The following Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is intended to help the reader understand
Trans Energy'sfinancial position, changes in financial condition, and results of operations. MD&A is provided as a supplement to the Company's Consolidated Financial Statements and the accompanying Notes to Consolidated Financial Statements ("Footnote" or "Notes") and should be read in conjunction with the Consolidated Financial Statements and Notes. Certain statements in this report including, without limitation, statements regarding future financial results and performance, plans and objectives, capital expenditures and the Company's or management's beliefs, expectations or opinions, are forward-looking statements. The Company's forward-looking statements should be read in conjunction with the Company's comments in this report under the heading, "Disclosure Regarding Forward-Looking Statements." Actual results may differ materially from those statements as a result of factors, risks and uncertainties over which the Company has no control. For a list of these factors, risks and uncertainties, refer to Item 1A - Risk Factors.
Trans Energyis an independent energy company primarily engaged in the acquisition, exploration, development, and production of oil and natural gas properties, with interests targeting the Marcellus Shalein West Virginia. We successfully increased our drilling program in 2013 and 2012, adding both natural gas and natural gas liquids reserves to the Company's 2013 proved developed reserve base and natural gas and oil reserves to the Company's 2012 proved reserves base. Furthermore, the Company established major interconnects with interstate pipelines to allow increased access to the market. We intend to focus our development and exploration efforts in our Marcellus Propertiesand utilize our acreage position to expand our reserve base through continued exploratory and development drilling in the Marcellus Shaleduring 2014 and beyond. We will evaluate our properties on a continuous basis in order to optimize our existing asset base. We 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 believe that our acreage position will allow us to grow through horizontal drilling in the near term. In summary, our strategy is to increase our oil and gas reserves and production while keeping our development costs and operating costs as low as possible. We will implement this strategy through drilling exploratory and development wells from our inventory of available prospects that we have evaluated for geologic and mechanical risk and future reserve or resource potential. The success of this strategy is contingent on various risk factors, as discussed elsewhere in this Form 10-K. 20
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The implementation of our strategy requires that we continually incur significant capital expenditures in order to replace current production and find and develop new oil and gas reserves. In order to finance our capital and exploration program, we depend on cash flow from operations or bank debt and equity offerings as discussed below in Liquidity and Capital Resources. Results of Operations Fiscal Year Ended December 31, 2013 2012 Total revenues 18,365,558
$ 11,755,421Total costs and expenses (22,202,993 ) (26,602,269 ) Gain on sale of assets 7,015,950 112,898 Income (loss) from operations 3,178,515 (14,733,950 ) Other expenses (20,913,866 ) (6,527,667 ) Income tax benefit (expense) - 58,013 Net loss (17,735,351 ) (21,203,604 )
The following table is a summary of revenues, volumes, and pricing for the twelve months ended
Twelve Months Ended
December 31, 2013compared to the Twelve Months Ended December 31, 2012Twelve Months Ended December 31, Increase/ 2013 2012 (Decrease) Natural gas sales $ 14,580,415 $ 7,754,107 $ 6,826,30888.0 % Oil sales $ 160,583 $ 1,012,918 $ (852,335 )(84.1 %) Natural gas liquid sales $ 3,433,526 $ 2,589,601
Total Oil & Gas Sales
$ 18,174,524 $ 11,356,626 $ 6,817,89860.0 % Transportation and other revenue $ 191,034 $ 398,795 $ (207,761 )(52.1 %) Total revenue $ 18,365,558 $ 11,755,421 $ 6,610,13756.2 % Net Production Natural gas sales (Mcf) 3,793,457 2,118,350 1,675,107 79.1 % Oil sales (Bbls) 1,897 11,006 (9,109 ) (82.8 %) Natural gas liquids (gallons) 4,224,840 3,510,108 714,732 20.4 % Natural Gas Equivalent ( Mcfe) 4,408,388 2,685,830 1,722,558 64.1 % Average Sales Price per Unit Natural Gas (Mcf) $ 3.84 $ 3.66 $ .184.9 % Oil (Bbl) $ 84.65 $ 92.03 $ (7.38 )(8.0 %) Natural gas liquids (gallons) $ .81 $ .74 $ .079.5 % Natural Gas Equivalent (Mcfe) $ 4.12 $ 4.23 $ (.11 )(2.6 %) 21
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All data presented below is derived from costs and production volumes for the relevant period indicated. Twelve Months Ended
December 31, 20132012
Costs and Expenses Per Mcfe of Production:
Production Taxes 0.34
G&A Expenses (Excluding Share-Based Compensation) 1.13
Non-Cash Shared-Based Compensation 0.28
Oil and Natural Gas Properties1.28
Oil and Natural Gas Properties-
Depreciation and Amortization 0.02
Accretion of Discount on Asset Retirement Obligation -
Total revenues of
$18,365,558for the year ended December 31, 2013increased $6,610,137or 56.2% compared to $11,755,421for the year ended December 31, 2012. The increase in revenue is due to an increase in pricing on natural gas, natural gas liquids, and production volumes. We focused our efforts during 2013 and 2012 on the implementation of our drilling program in Marshalland WetzelCounties, West Virginia. We expect an increase in production from the drilling program throughout 2014. Production costs increased $3,448,911or 50.9% for 2013 as compared to 2012, primarily due to severance and property taxes and an increase in transportation fees and natural gas liquid processing fees, associated with the increased production in NGLs. In lieu of constructing and maintaining a pipeline, the Company has agreed to pay the transporter $0.35per Mcf to transport a contractual amount of production on the first well drilled on the pad. After the contractual amount is transported, the price reduces to $0.15per Mcf to transport gas. Any future wells drilled are charged $0.15per Mcf for transporting the gas produced. We are contractually obligated to provide 2,000,000 MMBTU/mile of lateral extension that must be fulfilled within the first five years in order to reduce our transportation fee per Mcf. If the volumes are not met the transportation fee remains at $0.35per Mcf.
Depreciation, depletion, amortization and accretion expense increased
Impairment of oil and gas properties in 2013 decreased by
$10,132,702due to the write down of shallow producing properties in 2012. The shallow oil and gas properties were written down to the net cash proceeds to be received from the shallow well sale in January 2013, plus a value for the ORRI retained by the Company. The Company recorded no impairments of its oil and gas properties for the year ended December 31, 2013.
Selling, general and administrative expense increased
Gain on sale of assets increased by
Our income from operations for 2013 was
$3,178,515compared to loss of $14,733,950for 2012. This change is primarily due to the large sale of acreage to Antero and the increase in production revenue in 2013, as well as the oil and gas property impairment recorded for 2012. 22
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Interest expense increased
$9,308,816or 162% for 2013, as compared to 2012 due to a significantly higher loan balance after the refinancing. The average loan balance for 2013 and 2012 was $75,979,762and $38,699,144respectively. Extinguishment/loss on derivative for 2013 was $6,191,722compared to a loss of $807,639in 2012. The extinguishment/loss for 2013 was the result of settlement of the warrant derivative liability which was a part of the ASD Credit Agreement. The loss for 2012 was the result of recording the change in the fair value of the put option associated with our warrant derivative liability. We have accumulated approximately $51.4 millionof net operating loss carryforwards as of December 31, 2013, which may be offset against future tax obligations through 2032. The use of these losses to reduce future income taxes will depend on the generation of sufficient taxable income prior to the expiration of the net operating loss carryforwards. In the event of certain changes in control, there would be an annual limitation on the amount of net operating loss carryforwards which can be used. We recorded $58,013in income tax benefits in 2012, for alternative minimum tax related to our gain on sale. No tax benefit has been reported in the financial statements for the year ended December 31, 2013because the potential tax benefit of the loss carryforward is offset by a valuation allowance of the same amount.
Off Balance Sheet Arrangements
Liquidity and Capital Resources
Historically, we have satisfied our working capital needs with operating revenues, borrowed funds and the proceeds of acreage sales. At
December 31, 2013, we have positive working capital of $65,897compared to a positive working capital of $2,487,924at December 31, 2012. This decrease in working capital is primarily attributed to an increase in accounts payable due to drilling operator and an increase in accrued expenses. During 2013, net cash used by operating activities was $3,760,460compared to net cash used of $14,707,856in 2012. This increase in cash flow from operating activities is primarily due to a smaller decrease in accounts payable during 2013 compared to 2012.
We expect our cash flow provided by operations for 2014 to increase because of higher projected production from the drilling program, combined with steady operating, general and administrative, interest and financing costs per Mcfe.
Excluding the effects of significant unforeseen expenses or other income, our cash flow from operations fluctuates primarily because of variations in oil and gas production and prices, or changes in working capital accounts and actual well performance. In addition, our oil and gas production may be curtailed due to factors beyond our control, such as downstream activities on major pipelines causing us to shut-in production for various lengths of time. During 2013, net cash used for investing activities was
$18,266,499compared to net cash used of $24,845,110in 2012. The reason for the change was an increase in cash proceeds from acreage sales and increased expenditures for oil and gas properties during 2013 compared to 2012. See notes 6 and 8 to the financial statements for additional information. 23
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During 2013, net cash provided by financing activities was
$23,745,707compared to net cash provided of $32,676,398in 2012. This change reflects that the Company's debt increased by a greater amount in 2012 than in 2013. We anticipate meeting our working capital needs with revenues from our ongoing operations and from debt or equity financings.
In the opinion of our management, inflation has not had a material overall effect on our operations. However, our credit facility is indexed to LIBOR and any increase in LIBOR would affect our interest costs.
May 21, 2014("Funding Date"), our wholly owned subsidiary, American Shale, entered into a credit agreement (hereafter the "Credit Agreement") by and among American Shale, several banks and other financial institutions or entities that from time-to-time will be parties to the Credit Agreement (the "Lenders"), and Morgan Stanley Capital Group Inc.as the administrative agent ("Agent"). Trans Energyis a guarantor of the Credit Agreement as is Prima, another of our wholly owned subsidiaries. The Credit Agreement provides that the Lenders will lend American Shaleup to $200 million, including an initial draw of $102.5 million, a contingent committed amount of $47.5 millionand an uncommitted amount of $50 million(the "Loans"). The initial draw under the facility was used primarily to repay all of the outstanding debt under the A&R Credit Agreement with Chambers, as well as to fund certain fees and expenses incurred in connection with the Credit Agreement. (See Note 18, Subsequent Events).
Forward-looking and Cautionary Statements
This report includes forward-looking statements. These forward-looking statements may relate to such matters as anticipated financial performance, future revenues or earnings, business prospects, projected ventures, new products and services, anticipated market performance and similar matters. When used in this report, the words "may," "will," "expect," "anticipate," "continue," "estimate," "project," "intend," and similar expressions are intended to identify forward-looking statements regarding events, conditions, and financial trends that may affect our future plans of operations, business strategy, operating results, and our future plans of operations, business strategy, operating results, and financial position. We caution readers that a variety of factors could cause our actual results to differ materially from the anticipated results or other matters expressed in forward-looking statements. These risks and uncertainties, many of which are beyond our control, include:
• the sufficiency of existing capital resources and our ability to raise
additional capital to fund cash requirements for future operations; • uncertainties involved in the rate of growth of our business and acceptance of any products or services; • success of our drilling activities;
• volatility of the stock market, particularly within the energy sector;
• the risk factors described elsewhere herein; and • general economic conditions.
Although we believe the expectations reflected in these forward-looking statements are reasonable, such expectations cannot guarantee future results, levels of activity, performance or achievements.
Critical Accounting Policies
We consider accounting policies related to our estimates of proved reserves, accounting for derivatives, share-based payments, accounting for oil and natural gas properties, asset retirement obligations and accounting for income taxes as critical accounting policies. The policies include significant estimates made by management using information available at the time the estimates are made. However, these estimates could change materially if different information or assumptions were used. These policies are summarized in Note 1 of Notes to Consolidated Financial Statements. 24
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New Accounting Standards