Mmcf

    275.0       262.4       5

%

Average Price per Mcf

  $ 2.30     $ 2.86       (20

)

Total gas sales revenues (thousands)

  $ 633     $ 750       (16

)%

                         

Crude Oil

                       

Sales volumes MBbl

    44.9       43.0       4

%

Average Price per Bbl

  $ 51.15     $ 62.06       (18

)

Total oil sales revenues (thousands)

  $ 2,296     $ 2,670       (14

)%

                         

Natural gas liquids

                       

Sales volumes MBbl

    16.0       13.5       19

%

Average Price per Bbl

  $ 18.01     $ 26.22       (31

)

Total natural gas liquids sales revenues (thousands)

  $ 288     $ 355       (19

)%

 

 

In the United States the Company’s natural gas sales volumes increased by 5%, crude oil sales volumes increased by 4%, and natural gas liquids sales volumes increased by 19% for the first quarter of 2019 compared to the same period of 2018.

 

The Company’s average natural gas price received for the first quarter of 2019 decreased by 20%, or $0.56 per Mcf, when compared to the same period of 2018. The Company’s average crude oil price for the first quarter of 2019 decreased by 18%, or $10.91 per Bbl, when compared to the same period of 2018. Our average natural gas liquids price for the first quarter of 2019 decreased by 31%, or $8.21 per Bbl, when compared to the same period of 2018.

 

Analysis of Oil and Gas Operations Sales Revenues

 

The following table provides a summary of the effects of changes in volumes and prices on Isramco’s United States sales revenues for the three months ended March 31, 2019 compared to the same period of 2018.

 

In thousands

 

Natural Gas

   

Oil

   

Natural gas liquids

 

2018 sales revenues

  $ 750     $ 2,670     $ 355  

Changes associated with sales volumes

    36       115       64  

Changes in prices

    (153

)

    (489

)

    (131

)

2019 sales revenues

  $ 633     $ 2,296     $ 288  

 

Operating Expenses (excluding production services segment)

 

   

Three Months Ended March 31,

 

In thousands except percentages

 

2019

   

2018

   

▲ vs. 2018

 

Lease operating expense, transportation and taxes

  $ 2,429     $ 2,300       6

%

Depreciation, depletion and amortization of oil and gas properties

    385       470       (18

)

Accretion expense

    215       230       (7

)

Loss from plugging and abandonment of wells

    62       58       7  

General and administrative

    1,350       1,186       14  
    $ 4,441     $ 4,244       5

%

 

During the three months ended March 31, 2019, our operating expenses increased by 5% when compared to the same period of 2018 due to the following factors:

 

 

Lease operating expense, transportation cost and taxes increased by 6%, or $129,000, in 2019 when compared to 2018 primarily due to increased repair work. On a per unit basis, lease operating expenses (excluding transportation and taxes) increased by $0.4 per MBOE to $18.72 per MBOE in 2018 from $18.32 per MBOE in 2018.

 

 

Depreciation, Depletion & Amortization (“DD&A”) of the cost of proved oil and gas properties is calculated using the unit-of production method. Our DD&A rate and expense are the composite of numerous individual field calculations. There are several factors that can impact our composite DD&A rate and expense including, but not limited to, field production profiles, drilling or acquisition of new wells, disposition of existing wells, and reserve revisions (upward or downward) primarily related to well performance and commodity prices, and impairments. Changes in these factors may cause our composite DD&A rate and expense to fluctuate from period to period. DD&A decreased 18% in the first three months of 2019 as compared to the same period in 2018 as a result of a lower depletable base.

 

 

General and administrative expenses increased by 14% or $164,000, in 2019 when compared to 2018 as a result of increased professional fees, legal fees and wages.

 

 

Production Services Segment

 

   

Three Months Ended March 31,

 

In thousands except percentages

 

2019

   

2018

   

 

 vs. 2018

 

Production Services

  $ 9,605     $ 5,763       67

%

Operating expenses

    8,687       5,585       56  

Depreciation

    945       821       15  

General and administrative

    134       209       (36

)

Operating loss

  $ (161

)

  $ (852

)

    81

%

 

 

Our sales revenues from production services operations for the first quarter of 2019 increased by 67% or $3,842,000 when compared to same period in 2018 as a result of the increased demand for our services and related expansion in the market.

 

 

Operating expenses from production services operations for the first quarter of 2019 increased by 56% or $3,102,000 when compared to the same period in 2018 as a result increased operations and related payroll.

 

 

Production service equipment depreciation amounts represent depreciation of production services rigs and auxiliary equipment for our production services subsidiary. The depreciation expenses for the first quarter of 2019 totaled $945,000, an increase of $124,000 compared to the same period in 2018. This increase in depreciation is primarily a result of additional equipment purchases.

 

 

General and administrative expenses from production services operations for the first quarter of 2019 totaled $134,000, a decrease of $75,000 compared to the same period in 2018 which was primarily related to decreased legal and professional fees.

 

Other expenses

 

   

Three Months Ended March 31,

 

In thousands except percentages

 

2019

   

2018

   

▲ vs. 2018

 

Interest expense, net

  $ 1,184     $ 1,217       (3

)%

Loss (gain) on interest rate swap

    333       (865

)

    138  

Gain on sale of equipment

    (2

)

    -       NM  
    $ 1,515     $ 352       330

%

 

Interest expense.  Isramco’s interest expense decreased by 3%, or $33,000, for the three months ended March 31, 2019 compared to the same period of 2018. This decrease was primarily due to lower principal balances outstanding during the first quarter of 2019 compared to 2018.

 

Unrealized loss (gain) on interest rate swaps. For the first quarter of 2018 we recorded a loss as a result of changes in fair value of our derivative contract in the amount of $333,000, comprised of a cash settlement gain of $38,000 and loss of $371,000 as a result of changes in the fair value of such contract. In the first quarter of 2018 we recorded a gain as a result of changes in fair value of our derivative contract in the amount of $865,000, comprised of a cash settlement loss of $195,000 and gain of $1,060,000 as a result of changes in the fair value of such contract.

 

 

Adjusted EBITDAX. 

 

To assess the operating results of Isramco, management analyzes income from operations before income taxes, interest expense, exploration expense, unrealized gain (loss) on derivative contracts and DD&A expense and impairments (“Adjusted EBITDAX”). Adjusted EBITDAX is not a GAAP measure. Isramco’s definition of Adjusted EBITDAX excludes exploration expense because exploration expense is not an indicator of operating efficiency for a given reporting period, but rather is monitored by management as a part of the costs incurred in exploration and development activities. Similarly, Isramco excludes DD&A expense and impairments from Adjusted EBITDAX as a measure of segment operating performance because capital expenditures are evaluated at the time capital costs are incurred. The Company’s definition of Adjusted EBITDAX also excludes interest expense to allow for assessment of segment operating results without regard to Isramco’s financing methods or capital structure. The Company believes that adjusted EBITDAX is a widely accepted financial indicator of a company’s ability to incur and service debt, fund capital expenditures and make payments on its long term loans. Management believes that the presentation of Adjusted EBITDAX provides information useful in assessing the Company’s financial condition and results of operations.

 

However, Adjusted EBITDAX, as defined by Isramco, may not be comparable to similarly titled measures used by other companies. Therefore, Isramco’s consolidated Adjusted EBITDAX should be considered in conjunction with income (loss) from operations and other performance measures prepared in accordance with GAAP, such as operating income or cash flow from operating activities. Adjusted EBITDAX has important limitations as an analytical tool because it excludes certain items that affect income from continuing operations and net cash provided by operating activities. Adjusted EBITDAX should not be considered in isolation or as a substitute for an analysis of Isramco’s results as reported under GAAP. Below is a reconciliation of consolidated Adjusted EBITDAX to income (loss) from operations before income taxes.

 

   

Three Months Ended March 31,

 

In thousands except percentages

 

2019

   

2018

 

Income from operations before income taxes

  $ 5,497     $ 6,312  

Depreciation, depletion and amortization expense

    1,330       1,291  

Unrealized loss (gain) on interest rate swap

    371       (1,060

)

Interest expense

    1,184       1,217  

Accretion expense

    215       230  

Consolidated Adjusted EBITDAX

  $ 8,597     $ 7,990  

 

 

ITEM 3. Quantitative and Qualitative Disclosures about Market Risk

 

Derivative Instruments and Hedging Activity

 

We are exposed to various risks, including risks associated with energy commodity price. If oil and natural gas prices decline significantly, our ability to finance our capital budget and operations could be adversely impacted. We expect energy prices to remain volatile and unpredictable, therefore we have adopted a risk management policy which allows for the use of derivative instruments to provide partial protection against declines in oil and natural gas prices by reducing the risk of price volatility and the affect it could have on our operations. The type of derivative instrument that we typically utilize is swaps. The total volumes which we hedge through the use of our derivative instruments vary from period to period.  Currently, we have no open positions or contracts in place in relation to commodity prices.

 

When such contracts are in place, we are exposed to market risk on our open derivative contracts and counterparty performance risk with respect to our counterparties. However, we usually do not expect such non-performance because our contracts are usually with major financial institutions with investment grade credit ratings.

 

We are also exposed to interest rate risk on our variable interest rate debt. If interest rates increase, our interest expense would increase and our available cash flow would decrease. We continue to monitor our risk exposure as we incur future indebtedness at variable interest rates and will look to continue our risk management policy as situations present themselves. Periodically, we look to utilize interest rate swaps to reduce the exposure to market rate fluctuations by converting variable interest rates to fixed interest rates.

 

We account for our derivative activities under the provisions of ASC 815, Derivatives and Hedging (ASC 815). ASC 815 establishes accounting and reporting that every derivative instrument be recorded on the balance sheet as either an asset or liability measured at fair value. The Company has elected not to designate any of its positions for hedge accounting. See Item 1. Consolidated Financial Statements.

 

ITEM 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures.

 

In accordance with Exchange Act Rule 13a-15 and 15d-15, we carried out an evaluation, under the supervision and with the participation of management, including our Co-Chief Executive Officers, our Chief Financial Officer, and our Chief Accounting Officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, our Co-Chief Executive Officer, Chief Financial Officer, and Chief Accounting Officer concluded that our disclosure controls and procedures were effective as of March 31, 2019 to provide reasonable assurance that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Our disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer as appropriate, to allow timely decisions regarding required disclosure.

 

There were no changes in the Company’s internal control over financial reporting that occurred 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

 

As noted above, the Company owns an overriding royalty interest of 1.5375% in the Tamar Field, which will increase to 2.7375% after payout (the “Tamar Royalty”). With regard to the payout of the Tamar Field, a disagreement between the Company and Isramco Negev 2 Limited Partnership has emerged as to what costs should be included in the calculation of payout.  In addition to actual costs for the development of the Tamar Field, Isramco, Negev 2 Limited Partnership has asserted that the following costs should be included in the calculation of payout: (i) Isramco Negev 2 Limited Partnership’s financing costs; (ii) the general and administrative expenses of Isramco Negev 2 Limited Partnership; (iii) the expected decommissioning costs of the Tamar Field; and (iv) expected future payments to be made in respect of the “Sheshinsky Levy” under Israeli law. At the time of initiating arbitration, the Company believed that the total scope of the disagreement was approximately forty-five million dollars ($45,000,000); however, this amount increases each month based on Isramco Negev 2 Limited Partnership’s failure to pay the increased, post-payout overriding royalty of 2.7375%.  Under the terms of the agreements creating the Tamar Royalty, the dispute is subject to arbitration in Israel. The Company believes that the claims of Isramco Negev 2 Limited Partnership are erroneous and contrary to generally accepted industry practice. The Company expects that the matter will be favorably resolved through this arbitration process; however, the Company cannot be assured of a favorable result in this arbitration process. On February 26, 2017, Isramco Negev 2 Limited Partnership reported the dispute concerning the Tamar Royalty in its filing with the stock exchange in Israel. As noted above, this dispute will be resolved through arbitration proceedings. The Company and Isramco Negev 2-LP have arranged to conduct the arbitration through the Center for Arbitration and Dispute Resolution (CADR) in Israel and have agreed upon the appointment of retired judge Itzhak Inbar to preside over the proceeding. The preliminary arbitration hearing in the matter occurred on August 13, 2017. On February 25, 2018, the Company submitted as Statement of Claim outlining the Company’s position with regard to the matter. Currently, the case is in its early stages with the parties expected to complete the discovery process in the coming months. The Company expects the discovery and evidentiary filings in the matter to conclude in 2019, with evidentiary hearings to occur in February of 2020. The Company believes that its interpretation of the agreements governing the creation of the Tamar Royalty is the correct interpretation and, accordingly, intends to vigorously pursue its case in the aforementioned arbitration proceedings.

 

ITEM 1A. Risk Factors

 

           None

 

ITEM 2. Change in Securities & Use of Proceeds

 

           None

 

ITEM 3. Default Upon Senior Securities

 

           None

 

ITEM 4. Removed and Reserved

 

           None

 

ITEM 5. Other Information

 

           None

 

 

ITEM 6. Exhibits

 

Exhibits

 

31.1

Certification of Chief Executive Officer pursuant to Section 31 2 of Sarbanes-Oxley Act

31.2

Certification of Chief Financial Officer pursuant to Section 31 2 of Sarbanes-Oxley Act

31.3

Certification of Chief Accounting Officer pursuant to Section 31 2 of Sarbanes-Oxley Act

32.1

Certification of Chief Executive and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 Of the Sarbanes-Oxley act of 2002

32.2

Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 Of the Sarbanes-Oxley act of 2002

32.3

Certification of Chief Accounting Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 Of the Sarbanes-Oxley act of 2002

101.INS

XBRL Instance Document

101.SCH

XBRL Taxonomy Extension Schema

101.CAL

XBRL Taxonomy Extension Calculation Linkbase

101.DEF

XBRL Taxonomy Extension Definition Linkbase

101.LAB

XBRL Taxonomy Extension Label Linkbase

101.PRE

XBRL Taxonomy Extension Presentation Linkbase

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. 

 

 

ISRAMCO, INC

 

 

 

 

 

Date: MAY 10, 2019

By:

/s/ HAIM TSUFF             

 

 

 

HAIM TSUFF

 

 

 

CO-CHIEF EXECUTIVE OFFICER

 

 

 

(PRINCIPAL EXECUTIVE OFFICER)

 

 

 

 

 

Date: MAY 10, 2019

By:

/s/ EDY FRANCIS      

 

 

 

EDY FRANCIS

 

 

 

CO-CHIEF EXECUTIVE OFFICER &

CHIEF FINANCIAL OFFICER

 

 

 

(PRINCIPAL FINANCIAL OFFICER)

 

 

 

 

 

Date: MAY 10, 2019

By:

/s/ ZEEV KOLTOVSKOY      

 

 

 

ZEEV KOLTOVSKOY      

 

 

 

CHIEF ACCOUNTING OFFICER

 

 

 

(PRINCIPAL ACCOUNTING OFFICER)

 

 

  

32