Dune Energy 10-Q 2011
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
For the quarterly period ended June 30, 2011
For the transition period from to
Commission file number 001-32497
DUNE ENERGY, INC.
(Exact name of registrant as specified in its charter)
(Registrants telephone number, including area code)
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 ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act. Yes ¨ No x
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date: 48,821,142 shares of Common Stock, $.001 par value per share, as of August 4, 2011.
Dune Energy, Inc.
Consolidated Balance Sheets
See notes to consolidated financial statements.
Dune Energy, Inc.
Consolidated Statements of Operations
See notes to consolidated financial statements.
Dune Energy, Inc.
Consolidated Statements of Cash Flows
See notes to consolidated financial statements.
DUNE ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1ACCOUNTING POLICIES AND BASIS OF PRESENTATION
Dune Energy, Inc., a Delaware corporation (Dune or the Company), is an independent energy company that was formed in 1998. Since May 2004, Dune has been engaged in the exploration, development, exploitation and production of oil and natural gas. Dune sells its oil and gas production primarily to domestic pipelines and refineries. Its operations are presently focused in the states of Texas and Louisiana.
Dune prepared these financial statements according to the instructions for Form 10-Q. Therefore, the financial statements do not include all disclosures required by generally accepted accounting principles. However, Dune has recorded all transactions and adjustments necessary to fairly present the financial statements included in this Form 10-Q. The adjustments made are normal and recurring. The following notes describe only the material changes in accounting policies, account details or financial statement notes during the first six months of 2011. Therefore, please read these financial statements and notes to the financial statements together with the audited financial statements and notes thereto in our Annual Report on Form 10-K for the year ended December 31, 2010. The income statement for the six months ended June 30, 2011 cannot necessarily be used to project results for the full year.
On June 30, 2010, the Company closed the sale of its South Florence Properties located in Vermilion Parish, Louisiana. In accordance with FASB ASC 360-10 Accounting for the Impairment or Disposal of Long-lived Assets, the results of operations of this divestiture have been reflected as discontinued operations. See Note 8 for additional information regarding discontinued operations.
Loss per share
Basic earnings per share amounts are calculated based on the weighted average number of shares of common stock outstanding during each period. Diluted earnings per share is based on the weighted average numbers of shares of common stock outstanding for the periods, including dilutive effects of stock options, warrants granted and convertible preferred stock. Dilutive options and warrants that are issued during a period or that will expire or are canceled during a period are reflected in the computations for the time they were outstanding during the periods being reported. Since Dune incurred losses for all other periods, the impact of the common stock equivalents would be antidilutive and therefore are not included in the calculation.
Impact of recently issued accounting standards
There were no new accounting pronouncements that had a significant impact on the Companys operating results or financial position.
NOTE 2LIQUIDITY AND GOING CONCERN
The accompanying financial statements have been prepared assuming Dune will continue as a going concern. At June 30, 2011, Dunes cash balance was $21.8 million while the Company also registered a net loss available to common shareholders of $32.2 million for the first six months of fiscal 2011. In addition, as of June 30, 2011, Dune has negative working capital of $325.6 million resulting from the $40 million term loan facility and $296.8 million senior secured notes being classified as current liabilities with maturity dates of March 15, 2012 and June 1, 2012, respectively. Management is and will continue to strive to raise additional capital and/or restructure its debt obligations prior to their due dates. However, should these efforts prove unsuccessful, Dunes ability to continue to operate as a going concern in 2012 would be substantially in doubt.
NOTE 3DEBT FINANCING
Long-term debt consists of:
Wells Fargo Foothill Credit Agreement
On May 15, 2007, Dune entered into a credit agreement among it, each of Dunes subsidiaries named therein as borrowers, each of Dunes subsidiaries named therein as guarantors, certain lenders and Wells Fargo Capital Finance, Inc. formerly Wells Fargo Foothill (Wells Fargo), as arranger and administrative agent (the WF Agreement). On December 7, 2010, Wells Fargo assigned to Wayzata Opportunities Fund II, L.P. (Wayzata) its rights, obligations and commitment under this Credit Agreement with Dune. In connection with this assignment, the Company as a borrower entered into the Amended and Restated Credit Agreement (the Credit Agreement) with Wayzata as the sole lender and Wells Fargo as the administrative agent. The Credit Agreement is a $40 million term loan facility which will mature on March 15, 2012. Pursuant to the Credit Agreement, (i) interest is 15% per annum which is due and payable, in arrears, on the first day of each month at any time that obligations are outstanding and (ii) if any or all of the $40 million term loan is prepaid (whether mandatory or voluntary prepayment) on or prior to November 15, 2011, the Company shall owe a prepayment premium equal to 10% of the principal amount prepaid.
As security for its obligations under the Credit Agreement, Dune and certain of its operating subsidiaries continue to grant Agent a security interest in and a first priority lien on all of its oil and gas properties and certain deposit accounts. In addition, its subsidiary, Dune Operating Company has guaranteed the obligations.
The Credit Agreement also continues to contain various covenants that limit the Companys ability to: incur indebtedness; dispose of assets; grant certain liens; enter into certain swaps; make certain investments; prepay any subordinated debt; merge, consolidate, recapitalize, consolidate or allow any material change in the character of our business; enter into farm-out agreements; enter into forward sales; enter into agreements which (i) warrant production of hydrocarbons (other than permitted hedges) and (ii) shall not allow gas imbalances, take-or-pay or other prepayment with respect to its oil and gas properties; and; enter into certain marketing activities.
The Credit Agreement modifies the definition of Change in Control to mean (i) that any person or group, other than Permitted Holders or Wayzata and its Affiliates, becomes the beneficial owner, directly or indirectly, of 35%, or more, of the Stock of the Company having the right to vote for the election of members of the Board of Directors, (ii) that a majority of the members of the Board of Directors do not constitute Continuing Directors, (iii) that the Company ceases to own and control, directly or indirectly, 100% of the outstanding Stock of each other Loan Party, (iv) either James Watt or Frank Smith shall cease to be involved in the day to day operations and management of the business of the Company, and a successor reasonably acceptable to Agent and Lenders is not appointed on terms reasonably acceptable to Agent and Lenders within 60 days of such cessation of involvement, or (v) any Change of Control or similar term, as defined in the Second Secured Debt Documents.
The Credit Agreement has a new financial covenant that requires Dune to maintain the following ratio: the total present value of future net revenues discounted at 10% of the proved developed reserves must be greater than two times the value of the face amount of the term loan.
If an event of default exists under the Credit Agreement, the Lenders will be able to accelerate the maturity of the Credit Agreement and exercise other rights and remedies. Each of the following would continue to be an event of default: failure to pay any principal when due or any reimbursement amount, interest, fees or other amount within certain grace periods; a representation or warranty is proven to be incorrect when made; failure to perform or otherwise comply with the covenants, including, but not limited to maintenance of (i) required cash management activities and (ii) the interest reserve account, or conditions contained in the Credit Agreement or other loan documents, subject, in certain instances, to certain grace periods; default by the Company on the payment of any other indebtedness or results in the third partys right to accelerate the maturity of such indebtedness; bankruptcy or insolvency events involving the Company or any of its subsidiaries; the loan documents cease to be in full force and effect; our failing to create a valid lien, except in limited circumstances; the occurrence of a Change in Control; the entry of, and failure to pay or have stayed pending appeal, one or more adverse judgments in excess of an aggregate amount of $5.0 million or more.
In connection with entering into the Credit Agreement on December 7, 2010, standby letters of credit totaling $8.5 million were taken down as the Company cash collateralized these obligations through a bonding agent and has reduced the obligation to $8 million at June 30, 2011.
On March 1, 2011, the Credit Agreement was amended, effective as of December 7, 2010, to permit the repurchase or other acquisition by Parent of shares of common stock of Parent from employees, former employees, directors or former directors of Parent or its Subsidiaries or permitted transferees of such employees, former employees, directors or former directors, in each case pursuant to the terms of the agreements (including employment agreements) or plans (or amendments thereto) or other arrangements approved by the Board of Directors of the Parent under which such shares were granted, issued or sold; provided, that (A) no Default or Event of Default has occurred and is continuing or would exist after giving effect to such repurchase or other acquisition, and (B) the aggregate amount of all such repurchases and other acquisitions following the Restatement Date shall not exceed $500,000. This amendment also waived any misrepresentation that may have inadvertently arisen as a result of any such repurchase prior to the date of the amendment.
On June 1, 2011, in connection with the liquidation of the escrow balance of $15.7 million established for the June 2011 bond interest payment on the Senior Secured Notes, the Company applied the remaining escrow balance of $25,680 to the term loan facility reducing the balance to $39,974,320 at June 30, 2011. Additionally, a 10% prepayment premium of $2,568 was made in accordance with the terms of the agreement.
Senior Secured Notes
On May 15, 2007, Dune sold to Jefferies & Company, Inc. $300 million aggregate principal amount of 10 1/2% Senior Secured Notes due 2012 (Senior Secured Notes) at a purchase price of $285 million. The Senior Secured Notes, bearing interest at the rate of 10 1/2 % per annum, were issued under that certain indenture, dated May 15, 2007, among Dune, the guarantors named therein, and The Bank of New York Trust Company NA, as trustee (the Indenture). The Indenture contains customary representations and warranties by the Company as well as typical restrictive covenants whereby Dune has agreed, among other things, to limitations to incurrence of additional indebtedness, declaration of dividends, issuance of capital stock, sale of assets and corporate reorganizations.
The Senior Secured Notes are subject to redemption by Dune after June 1, 2011, at a repurchase price equal to 100% of the aggregate principal amount plus accrued interest. Holders of the Senior Secured Notes may put such notes to the Company for repurchase, at a repurchase price of 101% of the principal amount plus accrued interest, upon a change in control as defined in the Indenture.
The Senior Secured Notes are secured by a lien on substantially all of Dunes assets, including without limitation, those oil and gas leasehold interests located in Texas and Louisiana held by Dunes operating subsidiaries. The Senior Secured Notes are unconditionally guaranteed on a senior secured basis by each of Dunes existing and future domestic subsidiaries. The collateral securing the Senior Secured Notes is subject to, and made subordinate to, the lien granted to Wayzata under the Credit Agreement.
The debt discount is being amortized over the life of the notes using the effective interest method. Amortization expense associated with the debt discount amounted to $851,269 and $1,562,527 and is included in interest expense in the consolidated statements of operations for the three and six months ended June 30, 2011, respectively.
NOTE 4REDEEMABLE CONVERTIBLE PREFERRED STOCK
During the quarter ended June 30, 2007, Dune sold to Jefferies & Company, Inc. pursuant to the Purchase Agreement dated May 1, 2007, 216,000 shares of its Senior Redeemable Convertible Preferred Stock (Preferred Stock) for gross proceeds of $216 million less a discount of $12.3 million yielding net proceeds of $203.7 million. As provided in the Certificate of Designations, the Preferred Stock has a liquidation preference of $1,000 per share and a dividend at a rate of 12% per annum, payable quarterly, at the option of Dune in additional shares of Preferred Stock, shares of common stock (subject to the satisfaction of certain conditions) or cash.
The conversion price of the Preferred Stock is subject to adjustment pursuant to customary anti-dilution provisions and may also be adjusted upon the occurrence of a fundamental change as defined in the Certificate of Designations. The Preferred Stock is redeemable at the option of the holder on December 1, 2012 and subject to the terms of any of the Companys indebtedness or upon a change of control. In the event Dune fails to redeem shares of Preferred Stock put to Dune by a holder, then the conversion price shall be lowered and the dividend rate increased. After December 1, 2012, Dune may redeem shares of Preferred Stock. The Company analyzed the adjustment of the conversion right for derivative accounting under FASB ASC 815 Derivatives and Hedges and determined that it was not applicable.
The Preferred Stock discount is deemed a Preferred Stock dividend and is being amortized over five years using the effective interest method and is charged to additional paid-in capital as the Company has a deficit balance in retained earnings. Charges to additional paid-in capital for the three and six months ended June 30, 2011 amounted to $597,046 and $1,174,369, respectively.
During the six months ended June 30, 2011, holders of 62,288 shares of the preferred stock converted their shares into 7,118,641 shares of common stock.
During the six months ended June 30, 2011 and 2010, Dune paid dividends on the preferred stock in the amount of $9,458,000 and $11,623,000, respectively. In lieu of cash, the Company elected to issue 9,458 and 11,623 additional shares of preferred stock, respectively.
NOTE 5HEDGING ACTIVITIES
As a result of entering into the Credit Agreement, the Company is no longer required to hedge and all hedge balances were settled. Prior to this event, Dune accounted for its production hedge derivative instruments as defined in FASB ASC 815-Derivatives and Hedging. Accordingly, the Company designated derivative instruments as fair value hedges and recognized gain or losses in current earnings.
For the three and six months ended June 30, 2010, Dune recorded a gain on the derivatives of $436,390 and $1,695,264, composed of an unrealized gain on changes in mark-to-market valuations of $189,990 and $1,749,231 and a realized gain (loss) on cash settlements of $246,400 and ($53,967), respectively.
NOTE 6RESTRICTED STOCK, STOCK OPTIONS AND WARRANTS
The Company utilizes restricted stock, stock options and warrants to compensate employees, officers, directors and consultants. Total stock-based compensation expense including options, warrants and restricted stock was $185,308 and $365,491 for the three and six months ended June 30, 2011 and $349,108 and $1,169,997 for the three and six months ended June 30, 2010, respectively.
The 2007 Stock Incentive Plan, which was approved by Dunes shareholders, authorizes the issuance of up to 3,200,000 shares of common stock for issuance to employees, officers and non-employee directors. The Plan is administered by Dunes Compensation Committee. The following table reflects the vesting activity associated with restricted stock awards at June 30, 2011:
Common shares available to be awarded at June 30, 2011 are as follows:
NOTE 7INCOME TAXES
Dune is in a position of cumulative reporting losses for the current and preceding reporting periods. The volatility of energy prices and uncertainty of when energy prices may rebound is not readily determinable by management. At this date, this general fact pattern does not allow the Company to project sufficient sources of future taxable income to offset tax loss carryforwards and net deferred tax assets in the U.S. Under these current circumstances, it is managements opinion that the realization of these tax attributes does not reach the more likely than not criteria under FASB ASC 740 Income Taxes. As a result, the Companys taxes through June 30, 2011 are subject to a full valuation allowance.
NOTE 8DISCONTINUED OPERATIONS
On June 30, 2010, Dune consummated the sale of the South Florence field located in Vermilion Parish, Louisiana. The disposition of the South Florence Properties allowed the Company to repay all outstanding borrowings under the WF Agreement and to invest in new assets or fund maintenance, repair or improvement of existing properties and assets. The effective date of the sale was May 1, 2010.
Consideration received by the Company for the South Florence Properties aggregated $29,189,243, consisting of the purchase price of $30 million, as adjusted to account for the sale of hydrocarbons and various related costs, expenses and charges incurred between the execution and the Purchase and Sale Agreement and completion of the sale.
Pursuant to accounting rules for discontinuing operations, Dune has classified 2010 and prior reporting periods to present the activity related to the South Florence Properties as a discontinued operation. Discontinued operations for the three and six months ended June 30, 2010 are summarized as follows:
NOTE 9COMMITMENTS AND CONTINGENCIES
The Company, as an owner or lessee and operator of oil and gas properties, is subject to various federal, state and local laws and regulations relating to discharge of materials into, and protection of, the environment. These laws and regulations may, among other things, impose liability on the lessee under an oil and gas lease for the cost of pollution clean-up resulting from operations and subject the lessee to liability for pollution damages. In some instances, the Company may be directed to suspend or cease operations in the affected area. Dune maintains insurance coverage, which it believes is customary in the industry, although Dune is not fully insured against all environmental risks.
In connection with the acquisition of Goldking, the Company inherited an environmental contingency which after conducting its due diligence and subsequent testing believes is the responsibility of a third party. However, federal and state regulators have determined Dune is the responsible party for clean up of this area. Dune has maintained a passive maintenance of this site since it was first discovered after Hurricane Katrina. Cost to date of approximately $1,100,000 has been covered by the Companys insurance minus the standard deductibles. The Company still feels another party has the primary responsibility for this occurrence but is committed to working with the various state and federal authorities on resolution of this issue. At this time no estimate of the final cost of remediation of this site can be determined or if the Companys insurance will continue to cover the clean up costs or if the Company can be successful in proving the other party should be primarily responsible for the cost of remediation.
The following discussion will assist in the understanding of our financial position and results of operations. The information below should be read in conjunction with the consolidated financial statements, the related notes to consolidated financial statements and our Annual Report on Form 10-K for the year ended December 31, 2010. Our discussion contains both historical and forward-looking information. We assess the risks and uncertainties about our business, long-term strategy and financial condition before we make any forward-looking statements but we cannot guarantee that our assessment is accurate or that our goals and projections can or will be met. Statements concerning results of future exploration, exploitation, development and acquisition expenditures as well as revenue, expense and reserve levels are forward-looking statements. We make assumptions about commodity prices, drilling results, production costs, administrative expenses and interest costs that we believe are reasonable based on currently available information.
Our primary focus will continue to be the development and exploration efforts in our Gulf Coast properties. We believe that our acreage position will allow us to grow organically through low risk drilling in the near term. This position continues to present attractive opportunities to expand our reserve base through field extensions and high risk/high reward exploratory drilling opportunities. In addition, we will constantly review, rationalize and high-grade our properties in order to optimize our existing asset base.
We expect to maintain and utilize our technical and operations teams knowledge of salt-dome structures and multiple stacked producing zones common in the Gulf Coast to enhance our growth prospects and reserve potential. We expect to employ technical advancements, including 3-D seismic data, pre-stack depth migration and directional drilling, to identify and exploit new opportunities in our asset base. We also plan to employ the latest drilling, completion and fracturing technology in all of our wells to enhance recoverability and accelerate cash flows associated with these wells.
We continually review opportunities to acquire producing properties, leasehold acreage and drilling prospects that are in core operating areas. We are seeking to acquire operational control of properties that we believe have a solid proved reserve base coupled with significant exploitation and exploration potential.
Liquidity and Capital Resources
During the first six months of 2011 compared to the first six months of 2010, net cash used in continued operations decreased by $1.7 million to ($7.3) million. This decrease was primarily attributable to the Companys decision to expense $5.2 million of costs associated with an exploratory well in the second quarter of 2011.
Our current assets were $31.5 million on June 30, 2011. Cash on hand comprised approximately $21.8 million of this amount. This compared to $23.7 million at the end of the calendar year 2010 and $12.9 million at the end of the second quarter of 2010. Accounts payable have decreased from $7.0 million at year end 2010 to $4.7 million at June 30, 2011. Accounts payable were $2.6 million at June 30, 2010.
The financial statements continue to reflect a modest but ongoing drilling and facilities upgrade program which amounted to $14.7 million during the first six months of 2011. The increased spending reflected drilling activity at the S prospect and the Deep Subsalt prospect at Garden Island Bay. We expect to spend approximately $13.0 million during the final six months of 2011 on continuing development and exploitation of our asset base. This would represent a $19.0 million increase over our almost $8.7 million of capital investment in 2010. However, the exact amount will depend upon individual well performance results, cash flow and, where applicable, partners negotiations on the timing of drilling obligations. In addition, we expect to offer participations in our drilling program to industry partners over this time frame, thus potentially reducing our capital requirements.
During the fourth quarter of 2010, Dune replaced its $40 million revolving credit facility from Wells Fargo Foothill with a new $40 million term loan facility from Wayzata. The new facility matures on March 15, 2012
and provides for Wells Fargo Foothill to remain as agent for the facility. The Company has received all of the funds associated with the facility and has placed $8.0 million in escrow to cash collateralize $8.0 million of standby letters of credit. The Company is deploying the remaining funds from the new term loan and available cash flow from operations to cover anticipated drilling and recompletion projects in 2011. Additionally, all hedging contracts were settled in 2010 and the Company no longer hedges its oil and gas production.
Semi-annual interest of $15.75 million on our 10 1/2% Senior Secured Notes due 2012 was paid on June 1, 2011 and is due on December 1 and June 1 thereafter. The principal on the Senior Secured Notes is not due until June 1, 2012.
Shares of our Senior Redeemable Convertible Preferred Stock are not redeemable until the later of December 1, 2012 or the repayment in full of all senior secured debt or upon a change in control. Dividends are payable quarterly with the Company having the option of paying any dividend on the preferred stock in shares of common stock, shares of preferred stock or cash.
Our primary source of liquidity over the first half of the year has been cash provided by operating activities and industry joint-ventures involving our drilling opportunities. The strength of our current cash position puts us in a position to meet our current financial obligations and ongoing capital programs in the current commodity price environment.
As noted in Note 2 to the Consolidated Financial Statements, our current liabilities increased materially during the quarter and now exceed our current assets by $325.6 million. The primary reason for this significant change is the movement into the current maturity category of our $40 million term loan facility due March 15, 2012 and $296.8 million of Senior Secured Notes due June 1, 2012. If the Company is unable to obtain financing from third parties or otherwise restructure its debt obligations prior to maturity, our ability to fund operations and execute our business plan will be impaired. Consequently, the Companys ability to continue to operate as a going concern in 2012 would be doubtful. There is no assurance that we can raise additional capital from external sources or restructure our long-term obligations, the failure of which could cause us to consider other strategic solutions including, among other things, the sale of key assets and/ or the material curtailment of operations. Management is currently making a concerted effort to resolve this situation and has historically relied on best efforts to access the capital markets.
Results of Operations
Year-over-year production decreased from 3,768 Mmcfe for the first six months of 2010 to 3,065 Mmcfe for the same six month period of 2011. This decrease was caused by normal reservoir declines which were not offset by increased production due to the limited amount of capital reinvestment made during 2011.
The following table reflects the increase (decrease) in oil and gas sales revenue due to the changes in prices and volumes:
We recorded a net loss available to common shareholders for the three months ended June 30, 2011 of ($18.9 million) or ($0.39) basic and diluted loss per share compared to net loss available to common shareholders of ($37.4 million) or ($0.92) basic and diluted loss per share for the same quarter of 2010. For the six months ended June 30, 2011, we recorded a net loss available to common shareholders of ($32.1 million) or ($0.67) basic and diluted loss per share compared to a net loss available to common shareholders of ($51.7 million) or ($1.28) basic and diluted loss per share for the same period of 2010.
Revenues from continuing operations for the quarter ended June 30, 2011 totaled $15.9 million compared to $16.0 million for the quarter ended June 30, 2010 representing a $0.1 million decrease. Production volumes for 2011 were 114 Mbbls of oil and 0.7 Bcf of natural gas or 1.4 Bcfe. This compares to 147 Mbbls of oil and 1.0 Bcf of natural gas or 1.9 Bcfe representing a 25% decline in production volumes. In 2011, the average sales price per barrel of oil was $108.25 and $4.92 per Mcf of natural gas as compared to $76.59 per barrel and $4.74 per Mcf, respectively for 2010. These results indicate that the slight decrease in revenue is primarily attributable to the reduction in production volumes of 0.5 Bcfe or 25% which were partially offset by increases in commodity prices of $2.80 per Mcfe or 33%.
Revenues from continuing operations for the six months ended June 30, 2011 totaled $33.3 million compared to $32.9 million for the six months ended June 30, 2010 representing a $0.4 million increase. Production volumes for 2011 were 254 Mbbls of oil and 1.5 Bcf of natural gas or 3.0 Bcfe. This compares to 298 Mbbls of oil and 2.0 Bcf of natural gas or 3.8 Bcfe representing a 19% decline in production volume. In 2011, the average sales price per barrel of oil was $102.00 and $4.80 per mcf of natural gas as compared to $76.36 per barrel and $5.14 per Mcf, respectively for 2010. These results indicate that the small increase in revenue was primarily attributable to the increase in commodity prices of $2.13 per Mcfe or 24% offsetting the reduction in production volumes of 0.7 Bcfe or 19%.
Lease operating expense
The following table presents the major components of Dunes lease operating expense (in thousands) for the three and six months ended June 30, 2011 and 2010 on a Mcfe basis:
Lease operating expense from continuing operations for the quarter ended June 30, 2011 totaled $6.9 million versus $6.6 million for the same period of 2010. This translated into an increase of $1.37/Mcfe on a volume basis. The overall increase in lease operating expense between periods reflects the additional costs associated with operating older more mature fields which required additional repair and maintenance cost during the quarter ended June 30, 2011.
Lease operating expense from continuing operations for the six months ended June 30, 2011 totaled $14.0 million versus $14.2 million for the same period of 2010. This translated into an increase of $0.78/Mcfe on a volume basis. This overall decrease between periods reflects the impact of Dunes efforts to reduce field operating expenses which were negatively influenced by repairs and maintenance associated with operating older, more mature fields as experienced during the second quarter of 2011.
Accretion of asset retirement obligation
Accretion expense for asset retirement obligations decreased by $0.1 million for the quarter ended June 30, 2011 compared to the same period in 2010. Similarly, accretion expense for the six month period ended June 30, 2011reflected a $0.2 million decrease from the comparable period of 2010. This small decrease is the result of reevaluating abandonment costs at year end.
Depletion, depreciation and amortization (DD&A)
For the quarter ended June 30, 2011, the Company recorded DD&A expense of $5.2 million ($3.73/Mcfe) compared to $7.4 million ($3.95/Mcfe) for the quarter ended June 30, 2010 representing a decrease of $2.2 million ($0.22/Mcfe). Additionally, for the six months ended June 30, 2011, the Company recorded DD&A expense of $11.5 million ($3.79/Mcfe) compared to $14.4 million ($3.82/Mcfe) for the six months ended June 30, 2010 representing a decrease of $2.9 million ($0.03/Mcfe). This decrease reflects the impact of a 19% and 25% reduction in production volumes that directly impacts the DD&A calculation for the three and six months ended June 30, 2011.
General and administrative expense (G&A expense)
G&A expense for the current quarter ended 2011 decreased $0.9 million (31%) from the comparable 2010 quarter to $2.0 million. Cash G&A expense for 2011 fell $0.7 million (28%) from 2010 to $1.8 million. These decreases resulted principally from a reduction in personnel expense of $0.2 million, stock-based compensation of $0.2 million and professional fees of $0.5 million.
For the six months ended June 30, 2011 and 2010, G&A expense decreased $2.2 million (34%) to $4.2 million. Cash G&A expense for the first half of the year declined $1.4 million (27%) to $3.8 million. This decrease primarily resulted from a reduction in personnel expense of $0.5 million, stock-based compensation expense of $0.8 million and professional fees of $0.9 million.
On a unit of production basis, G&A fell from $1.55/Mcfe for the quarter ended June 30, 2010 to $1.44/mcfe for the same period of 2011. For the six month period ended June 30, 2010, G&A fell from $1.68/mcfe to $1.36/Mcfe for the same period of 2011.
Loss on impairment of oil and gas properties
Dune recorded an impairment of oil and gas properties of $16.1 million in the second quarter of 2010. This amount consisted of expired leasehold costs of $5.3 million and drilling costs of $10.8 million on a well which will not be completed.
In the second quarter of 2011, the Company, as a party to a joint venture, drilled an exploratory well. Although the Company will continue to evaluate future options associated with the well, it has determined that the costs incurred of $5.2 million should be expensed for the three and six months ended June 30, 2011.
Other income (expense)
Interest income for the quarter ended June 30, 2011 was $0.02 million more than the comparable 2010 quarter. Interest income for the six months ended June 30, 2011 was $0.04 million more than the comparable 2010 period. This was the result of higher cash balances held in escrow associated with the Credit Agreement.
As a result of the higher interest rate applicable to the Credit Agreement, interest expense for the quarter ended June 30, 2011 was $10.1 million compared to $9.2 million in the comparable quarter ended 2010. Additionally, interest expense for the six months ended June 30, 2011 amounted to $20.0 million compared to $18.1 million in the comparable period of 2010.
Gain on derivative liabilities
For the quarter ended June 30, 2010, the Company incurred a gain on derivatives of $0.4 million composed of an unrealized gain of $0.2 million due to the change in the mark-to-market valuation and a realized gain of $0.2 million for cash settlements.
For the six months ended June 30, 2010, the Company incurred a gain on derivatives of $1.7 million composed of an unrealized gain of $1.75 million due to the change in mark-to-market valuation and a realized loss of $0.05 million for cash settlements.
In connection with entering into the Credit Agreement in December 2010, all hedging requirements were eliminated and all hedge balances were settled.
Net loss available to common shareholders
For the quarter ended June 30, 2011, net loss available to common shareholders decreased $18.5 million from the comparable quarter of 2010. This decrease reflects the impact of a $13.8 million decrease in operating expenses, a $4.6 million decrease in loss on discontinued operations and a $1.4 million decrease in preferred stock dividends partially offset by a ($0.9 million) increase in interest expense and a ($0.4 million) reduction in the gain on derivative liabilities.
For the six months ended June 30, 2011, net loss available to common shareholders decreased $19.5 million from the comparable 2010 period. This decrease reflects the impact of a $0.4 million increase in revenues, $16.5
million decrease in operating expenses, $2.9 million decrease in preferred stock dividends and a $3.4 million decrease in loss on discontinued operations partially offset by a ($1.9 million) increase in interest expense and a ($1.7 million) reduction in the gain on derivative liabilities.
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commissions rules and forms, and that such information is accumulated and communicated to our 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 13a-15(e). In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
At the end of the period covered by this quarterly report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Companys disclosure controls and procedures. Based upon the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that, as of June 30, 2011, our disclosure controls and procedures are effective.
During the quarter ended June 30, 2011, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II OTHER INFORMATION
Our current liabilities increased materially during the second quarter of 2011 and exceed our current assets. The primary reason for this significant change is the movement into the current maturity category of our $40 million term loan facility due March 15, 2012 and our $296.8 million of Senior Secured Notes due June 1, 2012. If we are unable to obtain financing from third parties or otherwise restructure our debt obligations prior to maturity, our ability to fund operations and execute our business plan will be impaired. Consequently, our ability to continue to operate as a going concern in 2012 would be doubtful.
In connection with any restructuring of our debt obligations prior to maturity, the preferred stock and common equity components of our capital structure will likely be reorganized as well.
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.
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