UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
CHECK ONE
|X| Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of
1934 for the quarterly period ended September 30, 2007
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 I.R.S. Employer Number
Incorporation or Organization)
4801 Woodway Drive, HOUSTON, TX 77056
(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 Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes |X| No |_|
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer.
Large accelerated filer |_| Accelerated filer |_| Non-accelerated filer |X|
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes |_| No |X|
The number of shares outstanding of the registrant's Common Stock as November
14, 2007 was 2,717,691.
INDEX
Page
----
PART I - FINANCIAL INFORMATION:
Item 1. Financial Statements
Consolidated Balance Sheets at September 30, 2007 and
December 31, 2006 1
Consolidated Statements of Operations for the three and nine
months ended September 30, 2007 and 2006 2
Consolidated Statements of Cash Flows for the nine months ended
September 30, 2007 and 2006 3
Notes to Consolidated Financial Statements 4
Item 2. Management's discussion and analysis of Financial Condition and
Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures about Market Risk 14
Item 4. Controls and Procedures 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 1A. Risk Factors 16
Item 2. Changes in Securities and Use of Proceeds and Issuer Purchases of
Equity Securities 16
Item 3. Defaults upon senior securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 17
Item 6. Exhibits 17
Signatures 18
I
FORWARD LOOKING STATEMENTS
CERTAIN STATEMENTS MADE IN THIS QUARTERLY REPORT ON FORM 10-Q ARE
"FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995. FORWARD-LOOKING STATEMENTS CAN BE IDENTIFIED BY
TERMINOLOGY SUCH AS "MAY", "WILL", "SHOULD", "EXPECTS", "INTENDS",
"ANTICIPATES", "BELIEVES", "ESTIMATES", "PREDICTS", OR "CONTINUE" OR THE
NEGATIVE OF THESE TERMS OR OTHER COMPARABLE TERMINOLOGY AND INCLUDE, WITHOUT
LIMITATION, STATEMENTS BELOW REGARDING EXPLORATION AND DRILLING PLANS, FUTURE
GENERAL AND ADMINISTRATIVE EXPENSES, FUTURE GROWTH, FUTURE EXPLORATION, FUTURE
GEOPHYSICAL AND GEOLOGICAL DATA, GENERATION OF ADDITIONAL PROPERTIES, RESERVES,
NEW PROSPECTS AND DRILLING LOCATIONS, FUTURE CAPITAL EXPENDITURES, SUFFICIENCY
OF WORKING CAPITAL, ABILITY TO RAISE ADDITIONAL CAPITAL, PROJECTED CASH FLOWS
FROM OPERATIONS, OUTCOME OF ANY LEGAL PROCEEDINGS, DRILLING PLANS, THE NUMBER,
TIMING OR RESULTS OF ANY WELLS, INTERPRETATION AND RESULTS OF SEISMIC SURVEYS OR
SEISMIC DATA, FUTURE PRODUCTION OR RESERVES, LEASE OPTIONS OR RIGHTS,
PARTICIPATION OF OPERATING PARTNERS, CONTINUED RECEIPT OF ROYALTIES, AND ANY
OTHER STATEMENTS REGARDING FUTURE OPERATIONS, FINANCIAL RESULTS, OPPORTUNITIES,
GROWTH, BUSINESS PLANS AND STRATEGY. BECAUSE FORWARD-LOOKING STATEMENTS INVOLVE
RISKS AND UNCERTAINTIES, THERE ARE IMPORTANT FACTORS THAT COULD CAUSE ACTUAL
RESULTS TO DIFFER MATERIALLY FROM THOSE EXPRESSED OR IMPLIED BY THESE
FORWARD-LOOKING STATEMENTS. ALTHOUGH THE COMPANY BELIEVES THAT EXPECTATIONS
REFLECTED IN THE FORWARD-LOOKING STATEMENTS ARE REASONABLE, IT CANNOT GUARANTEE
FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS. MOREOVER, NEITHER THE COMPANY NOR
ANY OTHER PERSON ASSUMES RESPONSIBILITY FOR THE ACCURACY AND COMPLETENESS OF
THESE FORWARD-LOOKING STATEMENTS. THE COMPANY IS UNDER NO DUTY TO UPDATE ANY
FORWARD-LOOKING STATEMENTS AFTER THE DATE OF THIS REPORT TO CONFORM SUCH
STATEMENTS TO ACTUAL RESULTS.
II
ISRAMCO INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except for share information)
(Unaudited)
September 30, December 31,
2007 2006
--------- ---------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 2,072 $ 573
Restricted and designated cash 1,501 17,000
Marketable securities, at market 1,323 3,130
Accounts receivable 3,835 403
Prepaid expenses and other current assets 1,923 3,087
Derivative asset -- 1,970
Receivable - sale of subsidiary - Magic -- 2,150
--------- ---------
TOTAL CURRENT ASSETS 10,654 28,313
--------- ---------
Property and equipment, net (successful efforts method
for oil and gas properties) 99,103 12,537
Marketable securities, at market 6,745 5,759
Investment in affiliates 17,365 15,302
Other 117 162
--------- ---------
TOTAL ASSETS $ 133,984 $ 62,073
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 5,292 $ 5,214
Current maturities of long-term debt and short-term debt 6,385 347
Derivative liability 831 --
Short term loan from related party -- 17,000
--------- ---------
TOTAL CURRENT LIABILITIES 12,508 22,561
--------- ---------
LONG-TERM LIABILITIES
Long-term debt 25,700 --
Long-term debt - related party 52,526 --
Asset retirement obligations 1,554 356
Derivative liability - non-current 2,962 --
Deferred income taxes 3,977 4,412
--------- ---------
TOTAL LONG-TERM LIABILITIES 86,719 4,768
--------- ---------
TOTAL LIABILITIES 99,227 27,329
--------- ---------
SHAREHOLDERS' EQUITY
Common stock $0.0l par value; authorized 7,500,000 shares;
issued 2,746,958 shares; outstanding 2,717,691 shares 27 27
Additional paid-in capital 26,240 26,240
Retained earnings 4,184 5,399
Accumulated other comprehensive income 4,470 3,242
Treasury stock, 29,267 shares at cost (164) (164)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY 34,757 34,744
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 133,984 $ 62,073
========= =========
See notes to the consolidated financial statements.
1
ISRAMCO INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except for share information)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
2007 2006 2007 2006
----------- ----------- ----------- -----------
REVENUES:
Oil and gas sales $ 5,877 $ 599 $ 13,528 $ 1,804
Operator fees from related party (16) 26 19 61
Office services to affiliate and other 165 189 547 569
Equity in earnings of unconsolidated affiliates (671) 267 1,598 1,930
----------- ----------- ----------- -----------
Total revenues 5,355 1,081 15,692 4,364
OPERATING EXPENSES:
Lease operating expense and severance tax 2,207 499 5,188 898
Depreciation, depletion, amortization and impairment 1,699 8 4,384 295
Accretion expense 38 15 82 52
Exploration costs 286 35 321 125
Operator expense -- 178 -- 554
General and administrative 739 293 2,066 1,075
----------- ----------- ----------- -----------
Total operating expenses 4,969 1,028 12,041 2,999
----------- ----------- ----------- -----------
Operating income 386 53 3,651 1,365
OTHER INCOME AND (EXPENSE):
Interest income 51 73 533 370
Unrealized gain (loss) on marketable securities (280) 73 229 885
Realized gain on sale of investment and capital gain 6 -- 1,653 --
Interest expense (1,847) (3) (5,024) (78)
Gain (loss) from swap transactions, net 678 16 (2,919) 609
Net gain on legal settlement and other 36 -- 36 2,565
----------- ----------- ----------- -----------
Total other income and (expense) (1,356) 159 (5,492) 4,351
----------- ----------- ----------- -----------
Income (loss) before income taxes (970) 212 (1,841) 5,716
Income taxes benefit (expense) 323 (101) 626 (959)
----------- ----------- ----------- -----------
Income (loss) from continuing operations (647) 111 (1,215) 4,757
Income (loss) from discontinued operation, net of tax -- 471 -- (2,715)
----------- ----------- ----------- -----------
Net income (loss) $ (647) $ 582 $ (1,215) $ 2,042
=========== =========== =========== ===========
Basic and diluted income (loss) per share:
Continuing operations $ (0.24) $ 0.04 $ (0.45) $ 1.75
Discontinued operations -- 0.17 -- (1.00)
----------- ----------- ----------- -----------
Net income (loss) $ (0.24) $ 0.21 $ (0.45) $ 0.75
=========== =========== =========== ===========
Weighted average number of shares
outstanding - basic and diluted 2,717,691 2,717,691 2,717,691 2,717,691
=========== =========== =========== ===========
See notes to the consolidated financial statements
2
ISRAMCO INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Month Ended September 30,
------------------------------
2007 2006
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (1,215) $ 2,042
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Discontinued operations -- 2,715
-------- --------
Income (loss) from continuing operations (1,215) 4,757
Depreciation, depletion amortization and impairment 4,384 310
Accretion expense 82 52
Unrealized gain on marketable securities (333) (367)
Unrealized (gain) loss on derivative contracts 5,740 (609)
Equity in earnings of unconsolidated affiliates (1,189) (676)
Deferred taxes (1,069) 560
Realized gain on sale of investment and capital gain (1,664) --
Changes in components of working capital and
other liabilities:
Accounts receivable (3,432) (95)
Prepaid expenses and other current assets 95 (38)
Accounts payable and accrued liabilities (1,542) 2,245
Other liabilities (35) --
-------- --------
Net cash provided by (used in) operating activities
Continuing operations (178) 6,139
Discontinued operations -- 348
-------- --------
Net cash provided by (used in) operating activities (178) 6,487
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in affiliate -- (1,197)
Addition to property and equipment, net (87,082) (3,123)
Proceeds from restricted deposit 15,499 --
Proceeds from sale of subsidiary - Magic 2,150 --
Proceeds from sale of gas properties and equipment 36 --
Proceeds from sale of other investment 1,670 --
Purchase of marketable securities (740) (1,373)
Proceeds from sale of marketable securities 2,880 2,435
-------- --------
Continuing operations (65,587) (3,258)
Discontinued operations -- (8)
-------- --------
Net cash used in investing activities (65,587) (3,266)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from loans - related parties 35,526 --
Proceeds from long-term debt 35,300 --
Repayment of loan (5,533) (120)
Repayment on bank loans, net 1,971 --
-------- --------
Continuing operations 67,264 (120)
Discontinued operations -- (720)
-------- --------
Net cash provided by (used in) financial activities 67,264 (840)
-------- --------
Net increase (decrease) in cash and cash equivalents 1,499 2,381
Cash and cash equivalents-beginning of period 573 1,249
-------- --------
Cash and cash equivalents-end period $ 2,072 $ 3,630
======== ========
Supplemental cash flow information
Interest paid $ 1,377 $ 275
Income taxes paid -- --
Non-cash disclosures
Property and equipment included in accounts payable $ 1,369 --
See notes to the consolidated financial statements
3
ISRAMCO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
As used in these financial statements, the terms "Company" and "Isramco" refer
to Isramco, Inc. and subsidiaries.
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q. accordingly, they
do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion
of Management, all adjustments (consisting of only normal recurring adjustments)
considered necessary for a fair presentation have been included. Results for the
nine month period ended September 30, 2007 are not necessarily indicative of the
results that may be expected for the year ended December 31, 2007. For further
information, refer to the consolidated financial statements and footnotes
thereto included in Isramco's Annual Report on Form 10-K for the fiscal year
ended December 31, 2006.
Certain re-classification of prior year amounts has been made to conform to
current presentation.
On March 2, 2007 (the "Acquisition Date"), Isramco purchased certain oil and gas
properties located in Texas and New Mexico from Five States Energy Company, LLC
for an aggregate preliminary purchase price of $92 million (before adjustments
as defined in the agreement). Although the acquisition was closed on March 2,
2007, the effective dated of the purchase was determined to be October 1, 2006
(the "Effective Date"). Accordingly, the Company is entitled to the net
revenues, less direct operating expenses, of the acquired properties from the
Effective Date through the Acquisition Date. This will result in an adjustment
to the preliminary purchase price. These financial statements reflect the assets
acquired and operations related to those assets from the Acquisition Date
through September 30, 2007.
NOTE 2 - CONSOLIDATION
The consolidated financial statements include the accounts of Isramco, its
direct and indirect non U.S. based wholly-owned subsidiaries Isramco Oil and Gas
Ltd. ("Oil and Gas") and its U.S. based wholly-owned subsidiaries: Jay
Petroleum, L.L.C. ("Jay Petroleum"), Jay Management L.L.C. ("Jay Management"),
IsramTec Inc. ("IsramTec") and Isramco Energy LLC. Inter company balances and
transactions have been eliminated in consolidation.
NOTE 3 - NEW ACCOUNTING PRONOUNCEMENTS
In June 2006, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes, an
interpretation of FASB Statement No. 109" (FIN 48). This Interpretation provides
guidance on recognition, classification and disclosure concerning uncertain tax
liabilities. The evaluation of a tax position requires recognition of a tax
benefit if it is more likely than not it will be sustained upon examination. We
adopted this Interpretation effective January 1, 2007. The adoption did not have
a material impact on our consolidated financial statements.
NOTE 4 - OIL AND GAS PROPERTIES
Isramco follows the "successful efforts" method of accounting for its oil and
gas properties. Under this method of accounting, all property acquisition costs
and costs of exploratory and development wells are capitalized when incurred,
pending determination of whether the well has found proved reserves. If an
exploratory well has not found proved reserves, the costs of the well are
charged to expense. The costs of development wells are capitalized whether
successful or unsuccessful. Geological and geophysical costs and the costs of
carrying and retaining undeveloped properties are expensed as incurred.
NOTE 5 - TRANSACTION WITH FIVE STATES
On March 2, 2007, Isramco purchased certain oil and gas properties located in
Texas and New Mexico from Five States Energy Company, LLC for an aggregate
preliminary purchase price of $92 million (in addition see Note 1).
According to an engineering report prepared by an independent consulting
company relating to the properties purchased, the estimated proved developed
producing reserves are 1,447,161 net barrels of oil and 20,078,174 net
MMCF's of natural gas and 1,305,705 net of liquid products.
To fund the purchase, we obtained loans from our parent Naphtha Israel Petroleum
Corp. Ltd. (including through its wholly owned subsidiary IOC-Israel Oil Company
Ltd) in an aggregate principle amount of $42 million. In addition, we obtained a
$7 million loan from J.O.E.L Jerusalem Oil Exploration Ltd, which is a related
party, and a $35.3 million line of credit from Wells Fargo. (see Note 7) The
balance of the purchase was funded from working capital.
4
The following table summarizes the preliminary estimated fair values of assets
that Isramco acquired and the liabilities assumed in connection with the
acquisition of the Five States properties:
(in thousands)
Oil and gas properties (after adjustments) $ 86,309
Asset retirement obligation (1,166)
--------
Net asset acquired $ 85,143
========
The following unaudited pro forma information assumes the acquisition of the
Five States properties occurred as of January 1, 2006.
The pro forma results are not necessarily indicative of what actually would have
occurred had the acquisition been in effect for the period presented.
(in thousands, except for share data) AS
REPORTED PRO FORMA
Nine months ended September 30, 2007:
-------------------------------------
Revenues $ 15,692 $ 19,063
Net income (loss) (1,215) 820
Loss per share - basic and diluted
Continuing operations $ (0.45) $ 0.30
Discontinued operations -- --
-------- ---------
Total $ (0.45) $ 0.30
======== =========
Nine months ended September 30, 2006:
-------------------------------------
Revenues $ 4,364 $ 21,660
Net income 2,042 1,813
Income (loss) per share - basic and diluted
Continuing operations $ 1.75 $ 1.66
Discontinued operations (1.00) (1.00)
-------- ---------
Total $ 0.75 $ 0.66
======== =========
Three months ended September 30, 2006:
--------------------------------------
Revenues $ 1,081 $ 6,932
Net income 582 743
Income per share - basic and diluted
Continuing operations $ 0.04 $ 0.06
Discontinued operations 0.17 0.21
-------- ---------
Total $ 0.21 $ 0.27
======== =========
5
NOTE 6 - DERIVATIVE CONTRACTS
Following the closing of Five States transaction (see Note 5), Isramco signed
swap agreements with Wells Fargo Bank to secure its future oil and
gas prices as follows:
Swap contracts to sell 398,918 barrels of crude oil during 46 months commencing
March 2007 for a total consideration of $25.4 million. Swap contracts to sell
29,609,026 MMBTU of natural gas during 46 months commencing March 2007 for a
total consideration of $29.6 million.
The following is the Company's open swap contracts positions at September 30,
2007:
OIL
==============================================================================
MONTHLY AVERAGE NUMBER TOTAL
QUANTITY FUTURE OF QUANTITY
BARRELS PRICE YEAR MONTHS BARRELS TOTAL AMOUNT
------------------------------------------------------------------------------
4,000 $ 62.90 2007 3 12,000 $ 754,800
4,000 65.08 2008 12 48,000 3,123,960
3,700 64.97 2009 12 44,400 2,884,680
2,700 63.30 2010 12 32,400 2,050,920
6,341 62.47 2007 3 19,023 1,188,367
5,516 64.70 2008 12 66,192 4,282,622
6,096 64.55 2009 12 73,152 4,721,962
5,447 63.80 2010 12 65,364 4,170,223
1,000 66.05 2007 3 3,000 198,150
1,000 68.46 2008 12 12,000 821,520
---------------------------------
Total 375,531 $ 24,197,204
=================================
GAS
=============================================================================
MONTHLY AVERAGE NUMBER TOTAL
QUANTITY FUTURE OF QUANTITY
MMBTU PRICE YEAR MONTHS MMBTU TOTAL AMOUNT
-----------------------------------------------------------------------------
101,167 $ 8.08 2007 3 303,501 $ 2,450,913
100,876 8.29 2008 12 1,210,512 10,036,598
100,874 7.85 2009 12 1,210,488 9,496,392
79,286 7.49 2010 12 951,432 7,126,226
20,000 7.87 2007 3 60,000 471,900
13,000 8.37 2008 12 156,000 1,304,940
--------------------------------
Total 3,891,933 $ 30,886,969
================================
Isramco recognized a loss of $2,919,000 for the nine months ended September 30,
2007 and a gain of $609,000 for the nine months ended September 30, 2006 related
to the swap agreements.
NOTE 7 - DEBT
In connection with the acquisition of the Five States properties (see Note 5),
we obtained the following financing:
Pursuant to a Loan Agreement dated as of February 27, 2007 (the "Loan
Agreement"), Isramco obtained a loan from Naphtha, its parent company, in the
aggregate principal amount of $18.5 million. The outstanding principal amount of
the loan accrues interest at per annum rate equal to the London Inter-bank
Offered Rate (LIBOR) plus 5.5%, not to exceed 11% per annum. Interest is payable
at the end of each loan year. Principal plus any accrued and unpaid interest are
due and payable on February 26, 2014. Interest after the maturity date accrues
at the per annum rate of LIBOR plus 12% until paid in full. At any time, Isramco
is entitled to prepay the outstanding amount of the loan without penalty or
prepayment. To secure its obligations that may be incurred under the Loan
Agreement, Isramco agreed to grant to Naphtha a security interest in certain
specified properties held by Jay Petroleum, its wholly owned subsidiary. Naphtha
can accelerate the loan and exercise its rights under the collateral upon the
occurrence of certain specified events of default. Mr. Jackob Maimon, Isramco's
president and director is a director of Naphtha and Mr. Haim Tsuff, Isramco's
Chief Executive Officer and Chairman is a controlling shareholder of Naphtha.
6
Pursuant to a Loan Agreement dated as of February 27, 2007 (the "Second Loan
Agreement") Isramco obtained a loan from Naphtha, in the principal amount of
$11.5 million, repayable at the end of seven years. Interest accrues at a per
annum rate of LIBOR plus 6%. At any time Isramco can make prepayments without
premium or penalty. The Second Loan is unsecured. The other terms of the Second
Loan Agreement are identical to the terms of the Loan Agreement.
Pursuant to a Loan Agreement dated as of February 27, 2007 (the "Third Loan
Agreement ") Isramco obtained a loan from Naphtha, in the principal amount of
$12 million, repayable at the end of five years. Interest accrues at a per annum
rate of LIBOR plus 6%. At any time Isramco can make prepayments without premium
or penalty. The Third Loan is unsecured. The other terms of the Third Loan
Agreement are identical to the terms of the Loan Agreement.
Pursuant to a Loan Agreement dated as of February 26, 2007 Isramco obtained a
loan from J.O.E.L Jerusalem Oil Exploration Ltd, a related party ("JOEL"), in
the principal amount of $7 million, repayable at the end of 3 months. Interest
accrues at a per annum rate of 5.36%. Mr. Jackob Maimon, Isramco's president and
director is a director of JOEL and Mr. Haim Tsuff, Isramco's Chief Executive
Officer and Chairman is a controlling shareholder of JOEL. On May 26, 2007, the
maturity date this loan was extended until July 11, 2007. Pursuant to a loan
agreement dated as of July 11, 2007, the maturity date on this loan was extended
for an additional period of seven years. Interest accrues at a per annum rate of
LIBOR plus 6%. Principal amount is repayable beginning at the end of third year
in five equal installments. At any time Isramco can make prepayments without
premium or penalty. The Loan is unsecured.
On March 2, 2007, Isramco Energy obtained a $35.3 million credit line from Wells
Fargo Bank. Amounts outstanding under the credit line are payable by March 1,
2011. Interest on amounts outstanding accrue at a per annum rate equal to LIBOR
plus 2%. Isramco is required to maintain several financial covenants in
connection with this credit line. The borrowing base for the credit line is
determined periodically by Wells Fargo Bank using engineering reports and other
information provided by Isramco. In addition, Isramco is required to hedge 80%
of expected future volumes for a period of four years. Amounts outstanding under
the credit line are secured by a guarantee from Isramco and a pledge by Isramco
of the shares of Isramco Energy. Additionally, pursuant to an agreement between
Sigma Energy Corporation ("Sigma"), an unrelated party that originated the
transaction with Five States, Isramco and Isramco Energy, Isramco Energy paid to
Sigma on March 2, 2007, the amount of $300,000 and after Payout (as defined in
the agreement with Sigma), Isramco Energy will assign to Sigma a direct
ownership interests equal to 3.75% of the interests acquired by Isramco Energy
under the Five States Purchase and Sale Agreement. During the period, the
borrowing base with Wells Fargo Bank was reduced to $27 million due to lack of
engineering reports. Isramco will pay back the $8.3 milion reduction in six
monthly payments beginning July 1, 2007. As of September 30, 2007 Isramco paid
down approximately $5.8 million. On 30 October, 2007 Isramco provided the bank
an engineering report as required on the Credit agreement. Based on this report
the bank will determine the new borrowing base.
NOTE 8 - DISCONTINUED OPERATION
In March 2004, Isramco purchased a luxury cruise liner for aggregate
consideration of $8,050,000. The vessel, a Bahamas registered ship, contains 270
passenger cabins on nine decks. Isramco leased the vessel to a tour operator for
the period from April 4, 2005 through October 31, 2005 and from April 6 2006
through November 5 2006 at a daily rate of $8,000. Under the lease all
maintenance and operating costs associated with the vessel were borne by the
operator.
Title to the Vessel was in Magic 1 Cruise Line Corp., a British Virgin Islands
corporation and a wholly owned subsidiary of Isramco ("Magic"). Isramco expended
approximately $1.4 million and $1 million in the years 2006 and 2005,
respectively, in respect of the maintenance, repairs, renovation and upkeep of
the vessel. In addition, following management's assessment conducted in April
and May 2006 as part of the preparation of the financial statements for the
first quarter of 2006, management determined that there has been a decrease in
the fair market value of Isramco's investment in the Magic 1 cruise vessel and,
that as a consequence thereof, Isramco believed the investment had been
impaired. Accordingly, Isramco recorded as impairment charge in March 2006 in
the amount of $2,200,000.
On December 31, 2006, Isramco and Chesny Estates Ltd., a British Virgin Islands
corporation, entered into a Share Purchase and Sale Agreement, dated as of
December 31, 2006, pursuant to which Isramco sold to Chesny all of the
outstanding share capital of Magic for a purchase price of $2.15 million. The
purchase included the assumption by Chesny of a loan in the principal amount of
$3.3 million incurred by Isramco in connection with the purchase of Magic.
7
Isramco's decision to sell its holdings in Magic was primarily attributable to
Isramco's decision to focus principally on the oil and gas business. Following
the sale of Magic, Isramco is no longer engaged in the cruise line business.
NOTE 9 - EARNINGS PER SHARE COMPUTATION
Basic and diluted net income/loss per share calculations are presented in
accordance with Financial Accounting Standards Statement 128, and are calculated
on the basis of the weighted average number of common shares outstanding during
the year. Our weighted average number of outstanding share is the same for both
calculating both basic and diluted earnings per share as we did not have any
common stock equivalents outstanding during the period.
NOTE 10 - GEOGRAPHICAL SEGMENT INFORMATION
Isramco's operations for 2007 involve one industry segment - the exploration,
development production and transportation of oil and natural gas. Prior to 2007
Isramco operated in two operating segment - oil and gas activities and holding
and leasing its cruise line vessel. Its current oil and gas activities are
concentrated in the United States and Israel. Operating outside the United
States subjects the company to inherent risks such as a loss of revenues,
property and equipment from such hazards as exploration, nationalization, war
and other political risks, risks of and governmental royalties, renegotiation of
contracts with governmental royalties, renegotiation of contracts with
government entities and change in laws and policies governing operations of
foreign-based companies.
Isramco's oil and gas business is subject to operating risks associated with the
exploration, and production of oil and gas, including blowouts, pollution and
acts of nature that could result in damage to oil and gas wells, production
facilities of formations. In addition, oil and gas prices have fluctuated
substantially in recent years as a result of events outside of Isramco's
control. Isramco does not directly operator the operators. This segment of
Isramco's business is subject to many risks all of which cannot be presently
anticipated, including losses resulting from unexpected repairs and maintenance
and competition.
UNITED CONSOLIDATED
STATES ISRAEL TOTAL
--------- --------- ---------
Identifiable assets at September 30, 2007 $ 97,093 $ 1,977 $ 99,070
Cash and corporate assets 34,914
---------
Total Assets at September 30, 2007 133,984
=========
Identifiable assets at December 31, 2006 10,583 1,954 12,537
Cash and corporate assets 49,536
---------
Total Assets at December 31, 2006 $ 62,073
=========
NINE MONTHS ENDED SEPTEMBER 30, 2007
Sales and other operating revenue $ 13,661 $ 2,031 $ 15,692
Operating expenses (11,089) (952) (12,041)
--------- --------- ---------
Operating profit 2,572 1,079 3,651
Interest income 533
Interest expense (5,024)
Gain on marketable securities and other investments 1,882
Loss from swap transactions (2,919)
Other 36
Income Taxes 626
---------
Net income $ (1,215)
=========
8
NINE MONTHS ENDED SEPTEMBER 30, 2006
Sales and other operating revenue $ 1,915 $ 2,449 $ 4,364
Costs and operating expenses (1,928) (1,071) (2,999)
------- ------- -------
Operating profit (13) 1,378 1,365
Interest income 370
Interest expense (78)
Gain on marketable securities and other investments 885
Gain from swap transactions 609
Net gain on legal settlement 2,565
Income taxes (959)
Discontinued operation (2,715)
-------
Net income $ 2,042
=======
THREE MONTHS ENDED SEPTEMBER 30, 2007
Sales and other operating revenue $ 5,510 $ (155) $ 5,355
Costs and operating expenses (4,711) (258) (4,969)
------- ------- -------
Operating profit 799 (413) 386
Interest income 51
Interest expense (1,847)
Gain on marketable securities and other investments (274)
Loss from swap transactions 678
Other 36
Income Taxes 323
-------
Net loss $ (647)
=======
THREE MONTHS ENDED SEPTEMBER 30, 2006
Sales and other operating revenue $ 596 $ 485 $ 1,081
Costs and operating expenses (394) (634) (1,028)
------- ------- -------
Operating profit 202 (149) 53
Interest income 73
Interest expense (3)
Gain on marketable securities 73
Gain from swap transactions 16
Income taxes (101)
Discontinued operation 471
-------
Net loss $ 582
=======
9
NOTE 11 - COMPREHENSIVE INCOME
Isramco's comprehensive income for the three and nine months period ended
September 30, 2007 and 2006 was as follows:
Three Months Ended Nine Months Ended
September 30 September 30
------------------ ------------------
2007 2006 2007 2006
------- ------- ------- -------
Net income (loss) $ (647) $ 582 $(1,215) $ 2,042
Other comprehensive gain (loss)
Available-for-sale securities (135) (96) 617 8
Foreign currency translation adjustments 669 415 577 311
------- ------- ------- -------
Comprehensive income (loss) $ (113) $ 901 $ (21) $ 2,361
======= ======= ======= =======
10
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, Inc., a Delaware company, is active in the exploration of oil and gas
in Israel and the United States. The Company acts as an operator of certain
leases and licenses and also holds participation interests in certain other
interests. The Company also holds certain non-oil and gas properties.
On March 2, 2007 (the "Acquisition Date"), Isramco purchased certain oil and gas
properties located in Texas and New Mexico from Five States Energy Company, LLC
for an aggregate preliminary purchase price of $92 million (before adjustments
as defined in the agreement). Although the acquisition was closed on March 2,
2007, the effective dated of the purchase was determined to be October 1, 2006
(the "Effective Date"). Accordingly, the Company is entitled to the net
revenues, less direct operating expenses, of the acquired properties from the
Effective Date through the Acquisition Date. This will result in an adjustment
to the preliminary purchase price. These financial statements reflect the assets
acquired and operations related to those assets from the Acquisition Date
through September 30, 2007.
CRITICAL ACCOUNTING POLICIES
In response to the Release No. 33-8040 of the Securities and Exchange
Commission, "Cautionary Advice Regarding Disclosure and Critical Accounting
Policies", the Company identified the accounting principles which it believes
are most critical to the reported financial status by considering accounting
policies that involve the most complex of subjective decisions or assessments.
The Company maintains allowances for doubtful accounts for estimated losses
resulting from the inability of customers to make required payments. If the
financial condition of customers were to deteriorate, resulting in an impairment
of their ability to make payments, additional allowances may be required.
The Company records an investment impairment charge when it believes an
investment has experienced a decline in value that is other than is temporary.
Future adverse changes in market conditions or poor operating results of
underlying investments could result in losses or an inability to recover the
carrying value of the investment that may not be reflected in an investment's
current carrying value, thereby possibly requiring an impairment charge in the
future.
The Company records a valuation allowance to reduce its deferred tax assets to
the amount that is more likely than not to be realized. While the Company has
considered future taxable income and ongoing prudent and feasible tax planning
strategies in assessing the need for the valuation allowance, in the event that
the Company were to determine that it would be able to realize its deferred tax
assets in the future in excess of its net recorded amount, an adjustment to the
deferred tax asset would increase net income in the period such determination
was made.
The Company does not participate in, nor has it created, any off-balance sheet
special purpose entities or other off-balance sheet financing.
The Company records a liability for asset retirement obligation at fair value in
the period in which it is incurred and a corresponding increase in the carrying
amount of the related long live assets.
11
LIQUIDITY AND CAPITAL RESOURCES
The Company finances its operations primarily from cash generated by operations.
During the nine months ended September 30, 2007, our consolidated cash and cash
equivalents increased by $1,499,000 from $573,000 at December 31, 2006 to
$2,072,000 at September 30, 2007. Our restricted and designated cash decreased
from $17,000,000 to $1,501,000 during the same period. The decrease in our
restricted cash is primarily attributable to the use of cash reserves related to
the Five States Acquisition, which was completed in March 2007.
Net cash used by operating activities was $178,000 for the nine months ended
September 30, 2007 compared to $6,487,000 provided by operating activities for
the same period in 2006. The decrease is primarily due to operational cash flows
from the properties acquired in the Five States Acquisition and from
discontinued operations in 2006 that did not exist in 2007.
Net cash used in investing activities for the nine-month period ended September
30, 2007 was $65,587,000 compared to $3,266,000 for the same period in 2006. The
cash used in 2007 period was use is primarily attributable to the Five States
Acquisition, offset by proceeds from a restricted deposit and the sale or
settlement of various investments.
Net cash provided by financing activities was $67,264,000 for the nine months
ended September 30, 2007 compared to net cash used in financing activities of
$840,000 for the same period in 2006. Our financing activities in 2007 primarily
relate to borrowings in connection with the Five States Acquisition.
The Company believes that existing cash balances and cash flows from operating
activities will be sufficient to meet its financing needs. The Company intends
to finance its ongoing oil and gas exploration activities from working capital.
RESULTS OF OPERATIONS
SUMMARY OF EXPLORATION EFFORTS IN THE UNITED STATES
The Company, through its wholly-owned subsidiaries, Isramco Energy LLC ("Isramco
Energy"), Jay Petroleum LLC ("Jay Petroleum") and Jay Management LLC ("Jay
Management"), is involved in oil and gas production in the United States. Jay
Petroleum owns varying working interests in oil and gas wells in Louisiana,
Texas, Oklahoma and Wyoming. Jay Management acts as the operator of certain of
the producing oil and gas interests owned or acquired by Jay Petroleum.
During the nine months ended September 30, 2007, we continued to invest in
drilling activities in the Barnett Shale in North Central Texas (Parker County)
in which we hold a 15% working interests. To date, 22 gas wells have been
drilled of which 11 wells are currently producing 6 wells waiting for pipeline
connection and the rest of the wells are in various stage of completion. As to
September 30, 2007 we invested $8,765,727 in the project. In another acres in
North Central Wise county Texas (2,700 acres), we have completed 3D data
acquiescing and processing and currently we are interpreting the data. The major
objective is the Barnett Shale. We intent to drill an horizontal well during the
year 2008. We hold 50% working Interests in the acres. During the nine months
period we have invested $272,267 in the projects of which $268,746 were expensed
as incurred and was recorded as exploration cost.
12
SUMMARY OF EXPLORATION EFFORTS IN ISRAEL
Hof Permit
The Company was granted 100% working interes in "Hof permit" offshore Israel
(the "Permit"), covering a total area of 98,800 acres. The Company processed and
interpreted 2D seismic data. Based on the results, the Company intends to shoot
high resolution 2D lines in the shallow water. The Company has reached an
agreement with Isramco Negev 2.L.P, for the transfer of 30% working interests in
the Permit in consideration for the payment of 37.5% share of the of the first
$4 million of the operation costs and their working interest share of the
remaining costs of the operations in the Permit.
The Company intends to transfer an additional 50% working interests in the
Permit to third parties, under the same terms, after which the Company shall
hold 20% working interests in the Permit and shall bear no operation costs up to
the first $4 million, in the exploration costs. The Company will serve as the
operator of the Permit.
Shimshon License
The Company was granted 100% working interests in Shimshon License offshore
Israel (the "License"), in a total area 98,800 acres. Based on interpretations
of 3D seismic Data, two prospects were identified.
The Company has reached an agreement with Isramco Negev 2.L.P, for the transfer
of 79% working interests in the License in consideration for overriding
royalties of 5%. The Company intends to transfer an additional 20% working
interests to third parties under the same terms. The Company will serve as the
operator of the License.
Michal&Matan Licenses.
The Company (through its limited partnership Isramco Negev 2) holds 28% working
interest in two offshore licenses .The operator of the licenses is Noble Energy.
The partners have approved a budget of $71 million to drill the "Tamar 1 "well
to a total depth of 16,500 feet. Drilling is expected to begin during the first
quarter of 2008
NINE MONTHS ENDED SEPTEMBER 30, 2007 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2006:
We reported a net loss of $1,215,000 or ($0.45) per share for the nine-month
period ended September 30, 2007 compared to net income of $2,042,000 or $0.75
per share for the same period in 2006. The loss recorded during the nine months
ended September 30, 2007 as compared to the income recorded for the same period
in 2006 is primarily attributable to an aggregate $16,853,000 increase in
interest expense, lease operating expense, depreciation, depletion, amortization
and impairment, and a loss on swap transactions. This was partially offset by a
$11,328,000 increase in revenues and from a one-time non-recurring net gain of
$1.65 million. In addition, we recorded $2,715,000 in loss from discontinued
operations in 2006 that did not exist in 2007.
OIL & GAS REVENUES - During the 2007 period, we recorded $13,528,000 in oil and
gas revenues compared to $1,804,000 in 2006. This increase is primarily due to
the Five States Acquisition, partially offset by a decline in production from
our older oil and gas properties and a shutdown of certain production in one of
our fields due to unanticipated pipeline maintenance.
LEASE OPERATING EXPENSES AND SEVERANCE TAXES - During the 2007 period, we
recorded $5,188,000 in lease operating expenses and severance taxes compared to
$898,000 in 2006. This increase is primarily due to the Five States Acquisition.
DEPRECIATION, DEPLETION, AMORTIZATION AND IMPAIRMENT - Depreciation depletion
and amortization expenses are connected to the producing wells in the United
States. During the 2007 period, we recorded $4,384,000 in depreciation,
depletion, amortization and impairment compared to $295,000 in 2006. This
increase is primarily due to the Five States Acquisition.
GENERAL AND ADMINISTRATIVE - During the 2007 period, we recorded $2,066,000 in
general and administrative compared to $1,074,000 in 2006. This increase is
primarily due to the Five States Acquisition.
INTEREST INCOME - During the 2007 period, we recorded $533,000 in interest
income compared to $370,000 in 2006. This increase is primarily due a restricted
cash deposit invested during the first part of the year.
INTEREST EXPENSE - During the 2007 period, we recorded $5,024,000 in interest
expense compared to $78,000 in 2006. This increase is primarily due to the
increasing of our long - term loans related to the Five States Acquisition.
GAIN ON SALE OF INVESTMENT - In April 2007, IsramTec Inc. a wholly owned
subsidiary of the Company, sold part of its equity interests in a high-tech
company, for aggregate consideration of approximately $1.7 million (net of
commission). As a result of the transaction, the Company recorded a one-time
non-recurring net gain of $1.65 million.
13
EQUITY IN EARNINGS OF UNCONSOLIDATED AFFILIATES - During the 2007 period, we
recorded $1,598,000 in equity in earnings of unconsolidated affiliates compared
to $1,930,000 in 2006. The net income is primarily attributable to the gain of
marketable securities held by the limited partnerships Isramco Negev 2 and
I.O.C. Dead Sea LP, affiliates of the Company.
NET GAIN ON LEGAL SETTLEMENTS - Net Gain on Legal Settlements in 2006 Period is
attributable to the receipt of approximately $3,050,000 million from the
settlement by the Company in February 2006 of certain lawsuits that it
initiated. According to the agreements with the defendants settling these
lawsuits, the Company recorded a net gain of $2,565,000.
THREE MONTHS ENDED SEPTEMBER 30, 2007 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2006:
We reported a net loss of $647,000 or $(0.24) per share for the three months
period ended September 30, 2007 compared to net income of $582,000 or $0.21 per
share for the same period in 2006. The decrease in net income is primarily
attributable to a $5,278,000 increase in revenue from oil and gas sales, offset
by an aggregate $5,243,000 increase in interest expense, lease operating
expense, depreciation, depletion, and amortization and impairment. We recorded
$471,000 in income from discontinued operations in 2006 that did not exist in
2007
OIL & GAS REVENUES - During the 2007 period, we recorded $5,877,000 in oil and
gas revenues compared to $599,000 in 2006. This increase is primarily due to the
Five States Acquisition, partially offset by a decline in production from our
older oil and gas properties and a shutdown of certain production in one of our
fields due to unanticipated pipeline maintenance.
LEASE OPERATING EXPENSES AND SEVERANCE TAXES - During the 2007 period, we
recorded $2,207,000 in lease operating expenses and severance taxes compared to
$499,000 in 2006. This increase is primarily due to the Five States Acquisition.
DEPRECIATION, DEPLETION, AMORTIZATION AND IMPAIRMENT - Depreciation depletion
and amortization expenses are connected to the producing wells in the United
States. During the 2007 period, we recorded $1,699,000 in Depreciation,
depletion, amortization and impairment compared to $8,000 in 2006. This
increase is primarily due to the Five States Acquisition.
GENERAL AND ADMINISTRATIVE - During the 2007 period, we recorded $739,000 in
general and administrative compared to $293,000 in 2006. This increase is
primarily due to the five states acquisition.
EQUITY IN EARNINGS OF UNCONSOLIDATED AFFILIATES - During the 2007 period, we
recorded $(671,000) in equity in earnings of unconsolidated affiliates compared
to $267,000 in 2006. The net loss is primarily attributable to the loss of
marketable securities held by the limited partnerships Isramco Negev 2 and
I.O.C. Dead Sea LP, affiliates of the Company.
INTEREST EXPENSE - During the 2007 period, we recorded $1,847,000 in interest
expense compared to $3,000 in 2006. This increase is primarily due to the
increasing of our long - term loans related to the Five States Acquisition.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risks relating to changes in interest rates and foreign currency
exchanges rates were reported in Item 7A of the Company's Annual Report on Form
10-K for the year ended December 31, 2006. There has been no material change in
these market risks since the end of the fiscal year 2006.
ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. The Company maintains
disclosure controls and procedures that are designed to ensure that information
required to be disclosed in the Company's Exchange Act reports is recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms, and that such information is accumulated and communicated
to management, including our Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow timely decisions regarding required disclosure
based closely on the definition of "disclosure controls and procedures" in Rule
13 a- 14 c.
14
As of the end of the period covered by this report, we carried out an
evaluation, under the supervision and with participation of management,
including our Chief Executive Officer and our Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures. Based on the foregoing, our Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and procedures were
effective.
CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING. During the quarter ended
September 30, 2007, there have been no changes in our internal controls over
financial reporting that have materially affected, or are reasonably likely to
materially affect, these controls.
15
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 1A. RISK FACTORS
The Risk Factors included in the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 2006 have not materially changed.
ITEM 2. CHANGE IN SECURITIES & USE OF PROCEEDS
None
ITEM 3. DEFAULT UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
16
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS
Exhibits
10.1 Employment Agreement dated as of September 1, 2007 between Isramco Inc.
and Edy Francis
31.1 Certification of Chief Executive Officer pursuant to Section 302 of
Sarbanes-Oxley Act
31.1 Certification of Chief Financial Officer pursuant to Section 302 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
32.1 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
20023
17
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: November 14, 2007 BY /S/ Haim Tsuff
-------------------------
Haim Tsuff,
CHIEF EXECUTIVE OFFICER
PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER
DATE: November 14, 2007 BY /S/ Edy Francis
------------------------
Edy Francis,
CHIEF FINANCIAL OFFICER
18