form10q.htm
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D. C. 20549
FORM
10-Q
(Mark
One)
x
|
Quarterly
report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of
1934
|
For the
quarterly period ended March 31, 2008
o
|
Transition
report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of
1934
|
For the transition period from
______________to
Commission
File Number 1-7908
ADAMS RESOURCES &
ENERGY, INC.
(Exact
name of Registrant as specified in its charter)
Delaware
|
|
74-1753147
|
(State
or other jurisdiction of
incorporation
or organization)
|
|
(I.R.S.
Employer
Identification
No.)
|
4400 Post Oak Pkwy Ste 2700 , Houston,
Texas 77027
|
(Address
of principal executive office & Zip
Code)
|
Registrant's
telephone number, including area code (713)
881-3600
Indicate
by check mark whether the Registrant
(1) has filed all reports required to be
filed by Section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. YES x NO o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definition of “large accelerated filer” “accelerated
filer” and “smaller reporting company” in Rule 126-2 of the Exchange
Act. (Check one)
Large
accelerated filero
Accelerated filero
Non-accelerated filerx Smaller Reporting
Companyo
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). YES o NO x
A total
of 4,217,596 shares of Common Stock were outstanding at May 10,
2008.
PART
1 – FINANCIAL INFORMATION
Item
1. Financial Statements
ADAMS
RESOURCES & ENERGY, INC. AND SUBSIDIARIES
UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In
thousands, except per share data)
|
|
Three
Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
REVENUES:
|
|
|
|
|
|
|
Marketing
|
|
$ |
945,637 |
|
|
$ |
469,141 |
|
Transportation
|
|
|
16,404 |
|
|
|
13,802 |
|
Oil
and gas
|
|
|
3,947 |
|
|
|
3,423 |
|
|
|
|
965,988 |
|
|
|
486,366 |
|
COSTS
AND EXPENSES:
|
|
|
|
|
|
|
|
|
Marketing
|
|
|
940,919 |
|
|
|
465,649 |
|
Transportation
|
|
|
14,687 |
|
|
|
11,909 |
|
Oil
and gas
|
|
|
1,426 |
|
|
|
2,888 |
|
General
and administrative
|
|
|
2,917 |
|
|
|
2,602 |
|
Depreciation,
depletion and amortization
|
|
|
3,038 |
|
|
|
2,491 |
|
|
|
|
962,987 |
|
|
|
485,539 |
|
|
|
|
|
|
|
|
|
|
Operating
earnings
|
|
|
3,001 |
|
|
|
827 |
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
355 |
|
|
|
367 |
|
Interest
expense
|
|
|
(4 |
) |
|
|
(31 |
) |
Earnings
before income tax
|
|
|
3,352 |
|
|
|
1,163 |
|
|
|
|
|
|
|
|
|
|
Income
tax provision
|
|
|
1,141 |
|
|
|
251 |
|
|
|
|
|
|
|
|
|
|
Net
earnings
|
|
$ |
2,211 |
|
|
$ |
912 |
|
|
|
|
|
|
|
|
|
|
EARNINGS
PER SHARE:
|
|
|
|
|
|
|
|
|
Basic
and diluted net earnings
|
|
|
|
|
|
|
|
|
per
common share
|
|
$ |
.52 |
|
|
$ |
.22 |
|
|
|
|
|
|
|
|
|
|
DIVIDENDS
PER COMMON SHARE
|
|
$ |
- |
|
|
$ |
- |
|
The
accompanying notes are an integral part of these financial
statements.
ADAMS
RESOURCES & ENERGY, INC. AND SUBSIDIARIES
UNAUDITED
CONDENSED CONSOLIDATED BALANCE SHEETS
(In
thousands)
|
|
March
31,
|
|
|
December
31,
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
25,957 |
|
|
$ |
23,697 |
|
Accounts
receivable, net of allowance for doubtful
|
|
|
|
|
|
|
|
|
accounts
of $216 and $192, respectively
|
|
|
303,158 |
|
|
|
261,710 |
|
Inventories
|
|
|
21,507 |
|
|
|
14,776 |
|
Fair
value contracts
|
|
|
12,294 |
|
|
|
5,388 |
|
Income
tax receivable
|
|
|
2,153 |
|
|
|
2,554 |
|
Prepayments
|
|
|
5,985 |
|
|
|
3,768 |
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
371,054 |
|
|
|
311,893 |
|
|
|
|
|
|
|
|
|
|
Property
and equipment
|
|
|
116,750 |
|
|
|
110,526 |
|
Less
– accumulated depreciation,
|
|
|
|
|
|
|
|
|
depletion
and amortization
|
|
|
(73,578 |
) |
|
|
(70,828 |
) |
|
|
|
43,172 |
|
|
|
39,698 |
|
Other
assets:
|
|
|
|
|
|
|
|
|
Fair
value contracts
|
|
|
2,631 |
|
|
|
1,563 |
|
Cash
deposits and other
|
|
|
3,988 |
|
|
|
3,921 |
|
|
|
$ |
420,845 |
|
|
$ |
357,075 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
305,474 |
|
|
$ |
252,310 |
|
Accounts
payable – related party
|
|
|
185 |
|
|
|
84 |
|
Fair
value contracts
|
|
|
11,148 |
|
|
|
4,116 |
|
Accrued
and other liabilities
|
|
|
4,078 |
|
|
|
3,707 |
|
Current
deferred income taxes
|
|
|
1,104 |
|
|
|
1,104 |
|
Total
current liabilities
|
|
|
321,989 |
|
|
|
261,321 |
|
|
|
|
|
|
|
|
|
|
Other
liabilities:
|
|
|
|
|
|
|
|
|
Asset
retirement obligations
|
|
|
1,182 |
|
|
|
1,153 |
|
Deferred
income taxes and other
|
|
|
3,700 |
|
|
|
4,063 |
|
Fair
value contracts
|
|
|
2,321 |
|
|
|
1,096 |
|
|
|
|
329,192 |
|
|
|
267,633 |
|
Commitments
and contingencies (Note 5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders’
equity:
|
|
|
|
|
|
|
|
|
Preferred
stock - $1.00 par value, 960,000 shares
|
|
|
|
|
|
|
|
|
authorized,
none outstanding
|
|
|
- |
|
|
|
- |
|
Common
stock - $.10 par value, 7,500,000 shares
|
|
|
|
|
|
|
|
|
authorized,
4,217,596 shares outstanding
|
|
|
422 |
|
|
|
422 |
|
Contributed
capital
|
|
|
11,693 |
|
|
|
11,693 |
|
Retained
earnings
|
|
|
79,538 |
|
|
|
77,327 |
|
Total
shareholders’ equity
|
|
|
91,653 |
|
|
|
89,442 |
|
|
|
$ |
420,845 |
|
|
$ |
357,075 |
|
The
accompanying notes are an integral part of these financial
statements.
ADAMS
RESOURCES & ENERGY, INC. AND SUBSIDIARIES
UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In
thousands)
|
|
Three
Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
PROVIDED BY OPERATIONS:
|
|
|
|
|
|
|
Net
earnings
|
|
$ |
2,211 |
|
|
$ |
912 |
|
Adjustments
to reconcile net earnings to net cash
|
|
|
|
|
|
|
|
|
provided
by operating activities -
|
|
|
|
|
|
|
|
|
Depreciation,
depletion and amortization
|
|
|
3,038 |
|
|
|
2,491 |
|
Gains
on property sales
|
|
|
(22 |
) |
|
|
- |
|
Dry
hole costs incurred
|
|
|
90 |
|
|
|
1,051 |
|
Impairment
of oil and gas properties
|
|
|
197 |
|
|
|
219 |
|
Other,
net
|
|
|
10 |
|
|
|
(18 |
) |
Decrease
(increase) in accounts receivable
|
|
|
(41,448 |
) |
|
|
3,230 |
|
Decrease
(increase) in inventories
|
|
|
(6,731 |
) |
|
|
(1,337 |
) |
Fair
value contracts
|
|
|
283 |
|
|
|
(249 |
) |
Decrease
(increase) in tax receivable
|
|
|
401 |
|
|
|
(754 |
) |
Decrease
(increase) in prepayments
|
|
|
(2,217 |
) |
|
|
(3,601 |
) |
Increase
(decrease) in accounts payable
|
|
|
53,351 |
|
|
|
7,594 |
|
Increase
(decrease) in accrued liabilities
|
|
|
371 |
|
|
|
(4,466 |
) |
Deferred
income taxes
|
|
|
(358 |
) |
|
|
473 |
|
|
|
|
|
|
|
|
|
|
Net
cash provided by operating activities
|
|
|
9,176 |
|
|
|
5,545 |
|
|
|
|
|
|
|
|
|
|
INVESTING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
Property
and equipment additions
|
|
|
(6,885 |
) |
|
|
(4,520 |
) |
Insurance
and tax deposits
|
|
|
(53 |
) |
|
|
(386 |
) |
Proceeds
from property sales
|
|
|
22 |
|
|
|
- |
|
Redemption
of short-term investments
|
|
|
10,000 |
|
|
|
- |
|
Investment
in short-term investments
|
|
|
(10,000 |
) |
|
|
- |
|
|
|
|
|
|
|
|
|
|
Net
cash (used in) investing activities
|
|
|
(6,916 |
) |
|
|
(4,906 |
) |
|
|
|
|
|
|
|
|
|
Increase
in cash and cash equivalents
|
|
|
2,260 |
|
|
|
639 |
|
|
|
|
|
|
|
|
|
|
Cash
at beginning of period
|
|
|
23,697 |
|
|
|
20,668 |
|
|
|
|
|
|
|
|
|
|
Cash
at end of period
|
|
$ |
25,957 |
|
|
$ |
21,307 |
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
paid during the period
|
|
$ |
4 |
|
|
$ |
32 |
|
|
|
|
|
|
|
|
|
|
Income
taxes paid during the period
|
|
$ |
5 |
|
|
$ |
535 |
|
The
accompanying notes are an integral part of these financial
statements
ADAMS
RESOURCES & ENERGY, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED
CONSOLIDATED
FINANCIAL STATEMENTS
Note 1 -
Basis of Presentation
The
accompanying condensed consolidated financial statements are unaudited but, in
the opinion of the Company's management, include all adjustments (consisting of
normal recurring accruals) necessary for the fair presentation of its financial
position at March 31, 2008, its results of operations and its cash flows for the
three months ended March 31, 2008 and 2007. Certain information and note
disclosures normally included in annual financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to Securities and Exchange Commission rules and
regulations. Although the Company believes the disclosures made are
adequate to make the information presented not misleading, it is suggested that
these consolidated financial statements be read in conjunction with the
financial statements, and the notes thereto, included in the Company's latest
annual report on Form 10-K. The interim statement of operations is not
necessarily indicative of results to be expected for a full year.
Note 2 -
Summary of Significant Accounting Policies
Principles
of Consolidation
The
accompanying consolidated financial statements include the accounts of Adams
Resources & Energy, Inc., a Delaware corporation, and its wholly owned
subsidiaries (the "Company") after elimination of all significant intercompany
accounts and transactions. Certain reclassifications have been made
to prior year amounts in order to conform to current year
presentations.
Nature of Operations
The
Company is engaged in the business of crude oil, natural gas and petroleum
products marketing, as well as tank truck transportation of liquid chemicals and
oil and gas exploration and production. Its primary area of operation
is within a 1,000 mile radius of Houston, Texas.
Cash, Cash Equivalents and Auction Rate
Investments
Cash and
cash equivalents include any treasury bill, commercial paper, money market fund
or federal funds with maturity of 30 days or less. Depending on cash
availability, auction rate investments in municipal bonds and bond mutual funds
are also made from time to time. The Company invests in tax-free
municipal securities in order to enhance the after-tax rate of return from
short-term investments of cash. The Company had no auction rate
investments as of March 31, 2008 and December 31, 2007.
Inventories
Crude oil
and petroleum product inventories are carried at the lower of cost or market.
Petroleum products inventory includes gasoline, lubricating oils and other
petroleum products purchased for resale. Petroleum products and crude oil
inventory is valued at average cost. Components of inventory are as
follows (in
thousands):
|
|
March
31,
|
|
|
December
31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Crude
oil
|
|
$ |
19,467 |
|
|
$ |
12,437 |
|
Petroleum
products
|
|
|
2,040 |
|
|
|
2,339 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
21,507 |
|
|
$ |
14,776 |
|
Property
and Equipment
Expenditures
for major renewals and betterments are capitalized, and expenditures for
maintenance and repairs are expensed as incurred. Interest costs
incurred in connection with major capital expenditures are capitalized and
amortized over the lives of the related assets. When properties are retired or
sold, the related cost and accumulated depreciation, depletion and amortization
("DD&A") is removed from the accounts and any gain or loss is reflected in
earnings.
Oil and
gas exploration and development expenditures are accounted for in accordance
with the successful efforts method of accounting. Direct costs of
acquiring developed or undeveloped leasehold acreage, including lease bonus,
brokerage and other fees, are capitalized. Exploratory drilling costs are
initially capitalized until the properties are evaluated and determined to be
either productive or nonproductive. Such evaluations are made on a
quarterly basis. If an exploratory well is determined to be
nonproductive, the capitalized costs of drilling the well are charged to
expense. Costs incurred to drill and complete development wells, including dry
holes, are capitalized. As of March 31, 2008, the Company had no
unevaluated or suspended exploratory drilling costs.
Producing
oil and gas leases, equipment and intangible drilling costs are depleted or
amortized over the estimated recoverable reserves using the units-of-production
method. Other property and equipment is depreciated using the
straight-line method over the estimated average useful lives of three to fifteen
years for marketing, three to fifteen years for transportation and ten to twenty
years for all others.
The
Company periodically reviews long-lived assets for impairment whenever there is
evidence that the carrying value of such assets may not be
recoverable. This consists of comparing the carrying value of the
asset with the asset’s expected future undiscounted cash flows without interest
costs. Estimates of expected future cash flows represent management’s
best estimate based on reasonable and supportable assumptions. Proved
oil and gas properties are reviewed for impairment on a field-by-field
basis. Any impairment recognized is permanent and may not be
restored. For the three-month periods ended March 31, 2008 and 2007,
there were no impairment provisions on producing oil and gas properties. In
addition, on a quarterly basis management evaluates the carrying value of
non-producing properties and unevaluated properties and may deem them impaired
for lack of drilling activity. Accordingly, impairment provisions on
non-producing properties totaling $197,000 and $219,000 were recorded for the
three-month periods ended March 31, 2008 and 2007, respectively.
Other
Assets
Other
assets primarily consist of cash deposits associated with the Company’s business
activities. The Company has established certain deposits to support
its participation in its liability insurance program and such deposits totaled
$3,070,498 and $3,040,498 as of March 31, 2008 and December 31, 2007,
respectively. In addition, the Company maintains certain deposits to
support the collection and remittance of state crude oil severance
taxes. Such deposits totaled $356,000 and $333,000 as of March 31,
2008 and December 31, 2007, respectively.
Revenue
Recognition
Commodity
purchases and sales associated with the Company’s natural gas marketing
activities qualify as derivative instruments under Statement of Financial
Accounting Standards (“SFAS”) No. 133, “Accounting for Derivative Instruments
and Hedging Activities”. Therefore, natural gas purchases and sales
are recorded on a net revenue basis in the accompanying financial
statements. In contrast, a significant portion of crude oil purchases
and sales qualify and have been designated as “normal purchases and
sales”. Therefore, crude oil purchases and sales are primarily
recorded on a gross revenue basis in the accompanying financial
statements. Those purchases and sales of crude oil that do not
qualify as “normal purchases and sales” are recorded on a net revenue basis in
the accompanying financial statements. For “normal purchase and sale”
activities, the Company’s customers are invoiced monthly based on contractually
agreed upon terms and revenue is recognized in the month in which the physical
product is delivered to the customer. Where required, the Company
recognizes fair value or mark-to-market gains and losses related to its natural
gas and crude oil trading activities. A detailed discussion of the Company’s
fair value contracts is included later in this footnote.
Substantially
all of the Company’s petroleum products marketing activity qualify as a “normal
purchase and sale” and revenue is recognized in the period when the customer
physically takes possession and title to the product upon delivery at their
facility. The Company recognizes fair value or mark-to- market gains
and losses on refined product marketing activities that do not qualify as
“normal purchases and sales”.
Transportation
customers are invoiced, and the related revenue is recognized as the service is
provided. Oil and gas revenue from the Company’s interests in
producing wells is recognized as title and physical possession of the oil and
gas passes to the purchaser.
Earnings
Per Share
The Company computes and presents
earnings per share in accordance with SFAS No. 128, “Earnings Per Share”, which
requires the presentation of basic earnings per share and diluted earnings per
share for potentially dilutive securities. Earnings per share are based on the
weighted average number of shares of common stock and potentially dilutive
common stock shares outstanding during the period. The weighted average number
of shares outstanding averaged 4,217,596 for the three-month periods ended March
31, 2008 and 2007. There were no potentially dilutive securities
during those periods in 2008 and 2007.
Share-Based
Payments
During
the periods presented herein, the Company had no stock-based employee
compensation plans, nor any other share-based payment
arrangements.
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ
from those estimates. Examples of significant estimates used in the accompanying
consolidated financial statements include the accounting for depreciation,
depletion and amortization, revenue accruals, oil and gas property impairments,
the provision for bad debts, insurance related accruals, income taxes,
contingencies and valuation of fair value contracts.
Fair
Value Measurements
The
carrying amount reported in the balance sheet for cash and cash equivalents,
accounts receivable and accounts payable approximates fair value because of the
immediate or short-term maturity of these financial instruments.
Fair
value contracts consist of derivative financial instruments as defined under
SFAS No. 133 and such contracts are recorded as either an asset or liability
measured at its fair value. Changes in fair value are recognized immediately in
earnings unless the derivatives qualify for, and the Company elects, cash flow
hedge accounting. The Company had no contracts designated for hedge
accounting under SFAS No. 133 during any current reporting periods.
SFAS No.
157, “Fair Value Measurements”, issued in September 2006
defines fair value, establishes a framework for measuring fair value and expands
disclosures related to fair value measurements. SFAS No. 157
clarifies that fair value should be based on assumptions that market
participants would use when pricing an asset or liability and establishes a fair
value hierarchy of three levels that prioritizes the information used to develop
those assumptions. Currently, for all items presented herein, the
Company utilizes a market approach to valuing its contracts. On a
contract by contract, forward month by forward month basis, the Company obtains
observable market data for valuing its contracts. The data utilized
falls into a fair value hierarchy as defined by SFAS No. 157. The
fair value hierarchy gives the highest priority to quoted prices in active
markets and the lowest priority to unobservable data. The fair value
hierarchy is summarized as follows:
|
Level
1 – quoted prices in active markets for identical assets or liabilities
that may be accessed at the measurement date. Active markets
are those in which transactions for the asset or liability occur in
sufficient frequency and volume to provide pricing information on an
ongoing basis.
|
|
Level
2 – (a) quoted prices for similar assets or liabilities in active markets,
(b) quoted prices for identical assets or liabilities but in markets that
are not actively traded or in which little information is released to the
public, (c) observable inputs other than quoted prices and (d) inputs
derived from observable market
data.
|
|
Level
3 – Unobservable market data inputs for assets or
liabilities.
|
The
Company adopted SFAS No. 157 effective January 1, 2008 and such adoption did not
have a material impact on net asset values. As of March 31, 2008, the
Company’s fair value assets and liabilities are summarized and categorized as
follows (in
thousands):
|
|
|
|
|
|
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
-
Current assets
|
|
$ |
262 |
|
|
$ |
12,032 |
|
|
$ |
- |
|
|
$ |
12,294 |
|
- Long-term
assets
|
|
|
32 |
|
|
|
2,599 |
|
|
|
- |
|
|
|
2,631 |
|
-
Current liabilities
|
|
|
- |
|
|
|
(11,148 |
) |
|
|
- |
|
|
|
(11,148 |
) |
-
Long-term liabilities
|
|
|
- |
|
|
|
(2,321 |
) |
|
|
- |
|
|
|
(2,321 |
) |
Net
Value
|
|
$ |
294 |
|
|
$ |
1,162 |
|
|
$ |
- |
|
|
$ |
1,456 |
|
The
Company’s fair value contracts give rise to market risk, which represents the
potential loss that may result from a change in the market value of a particular
commitment. The Company monitors and manages its exposure to market
risk to ensure compliance with the Company’s risk management policies. Such
policies are regularly assessed to ensure their appropriateness given
management’s objectives, strategies and current market conditions.
Asset
Retirement Obligations
The
Company has recorded a liability for the estimated retirement costs associated
with certain tangible long-lived assets. The estimated fair value of
asset retirement obligations are recorded in the period in which they are
incurred and the corresponding cost capitalized by increasing the carrying
amount of the related long-lived asset. The liability is accreted to its then
present value each period, and the capitalized cost is depreciated over the
useful life of the related asset. If the liability is settled for an amount
other than the recorded amount, a gain or loss is recognized. A
summary of the Company’s asset retirement obligations is presented as follows
(in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
on January 1,
|
|
$ |
1,153 |
|
|
$ |
1,152 |
|
-Liabilities
incurred
|
|
|
5 |
|
|
|
13 |
|
-Accretion
of discount
|
|
|
42 |
|
|
|
50 |
|
-Liabilities
settled
|
|
|
(18 |
) |
|
|
- |
|
-Revisions
to estimates
|
|
|
- |
|
|
|
- |
|
Balance
on March 31,
|
|
$ |
1,182 |
|
|
$ |
1,215 |
|
In
addition to an accrual for asset retirement obligations, the Company maintains
$75,000 in escrow cash, which is legally restricted for the potential purpose of
settling asset retirement costs in accordance with certain state
regulations. Such cash deposits are included in other assets in the
accompanying balance sheet.
New
Accounting Pronouncements
In
February 2007, the Financial Accounting Standards Board “FASB” issued SFAS No.
159, “The Fair Value Option for Financial Assets and Financial Liabilities”. SFAS No. 159
provides an entity with the option to measure certain assets and liabilities and
other items at fair value, with changes in fair value recognized in earnings as
those changes occur. The provisions of SFAS No. 159 do not affect the
fair value measurement of derivative financial instruments under SFAS No. 133 as
shown above. The provisions of SFAS No. 159 became effective
beginning January 1, 2008. Management did not elect the fair value
option for any eligible financial assets or liabilities not already carried at
fair value.
In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities – an amendment of FASB Statement No. 133,” as amended and
interpreted. SFAS No. 161 changes the disclosure requirements for
derivative instruments and hedging activities. Entities are required
to provide enhanced disclosures about (a) how and why an entity uses derivative
instruments, (b) how derivative instruments and related hedged items are
accounted for under SFAS No. 133 and its related interpretations, and (c) how
derivative instruments and related hedged items affect an entity’s financial
position, financial performance, and cash flows. SFAS No. 161 is
effective for financial statements issued for fiscal years and interim periods
beginning after November 15, 2008. Early adoption is
permitted. The Company is currently evaluating the impact the
adoption of SFAS No. 161 will have on its financial statements.
In
February 2008, the FASB issued FASB Staff Position No. FAS 157-2, “Effective
Date of FASB Statement No. 157,” (“FSP FAS No. 157-2”). This Staff Position
amends SFAS No. 157 to delay the effective date of SFAS No. 157 for
non-financial assets and non-financial liabilities until fiscal years beginning
after November 15, 2008, except for items that are recognized or disclosed at
fair value in the financial statements on a recurring basis. The Company is
currently assessing the impact of applying FSP FAS No. 157-2 to its
non-financial assets and liabilities. Future financial statements are
expected to include enhanced disclosures with respect to fair value
measurements.
Note 3 –
Segment Reporting
The
Company is primarily engaged in the business of marketing crude oil, natural gas
and petroleum products as well as tank truck transportation of liquid chemicals
and oil and gas exploration and production. Information concerning
the Company’s various business activities is summarized as follows (in thousands):
|
|
|
|
|
Segment
|
|
|
Depreciation
|
|
|
Property
and
|
|
|
|
|
|
|
Operating
|
|
|
Depletion
and
|
|
|
Equipment
|
|
|
|
Revenues
|
|
|
Earnings (Loss)
|
|
|
Amortization
|
|
|
Additions
|
|
For
the three months ended
|
|
|
|
|
|
|
|
|
|
|
|
|
March
31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing
|
|
|
|
|
|
|
|
|
|
|
|
|
-
Crude Oil
|
|
$ |
895,412 |
|
|
$ |
4,285 |
|
|
$ |
329 |
|
|
$ |
4,369 |
|
-
Natural gas
|
|
|
2,860 |
|
|
|
532 |
|
|
|
40 |
|
|
|
- |
|
-
Refined Products
|
|
|
47,365 |
|
|
|
(615 |
) |
|
|
147 |
|
|
|
61 |
|
Marketing
Total
|
|
|
945,637 |
|
|
|
4,202 |
|
|
|
516 |
|
|
|
4,430 |
|
Transportation
|
|
|
16,404 |
|
|
|
760 |
|
|
|
957 |
|
|
|
350 |
|
Oil
and gas
|
|
|
3,947 |
|
|
|
956 |
|
|
|
1,565 |
|
|
|
2,105 |
|
|
|
|
965,988 |
|
|
|
5,918 |
|
|
$ |
3,038 |
|
|
$ |
6,885 |
|
March
31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
Crude oil
|
|
$ |
430,436 |
|
|
$ |
1,784 |
|
|
$ |
147 |
|
|
$ |
228 |
|
-
Natural gas
|
|
|
3,436 |
|
|
|
1,294 |
|
|
|
15 |
|
|
|
35 |
|
-
Refined products
|
|
|
35,269 |
|
|
|
145 |
|
|
|
107 |
|
|
|
162 |
|
Marketing
Total
|
|
|
469,141 |
|
|
|
3,223 |
|
|
|
269 |
|
|
|
425 |
|
Transportation
|
|
|
13,802 |
|
|
|
726 |
|
|
|
1,167 |
|
|
|
38 |
|
Oil
and gas
|
|
|
3,423 |
|
|
|
(520 |
) |
|
|
1,055 |
|
|
|
4,057 |
|
|
|
$ |
486,366 |
|
|
$ |
3,429 |
|
|
$ |
2,491 |
|
|
$ |
4,520 |
|
Identifiable
assets by industry segment are as follows (in thousands):
|
|
March
31,
|
|
|
December
31,
|
|
|
|
|
|
|
|
|
Marketing
|
|
|
|
|
|
|
-
Crude oil
|
|
$ |
227,442 |
|
|
$ |
186,163 |
|
-
Natural gas
|
|
|
96,778 |
|
|
|
74,585 |
|
-
Refined products
|
|
|
18,480 |
|
|
|
21,844 |
|
Marketing
Total
|
|
|
342,700 |
|
|
|
282,592 |
|
Transportation
|
|
|
19,488 |
|
|
|
18,282 |
|
Oil
and gas
|
|
|
25,777 |
|
|
|
25,267 |
|
Other
|
|
|
32,880 |
|
|
|
30,934 |
|
|
|
$ |
420,845 |
|
|
$ |
357,075 |
|
Intersegment
sales are insignificant. Other identifiable assets are primarily
corporate cash, accounts receivable, and properties not identified with any
specific segment of the Company’s business. All sales by the Company
occurred in the United States.
Segment
operating earnings reflect revenues net of operating costs and depreciation,
depletion and amortization. Segment earnings reconcile to earnings
from continuing operations before income taxes as follows (in thousands):
|
|
Three
months ended
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
operating earnings
|
|
$ |
5,918 |
|
|
$ |
3,429 |
|
-
General and administrative
|
|
|
(2,917 |
) |
|
|
(2,602 |
) |
Operating
earnings
|
|
|
3,001 |
|
|
|
827 |
|
-
Interest income
|
|
|
355 |
|
|
|
367 |
|
-
Interest expense
|
|
|
(4 |
) |
|
|
(31 |
) |
Earnings
before income tax
|
|
$ |
3,352 |
|
|
$ |
1,163 |
|
Note 4 -
Transactions with Affiliates
Mr. K. S.
Adams, Jr., Chairman and Chief Executive Officer, and certain of his family
partnerships and affiliates have participated as working interest owners with
the Company’s subsidiary, Adams Resources Exploration
Corporation. Mr. Adams and such affiliates participate on terms
similar to those afforded other non-affiliated working interest owners. In
recent years, such related party transactions generally result after the Company
has first identified oil and gas prospects of interest. Typically the
available dollar commitment to participate in such transactions is greater than
the amount management is comfortable putting at risk. In such event,
the Company first determines the percentage of the transaction it wants to
obtain, which allows a related party to participate in the investment to the
extent there is excess available. In those instances where there was
no excess availability there has been no related party
participation. Similarly, related parties are not required to
participate, nor is the Company obligated to offer any such participation to a
related or other party. When such related party transactions occur,
they are individually reviewed and approved by the Audit Committee comprised of
the independent directors on the Company’s Board of Directors. During
the first quarter of 2008 and 2007, the Company’s investment commitments totaled
approximately $1.1 million and $3.1 million, respectively, in those oil and gas
projects where a related party was also participating in such
investments. As of March 31, 2008 and December 31, 2007, the Company
owed a combined net total of $184,875 and $84,284, respectively, to these
related parties. In connection with the operation of certain oil and
gas properties, the Company also charges such related parties for administrative
overhead primarily as prescribed by the Council of Petroleum Accountants Society
Bulletin 5. Such overhead recoveries totaled $31,657 and $30,033 for
the three-month periods ended March 31, 2008 and 2007,
respectively.
David B.
Hurst, Secretary of the Company, is a partner in the law firm of Chaffin &
Hurst. The Company has been represented by Chaffin & Hurst since
1974 and plans to use the services of that firm in the
future. Chaffin & Hurst currently leases office space from the
Company. Transactions with Chaffin & Hurst are on the same terms
as those prevailing at the time for comparable transactions with unrelated
entities.
The
Company also enters into certain transactions in the normal course of business
with other affiliated entities including direct cost reimbursement for shared
phone and secretarial services. For the three-month period ended
March 31, 2008 and 2007, the affiliated entities charged the Company $16,015 and
$41,870, respectively, of expense reimbursement and the Company charged the
affiliates $24,222 and $8,016, respectively, for such expense
reimbursements.
Note 5 -
Commitments and Contingencies
In March
2004, a suit styled Le Petit
Chateau De Luxe, et. al. vs Great Southern Oil & Gas Co., et. al. was filed in
the Civil District Court for Orleans Parish, Louisiana against the Company and
its subsidiary, Adams Resources Exploration Corporation, among other
defendants. The suit alleges that certain property in Acadia Parish,
Louisiana was environmentally contaminated by oil and gas exploration and
production activities during the 1970s and 1980s. An alleged amount
of damage has not been specified. Management believes the Company has
consistently conducted its oil and gas exploration and production activities in
accordance with all environmental rules and regulations in effect at the time of
operation. Management notified its insurance carrier about this
claim, and thus far the insurance carrier has declined to offer
coverage. The Company intends to litigate this matter with its
insurance carrier if this matter is not resolved to the Company’s
satisfaction. In any event, management does not believe the outcome
of this matter will have a material adverse effect on the Company’s financial
position or results of operations.
Under
certain of the Company’s automobile and workers compensation insurance policies,
the Company can either receive a return of premium paid or be assessed for
additional premiums up to pre-established limits. Additionally under
the policies in certain instances the risk of insured losses is shared with a
group of similarly situated entities. As of March 31, 2008,
management has appropriately recognized estimated expenses and liability related
to the program.
From time
to time as incidental to its operations, the Company becomes involved in various
lawsuits and/or disputes. Primarily as an operator of an extensive
trucking fleet, the Company is a party to motor vehicle accidents, worker
compensation claims and other items of general liability as would be typical for
the industry. Except as disclosed herein, management of the Company
is presently unaware of any claims against the Company that are either outside
the scope of insurance coverage, or that may exceed the level of insurance
coverage, and could potentially represent a material adverse effect on the
Company’s financial position or results of operations.
Item
2. MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Results of
Operations
Marketing
segment revenues result from sales of crude oil, natural gas and refined
products such as gasoline and diesel fuel. For certain sales
transactions, required reporting is on a gross revenue basis as title passes to
the customer, while other sales transactions are reported on a net revenue basis
(i.e. the commodity acquisition cost is netted against gross sales
value). Marketing segment revenues, operating earnings and
depreciation are presented as follows (in thousands):
|
|
|
|
|
Segment
|
|
|
Depreciation
|
|
|
|
|
|
|
Operating
|
|
|
Depletion
and
|
|
|
|
Revenues
|
|
|
Earnings
|
|
|
Amortization
|
|
Period
ended March 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
Crude Oil
|
|
$ |
895,412 |
|
|
$ |
4,285 |
|
|
$ |
329 |
|
-
Natural gas
|
|
|
2,860 |
|
|
|
532 |
|
|
|
40 |
|
-
Refined Products
|
|
|
47,365 |
|
|
|
(615 |
) |
|
|
147 |
|
Total
|
|
$ |
945,637 |
|
|
$ |
4,202 |
|
|
$ |
516 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period
ended March 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
Crude oil
|
|
$ |
430,436 |
|
|
$ |
1,784 |
|
|
$ |
147 |
|
-
Natural gas
|
|
|
3,436 |
|
|
|
1,294 |
|
|
|
15 |
|
-
Refined products
|
|
|
35,269 |
|
|
|
145 |
|
|
|
107 |
|
Total
|
|
$ |
469,141 |
|
|
$ |
3,223 |
|
|
$ |
269 |
|
Supplemental
volume and price information is as follows:
|
|
Three
Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Field
Level Purchase Volumes – Per day (1)
|
|
|
|
|
|
|
Crude
oil – barrels
|
|
|
63,965 |
|
|
|
58,145 |
|
Natural
gas – mmbtu’s
|
|
|
459,513 |
|
|
|
455,200 |
|
|
|
|
|
|
|
|
|
|
Average
Purchase Price
|
|
|
|
|
|
|
|
|
Crude
Oil – per barrel
|
|
$ |
98.85 |
|
|
$ |
54.43 |
|
Natural
Gas – per mmbtu
|
|
$ |
8.27 |
|
|
$ |
6.89 |
|
_________________
(1) Reflects the volume
purchased from third parties at the oil and gas field level.
Crude oil
revenues and operating earnings increased for the comparative current period
because of an approximate doubling of crude oil prices as shown above. Rising
crude oil prices afforded the opportunity to increase per unit margins, thus
producing improved operating earnings for the current quarter. During
the first quarter of 2008, the average acquisition price of crude oil rose from
the $90 per barrel level in January 2008 to the $105 per barrel level in March
2008. This event produced a first quarter 2008 inventory liquidation
gain of $1,967,000. A similar but lesser event occurred in the first
quarter of 2007 as crude oil prices rose from the $54 per barrel range in
January 2007 to the $60 per barrel range in March 2007 producing a $761,000
inventory liquidation gain. As of March 31, 2008 the Company held
185,553 barrels of crude oil inventory at an average price of $104.91 per
barrel.
Natural
gas sales are reported net of underlying natural gas purchase costs and thus
reflect gross margin. As shown above, such margins were reduced in
the first quarter of 2008 relative to 2007. Such reduction occurred
because the Company’s natural gas marketing personnel were less effective in
capturing margin opportunities as they became available in the marketplace
during 2008.
The
refined products segment operating loss in the first quarter of 2008 occurred
because the rate of increase in the crude oil driven supply cost of gasoline and
diesel fuel exceeded the rate of increase in the market value of such
fuels. As a result, per unit margins narrowed and did not cover fixed
operating expenses. Also, the Company’s supplier of biodiesel fuel failed to
deliver scheduled product resulting in a direct loss to the Company of
approximately $400,000. The product was contracted to the Company at
a fixed price and the Company had entered into an offsetting price protection
agreement (a swap). Although the underlying material did not ship as
scheduled, the Company honored its swap commitment producing the resulting
loss.
Transportation
Transportation
segment revenues, earnings and depreciation are as follows (in thousands):
|
|
Three
Months Ended
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
16,404 |
|
|
$ |
13,802 |
|
|
|
18.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
earnings
|
|
$ |
760 |
|
|
$ |
726 |
|
|
|
4.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
$ |
957 |
|
|
$ |
1,167 |
|
|
|
(17.9 |
)% |
Revenues
are increased for the transportation segment due to strong customer
demand. The Company’s customers are predominately the domestic United
States petrochemical industry, and the belief is the declining value of the
dollar relative to foreign currencies has stimulated demand for the Company’s
services. However, the increase in operating earnings did not keep
pace with the rate of increase for revenues due to increased wage and fuel
operating expenses.
- Oil and Gas
Oil and
gas segment revenues and operating earnings are primarily a function of crude
oil and natural gas prices and volumes. Comparative amounts for
revenues, operating earnings and depreciation and depletion are as follows
(in thousands):
|
|
Three
Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
3,947 |
|
|
$ |
3,423 |
|
|
|
15.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
earnings (loss)
|
|
$ |
956 |
|
|
$ |
(520 |
) |
|
|
283.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and depletion
|
|
$ |
1,565 |
|
|
$ |
1,055 |
|
|
|
48.3 |
% |
The
revenue and earnings improvement for the oil and gas segment is attributable to
increased prices coupled with reduced exploration expenses as shown in the
tables below.
Production
volumes and prices were as follows (in
thousands):
|
|
Three
Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
Crude
Oil
|
|
|
|
|
|
|
Volume
– barrels
|
|
|
11,967 |
|
|
|
17,200 |
|
Average
price per barrel
|
|
$ |
100.63 |
|
|
$ |
56.73 |
|
|
|
|
|
|
|
|
|
|
Natural
gas
|
|
|
|
|
|
|
|
|
Volume
– mcf
|
|
|
287,162 |
|
|
|
335,000 |
|
Average
price per mcf
|
|
$ |
9.55 |
|
|
$ |
7.30 |
|
Exploration
costs were as follows (in
thousands):
|
|
Three
Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
Dry
hole expense
|
|
$ |
90 |
|
|
$ |
1,051 |
|
Prospect
impairments
|
|
|
197 |
|
|
|
219 |
|
Seismic
and geological
|
|
|
173 |
|
|
|
506 |
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
460 |
|
|
$ |
1,776 |
|
During
the first three months of 2008, the Company participated in the drilling of two
successful wells and has an interest in seven wells that were in process on
March 31, 2008. Evaluation on the in-process wells is anticipated
during the second quarter of 2008. Participation in the drilling of
approximately 30 wells is planned for the remainder of 2008 on the Company’s
prospect acreage in Arkansas, Louisiana and Texas.
In
February 2007, the Company, together with its joint interest partners, was
awarded a promote license in the United Kingdom North Sea Blocks 21-1b, 21-2b
and 21-3d. The Company holds a 30 percent equity interest in these
blocks located in the Central Sector of the North Sea. The Company
has two years to confirm an exploration prospect and identify a partner to
finance, on a promoted basis, the drilling of the first well on the
Block. The terms of the license do not include a well
commitment. The Company also acquired an approximate nine percent
equity interest in a promote licensing right to Block 42-27b, located in the
Southern Sector of the U.K. North Sea.
- Outlook
Management
anticipates continued strength for oil and gas segment with a stable trend for
marketing and transportation. However, the risk of a significant
decline in crude oil prices remains a possibility with crude oil currently
valued over $105 per barrel. A significant price decline would affect
crude oil inventory carrying values and would have an adverse impact on
quarterly results.
Liquidity
and Capital Resources
During the first three
months of 2008, net cash provided by operating activities totaled $9,176,000
versus $5,545,000 provided by operations during the first three months of
2007. Management generally balances the cash flow requirements
of the Company’s investment activity with available cash generated from
operations. Over time, cash utilized for property and equipment
additions, tracks with earnings from continuing operations plus the non-cash
provision for depreciation, depletion and amortization. Presently,
management intends to restrict investment decisions to available cash flow.
Significant, if any, additions to debt are not anticipated. A summary of this
relationship follows (in
thousands):
|
|
Three
Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings
|
|
$ |
2,211 |
|
|
$ |
912 |
|
Depreciation, depletion and amortization
|
|
|
3,038 |
|
|
|
2,491 |
|
Property
and equipment additions
|
|
|
(6,885 |
) |
|
|
(4,520 |
) |
|
|
|
|
|
|
|
|
|
Cash
provided by other uses
|
|
$ |
(1,636 |
) |
|
$ |
(1,117 |
) |
Capital
expenditures during the first three months of 2008 included $4,780,000 for
marketing and transportation equipment additions and $2,105,000 in property
additions associated with oil and gas exploration and production
activities. Included in marketing equipment addition was
approximately $3.9 million expended to acquire forty-four used truck-tractor
trailer combinations for use in the Company’s crude oil marketing business in
Michigan, West Texas and New Mexico. For the remainder of 2008, the
Company anticipates expending approximately $5 million on oil and gas
exploration projects to be funded from operating cash flow and available working
capital. In addition, approximately $1.5 million will be expended
toward additional equipment purchases within the Company’s marketing and
transportation businesses with funding from available cash
flow.
-
Banking Relationships
The
Company’s primary bank loan agreement with Bank of America provides for two
separate lines of credit with interest at the bank’s prime rate minus ¼ of one
percent. The working capital loan provides for borrowings up to $5
million based on 80 percent of eligible accounts receivable and 50 percent of
eligible inventories. Available capacity under the line is calculated
monthly and as of March 31, 2008 was established at $5 million. The
oil and gas production loan provides for flexible borrowings subject to a
borrowing base established semi-annually by the bank. The borrowing
base was established at $5 million as of March 31, 2008. The line of
credit loans are scheduled to expire on October 31, 2009, with the then present
balance outstanding converting to a term loan payable in eight equal quarterly
installments. As of March 31, 2008, there was no bank debt
outstanding under the Company’s two revolving credit facilities.
The Bank
of America loan agreement, among other things, places certain restrictions with
respect to additional borrowings and the purchase or sale of assets, as well as
requiring the Company to comply with certain financial covenants, including
maintaining a 1.0 to 1.0 ratio of consolidated current assets to consolidated
current liabilities, maintaining a 3.0 to 1.0 ratio of pre-tax net income to
interest expense, and consolidated net worth in excess of
$61,635,000. Should the Company’s net worth fall below this
threshold, the Company may be restricted from payment of additional cash
dividends on its common stock. The Company is in compliance with these
restrictions.
The
Company’s Gulfmark subsidiary maintains a separate banking relationship with BNP
Paribas in order to support its crude oil purchasing activities. In
addition to providing up to $60 million in letters of credit, the facility also
finances up to $6 million of crude oil inventory and certain accounts receivable
associated with crude oil sales. Such financing is provided on a
demand note basis with interest at the bank’s prime rate plus one
percent. As of March 31, 2008, the Company had $6 million of eligible
borrowing capacity under this facility and no working capital advances were
outstanding. Letters of credit outstanding under this facility
totaled approximately $49.7 million as of March 31, 2008. The letter
of credit and demand note facilities are secured by substantially all of
Gulfmark’s and ARM’s assets. Under this facility, BNP Paribas has the right to
discontinue the issuance of letters of credit without prior notification to the
Company.
The Company’s ARM subsidiary also
maintains a separate banking relationship with BNP Paribas in order to support
its natural gas purchasing activities. In addition to providing up to $25
million in letters of credit, the facility finances up to $4 million of general
working capital needs. Such financing is provided on a demand note
basis with interest at the bank’s prime rate plus one percent. No
working capital advances were outstanding under this facility as of March 31,
2008. Letters of credit outstanding under this facility totaled
approximately $12.5 million as of March 31, 2008. The letter of
credit and demand note facilities are secured by substantially all of Gulfmark’s
and ARM’s assets. Under this facility, BNP Paribas has the right to
discontinue the issuance of letters of credit without prior notification to the
Company.
Critical Accounting Policies
and Use of Estimates
As an
integral part of its marketing operation, the Company enters into certain
forward commodity contracts that are required to be recorded at fair value in
accordance with Statement of Financial Accounting Standards No. 133, “Accounting
for Derivative Instruments and Hedging Activities” and related accounting
pronouncements. Management believes this required accounting, known
as mark-to-market accounting, creates variations in reported earnings and the
reported earnings trend. Under mark-to-market accounting, significant
levels of earnings are recognized in the period of contract initiation rather
than the period when the service is provided and title passes from supplier to
customer. As it affects the Company’s operation, management believes
mark-to-market accounting impacts reported earnings and the presentation of
financial condition in three important ways.
1.
|
Gross
margins, derived from certain aspects of the Company’s ongoing business,
are front-ended into the period in which contracts are
executed. Meanwhile, personnel and other costs associated with
servicing accounts as well as substantially all risks associated with the
execution of contracts are expensed as incurred during the period of
physical product flow and title
passage.
|
2.
|
Mark-to-market
earnings are calculated based on stated contract volumes. A significant
risk associated with the Company’s business is the conversion of stated
contract or planned volumes into actual physical commodity movement
volumes without a loss of margin. Again the planned profit from
such commodity contracts is bunched and front-ended into one period while
the risk of loss associated with the difference between actual versus
planned production or usage volumes falls in a subsequent
period.
|
3.
|
Cash
flows, by their nature, match physical movements and passage of title.
Mark-to-market accounting, on the other hand, creates a divergence between
reported earnings and cash flows. Management believes this
complicates and confuses the picture of stated financial conditions and
liquidity.
|
The
Company attempts to mitigate the identified risks by only entering into
contracts where current market quotes in actively traded, liquid markets are
available to determine the fair value of contracts. In addition,
substantially all of the Company’s forward contracts are less than 18 months in
duration. However, the reader is cautioned to develop a full
understanding of how fair value or mark-to-market accounting creates reported
results that differ from those presented under conventional accrual
accounting.
- Trade
Accounts
Accounts
receivable and accounts payable typically represent the single most significant
assets and liabilities of the Company. Particularly within the
Company’s energy marketing and oil and gas exploration and production
operations, there is a high degree of interdependence with and reliance upon
third parties (including transaction counterparties) to provide adequate
information for the proper recording of amounts receivable or
payable. Substantially all such third parties are larger firms
providing the Company with the source documents for recording trade
activity. It is commonplace for these entities to retroactively
adjust or correct such documents. This typically requires the Company
to either absorb, benefit from, or pass along such corrections to another third
party.
Due to
the volume and the complexity of transactions and the high degree of
interdependence with third parties, this is a difficult area to control and
manage. The Company manages this process by participating in a
monthly settlement process with each of its counterparties. Ongoing
account balances are monitored monthly and the Company attempts to gain the
cooperation of such counterparties to reconcile outstanding
balances. The Company also places great emphasis on collecting cash
balances due and paying only bonafide properly supported claims. In
addition, the Company maintains and monitors its bad debt
allowance. Nevertheless a degree of risk always remains due to the
customs and practices of the industry.
- Oil
and Gas Reserve Estimate
The value
of capitalized costs of oil and gas exploration and production related assets
are dependent on underlying oil and gas reserve estimates. Reserve
estimates are based on many subjective factors. The accuracy of
reserve estimates depends on the quantity and quality of geological data,
production performance data and reservoir engineering data, changing prices, as
well as the skill and judgment of petroleum engineers in interpreting such
data. The process of estimating reserves requires frequent revision
of estimates (usually on an annual basis) as additional information becomes
available. Calculation of estimated future oil and gas revenues are also based
on estimates as to the timing of oil and gas production, and there is no
assurance that the actual timing of production will conform to or approximate
such estimates. Also, certain assumptions must be made with respect to pricing.
The Company’s estimates assume prices will remain constant from the date of the
engineer’s estimates, except for changes reflected under natural gas sales
contracts. There can be no assurance that actual future prices will
not vary as industry conditions, governmental regulation, political conditions,
economic conditions, weather conditions, market uncertainty and other factors
impact the market price for oil and gas.
The
Company follows the successful efforts method of accounting, so only costs
(including development dry hole costs) associated with producing oil and gas
wells are capitalized. Estimated oil and gas reserve quantities are
the basis for the rate of amortization under the Company’s units of production
method for depreciating, depleting and amortizing of oil and gas properties.
Estimated oil and gas reserve values also provide the standard for the Company’s
periodic review of oil and gas properties for impairment.
- Contingencies
In March
2004, a suit styled Le Petit
Chateau De Luxe, et. al. vs Great Southern Oil & Gas Co., et. al. was filed in
the Civil District Court for Orleans Parish, Louisiana against the Company and
its subsidiary, Adams Resources Exploration Corporation, among other
defendants. The suit alleges that certain property in Acadia Parish,
Louisiana was environmentally contaminated by oil and gas exploration and
production activities during the 1970s and 1980s. An alleged amount
of damage has not been specified. Management believes the Company has
consistently conducted its oil and gas exploration and production activities in
accordance with all environmental rules and regulations in effect at the time of
operation. Management notified its insurance carrier about this
claim, and thus far the insurance carrier has declined to offer
coverage. The Company intends to litigate this matter with its
insurance carrier if this matter is not resolved to the Company’s
satisfaction. In any event, management does not believe the outcome
of this matter will have a material adverse effect on the Company’s financial
position or results of operations.
From time
to time, as incident to its operations, the Company becomes involved in various
accidents, lawsuits and/or disputes. Primarily as an operator of an
extensive trucking fleet, the Company may be a party to motor vehicle accidents,
worker compensation claims or other items of general liability as would be
typical for the industry. In addition, the Company has extensive
operations that must comply with a wide variety of tax laws, environmental laws
and labor laws, among others. Should an incident occur, management
would evaluate the claim based on its nature, the facts and circumstances and
the applicability of insurance coverage. To the extent management
believes that such event may impact the financial condition of the Company,
management will estimate the monetary value of the claim and make appropriate
accruals or disclosure as provided in the guidelines of Statement of Financial
Accounting Standards No. 5, “Accounting for Contingencies”.
Item
3. Quantitative and Qualitative Disclosures about Market
Risk
The
Company is exposed to market risk, including adverse changes in interest rates
and commodity prices.
The
Company’s long-term debt facility constitutes floating rate debt. As
a result, the Company’s annual interest costs fluctuate based on interest rate
changes. Because the interest rate on the Company’s long-term debt is
a floating rate, the fair value approximates carrying value. The
Company had no long-term debt as of March 31, 2008. A hypothetical 10
percent adverse change in the floating rate would not have had a material effect
on the Company’s results of operations for the three-month period
ended March 31, 2008.
The
Company’s major market risk exposure is in the pricing applicable to its
marketing and production of crude oil and natural gas. Realized
pricing is primarily driven by the prevailing spot prices applicable to oil and
gas. Commodity price risk in the Company’s marketing operations represents the
potential loss that may result from a change in the market value of an asset or
a commitment. From time to time, the Company enters into forward
contracts to minimize or hedge the impact of market fluctuations on its
purchases of crude oil and natural gas. The Company may also enter into price
support contracts with certain customers to secure a floor price on the purchase
of certain supply. In each instance, the Company locks in a separate matching
price support contract with a third party in order to minimize the risk of these
financial instruments. Substantially all forward contracts fall
within a six-month to one-year term with no contracts extending longer than
three years in duration. The Company monitors all commitments, positions and
endeavors to maintain a balanced portfolio.
Certain
forward contracts are recorded at fair value, depending on management’s
assessments of numerous accounting standards and positions that comply with
generally accepted accounting principles. The fair value of such contracts is
reflected on the balance sheet as fair value assets and liabilities. The
revaluation of fair value contracts is recognized on a net basis in the
Company’s results of operations. See discussion under “Fair Value
Contracts” in Note 1 to the Unaudited Condensed Consolidated Financial
Statements.
Historically,
prices received for oil and gas production have been volatile and
unpredictable. Price volatility is expected to
continue. From January 1, 2008 through March 31, 2008 natural gas
price realizations ranged from a monthly low of $7.65 per mmbtu to a monthly
high of $8.97 per mmbtu. Oil prices ranged from a monthly low of
$93.29 per barrel to a monthly high of $106.24 per barrel during the same
period. A hypothetical 10 percent adverse change in average natural
gas and crude oil prices, assuming no changes in volume levels, would have
reduced earnings before income taxes by approximately $2,341,000 for the
three-month period ended March 31, 2008.
Forward-Looking
Statements—Safe Harbor Provisions
This
report for the period ended March 31, 2008 contains certain forward-looking
statements intended to be covered by the safe harbors provided under Federal
securities law and regulation. To the extent such statements are not
recitations of historical fact, forward-looking statements involve risks and
uncertainties. In particular, statements under the captions (a)
Management’s Discussion and Analysis of Financial Condition and Results of
Operations, (b) Liquidity and Capital Resources, (c) Critical Accounting
Policies and Use of Estimates, (d) Quantitative and Qualitative Disclosures
about Market Risk, (e) Income Taxes, (f) Fair Value Contracts and (g)
Commitments and Contingencies among others, contain forward-looking statements.
Where the Company expresses an expectation or belief of future results or
events, such expression is made in good faith and believed to have a reasonable
basis in fact. However, there can be no assurance that such expectation or
belief will actually result or be achieved.
A number
of factors could cause actual results or events to differ materially from those
anticipated. Such factors include, among others, (a) general economic
conditions, (b) fluctuations in hydrocarbon prices and margins, (c) variations
between crude oil and natural gas contract volumes and actual delivery volumes,
(d) unanticipated environmental liabilities or regulatory changes, (e)
counterparty credit default, (f) inability to obtain bank and/or trade credit
support, (g) availability and cost of insurance, (h) changes in tax laws, (i)
the availability of capital, (j) changes in regulations, (k) results of current
items of litigation, (l) uninsured items of litigation or losses, (m)
uncertainty in reserve estimates and cash flows, (n) ability to replace oil and
gas reserves, (o) security issues related to drivers and terminal facilities,
(p) commodity price volatility, (q) demand for chemical based trucking
operations and (r) successful completion of drilling activity. For
more information, see the discussion under Forward-Looking Statements in the
annual report on Form 10-K for the year ended December 31, 2007.
Item
4. Disclosure Controls and Procedures
The
Company maintains “disclosure controls and procedures” (as defined in Rule
13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934, as
amended (the “Exchange Act”) that are designed to ensure that information
required to be disclosed in the reports that the Company files or submits under
the Exchange Act are recorded, processed, summarized and reported within the
time periods specified in the SEC’s rules and forms and is accumulated and
communicated to management, including the Company’s Chief Executive Officer and
Chief Financial Officer, as appropriate, to allow timely discussions regarding
required disclosure. As of the end of the period covered by this
quarterly report, an evaluation was carried out under the supervision and with
the participation of the Company's management, including the Company’s Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of the Company’s disclosure controls and
procedures. Based upon that evaluation, the Chief Executive Officer
and the Chief Financial Officer concluded that the design and operation of these
disclosure controls and procedures were effective.
During
the Company’s first fiscal quarter, there have not been any changes in the
Company’s internal controls over financial reporting (as defined in Rules
13a-13(f) and 15d-15(f) of the Exchange Act) 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.
In March
2004, a suit styled Le Petit
Chateau De Luxe, et. al. vs Great Southern Oil & Gas Co., et. al. was filed in
the Civil District Court for Orleans Parish, Louisiana against the Company and
its subsidiary, Adams Resources Exploration Corporation, among other
defendants. The suit alleges that certain property in Acadia Parish,
Louisiana was environmentally contaminated by oil and gas exploration and
production activities during the 1970s and 1980s. An alleged amount
of damage has not been specified. Management believes the Company has
consistently conducted its oil and gas exploration and production activities in
accordance with all environmental rules and regulations in effect at the time of
operation. Management notified its insurance carrier about this
claim, and thus far the insurance carrier has declined to offer
coverage. The Company intends to litigate this matter with its
insurance carrier if this matter is not resolved to the Company’s
satisfaction. In any event, management does not believe the outcome
of this matter will have a material adverse effect on the Company’s financial
position or results of operations.
From time
to time as incident to its operations, the Company becomes involved in various
lawsuits and/or disputes. Primarily as an operator of an extensive
trucking fleet, the Company may be a party to motor vehicle accidents, worker
compensation claims or other items of general liability as would be typical for
the industry. Except as disclosed herein, management of the Company
is presently unaware of any claims against the Company that are either outside
the scope of insurance coverage, or that may exceed the level of insurance
coverage, and could potentially represent a material adverse effect on the
Company’s financial position or results of operations.
|
Item
1A. - There have been no material changes in the Company’s risk factors
from those disclosed in the 2007 Form
10-K.
|
Item 3. -
None
Item 4. -
None
Item 5. –
None
Item
6. Exhibits
31.1
|
Certification
of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
|
|
|
31.2
|
Certification
of Chief Financial officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
|
|
|
32.1
|
Certification
of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley
of 2002
|
|
|
32.2
|
Certification
of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
|
|
|
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.
|
ADAMS
RESOURCES & ENERGY, INC
|
|
(Registrant)
|
|
|
|
|
|
|
Date: May
13, 2008
|
By /s/K. S. Adams, Jr.
|
|
K.
S. Adams, Jr.
|
|
Chief
Executive Officer
|
|
|
|
|
|
By
/s/Frank T.
Webster
|
|
Frank
T. Webster
|
|
President
& Chief Operating Officer
|
|
|
|
|
|
By /s/Richard B. Abshire
|
|
Richard
B. Abshire
|
|
Chief
Financial Officer
|
EXHIBIT
INDEX
Exhibit
|
|
Number
|
Description
|
|
|
31.1
|
Certificate
of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
|
|
|
31.2
|
Certificate
of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
|
|
|
32.1
|
Certificate
of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
|
|
|
32.2
|
Certificate
of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
|