SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
CHECK ONE
|X| Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of
1934 for the quarterly period ended September 30, 2006 or
|_| Transition report under Section 13 or 15(d) of the Securities Exchange Act
of 1934 from _______ to ______
COMMISSION FILE NUMBER 0-12500
ISRAMCO, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 13-3145265
(State or other Jurisdiction of I.R.S. Employer Number
Incorporation or Organization)
11767 KATY FREEWAY, HOUSTON, TX 77079
(Address of Principal Executive Offices)
713-621-3882
(Registrant's Telephone Number, Including Area Code)
Indicate by check whether the registrant: (1) filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes |X| No |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X|
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act.). Yes |_| No |X|
As of November 13 2006, the registrant had 2,717,891 shares of common stock,
$0.01 per share, outstanding.
PART I - FINANCIAL INFORMATION:
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets at September 30, 2006 and December 31, 2005 1
Consolidated Statements of Operations for the three and nine months
ended September 30, 2006 and 2005 2
Consolidated Statements of Cash Flows for the nine months ended
September 30, 2006 and 2005 3
Notes to Consolidated Financial Statements 4
Item 2. Management's discussion and analysis of financial statements 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk 12
Item 4. Controls and Procedures 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 2. Changes in Securities & Use of Proceeds 13
Item 3. Defaults upon senior securities 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 5. Other Information 13
Item 6. Exhibits 13
Signatures 14
FORWARD LOOKING STATEMENTS
CERTAIN STATEMENTS MADE IN THIS QUARTERLY REPORT ON FORM 10-Q ARE
FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995. FORWARD-LOOKING STATEMENTS CAN BE IDENTIFIED BY
TERMINOLOGY SUCH AS "MAY", "WILL", "SHOULD", "EXPECTS", "INTENDS",
"ANTICIPATES", "BELIEVES", "ESTIMATES", "PREDICTS", OR "CONTINUE" OR THE
NEGATIVE OF THESE TERMS OR OTHER COMPARABLE TERMINOLOGY AND INCLUDE, WITHOUT
LIMITATION, STATEMENTS BELOW REGARDING EXPLORATION AND DRILLING PLANS, FUTURE
GENERAL AND ADMINISTRATIVE EXPENSES, FUTURE GROWTH, FUTURE EXPLORATION, FUTURE
GEOPHYSICAL AND GEOLOGICAL DATA, GENERATION OF ADDITIONAL PROPERTIES, RESERVES,
NEW PROSPECTS AND DRILLING LOCATIONS, FUTURE CAPITAL EXPENDITURES, SUFFICIENCY
OF WORKING CAPITAL, ABILITY TO RAISE ADDITIONAL CAPITAL, PROJECTED CASH FLOWS
FROM OPERATIONS, OUTCOME OF ANY LEGAL PROCEEDINGS, DRILLING PLANS, THE NUMBER,
TIMING OR RESULTS OF ANY WELLS, INTERPRETATION AND RESULTS OF SEISMIC SURVEYS OR
SEISMIC DATA, FUTURE PRODUCTION OR RESERVES, LEASE OPTIONS OR RIGHTS,
PARTICIPATION OF OPERATING PARTNERS, POTENTIAL ASSET IMPAIRMENT AND ANY OTHER
STATEMENTS REGARDING FUTURE OPERATIONS, FINANCIAL RESULTS, OPPORTUNITIES,
GROWTH, BUSINESS PLANS AND STRATEGY. BECAUSE FORWARD-LOOKING STATEMENTS INVOLVE
RISKS AND UNCERTAINTIES, THERE ARE IMPORTANT FACTORS THAT COULD CAUSE ACTUAL
RESULTS TO DIFFER MATERIALLY FROM THOSE EXPRESSED OR IMPLIED BY THESE
FORWARD-LOOKING STATEMENTS. ALTHOUGH THE COMPANY BELIEVES THAT EXPECTATIONS
REFLECTED IN THE FORWARD-LOOKING STATEMENTS ARE REASONABLE, IT CANNOT GUARANTEE
FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS. MOREOVER, NEITHER THE COMPANY NOR
ANY OTHER PERSON ASSUMES RESPONSIBILITY FOR THE ACCURACY AND COMPLETENESS OF
THESE FORWARD-LOOKING STATEMENTS. THE COMPANY IS UNDER NO DUTY TO UPDATE ANY
FORWARD-LOOKING STATEMENTS AFTER THE DATE OF THIS REPORT TO CONFORM SUCH
STATEMENTS TO ACTUAL RESULTS.
(i)
ISRAMCO INC.
CONSOLIDATED BALANCE SHEETS
(in thousands except for share information)
(Unaudited)
September 30, December 31,
2006 2005
-------- --------
ASSETS
Current assets:
Cash and cash equivalents $ 3,630 $ 1,249
Accounts receivable - oil and gas sales 618 605
Marketable securities, at market 4,876 5,570
Prepaid expenses and other 135 98
-------- --------
Total current assets 9,259 7,522
Oil and gas properties, net 7,803 5,030
Equipment, less accumulated depreciation 66 80
Real Estate 1,888 1,887
Marketable securities, at market 5,161 3,619
Investment in affiliate 14,657 11,836
Investment in Vessel 5,578 8,479
Other 162 162
-------- --------
Total assets $ 44,574 $ 38,615
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 3,951 $ 2,243
Income tax payable --
Credit from banks 1,260 1,380
-------- --------
Total current liabilities 5,211 3,623
-------- --------
Deferred tax liability 4,306 2,899
Long-term bank loans 2,537 3,257
Asset retirement obligations 341 343
-------- --------
Total Long Term Liabilities 7,184 6,499
-------- --------
Total liabilities 12,395 10,122
-------- --------
Commitments, contingencies and other matters
Common stock $0.01 par value; 7,500,000 authorized shares; 2,747,158
issued shares; 2,717,891 shares outstanding 27 27
Additional paid-in capital 26,240 26,240
Retained earnings 3,599 1,557
Accumulated other comprehensive income 2,477 833
Treasury stock, 29,267 shares (164) (164)
-------- --------
Total shareholders' equity 32,179 28,493
-------- --------
Total liabilities and shareholders' equity $ 44,574 $ 38,615
======== ========
See notes to the consolidated financial statements
-1-
ISRAMCO INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except for share information)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- -----------------------------
2006 2005 2006 2005
----------- ----------- ----------- -----------
REVENUES:
Operator fees from related party $ 26 $ 18 $ 61 $ 54
Oil and gas sales 599 775 1,804 2,292
Magic 1 vessel revenues 736 736 1,424 1,304
Interest income 73 164 370 320
Office services to affiliate and other 189 130 569 586
Gain on marketable securities 73 124 885 343
Equity in net income of investees 267 1,182 1,930 1,571
Net gain in legal settlement -- -- 2,565 --
Other Income 16 172 609 236
----------- ----------- ----------- -----------
Total revenues 1,979 3,301 10,217 6,706
----------- ----------- ----------- -----------
COSTS AND EXPENSES:
Interest expense 64 57 275 213
Cost of revenues of vessel 11 216 1,028 957
Depreciation, depletion and
Amortization 187 542 1,005 1,372
Accretion expenses 15 29 52 48
Lease operating expenses and severance taxes 499 499 898 1,124
Exploration costs 35 -- 125 160
Operator expense 178 133 554 495
General and administrative 307 483 1,079 1,286
Impairment of vessel -- -- 2,200 --
----------- ----------- ----------- -----------
Total expenses 1,296 1,959 7,216 5,655
----------- ----------- ----------- -----------
Income before income taxes 683 1,342 3,001 1,051
Income taxes (101) (250) (959) (250)
----------- ----------- ----------- -----------
Net income $ 582 $ 1,092 $ 2,042 $ 801
=========== =========== =========== ===========
Earnings per common share:
Basic and diluted $ 0.21 $ 0.40 $ 0.75 $ 0.29
Weighted average number of shares outstanding:
Basic and diluted 2,717,891 2,717,891 2,717,891 2,717,891
See notes to the consolidated financial statements.
-2-
ISRAMCO INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
Nine Months Ended September 30,
-------------------------------
2006 2005
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,042 $ 801
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation, depletion and amortization 1,020 1,376
Impairment of assets 2,200 --
Accretion expense 52 --
Loss (gain) on marketable securities (367) (393)
Equity in net loss (gain) of investees (1,930) (1,570)
Deferred taxes 560 --
Changes in assets and liabilities:
Accounts receivable (13) 93
Prepaid expenses and other current assets (38) (231)
Accounts payable and accrued liabilities 1,707 715
------- -------
Net cash provided by operating activities 5,233 791
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (3,131) (2,021)
Investment in affiliate (1,197) --
Dividend from affiliate 1,254 --
Purchase of marketable securities (1,373) (2,177)
Proceeds from sale of marketable securities 2,435 4,467
------- -------
Net cash provided (used) in investing activities (2,012) 269
------- -------
Net cash provided by financial activities
Change in short term credit from banks (126) --
Repayment of loan (714) (1,538)
------- -------
Net cash used by financial activities (840) (1,538)
------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,381 (478)
Cash and cash equivalents-beginning of period 1,249 2,087
------- -------
Cash and cash equivalents-end period $ 3,630 $ 1,609
======= =======
Supplemental disclosures:
Cash paid for interest $ 275 $ 213
Cash paid for income taxes -- --
See notes to the consolidated financial statements.
-3-
ISRAMCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United States
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally accepted
in the United States for complete financial statements. In the opinion of
management, all adjustments (consisting of only normal recurring adjustments)
considered necessary for a fair presentation have been included. Results
presented for the interim periods ended September 30, 2006, are not necessarily
indicative of the results that may be expected for the year ended December 31,
2006. For further information, refer to the consolidated financial statements
and footnotes thereto included in Isramco's Annual Report on Form 10-K/A for the
fiscal year ended December 31, 2005 filed with the Securities and Exchange
Commission.
Stock-Based Compensation
On January 1, 2006 Isramco adopted Statement of Financial Accounting Standards
("SFAS") Statement No. 123(R), "Share-Based Payment" ("SFAS 123(R)"). SFAS
123(R) replaced SFAS No. 123 and supersedes APB Opinion No. 25. SFAS 123(R)
requires all share-based payments to employees, including grants of employee
stock options, to be recognized in the financial statements based on their fair
values. The pro forma disclosures previously permitted under SFAS 123 are no
longer an alternative to financial statement recognition. Isramco adopted SFAS
123(R) using the modified prospective method which requires the application of
the accounting standard as of January 1, 2006. The consolidated financial
statements as of and for the quarter ended March 31, 2006 reflect the impact of
adopting SFAS 123(R). In accordance with the modified prospective method, the
consolidated financial statements for prior periods have not been restated to
reflect, and do not include, the impact of SFAS 123(R).
Prior to 2006, Isramco accounted for employee stock-based compensation granted
under our long-term incentive plans using the intrinsic value method prescribed
by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations. Isramco did not have any compensation
expense for the three and nine month periods ended September 30, 2006 and 2005,
as there were no options granted and options historically granted were fully
vested on the date of grant. Therefore, pro forma net income and earnings per
share would have been the same as the amounts as reported if we had applied the
fair value recognition provisions of SFAS 123 to stock-based employee
compensation.
NOTE 2 - INVESTMENT IN VESSEL
In February 2006, Isramco's wholly owned subsidiary Magic 1 Cruise Line Corp.
entered into a bareboat charter with a tour operator pursuant to which the
luxury cruise liner was leased between April 6, 2006 and November 5, 2006 and is
scheduled to be leased for the period commencing on March 29, 2007 and
terminating on October 28, 2007 and thereafter the period commencing on April 8,
2008 and terminating on November 7, 2008, at a daily rate of $8,000. The
operator may cancel the second and third charter periods by giving a written
notice to the Magic to such effect by no later than November 1, 2006 and it may
cancel the third charter period by giving a written notice to such effect by no
later than November 1, 2007. As of the November 13, 2006, the operator has not
given any cancellation notice.
Following management's assessment conducted at the end of the three month period
ending March 31, 2006, management determined that there has been a decrease in
the fair market value of Isramco's investment in such vessel and, that as a
consequence thereof, Isramco believes the investment to have been impaired.
Accordingly, Isramco recorded an impairment charge as of March 31, 2006 in the
amount of $2,200,000.
-4-
NOTE 3 - OIL AND GAS PROPERTIES
During 2006 we continued to invest in drilling activities in the Barnett shale
in North Central Texas (Parker County) in which we hold 15% working interests.
To date, 16 gas wells have been drilled of which one well has been completed for
production and the remainder are in various stages of completion. The total
investment during the 2006 Period was $3,290,910.
NOTE 4 - EARNINGS PER SHARE COMPUTATION
SFAS No. 128 requires a reconciliation of the numerator (income) and denominator
(shares) of the basic earnings per share ("EPS") computation to the numerator
and denominator of the diluted EPS computation. The reconciliation is as
follows:
For the three months ended September 30,
2006 2005
Income Shares Income Shares
Basic $ 582,000 2,717,891 $1,092,000 2,717,891
Effect of dilutive securities of stock options -- -- -- --
---------- ---------- ---------- ----------
Diluted $ 582,000 2,717,891 $1,092,000 2,717,891
========== ========== ========== ==========
For the nine months ended September 30,
2006 2005
Income Shares Income Shares
Basic $2,042,000 2,717,891 $ 801,000 2,717,891
Effect of dilutive securities of stock options -- -- -- --
---------- ---------- ---------- ----------
Diluted $2,042,000 2,717,891 $ 801,000 2,717,891
========== ========== ========== ==========
-5-
NOTE 5 - GEOGRAPHICAL SEGMENT INFORMATION
Isramco's operations for 2006 involve two industry segments - the exploration,
development production and transportation of oil and natural gas and holding and
leasing its cruise live vessel. Its current oil and gas activities are
concentrated in the United States and Israel. Operating outside the United
States subjects the company to inherent risks such as a loss of revenues,
property and equipment from such hazards as exploration. Nationalization, war
and other political risks, risks of increase of takes and governmental
royalties, renegotiation of contracts with governmental royalties, renegotiation
of contracts with government entities and change in laws and policies governing
operations of foreign-based companies.
Isramco's oil and gas business is subject to operating risks associated with the
exploration, and production of oil and gas, including blowouts, pollution and
acts of nature that could result in damage to oil and gas wells, production
facilities of formations. In additions, oil and gas prices have fluctuated
substantially in recent years as a result of events, which were outside of
Isramco's control. Isramco does not directly operator the operators. This
segment of Isramco's business is subject to many risks all of which cannot be
presently anticipated, including losses resulting from unexpected repairs and
maintenance and competition.
United Total Oil Consolidated
States Israel and Gas Vessel Total
-------- -------- -------- -------- --------
Identifiable assets at September 30, 2006 $ 7,780 $ 23 $ 7,803 $ 5,578 $ 13,381
Cash and corporate assets 31,193
--------
Total Assets at September 30, 2006 $ 44,574
========
Identifiable assets at December 31, 2005 $ 5,236 $ 68 $ 5,304 $ 8,479 $ 13,783
Cash and corporate assets 24,832
--------
Total Assets at December 31, 2005 $ 38,615
========
Nine Months Ended September 30, 2006
Sales and other operating revenue $ 1,915 $ 519 $ 2,434 $ 1,424 $ 3,858
Costs and operating expenses (1,354) (16) (1,370) (1,738) (3,108)
-------- -------- -------- -------- --------
Operating profit (loss) $ 561 $ 503 $ 1,064 $ (314) 750
======== ======== ======== ======== ========
Interest income, net of interest expense 95
General corporate expenses (1,633)
Gain on marketable securities 885
Equity in net income of investees 1,930
Other income 3,174
Impairment of Vessel (2,200)
Income taxes (959)
--------
$ 2,042
Net income ========
-6-
United Total Oil Consolidated
States Israel and Gas Vessel Total
------- ------- ------- ------- -------
Nine Months Ended September 30, 2005
Sales and other operating revenue $ 2,428 $ 504 $ 2,932 $ 1,304 $ 4,236
Costs and operating expenses (1,816) (558) (2,374) (1,782) (4,156)
------- ------- ------- ------- -------
Operating profit (loss) $ 612 $ (54) $ 558 $ (478) 80
======= ======= ======= ======= =======
Interest income, net of interest expense 107
General corporate expenses (1,286)
Gain on marketable securities 343
equity in net income of investees 1,571
Other income 236
Income taxes (250)
-------
Net income $ 801
=======
Three Months Ended September 30, 2006
Sales and other operating revenue $ 596 $ 218 $ 814 $ 736 $ 1,550
Costs and operating expenses (552) (5) (557) (190) (747)
------- ------- ------- ------- -------
Operating profit (loss) $ 44 $ 213 $ 257 $ 546 803
======= ======= ======= ======= =======
Interest income, net of interest expense 9
General corporate expenses (485)
Gain on marketable securities 73
Equity in net income of investees 267
Other income 16
Income taxes (101)
-------
Net income $ 582
=======
Three Months Ended September 30, 2005
Sales and other operating revenue $ 819 $ 104 $ 923 $ 736 $ 1,659
Costs and operating expenses (700) (186) (886) (530) (1,416)
------- ------- ------- ------- -------
Operating profit $ 119 $ (82) $ 37 $ 206 243
======= ======= ======= ======= =======
Interest income, net of interest expense 107
General corporate expenses (486)
Gain on marketable securities 124
Equity in net income of investees 1,182
Other income 172
Income taxes (250)
-------
Net income $ 1,092
=======
-7-
NOTE 6 - COMPREHENSIVE INCOME
Isramco's comprehensive income for the nine-month periods ended September 30,
2006 and 2005 was as follows (in thousands):
Nine months ended September 30,
2006 2005
-------- --------
Net income (loss) $ 2,042 $ 801
Other comprehensive gain (loss) available-for-sale securities 625 84
Foreign currency translation adjustments 1,019 (543)
-------- --------
Comprehensive income (loss) $ 3,686 $ 342
======== ========
NOTE 7 -- SUBSEQUENT EVENTS
On October 19, 2006 Jay Petroleum LLC, a wholly owned subsidiary of Isramco, and
Delek Energy US Inc each purchased a 50% working interest in 2,780 non producing
Barnett Shale acreages in Wise County Texas from McCommons Oil Company. Jay
Petroleum and Delek each paid $1.2 million for these rights.
In addition, Jay Management LLC, another wholly owned Isramco subsidiary, and
Delek entered into a joint operating agreement as of October 19, 2006 for Jay
Management to serve as operator of the acreages.
A 3D seismic survey of the area and two exploratory gas wells are currently
planned and, based on the results thereof, additional drillings will be
considered.
-8-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING COMMENTARY SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED
FINANCIAL STATEMENTS AND RELATED NOTES CONTAINED ELSEWHERE IN THIS REPORT ON
FORM 10-Q. THE DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS
AND UNCERTAINTIES. THESE STATEMENTS RELATE TO FUTURE EVENTS OR OUR FUTURE
FINANCIAL PERFORMANCE. IN SOME CASES, YOU CAN IDENTIFY THESE FORWARD-LOOKING
STATEMENTS BY TERMINOLOGY SUCH AS "MAY," "WILL," "SHOULD," "EXPECT," "PLAN,"
"ANTICIPATE," "BELIEVE," "ESTIMATE," "PREDICT," "POTENTIAL," "INTEND," OR
"CONTINUE," AND SIMILAR EXPRESSIONS. THESE STATEMENTS ARE ONLY PREDICTIONS. OUR
ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE
FORWARD-LOOKING STATEMENTS AS A RESULT OF A VARIETY OF FACTORS.
OVERVIEW
Isramco, Inc., a Delaware company, is active in the exploration of oil and gas
in Israel and the United States. We are an operator of certain leases and
licenses and also hold participation interests in certain other interests. We
also hold certain non-oil and gas properties.
CRITICAL ACCOUNTING POLICIES
Preparing financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenue,
and expenses. These estimates and assumptions are affected by our application of
accounting policies. Our critical accounting policies are as follows:
We maintain allowances for doubtful accounts for estimated losses resulting from
the inability of customers to make required payments. If the financial condition
of customers were to deteriorate, resulting in an impairment of their ability to
make payments, additional allowances may be required.
We record an investment impairment charge when we believe an investment has
experienced a decline in value that is other than is temporary. Future adverse
changes in market conditions or poor operating results of underlying investments
could result in losses or an inability to recover the carrying value of the
investment that may not be reflected in an investment's current carrying value,
thereby possibly requiring an impairment charge in the future.
LIQUIDITY AND CAPITAL RESOURCES
We finance our operations primarily from cash generated by operations.
The increase in our consolidated cash and cash equivalents of $2,381,000 from
$1,249,000 at December 31, 2005 to $3,630,000 at September 30, 2006, is
primarily attributable to the receipt of $2,565,000 from the settlement of two
lawsuit initiated by us.
Net cash used in investing activities for the nine-month period ended September
30, 2006 was $2,012,000 compared to $269,000 provided by during the nine-month
period ended September 30, 2005. The cash used in 2006 was primarily for
investment in oil and gas wells in US.
Capital expenditures for property and equipment during the nine months ended
September 30, 2005 were $3,131,000 compared to $2,021,000 for the same period in
2005. Capital expenditures during 2006 are primarily attributable to investments
in gas wells is the Barnett shale in West Texas. Capital expenditures during
2005 primarily attributable to investments in the Magic 1 cruise liner and in
the drilling of oil and gas wells in Texas.
-9-
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2006 (THE "2006 PERIOD") COMPARED TO THE NINE
MONTHS ENDED SEPTEMBER 30, 2005 (THE "2005 PERIOD") AND THE THREE MONTHS ENDED
SEPTEMBER 30, 2006 COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 2005.
We reported net income of $2,042.000 ($0.75 per share) for the nine-month period
ended September 30, 2006 compared to net income of $801,000 ($0.29 per share)
for the same period in 2005 and net income of $582,000 ($0.21 per share) for the
three months period ended September 30, 2006 compared to net income of
$1,092,000 ($0.40 per share) for the same period in 2005. The increase in the
net income for the nine months ended September 30, 2006 compared to the nine
months ended September 30, 2005 is attributable to the recording of a non
recurring one time payment of $2,565,000 in connection with the settlement of
certain lawsuits initiated by us, offset by decrease in oil and gas sales and
impairment of the cruise line vessel that we recorded during the first quarter
of 2006.
Set forth below is a break-down of these results:
United States
Oil and Gas Revenues (in thousands)
Three Months ended September 30, Nine Months ended September 30,
2006 2005 2006 2005
Oil Volume Sold (Bbl) 3 5.1 10 12.2
Gas Volume Sold (MCF) 59 90 172 285
Oil Sales ($) 216 258 643 583
Gas Sales ($) 383 554 1,161 1,735
Average Unit Price
Oil ($/Bbl) * $64.66 $ 50.50 $ 61.18 $47.70
$ 6.44 $ 6.15 $ 6.76 $ 6.08
Gas ($/MCF) **
* Bbl - Stock Market Barrel Equivalent to 42 U.S. Gallons
** MCF - 1,000 Cubic Feet
SUMMARY OF EXPLORATION EFFORTS IN THE UNITED STATES
Our wholly-owned subsidiaries, Jay Petroleum LLC and Jay Management LLC, are
involved in oil and gas exploration and production in the United States. Jay
Petroleum owns varying working interests in oil and gas wells in Louisiana,
Texas, Oklahoma and Wyoming. Independent estimates of the reserves held by Jay
Petroleum as of December 31, 2005 are approximately 106,638 net barrels of
proved developed producing oil and 1,645 MMCFs of proved developed producing
natural gas. Jay Management acts as the operator of certain of the producing oil
and gas wells owned by Jay Petroleum.
During 2006 we continued to invest in drilling activities in the Barnett shale
in North Central Texas (Parker County) in which we hold 15% working interests.
To date, 16 gas wells have been drilled of which one well has been completed for
production and the remainder are in various stages of completion. The total
investment during the 2006 Period was $3,290,910.
OPERATOR'S FEES
During the 2006 Period, we earned $61,000 in operator fees compared to $54,000
for the 2005 Period and $26,000 for the three months ended September 30, 2006
compared to $18,000 for the corresponding periods in 2005.
-10-
OIL & GAS REVENUES
During the 2006 Period, we had oil and gas revenues of $1,804,000 compared to
$2,292,000 for the 2005 Period and $599,000 for the three months ended September
30, 2006 compared to $775,000 for the comparable period in 2005. The decrease in
the 2006 Period and for the three months ended September 30, 2006 compared to
the same period in 2005 is primarily attributable to the decline in the gas
production of our wells.
LEASE OPERATING EXPENSES AND SEVERANCE TAXES
Lease operating expenses and severance taxes were primarily in connection with
oil and gas fields in the United States. Oil and gas lease operating expenses
and severance taxes for the 2005 Period were $898,000 compared to $1,124,000 for
the 2005 Period and $499,000 for the three months ended September 30, 2006
compared to $499,000 the comparable period in 2004.
OIL AND GAS EXPLORATION COSTS
During the 2006 Period, we incurred expenses for exploration costs of $125,000
compared to $160,000 in 2005 Period.
INTEREST INCOME
Interest income in respect of the 2006 Period was $370,000 compared to $320,000
for the 2005 Period and $73,000 in respect of the three months ended September
30, 2006 compared to $164,000 for the same period in 2005.
GAIN (LOSS) ON MARKETABLE SECURITIES
During the 2006 Period, we recognized a net realized and unrealized gain on
trading securities of $885,000 compared to gain of $343,000 for the 2005 Period
and gain of $73,000 for the three months ended September 30, 2006 compared to
gain of $124,000 for the same period in 2005.
Increases or decreases in the gains and losses from marketable securities are
dependent on the market prices in general and the composition of our portfolio.
EQUITY IN NET INCOME OF INVESTEES
Our equity in the net income of investees for the 2006 Period was $1,930,000
compared to our equity in net income of $1,571,000 for the 2005 Period and
$267,000 in respect of the three months ended September 30, 2006 compared to
$1,182,000 for the same three month period in 2005. The increase in the 2006
Period is primarily attributable to increase in the market value of the
marketable securities held by Isramco Negev 2 and IOC Dead Sea LP.
OPERATOR EXPENSE
Operator expenses were incurred primarily in connection with the offshore
activities in Israel. Operator expenses for the 2006 Period were $554,000
compared to $495,000 for the 2005 Period and $178,000 for the three months ended
September 30, 2006 compared to 133,000 for the corresponding period in 2005.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses for the 2006 Period were $1,079,000 compared
to $1,286,000 for the 2005 Period and $307,000 for the three months ended
September 30, 2006 compared to $483,000 for the same period in 2005.
CRUISE LINE VESSEL REVENUES
During the 2006 Period, we earned $1,424,000 from leasing the cruise line Vessel
compare to $1,304,000 during the 2005 Period. The lease for 2006 began in April
6, 2006 and expired on October 31, 2006.
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CRUISE LIVE VESSEL EXPENSES
Cruise Line vessel expenses for the 2006 Period were $1,028,000 and $11,000 for
the three months ended September 30, 2006. The expenses are primarily
attributable to maintenance, repairs and payroll. Expenses for 2005 Period were
$957,000 and 216,000 for the three months ended September 30, 2005.
DEPRECIATION, DEPLETION AND AMORTIZATION
Depreciation depletion and amortization expenses are connected to the producing
wells in the United States and to the cruise line vessel. During the 2006
Period, we recorded $1,005,000 compared to $1,372,000 for the 2005 Period and
$187,000 for the three months ended September 30, 2006 compared to $542,000 for
the comparable period in 2005. The decrease in the 2006 Period and for the three
months is primarily attributable to the lower depreciation on the vessel of
$114,000 as a result of the impairment taken in the first quarter of 2006 and
lower depletion during 2006 of $160,000 from a field that has had lower
production due to pipeline maintenance difficulties.
NET GAIN ON LEGAL SETTLEMENTS
Net gain on legal settlements in 2006 Period is attributable to the receipt of
approximately $3,050,000 from the settlements in February 2006 of certain
lawsuits that we initiated. We recorded a net gain of $2,565,000.
OTHER INCOME
Other income during the 2006 Period was $609,000 compared to $236,000 during the
2005 Period. Other income in the 2006 Period is primarily attributable to the
mark to market of swap contracts on oil and gas prices.
IMPAIRMENT OF ASSETS
Following management's assessment conducted in April and May 2006 as part of the
preparation of the financial statements for the first quarter of 2006,
management determined that there has been a decrease in the fair market value of
our investment in the Magic 1 cruise vessel and, that as a consequence thereof,
we believed the investment to have been impaired. Accordingly, we recorded as
impairment charge in March 2006 in the amount of $2,200,000 for the three month
period ended March 31, 2006.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risks relating to changes in interest rates and foreign currency
exchanges rates were reported in Item 7A of our Annual Report on Form 10-K for
the year ended December 31, 2005 There has been no material change in these
market risks since the end of the fiscal year 2005.
ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. We maintain disclosure
controls and procedures that are designed to ensure that information required to
be disclosed in our Exchange Act reports is recoded, processed, summarized and
reported within the time periods specified in the SEC's rules and forms, and
that such information is accumulated and communicated to management, including
our Chief Executive Officer (and Principal Financial and Accounting Officer), as
appropriate, to allow timely decisions regarding required disclosure based
closely on the definition of "disclosure controls and procedures" in Rule 13 a-
14 c.
As of the end of the period covered by this report, we carried out an
evaluation, under the supervision and with participation of management,
including its Chief Executive Officer (and Principal Financial and Accounting
Officer), of the effectiveness of the design and operation of the disclosure
controls and procedures. Based of the foregoing, our Chief Executive Officer
(and Principal Financial and Accounting Officer) concluded that our disclosure
controls and procedures were effective.
CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING. During the quarter ended
September 30, 2005, there have been no changes in our internal controls over
financial reporting that have materially affected, or are reasonably likely to
materially affect, these controls.
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PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 1A. RISK FACTORS
The Risk Factors included in our Annual Report on Form 10-K for the fiscal year
ended December 31, 2005 have not materially changed other than as set forth
below. The update to the risk factors contained below was first included in our
quarterly report on Form 10-QSB for the three months ended March 31, 2006.
In March 2004, we purchased a luxury cruise liner for $8,050,000. The vessel is
being operated by our wholly owned subsidiary Magic 1 Cruise Line Corp. Based on
a re-evaluation of the vessel's recoverable amount that we conducted in May 2006
based on a revision of the vessel's anticipated maintenance costs, we believe
there has been a decrease in the fair market value of the vessel and that our
investment has thus been impaired. Accordingly, we recorded an impairment charge
of $2,200,000 as of March 31, 2006. We periodically re-evaluate the carrying
value of the vessel. No assurance can be given that future developments in the
cruise line industry generally or in the costs associated with the maintenance
of the vessel will not result in additional impairment to the value of the
vessel.
ITEM 2. CHANGE IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES
None
ITEM 3. DEFAULT UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS
Exhibits
31. Certification of Chief Executive and Principal Financial Officer pursuant to
Section 302 of Sarbanes-Oxley Act
32. Certification of Chief Executive and Principal Financial Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
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SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ISRAMCO, INC.
DATE: NOVEMBER 14 2006 BY /s/ Haim Tsuff
--------------------------------------
Chief Executive Officer (and Principal
Financial and Accounting Officer)
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