UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
| X | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Fiscal Year ended December 31, 2016
OR
| ______ |
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
ADAMS RESOURCES & ENERGY, INC.
(Exact name of registrant as specified in its charter)
| Delaware | 74-1753147 | 17 South Briar Hollow Lane Suite 100 | 77027 |
| Houston, Texas | |||
| (State of Incorporation) | (I.R.S. Employer Identification No.) | (Address of Principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code: (713) 881-3600
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Name of each exchange on which registered |
| Common Stock, $.10 Par Value | NYSE MKT |
Indicate by check mark whether the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES ___NO X__
Indicate by check mark whether the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.YESAct. YES ____ NO X
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 the 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 was required to submit and post such files).
YES X NO ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. X X__
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or a smaller reporting company. See definition of ‟large accelerated filer”, ‟accelerated filer” and ‟smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ____Accelerated filer X
Non-accelerated filer ____ Smaller reporting company _____
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Act).
YES ___NO X
The aggregate market value of the voting and non-voting common equity held by non-affiliates as of the close of business on June 30, 20142016 was $172,042,728$85,082,805 based on the closing price of $78.13$38.50 per one share of common stock as reported on the NYSE MKT for such date. A total of 4,217,596 shares of Common Stock were outstanding at March 1, 2015.2017.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Annual Meeting of Stockholders to be held May 14, 20153, 2017 are incorporated by reference into Part III of this report.
PART I
Forward-Looking Statements –Safe Harbor Provisions
This annual report on Form 10-K for the year ended December 31, 20142016 contains certain forward-looking statements covered by the safe harbors provided under federal securities law and regulations. To the extent such statements are not recitations of historical fact, such forward-looking statements involve risks and uncertainties. In particular, statements under the captions (a) Production and Reserve Information, (b) Regulatory Status and Potential Environmental Liability, (c) Management’s Discussion and Analysis of Financial Condition and Results of Operations, (d) Outlook, (e) Critical Accounting Policies and Use of Estimates, (e)(f) Quantitative and Qualitative Disclosures about Market Risk, (f)(g) Income Taxes, (g)(h) Concentration of Credit Risk, (h)(i) Price Risk Management Activities, and (i)(j) Commitments and Contingencies, among others, contain forward-looking statements. Where the Company expresses an expectation or belief regarding 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.
With the uncertainties of forward looking statements in mind, the reader should consider the risks discussed elsewhere in this report and other documents filed by the Company with the Securities and Exchange Commission (the ‟SEC”) from time to time and the important factors described under ‟Item 1A. Risk Factors” that could cause actual results to differ materially from those expressed in any forward-looking statement made by or on behalf of the Company.
Items 1 and 2. BUSINESS AND PROPERTIES
Business Activities
Adams Resources & Energy, Inc. (‟ARE”AE”), a Delaware corporation organized in 1973, and its subsidiaries (collectively, the ‟Company”), are primarily engaged in the business of crude oil marketing, tank truck transportation of liquid chemicals and dry bulk, and oil and gas exploration and production. The Company’s headquarters are located in 23,45027,932 square feet of office space located at 17 South Briar Hollow Lane Suite 100, Houston, Texas 77027 and the telephone number of that address is (713) 881-3600. The revenues, operating results and identifiable assets of each industry segment for the three years ended December 31, 20142016 are set forth in Note (8) to the Consolidated Financial Statements included elsewhere herein.Statements.
Marketing Segment Subsidiary
Gulfmark Energy, Inc. (‟Gulfmark”), a subsidiary of ARE,AE, purchases crude oil and arranges sales and deliveries to refiners and other customers. Activity is concentrated primarily onshore in Texas, and Louisiana with additional operations inOklahoma, North Dakota, Michigan and North Dakota.Louisiana. Gulfmark operates 205156 tractor-trailer rigs and maintains over 121120 pipeline inventory locations or injection stations. Gulfmark has the ability to barge oil from four oil storage facilities along the intercoastal waterway of Texas and Louisiana and maintains 400,000425,000 barrels of storage capacity at the dock facilities in order to access waterborne markets for its products. During 2014,2016, Gulfmark purchased approximately 117,10072,900 barrels per day of crude oil at the field (wellhead) level. Gulfmark delivers physical supplies to refiner customers or enters into commodity exchange transactions when the costfrom time to exchange is less than the alternate costtime to transport or store the crude oil.protect from a decline in inventory valuation. During 2014,2016, Gulfmark had sales to twofour customers that comprised 20.318.2 percent, 14.016.5 percent, 15.9 percent and 10.6 percent, respectively, of total Company wide revenues. Management believes thatalternative market outlets for its commodity sales are readily available and a loss of any of these customers would not have a material adverse effect on the Company’s operations. See discussion under ‟Concentration of Credit Risk” in Note (3) to Consolidated Financial Statements.
2
Operating results for the marketing segment are sensitive to a number of factors. Such factors include commodity location, grades of product, individual customer demand for grades or location of product, localized market price structures, availability of transportation facilities, actual delivery volumes that vary from expected quantities, and the timing and costs to deliver the commodity to the customer.
Transportation Segment Subsidiary
Service Transport Company (‟STC”), a subsidiary of ARE,AE, transports liquid chemicals and to a lesser extent dry bulk on a ‟for hire” basis throughout the continental United States and Canada. Transportation service is provided to over 400 customers under multiple load contracts in addition to loads covered under STC’s standard price list. Pursuant to regulatory requirements, STC holds a Hazardous Materials Certificate of Registration issued by the United States Department of Transportation (‟DOT”). STC operates 308 truck tractors of which 285259 are Company owned with 2349 independent owner-operator units. The Company also owns and operates 509558 tank trailers. In addition, STC operates truck terminals in Houston, Corpus Christi, and Nederland, Texas as well as Baton Rouge (St. Gabriel), Louisiana, St. Rose, Louisiana and Mobile (Saraland), Alabama. Transportation operations are headquartered at a terminal facility situated on 2226.5 Company-owned acres in Houston, Texas. This property includes maintenance facilities, an office building, tank wash rack facilities and a water treatment system. The St. Gabriel, Louisiana terminal is situated on 11.5 Company-owned acres and includes an office building, maintenance bays and tank cleaning facilities. Pursuant to regulatory requirements, STC holds a Hazardous Materials Certificate of Registration issued by the United States Department of Transportation (‟DOT”).
STC is complianta recognized certified partner with International Organization for Standardization (‟ISO”) 9001:2000 Standard. Thethe American Chemistry Council’s Responsible Care Management System; the scope of this Quality System CertificateRCMS certification covers the carriage of bulk liquids throughout STC’s area of operations as well as the tank trailer cleaning facilities and equipment maintenance. STC’s quality management process is one of its major assets. The practice of using statistical process control covering safety, on-time performance and customer satisfaction aids continuous improvement in all areas of quality service. In addition to its ISO 9001:2000 practices, theThe American Chemistry Council recognizes STC as a Responsible CareÓ Partner. Responsible Care PartnersPartners© serve the chemical industry and implement and monitor the seven Codes of Management Practices. The seven codes address compliance and continuing improvement in (1) Community Awareness and Emergency Response, (2) Pollution Prevention, (3) Process Safety, (4) Distribution, (5) Employee Health and Safety, (6) Product Stewardship, and (7) Security.
Oil and Gas Segment Subsidiary
Adams Resources Exploration Corporation (‟AREC”), a subsidiary of ARE,AE, is actively engaged in the exploration and development of domestic oil and natural gas properties primarily in the Permian Basin of West Texas and the south central region of the United States.Haynesville Shale. AREC’s offices are maintained in Houston and the Company holds an interest in 514470 producing wells of which 296 are Company operated. The Company is currently considering strategic alternatives related to the oil and gas exploration and development subsidiary.
Producing Wells--The following table sets forth the Company’s gross and net productive wells as of December 31, 2014.2016. Gross wells are the total number of wells in which the Company has an interest, while net wells are the sum of the fractional interests owned.
| Oil Wells | Gas Wells | Total Wells | ||||
| Gross | Net | Gross | Net | Gross | Net | |
| Permian Basin | 178 | 3.15 | 55 | 1.09 | 233 | 4.24 |
| Haynesville Shale | - | - | 92 | 2.46 | 92 | 2.46 |
| Other | 95 | 2.20 | 50 | 4.60 | 145 | 6.80 |
| 273 | 5.35 | 197 | 8.15 | 470 | 13.50 | |
Oil Wells | Gas Wells | Total Wells | ||||||||||||||||||||||
Gross | Net | Gross | Net | Gross | Net | |||||||||||||||||||
| Texas | 247 | 8.11 | 149 | 11.46 | 396 | 19.57 | ||||||||||||||||||
| Other | 93 | 3.42 | 25 | .61 | 118 | 4.03 | ||||||||||||||||||
| 340 | 11.53 | 174 | 12.07 | 514 | 23.60 | |||||||||||||||||||
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Developed Acreage | Undeveloped Acreage | |||||||||||||||
Gross | Net | Gross | Net | |||||||||||||
| Texas | 128,780 | 10,556 | 118,731 | 13,911 | ||||||||||||
| Kansas | 1,018 | 51 | 14,784 | 739 | ||||||||||||
| North Dakota | - | - | 13,000 | 1,300 | ||||||||||||
| Other | 3,478 | 339 | 6,065 | 2,120 | ||||||||||||
| 133,276 | 10,946 | 152,580 | 18,070 | |||||||||||||
Drilling Activity--The following table sets forth the Company’s drilling activity for each of the three years ended December 31, 2014.2016. All drilling activity was onshore in Texas, Louisiana, Arkansas, North Dakota, Wyoming and Kansas.
| 2016 | 2015 | 2014 | ||||
| Gross | Net | Gross | Net | Gross | Net | |
| Exploratory wells drilled | ||||||
| - Productive | - | - | - | - | - | - |
| - Dry | - | - | 1 | .10 | 4 | .40 |
| Development wells drilled | ||||||
| - Productive | 7 | .13 | 13 | .16 | 46 | .83 |
| - Dry | - | - | - | - | 3 | .43 |
| 7 | .13 | 14 | .26 | 53 | 1.66 | |
2014 | 2013 | 2012 | ||||||||||||||||||||||
| Gross | Net | Gross | Net | Gross | Net | |||||||||||||||||||
| Exploratory wells drilled | ||||||||||||||||||||||||
| - Productive | - | - | - | - | - | - | ||||||||||||||||||
| - Dry | 4 | .40 | 3 | .38 | - | - | ||||||||||||||||||
| Development wells drilled | ||||||||||||||||||||||||
| - Productive | 46 | .83 | 77 | 1.40 | 109 | 2.40 | ||||||||||||||||||
| - Dry | 3 | .43 | - | - | - | - | ||||||||||||||||||
| 53 | 1.66 | 80 | 1.78 | 109 | 2.40 | |||||||||||||||||||
Production and Reserve Information--The Company’s estimated net quantities of proved oil and natural gas reserves, estimated future net cash flows before income taxes and the standardized measure of discounted future net cash flows, calculated at a 10% discount rate, for the three years ended December 31, 2014,2016, are presented in the table belowbelow (in thousands):
| As of December 31, | ||||||||||||
| 2016 | 2015 | 2014 | ||||||||||
| Crude oil (thousands of barrels) | 187 | 226 | 318 | |||||||||
| Natural gas (thousands of mcf) | 4,214 | 4,835 | 5,611 | |||||||||
| Future net cash flows before income taxes | $ | 5,479 | $ | 8,413 | $ | 41,396 | ||||||
| Standardized measure of oil and gas reserves | $ | 2,260 | $ | 3,527 | $ | 15,744 | ||||||
December 31, | ||||||||||||
2014 | 2013 | 2012 | ||||||||||
| Crude oil (thousands of barrels) | 318 | 368 | 307 | |||||||||
| Natural gas (thousands of mcf) | 5,611 | 6,286 | 8,837 | |||||||||
| Standardized measure of oil and gas reserves | $ | 15,744 | $ | 17,836 | $ | 16,355 | ||||||
The estimated value of oil and natural gas reserves and future net revenues fromderived therefrom are highly dependent upon oil and natural gas reserves was made bycommodity price assumptions. In such estimates, the Company’s independent petroleum engineers. The reserve value estimates provided at each of December 31, 2014, 2013 and 2012 are based onengineers assumed market prices of $89.60, $94.99 and $93.85 per barrel for crude oil and $5.42, $4.69 and $3.51 per thousand cubic feet (‟mcf”) for natural gas, respectively. as presented in the table below (in thousands):
| 2016 | 2015 | 2014 | ||||||||||
| Assumed market price | ||||||||||||
| Crude oil per barrel | $ | 38.34 | $ | 45.83 | $ | 89.60 | ||||||
| Natural gas per thousand cubic feet (mcf) | $ | 2.56 | $ | 2.62 | $ | 5.42 | ||||||
Such prices were based on the unweighted arithmetic average of the prices in effect on the first day of the month for each month of the respective twelve month periods as required by SEC regulations. The prices reported in the reserve disclosures for natural gas include the value of associated natural gas liquids. Hydrocarbon prices declined significantly during the fourth quarter of 2014. Realized domestic crude oil prices averaged in the $54 per barrel range during the month of December with additional price declines continuing into 2015.
Oil and gas reserve values and future net cash flow estimates are very sensitive to pricing assumptions and will vary accordingly.
Reserve estimates are based on many subjective factors. The accuracy of these estimates depends on the quantity and quality of geological data, production performance data, reservoir engineering data, the pricing assumptions utilized as well as the skill and judgment of petroleum engineers in interpreting such data. The process of estimating reserves requires frequent revision as additional information is made available through drilling, testing, reservoir studies and acquiring historical pressure and production data. In addition, the discounted present value of estimated future net revenues should not be construed as the fair market value of oil and natural gas producing properties. Such reserve valuations do not necessarily portray a realistic assessment of current value or future performance of such properties. These calculations are based on estimates as to the timing of oil and natural gas production, and there is no assurance that the actual timing of production will conform to or approximate such calculations. Also, certain assumptions have been made with respect to pricing. The estimates assume prices will remain constant from the date of the engineer’s assessment, 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 and other factors impact the market price for oil and natural gas.
4
The Company’s net oil and natural gas production for the three years ended December 31, 20142016 was as follows:
| Years Ended | Crude Oil | Natural | Crude Oil Equivalent |
| December 31, | (barrels) | Gas (mcf) | Per day (barrels) |
| 2016 | 76,700 | 662,000 | 511 |
| 2015 | 99,500 | 889,000 | 678 |
| 2014 | 127,300 | 1,133,000 | 865 |
| Years Ended | Crude Oil | Natural | ||||||
December 31, | (barrels) | Gas (mcf) | ||||||
| 2014 | 127,300 | 1,133,000 | ||||||
| 2013 | 102,300 | 1,608,000 | ||||||
| 2012 | 98,100 | 2,608,000 | ||||||
Certain financial information relating to the Company’s crude oil and natural gas exploration division revenues and earnings is summarized as follows:
| Years Ended December 31, | ||||||||||||
| 2016 | 2015 | 2014 | ||||||||||
| Average oil and condensate | ||||||||||||
sales price per barrel(1) | $ | 24.95 | $ | 28.94 | $ | 63.64 | ||||||
| Average natural gas | ||||||||||||
| sales price per mcf | $ | 2.26 | $ | 2.46 | $ | 4.65 | ||||||
| Average production cost, per equivalent | ||||||||||||
| barrel, charged to expense | $ | 18.70 | $ | 24.64 | $ | 21.42 | ||||||
Years Ended December 31, | ||||||||||||
2014 | 2013 | 2012 | ||||||||||
| Average oil and condensate | ||||||||||||
sales price per barrel(1) | $ | 63.64 | $ | 79.15 | $ | 84.39 | ||||||
| Average natural gas | ||||||||||||
| sales price per mcf | $ | 4.65 | $ | 3.75 | $ | 2.94 | ||||||
| Average production cost, per equivalent | ||||||||||||
| barrel, charged to expense | $ | 21.42 | $ | 15.54 | $ | 13.14 | ||||||
(1) Average oil and condensate prices include the value of associated natural gas liquids.
The Company had no reports to federal authorities or agencies of estimated oil and gas reserves. The Company is not obligated to provide any fixed and determinable quantities of oil or gas in the future under existing contracts or agreements associated with its oil and gas exploration and production segment.
Investment
In December 2015 the Company formed a new wholly owned subsidiary, Adams Resources Medical Management, Inc. (ARMM), and in January 2016 ARMM acquired a 30% member interest in Bencap LLC (Bencap) for a $2.2 million cash payment. Bencap provides medical insurance brokerage and medical claims auditing services to employers utilizing ERISA governed employee benefit plans. The Company has accounted for this investment under the equity method of accounting.
During the third quarter of 2016, the Company completed a review of its equity method investment in Bencap and determined there was an other than temporary impairment. Underlying this decision are the terms of the investment agreement where Bencap has the option to request borrowings up to $1.5 million (on or after December 5, 2016 but before October 31, 2018) that the Company must provide or forfeit its 30% member interest. During the third quarter of 2016, management of the Company determined that it was unlikely to provide additional funding due to Bencap’s lower than projected revenue growth and operating losses since investment inception. As a result, the Company recognized a net loss of $1.4 million from its investment in Bencap as of September 30, 2016. This loss included a pre-tax impairment charge of $1.7 million and pre-tax losses from the equity method investment of $0.5 million. In February 2017, Bencap requested additional funding of approximately $0.5 million and the Company declined the additional funding request.
In April 2016 the Company, through its ARMM subsidiary, acquired an approximate 15% equity interest (less than 3% voting interest) in VestaCare, Inc., a California corporation (“VestaCare”), for a $2.5 million cash payment. VestaCare provides an array of software as a service (“SaaS”) electronic payment technologies to medical providers, payers and patients including VestaCare’s most recent product offering, VestaPay™. VestaPay™ allows medical care providers to structure fully automated and dynamically updating electronic payment plans for their patients. The Company does not currently have any plans to pursue additional medical-related investments.
5
Environmental Compliance and Regulation
The Company is subject to an extensive variety of evolving federal, state and local laws, rules and regulations governing the storage, transportation, manufacture, use, discharge, release and disposal of product and contaminants into the environment, or otherwise relating to the protection of the environment. Presented below is a non-exclusive listing of the environmental laws that potentially impact the Company’s activities.
| - | The Solid Waste Disposal Act, as amended by the Resource Conservation and Recovery Act of 1976, as amended. |
| - | Comprehensive Environmental Response, Compensation and Liability Act of 1980 (‟CERCLA” or ‟Superfund”), as amended. |
| - | The Clean Water Act of 1972, as amended. |
| - | Federal Oil Pollution Act of 1990, as amended. |
| - | The Clean Air Act of 1970, as amended. |
| - | The Toxic Substances Control Act of 1976, as amended. |
| - | The Emergency Planning and Community Right-to-Know Act. |
| - | The Occupational Safety and Health Act of 1970, as amended. |
| - | Texas Clean Air Act. |
| - | Texas Solid Waste Disposal Act. |
| - | Texas Water Code. |
| - | Texas Oil Spill Prevention and Response Act of 1991, as amended. |
Railroad Commission of Texas (‟RRC”)--The--The RRC regulates, among other things, the drilling and operation of oil and natural gas wells, the operation of oil and gas pipelines, the disposal of oil and natural gas production wastes, and certain storage of unrefined oil and gas. RRC regulations govern the generation, management and disposal of waste from such oil and natural gas operations and provide for the clean up of contamination from oil and natural gas operations.
Louisiana Office of Conservation--This agency has primary statutory responsibility for regulation and conservation of oil, gas, and other natural resources in the State of Louisiana. Their objectives are to (i) regulate the exploration and production of oil, natural gas and other hydrocarbons, (ii) control and allocate energy supplies and distribution thereof, and (iii) protect public safety and the environment from oilfield waste, including the regulation of underground injection and disposal practices.
State and Local Government Regulation--Many states are authorized by the United States Environmental Protection Agency (‟EPA”) to enforce regulations promulgated under various federal statutes. In addition, there are numerous other state and local authorities that regulate the environment, some of which impose more stringent environmental standards than federal laws and regulations. The penalties for violations of state law vary, but typically include injunctive relief and recovery of damages for injury to air, water or property as well as fines for non-compliance.
Oil and Gas Operations--The Company’s oil and gas drilling and production activities are subject to laws and regulations relating to environmental quality and pollution control. One aspect of the Company’s oil and gas operation is the disposal of used drilling fluids, saltwater, and crude oil sediments. In addition, low-level naturally occurring radiation may, at times, occur with the production of crude oil and natural gas. The Company’s policy is to comply with environmental regulations and industry standards. Environmental compliance has become more stringent and the Company, from time to time, may be required to remediate past practices. Management believes that such required remediation in the future, if any, will not have a material adverse impact on the Company’s financial position or results of operations.
6
All states in which the Company owns producing oil and gas properties have statutory provisions regulating the production and sale of crude oil and natural gas. Regulations typically require permits for the drilling of wells and regulate the spacing of wells, the prevention of waste, protection of correlative rights, the rate of production, prevention and clean-up of pollution, and other matters.
Trucking Activities --The Company’s marketing and transportation businesses operate truck fleets pursuant to authority of the DOT and various state authorities. Trucking operations must be conducted in accordance with various laws relating to pollution and environmental control as well as safety requirements prescribed by states and the DOT. Matters such as weight and dimension of equipment are also subject to federal and state regulations. These regulations also require mandatory drug testing of drivers and require certain tests for alcohol levels in drivers and other safety personnel. The trucking industry is subject to possible regulatory and legislative changes such as increasingly stringent environmental requirements or limits on vehicle weight and size. Regulatory change may affect the economics of the industry by requiring changes in operating practices or by changing the demand for private and common or contract carrier services or the cost of providing truckload services. In addition, the Company’s tank wash facilities are subject to increasingly stringent local, state and federal environmental regulations.
The Company has implemented security procedures for drivers and terminal facilities. Satellite tracking transponders installed in the power units are used to communicate emergencies to the Company and to maintain constant information as to the unit’s location. If necessary, the Company’s terminal personnel will notify local law enforcement agencies. In addition, the Company is able to advise a customer of the status and location of their loads. Remote cameras and better lighting coverage in the staging and parking areas have augmented terminal security.
Regulatory Status and Potential Environmental Liability--The operations and facilities of the Company are subject to numerous federal, state, and local environmental laws and regulations including those described above, as well as associated permitting and licensing requirements. The Company regards compliance with applicable environmental regulations as a critical component of its overall operation, and devotes significant attention to providing quality service and products to its customers, protecting the health and safety of its employees, and protecting the Company’s facilities from damage. Management believes the Company has obtained or applied for all permits and approvals required under existing environmental laws and regulations to operate its current business. Management has reported that the Company is not subject to any pending or threatened environmental litigation or enforcement actions which could materially and adversely affect the Company’s business. The Company has, where appropriate, implemented operating procedures at each of its facilities designed to assure compliance with environmental laws and regulation. However, given the nature of the Company’s business, the Company is subject to environmental risks and the possibility remains that the Company’s ownership of its facilities and its operations and activities could result in civil or criminal enforcement and public as well as private actions against the Company, which may necessitate or generate mandatory clean up activities, revocation of required permits or licenses, denial of application for future permits, and/or significant fines, penalties or damages, any and all of which could have a material adverse effect on the Company. See “Item 1A. Risk Factors – Environmental liabilities and environmental regulations may have an adverse effect on the Company.” At December 31, 2014,2016, the Company is unaware of any unresolved environmental issues for which additional accounting accruals are necessary.
Employees
At December 31, 2014,2016, the Company employed 870 persons, 14 of whom were employed in the exploration and production of oil and gas, 401 in the marketing of crude oil, 436 in transportation operations, and 19 in administrative capacities.645 persons. None of the Company’s employees are represented by a union. Management believes its employee relations are satisfactory.
7
Federal and State Taxation
The Company is subject to the provisions of the Internal Revenue Code of 1986, as amended (the ‟Code”). In accordance with the Code, the Company computes its income tax provision based on a 35 percent tax rate. The Company’s operations are, in large part, conducted within the State of Texas. Texas operations are subject to a one-half percent state tax on its revenues net of cost of goods sold as defined by the state. Oil and gas activities are also subject to state and local income, severance, property and other taxes. Management believes the Company is currently in compliance with all federal and state tax regulations.
Available Information
The Company is required to file periodic reports as well as other information with the SEC within established deadlines. Any document filed with the SEC may be viewed or copied at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Additional information regarding the Public Reference Room can be obtained by calling the SEC at (800) SEC-0330. The Company’s SEC filings are also available to the public through the SEC’s web site located at http://www.sec.gov.
The Company maintains a corporate website at http://www.adamsresources.com, on which investors may access free of charge the annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports as soon as is reasonably practicable after filing or furnishing such material with the SEC. Additionally, the Company has adopted and posted on its website a Code of Business Ethics designed to reflect requirements of the Sarbanes-Oxley Act of 2002, NYSE MKT Exchange rules and other applicable laws, rules and regulations. The Code of Business Ethics applies to all of the Company’s directors, officers and employees. Any amendment to the Code of Business Ethics will be posted promptly on the Company’s website. The information contained on or accessible from the Company’s website does not constitute a part of this report and is not incorporated by reference herein. The Company will provide a printed copy of any of these aforementioned documents free of charge upon request by calling AREAE at (713) 881-3600 or by writing to:
Adams Resources & Energy, Inc.
ATTN: Richard B. AbshireJosh C. Anders
17 South Briar Hollow Lane, Suite 100
Houston, Texas 77027
Item 1A. RISK FACTORS
Fluctuations in oil and gas prices could have an adverse effect on the Company.
The Company’s future financial condition, revenues, results of operations and future rate of growth are materially affected by oil and natural gas prices that historically have been volatile and are likely to continue to be volatile in the future. Crude oil and natural gas prices depend on factors outside the control of the Company. These factors include:
| · | supply and demand for oil and gas and expectations regarding supply and demand; |
| · | political conditions in other oil-producing countries, including the possibility of insurgency or war in such areas; |
| · | economic conditions in the United States and worldwide; |
| · | governmental regulations and taxation; |
| · | impact of energy conservation efforts; |
| · | the price and availability of alternative fuel sources; |
| · | weather conditions; |
| · | availability of local, interstate and intrastate transportation systems; and |
| · | market uncertainty. |
8
Economic developments could damage operations and materially reduce profitability and cash flows.
Potential disruptions in the credit markets and concerns about global economic growth could have a significant adverse impact on global financial markets and commodity prices. Such factors could contribute to a decline in the Company’s stock price and corresponding market capitalization. Should commodity prices experience a period of rapid decline, or a prolonged period of low commodity prices, future earnings will be reduced. Since the Company currently has neither bank debt obligations nor covenants tied to its stock price, potential declines in the Company’s stock price do not affect the Company’s liquidity or overall financial condition. Should the capital and credit markets experience volatility and the availability of funds become limited, the Company’s customers and suppliers may incur increased costs associated with issuing commercial paper and/or other debt instruments and this, in turn, could adversely affect the Company’s ability to secure supply and make profitable sales.
General economic conditions could reduce demand for chemical based trucking services.
Customer demand for the Company’s products and services is substantially dependent upon the general economic conditions for the United States which are cyclical in nature. In particular, demand for liquid chemical truck transportation services is dependent on activity within the petrochemical sector of the U.S. economy. Chemical sector demand typically varies with the housing and auto markets as well as the relative strength of the U.S. dollar to foreign currencies. A relatively strong U.S. dollar exchange rate may be adverse to the Company’s transportation operation since it tends to suppress export demand for petrochemicals. Conversely, a weak U.S. dollar exchange rate tends to stimulate export demand for petrochemicals.
The Company’s business is dependent on the ability to obtain trade and other credit.
The Company’s future development and growth depends, in part, on its ability to successfully obtain credit from suppliers and other parties. Trade credit arrangements are relied upon as a significant source of liquidity for capital requirements not satisfied by operating cash flow. Should global financial markets and economic conditions disrupt and reduce stability in general, and the solvency of creditors specifically, the availability of funding from credit markets would be reduced as many lenders and institutional investors would enact tighter lending standards, refuse to refinance existing debt on terms similar to current debt or, in some cases, cease to provide funding to borrowers. These issues coupled with weak economic conditions would make it more difficult for the Company and its suppliers and customers to obtain funding. If the Company is unable to obtain trade or other forms of credit on reasonable and competitive terms, the ability to continue its marketing and exploration businesses, pursue improvements, and continue future growth will be limited. There is no assurance that the Company will be able to maintain future credit arrangements on commercially reasonable terms.
The financial soundness of customers could affect the Company’s business and operating results
Constraints in the financial markets and other macro-economic challenges that might affect the economy of the United States and other parts of the world could cause the Company’s customers to experience cash flow concerns. As a result, if customers’ operating and financial performance deteriorates, or if they are unable to make scheduled payments or obtain credit, customers would not be able to pay, or may delay payment of, accounts receivable owed to the Company. Any inability of current and/or potential customers to pay for services may adversely affect the Company’s financial condition and results of operations.
Counterparty credit default could have an adverse effect on the Company.
The Company’s revenues are generated under contracts with various counterparties and results of operations could be adversely affected by non-performance under the various contracts. A counterparty’s default or non-performance could be caused by factors beyond the Company’s control. A default could occur as a result of circumstances relating directly to the counterparty, or due to circumstances caused by other market participants having a direct or indirect relationship with such counterparty. The Company seeks to mitigate the risk of default by evaluating the financial strength of potential counterparties; however, despite mitigation efforts, contractual defaults may occur from time to time.
9
Potentially escalating diesel fuel prices could have an adverse effect on the CompanyCompany.
As an integral part of the Company’s marketing and transportation businesses, the Company operates approximately 500415 truck-tractors and diesel fuel costs are a significant component of operating expense. Such costs generally fluctuate with increasing and decreasing world crude oil prices. WhileDuring periods of high prices, the Company attempts to recoup rising diesel fuel costs through the pricing of its services,services; however to the extent such costs escalate, operating earnings will generally be adversely affected.
Revenues are generated under contracts that must be renegotiated periodically.
Substantially all of the Company’s revenues are generated under contracts which expire periodically or which must be frequently renegotiated, extended or replaced. Whether these contracts are renegotiated, extended or replaced is often subject to factors beyond the Company’s control. Such factors include sudden fluctuations in oil and gas prices, counterparty ability to pay for or accept the contracted volumes and, most importantly, an extremely competitive marketplace for the services offered by the Company. There is no assurance that the costs and pricing of the Company’s services can remain competitive in the marketplace or that the Company will be successful in renegotiating its contracts.
Anticipated or scheduled volumes will differ from actual or delivered volumes.
The Company’s crude oil marketing operation purchases initial production of crude oil at the wellhead under contracts requiring the Company to accept the actual volume produced. The resale of such production is generally under contracts requiring a fixed volume to be delivered. The Company estimates its anticipated supply and matches such supply estimate for both volume and pricing formulas with committed sales volumes. Since actual wellhead volumes produced will never equal anticipated supply, the Company’s marketing margins may be adversely impacted. In many instances, any losses resulting from the difference between actual supply volumes compared to committed sales volumes must be absorbed by the Company.
Environmental liabilities and environmental regulations may have an adverse effect on the Company.
The Company’s business is subject to environmental hazards such as spills, leaks or any discharges of petroleum products and hazardous substances. These environmental hazards could expose the Company to material liabilities for property damage, personal injuries, and/or environmental harms, including the costs of investigating and rectifying contaminated properties.
Environmental laws and regulations govern many aspects of the Company’s business, such as drilling and exploration, production, transportation and waste management. Compliance with environmental laws and regulations can require significant costs or may require a decrease in production. Moreover, noncompliance with these laws and regulations could subject the Company to significant administrative, civil, and/or criminal fines and/or penalties.
Operations could result in liabilities that may not be fully covered by insurance.
Transportation of hazardous materials and the exploration and production of crude oil and natural gas involves certain operating hazards such as well blowouts, automobile accidents, explosions, fires and pollution. Any of these operating hazards could cause serious injuries, fatalities or property damage, which could expose the Company to liability. The payment of any of these liabilities could reduce, or even eliminate, the funds available for exploration, development, and acquisition, or could result in a loss of the Company’s properties and may even threaten survival of the enterprise.
other areas.
Consistent with the industry standard, the Company’s insurance policies provide limited coverage for losses or liabilities relating to pollution, with broader coverage provided for sudden and accidental occurrences. Insurance might be inadequate to cover all liabilities. Moreover, from time to time, obtainingObtaining insurance for the Company’s line of business can become difficult and costly. Typically, when insurance cost escalates, the Company may reduce its level of coverage and more risk may be retained to offset cost increases. If substantial liability is incurred and damages are not covered by insurance or exceed policy limits, the Company’s operation and financial condition could be materially adversely affected.
10
Changes in tax laws or regulations could adversely affect the Company.
The Internal Revenue Service, the United States Treasury Department, Congress and the states frequently review federal or state income tax legislation. The Company cannot predict whether, when, or to what extent new federal or state tax laws, regulations, interpretations or rulings will be adopted. Any such legislative action may prospectively or retroactively modify tax treatment and, therefore, may adversely affect taxation of the Company.
The Company’s business is subject to changing government regulations.
Federal, state or local government agencies may impose environmental, labor or other regulations that increase costs and/or terminate or suspend operations. The Company’s business is subject to federal, state and local laws and regulations. These regulations relate to, among other things, the exploration, development, production and transportation of oil and natural gas. Existing laws and regulations could be changed, and any changes could increase costs of compliance and costs of operations.
Several proposals are before state legislators and the U.S. Congress that, if implemented, would either prohibit the practice of hydraulic fracturing or subject the process to regulation under state regulation or the Safe Drinking Water Act. The Company routinely participates in wells where fracturing techniques are utilized to expand the available space for natural gas and oil to migrate toward the well-bore. This is typically done at substantial depths in very tight formations. Although it is not possible at this time to predict the final outcome of the legislation regarding hydraulic fracturing, any new state or federal restrictions could result in increased compliance costs or additional operating restrictions.
Estimating reserves, production and future net cash flow is difficult.
Estimating oil and natural gas reserves is a complex process requiring significant interpretations of technical data and assumptions relating to economic factors such as future commodity prices, production costs, severance and excise taxes, capital expenditures and remedial costs, and the assumed effect of governmental regulation. As a result, actual results may differ from the Company’s estimates. Also, the use of a 10 percent discount factor for reporting purposes, as prescribed by the SEC, may not necessarily represent the most appropriate discount factor, given actual interest rates and risks to which the Company’s business is subject. Any significant variations from the Company’s valuations could cause the estimated quantities and net present value of the Company’s reserves to differ materially.
The reserve data included in this report is only an estimate. The reader should not assume that the present values referred to in this report represent the current market value of the Company’s estimated oil and natural gas reserves. The timing of the production and the expenses from development and production of oil and natural gas properties will affect both the timing of actual future net cash flows from the Company’s proved reserves and their present value.
Oil and gas segment revenues are dependent on the ability to successfully complete drilling activity.
| · | lack of favorable economics due to price volatility |
| · | lack of acceptable prospective acreage; |
| · | inadequate capital resources; |
| · | weather; |
| · | title problems; |
| · | compliance with governmental regulations; and |
| · | mechanical difficulties. |
11
Security issues exist relating to drivers, equipment and terminal facilities.
The Company transports liquid combustible materials including petrochemicals, and such materials may be a target for terrorist attacks. While the Company employs a variety of security measures to mitigate risks, no assurance can be given that such events will not occur.
Current and future litigation could have an adverse effect on the Company.
The Company is currently involved in certain administrative and civil legal proceedings as part of the ordinary course of its business. Moreover, as incidental to operations, the Company sometimes becomes involved in various lawsuits and/or disputes. Lawsuits and other legal proceedings can involve substantial costs, including the costs associated with investigation, litigation and possible settlement, judgment, penalty or fine. Although insurance is maintained to mitigate these costs, there can be no assurance that costs associated with lawsuits or other legal proceedings will not exceed the limits of insurance policies. The Company’s results of operations could be adversely affected if a judgment, penalty or fine is not fully covered by insurance.
The Company is subject to risks associated with climate change.
Potential climate change and efforts to regulate ‟greenhouse gas” (‟GHG”) emissions have the potential to adversely affect the Company’s business including negatively impacting the costs it incurs in providing its products and services, including costs to operate and maintain its facilities, install new emission controls on its facilities, acquire allowances to authorize its GHG emissions, pay any taxes related to GHG emissions, administer and manage a GHG emissions program, pay higher insurance premiums or accept greater risk of loss in areas affected by adverse weather and coastal regions in the event of rising sea levels. In addition, the demand for and consumption of its products and services (due to change in both costs and weather patterns), and the economic health of the regions in which the Company operates, could have a material adverse effect on the Company’s business, financial condition, results of operations and cash flows.
The Company is subject to risks related to cybersecurity.
The Company is subject to cybersecurity risks and may incur increasing costs in connection with its efforts to enhance and ensure security and in response to actual or attempted cybersecurity attacks.
Substantial aspects of the Company’s business depend on the secure operation of its computer systems and websites. Security breaches could expose the Company to a risk of loss, misuse, or interruption of sensitive and critical information and functions, including its own proprietary information and that of its customers, suppliers and employees. Such breaches could result in operational impacts, reputational harm, competitive disadvantage, litigation, regulatory enforcement actions, and liability. While the Company devotes substantial resources to maintaining adequate levels of cybersecurity, there can be no assurance that it will be able to prevent all of the rapidly evolving types of cyber attacks.cyberattacks. Actual or anticipated attacks and risks may cause the Company to incur increasing costs for technology, personnel and services to enhance security or to respond to occurrences.
If the Company’s security measures are circumvented, proprietary information may be misappropriated, its operations may be disrupted, and its computers or those of its customers or other third parties may be damaged. Compromises of the Company’s security may result in an interruption of operations, violation of applicable privacy and other laws, significant legal and financial exposure, damage to its reputation, and a loss of confidence in its security measures.
Item 1B. UNRESOLVED STAFF COMMENTS
None.
12
Item 3. LEGAL PROCEEDINGS
AREC is named as a defendant in a number of Louisiana based suits involving alleged environmental contamination from prior drilling operations. Such suits typically allege improper disposal of oilfield wastes in earthen pits with one suit alleging subsidence contributing ofto the formation of a sink hole. AREC is currently involved in three such suits. The suits are styled LePetit Chateau Deluxe v. Adams Resources Exploration Corporation dated March 2004, Gustave J. LaBarre, Jr., et. al. v. Adams Resources Exploration Corporation et al dated October 2012 and Henning Management, LLC v. Adams Resources Exploration Corporation dated November 2013. Each suit involves multiple industry defendants with substantially larger proportional interest in the properties except allproperties. In the LePetit Chateau Deluxe matter, the larger defendants have settled their claims in the LePetit Chateau Deluxe matter.case. The plaintiffs in each of these matters are seeking unspecified compensatory and punitive damages. In August 2014, AREC was dismissed from a similar suit styled Edward Conner, et al v. Adams Resources Exploration Corporation dated October 2013. While management does not believe that a material adverse effect will result from the claims, significant attorney fees will be incurred to defend these items. As of December 31, 20142016 and 2013,2015, the Company has accrued $500,000 and $200,000, respectively,$0.5 million of future legal and/or settlement costs for these matters.
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 is a party to motor vehicle accidents, worker compensation claims or other items of general liability as are 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 evaluates 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 appropriate accounting literature guidelines.disclosures.
Item 4. MINE SAFETY DISCLOSURES
Not Applicable.
PART II
| Item 5. | MARKET FOR THE REGISTRANT’S COMMON STOCK, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES |
The Company’s common stock is traded on the NYSE MKT under the ticker symbol ‟AE”. The following table sets forth the high and low sales prices of the common stock as reported by the NYSE MKT for each calendar quarter since January 1, 2013.2015.
| American Stock Exchange | ||||||||
| High | Low | |||||||
| 2016 | ||||||||
| First Quarter | $ | 43.00 | $ | 30.00 | ||||
| Second Quarter | 44.27 | 35.25 | ||||||
| Third Quarter | 39.47 | 29.64 | ||||||
| Fourth Quarter | 44.00 | 35.17 | ||||||
| 2015 | ||||||||
| First Quarter | $ | 73.28 | $ | 47.31 | ||||
| Second Quarter | 70.00 | 39.00 | ||||||
| Third Quarter | 48.60 | 38.88 | ||||||
| Fourth Quarter | 46.86 | 33.55 | ||||||
American Stock Exchange | ||||||||
High | Low | |||||||
| 2014 | ||||||||
| First Quarter | $ | 90.28 | $ | 57.19 | ||||
| Second Quarter | 81.50 | 56.08 | ||||||
| Third Quarter | 79.61 | 44.26 | ||||||
| Fourth Quarter | 50.54 | 38.58 | ||||||
| 2013 | ||||||||
| First Quarter | $ | 55.82 | $ | 33.75 | ||||
| Second Quarter | 70.80 | 43.00 | ||||||
| Third Quarter | 71.77 | 54.86 | ||||||
| Fourth Quarter | 70.01 | 47.46 | ||||||
2015. During each of March, June, September and December 20142016 and 2015, respectively, the Company paid to its common shareholders a quarterly cash dividend of $.22 per common share. In each of June, September and December 2013 the Company paid a quarterly cash dividend of $.22 per common share to its common stockholders. Such dividends totaled $3,711,544 and $2,783,658 for 2014 and 2013, respectively.
Performance Graph
The performance graph shown below was prepared under the applicable rules of the SEC based on data supplied by Research Data Group. The purpose of the graph is to show comparative total stockholder returns for the Company versus other investment options for a specified period of time. The graph was prepared based upon the following assumptions:
| 1. | $100.00 was invested on December 31, |
| 2. | Dividends are reinvested on the ex-dividend dates. |
Note: The stock price performance shown on the graph below is not necessarily indicative of future price performance.
| 12/09 | 12/10 | 12/11 | 12/12 | 12/13 | 12/14 | |
| Adams Resources & Energy, Inc. | 100.00 | 112.83 | 138.10 | 169.55 | 334.76 | 247.79 |
| S&P 500 | 100.00 | 115.06 | 117.49 | 136.30 | 180.44 | 205.14 |
| S&P Integrated Oil & Gas | 100.00 | 118.84 | 136.39 | 139.41 | 169.42 | 158.02 |
| 12/11 | 12/12 | 12/13 | 12/14 | 12/15 | 12/16 | |
| Adams Resources & Energy, Inc. | 100.00 | 122.77 | 242.41 | 179.43 | 140.52 | 148.54 |
| S&P 500 | 100.00 | 116.00 | 153.58 | 174.60 | 177.01 | 198.18 |
| S&P Integrated Oil & Gas | 100.00 | 102.21 | 124.21 | 115.85 | 99.80 | 123.89 |
Item 6. SELECTED FINANCIAL DATA
| SELECTED FINANCIAL DATA | ||||||||||||||||||||
| Years Ended December 31, | ||||||||||||||||||||
| 2016 | 2015 | 2014 | 2013 | 2012 | ||||||||||||||||
| (In thousands, except per share data) | ||||||||||||||||||||
| Revenues: | ||||||||||||||||||||
| Marketing | $ | 1,043,775 | $ | 1,875,885 | $ | 4,050,497 | $ | 3,863,057 | $ | 3,292,948 | ||||||||||
| Transportation | 52,355 | 63,331 | 68,968 | 68,783 | 67,183 | |||||||||||||||
| Oil and natural gas | 3,410 | 5,063 | 13,361 | 14,129 | 15,954 | |||||||||||||||
| $ | 1,099,540 | $ | 1,944,279 | $ | 4,132,826 | $ | 3,945,969 | $ | 3,376,085 | |||||||||||
| Operating earnings (loss): | ||||||||||||||||||||
| Marketing | $ | 17,045 | $ | 22,895 | $ | 20,854 | $ | 40,369 | $ | 46,145 | ||||||||||
| Transportation | (48 | ) | 3,701 | 4,750 | 5,180 | 10,253 | ||||||||||||||
| Oil and natural gas operations | (220 | ) | (6,934 | ) | (2,029 | ) | 518 | (1,136 | ) | |||||||||||
| Oil and natural gas property impairments | (313 | ) | (12,082 | ) | (8,009 | ) | (2,631 | ) | (4,699 | ) | ||||||||||
Oil and natural gas property sale (1) | - | - | 2,528 | - | 2,203 | |||||||||||||||
| General and administrative | (10,410 | ) | (9,939 | ) | (8,613 | ) | (9,060 | ) | (8,810 | ) | ||||||||||
| 6,054 | (2,359 | ) | 9,481 | 34,376 | 43,956 | |||||||||||||||
| Other income (expense): | ||||||||||||||||||||
| Interest income | 582 | 327 | 301 | 198 | 190 | |||||||||||||||
| Interest expense | (2 | ) | (13 | ) | (2 | ) | (24 | ) | (10 | ) | ||||||||||
| Earnings (loss) from continuing operations | ||||||||||||||||||||
| before income taxes and equity investment | 6,634 | (2,045 | ) | 9,780 | 34,550 | 44,136 | ||||||||||||||
| Income tax (provision) benefit | (2,691 | ) | 770 | (3,561 | ) | (12,429 | ) | (16,664 | ) | |||||||||||
| Earnings (loss) before equity investment | ||||||||||||||||||||
| and discontinued operations | 3,943 | (1,275 | ) | 6,219 | 22,121 | 27,472 | ||||||||||||||
| Earnings (loss) from discontinued | ||||||||||||||||||||
| operations, net of taxes | - | - | 304 | (511 | ) | 319 | ||||||||||||||
| Earnings (loss) from equity | ||||||||||||||||||||
| investments, net of taxes | (1,430 | ) | - | - | - | - | ||||||||||||||
| Net earnings (loss) | $ | 2,513 | $ | (1,275 | ) | $ | 6,523 | $ | 21,610 | $ | 27,791 | |||||||||
| Earnings (Loss) Per Share | ||||||||||||||||||||
| From continuing operations | $ | .94 | $ | (.30 | ) | $ | 1.48 | $ | 5.24 | $ | 6.51 | |||||||||
| From discontinued operations | - | - | .07 | (.12 | ) | .08 | ||||||||||||||
| From equity investments | (.34 | ) | - | - | - | - | ||||||||||||||
| Basic and diluted earnings per share | $ | .60 | $ | (.30 | ) | $ | 1.55 | $ | 5.12 | $ | 6.59 | |||||||||
| Dividends per common share | .88 | .88 | $ | .88 | $ | .66 | $ | .62 | ||||||||||||
| Financial Position | ||||||||||||||||||||
| Cash | $ | 87,342 | $ | 91,877 | $ | 80,184 | $ | 60,733 | $ | 47,239 | ||||||||||
| Net working capital | 106,444 | 96,340 | 82,342 | 79,561 | 58,474 | |||||||||||||||
| Total assets | 246,872 | 243,215 | 340,814 | 448,082 | 419,501 | |||||||||||||||
| Long-term debt | - | - | - | - | - | |||||||||||||||
| Shareholders’ equity | 151,312 | 152,510 | 157,497 | 154,685 | 135,858 | |||||||||||||||
| Dividends on common shares | 3,711 | 3,712 | 3,711 | 2,783 | 2,615 | |||||||||||||||
| (1) | In 2014 and 2012, certain oil and natural gas producing properties were sold for $4.1 million and $3.6 million, producing net gains of $2.5 million and $2.2 million, respectively. |
Years Ended December 31, | ||||||||||||||||||||
2014 | 2013 | 2012 | 2011 | 2010 | ||||||||||||||||
| (In thousands, except per share data) | ||||||||||||||||||||
| Revenues: | ||||||||||||||||||||
| Marketing | $ | 4,050,497 | $ | 3,863,057 | $ | 3,292,948 | $ | 2,961,176 | $ | 2,005,301 | ||||||||||
| Transportation | 68,968 | 68,783 | 67,183 | 63,501 | 56,867 | |||||||||||||||
| Oil and natural gas | 13,361 | 14,129 | 15,954 | 14,060 | 11,021 | |||||||||||||||
| $ | 4,132,826 | $ | 3,945,969 | $ | 3,376,085 | $ | 3,038,737 | $ | 2,073,189 | |||||||||||
| Operating earnings (loss): | ||||||||||||||||||||
| Marketing | $ | 20,854 | $ | 40,369 | $ | 46,145 | $ | 49,237 | $ | 13,530 | ||||||||||
| Transportation | 4,750 | 5,180 | 10,253 | 8,521 | 6,623 | |||||||||||||||
| Oil and gas operations | (10,038 | ) | (2,113 | ) | (5,835 | ) | (16,797 | ) | (1,801 | ) | ||||||||||
| Oil and gas property sale | 2,528 | - | 2,203 | 2,923 | - | |||||||||||||||
| General and administrative | (8,613 | ) | (9,060 | ) | (8,810 | ) | (8,678 | ) | (7,858 | ) | ||||||||||
| 9,481 | 34,376 | 43,956 | 35,206 | 10,494 | ||||||||||||||||
| Other income (expense): | ||||||||||||||||||||
| Interest income | 301 | 198 | 190 | 237 | 191 | |||||||||||||||
| Interest expense | (2 | ) | (24 | ) | (10 | ) | (8 | ) | (36 | ) | ||||||||||
| Earnings (loss) from continuing operations | ||||||||||||||||||||
| before income taxes | 9,780 | 34,550 | 44,136 | 35,435 | 10,649 | |||||||||||||||
| Income tax (provision) | (3,561 | ) | (12,429 | ) | (16,664 | ) | (12,717 | ) | (3,352 | ) | ||||||||||
| Earnings from continuing | ||||||||||||||||||||
| Operations | 6,219 | 22,121 | 27,472 | 22,718 | 7,297 | |||||||||||||||
| Earnings (loss) from discontinued | ||||||||||||||||||||
| operations, net of taxes | 304 | (511 | ) | 319 | 213 | 1,334 | ||||||||||||||
| Net earnings | $ | 6,523 | $ | 21,610 | $ | 27,791 | $ | 22,931 | $ | 8,631 | ||||||||||
| Earnings (Loss) Per Share | ||||||||||||||||||||
| From continuing operations | 1.48 | 5.24 | 6.51 | 5.39 | 1.73 | |||||||||||||||
| From discontinued operations | .07 | (.12 | ) | .08 | (.05 | ) | .32 | |||||||||||||
| Basic and diluted earnings per share | $ | 1.55 | $ | 5.12 | $ | 6.59 | $ | 5.34 | $ | 2.05 | ||||||||||
| Dividends per common share | $ | .88 | $ | .66 | $ | .62 | $ | .57 | $ | .54 | ||||||||||
| Financial Position | ||||||||||||||||||||
| Cash | $ | 80,184 | $ | 60,733 | $ | 47,239 | $ | 37,066 | $ | 29,032 | ||||||||||
| Net working capital | 82,342 | 79,561 | 58,474 | 48,871 | 39,978 | |||||||||||||||
| Total assets | 340,814 | 448,082 | 419,501 | 378,840 | 301,305 | |||||||||||||||
| Long-term debt | - | - | - | - | - | |||||||||||||||
| Shareholders’ equity | 157,497 | 154,685 | 135,858 | 110,682 | 90,155 | |||||||||||||||
| Dividends on common shares | 3,711 | 2,783 | 2,615 | 2,404 | 2,277 | |||||||||||||||
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
- Marketing
Crude oil marketing revenues, operating earnings depreciation and certainselected costs arewere as follows (in thousands):
2014 | 2013 | 2012 | ||||||||||
| Revenues | $ | 4,050,497 | $ | 3,863,057 | $ | 3,292,948 | ||||||
| Operating earnings | $ | 20,854 | $ | 40,369 | $ | 46,145 | ||||||
| Depreciation | $ | 9,626 | $ | 7,682 | $ | 5,945 | ||||||
| Driver commissions | $ | 21,744 | $ | 19,478 | $ | 15,151 | ||||||
| Insurance | $ | 7,446 | $ | 7,659 | $ | 5,241 | ||||||
| Fuel | $ | 14,851 | $ | 13,808 | $ | 11,617 | ||||||
| 2016 | 2015 | 2014 | ||||||||||
| Revenues | $ | 1,043,775 | $ | 1,875,885 | $ | 4,050,497 | ||||||
| Operating earnings | $ | 17,045 | $ | 22,895 | $ | 20,854 | ||||||
| Depreciation | $ | 9,997 | $ | 11,097 | $ | 9,626 | ||||||
| Driver commissions | $ | 14,933 | $ | 22,262 | $ | 21,744 | ||||||
| Insurance | $ | 7,442 | $ | 8,732 | $ | 7,446 | ||||||
| Fuel | $ | 5,397 | $ | 9,928 | $ | 14,851 | ||||||
Supplemental volume and price information:
| 2016 | 2015 | 2014 | ||||||||||
Field Level Purchases per day (1) | ||||||||||||
| Crude Oil – barrels | 72,900 | 106,400 | 117,100 | |||||||||
| Average Purchase Price | ||||||||||||
| Crude Oil – per barrel | $ | 39.30 | $ | 45.41 | $ | 89.40 | ||||||
2014 | 2013 | 2012 | ||||||||||
Field Level Purchases per day (1) | ||||||||||||
| Crude Oil – barrels | 117,100 | 106,000 | 89,200 | |||||||||
| Average Purchase Price | ||||||||||||
| Crude Oil – per barrel | $ | 89.40 | $ | 99.57 | $ | 99.66 | ||||||
2015.
| - | Field Level Operating Earnings (Non GAAP Measure) |
Two significant factors affecting comparative crude oil segment operating earnings are inventory valuations and forward commodity contract (derivatives or mark-to-market) valuations. As a purchaser and shipper of crude oil, the Company holds inventory in storage tanks and third-party pipelines. Inventory sales turnover occurs approximately every three days, but the quantity held in stock at the end of a given period is reasonably consistent. As a result, duringDuring periods of increasing crude oil prices, the Company recognizes inventory liquidation gains while during periods of falling prices, the Company recognizes inventory liquidation and valuation losses. Over time, these gains and losses tend to offset and have limited impact on cash flow. While crude oil prices fluctuated during 2014, 2013 and 2012, the net impact yielded inventory valuation losses totaling $14,247,000, $3,824,000 and $1,596,000, respectively. As of December 31, 2014, the Company held 292,355 barrels of crude oil inventory at a composite average price of $46.11 per barrel. As of December 31, 2013, the Company held 303,633 barrels of crude oil inventory at a composite average price of $90.06 per barrel.
17
Crude oil marketing operating earnings are also affected by the valuations of the Company’s forward month commodity contracts (derivative instruments) as of the various report dates. Such non-cash valuations are calculated and recorded at each period end based on the underlying data existing as of such date. The Company generally enters into these derivative contracts as part of a pricing strategy based on crude oil purchases at the wellhead (field level). Only those contracts qualifying as derivative instruments are accorded fair value treatment while the companion contracts to purchase crude oil at the wellhead (field level) are not subject to fair value treatment. ForThe valuation of derivative instruments theat period end requires recognition of ‟mark-to-market” gains and losses is required at each period end.losses.
The impact on crude oil segment operating earnings of inventory liquidations and derivative valuations is summarized in the following reconciliation from a GAAP to a non-GAAP measure (in thousands):
| 2016 | 2015 | 2014 | ||||||||||
| As reported segment operating earnings | $ | 17,045 | $ | 22,895 | $ | 20,854 | ||||||
| Add (less) - | ||||||||||||
| Inventory liquidation (gains) | (8,243 | ) | - | - | ||||||||
| Inventory valuation losses | - | 5,357 | 14,247 | |||||||||
| Derivative valuation (gains) losses | (243 | ) | 188 | (312 | ) | |||||||
Field level operating earnings(1) | $ | 8,559 | $ | 28,440 | $ | 34,789 | ||||||
2014 | 2013 | 2012 | ||||||||||
| As reported segment operating earnings | $ | 20,854 | $ | 40,369 | $ | 46,145 | ||||||
| Add (less) - | ||||||||||||
| Inventory liquidation (gains) losses | 14,247 | 3,824 | 1,596 | |||||||||
| Derivative valuation (gains) losses | (312 | ) | 193 | 2,001 | ||||||||
Field level operating earnings(1) | $ | 34,789 | $ | 44,386 | $ | 49,742 | ||||||
(1) | Such designation is unique to the Company and is not comparable to |
The Company held crude oil inventory at a weighted average composite price in barrels as follows:
| As of December 31, | ||||||||||||||||
| 2016 | 2015 | |||||||||||||||
| Average | Average | |||||||||||||||
| Barrels | Price | Barrels | Price | |||||||||||||
| Crude oil inventory | 255,146 | $ | 51.22 | 261,718 | $ | 29.31 | ||||||||||
Field level operating earnings and field level purchase volumes (see earlier table) depict the Company’s day-to-day operation of acquiring crude oil at the wellhead, transporting the material, and delivering it to market sales points. Comparative field level operating earnings decreased in 20142016 relative to 2013 and in 2013 relative to 20122015 as competition and additional industry infrastructure development progressed in the region. Previously, a key factor in unit margins was the value difference between the value of crude oil supplysupplies in the mid-continent region of the United States versus crude oil supply costs in the eastern region of the United States. The Company was able to capture some of this value difference by shipping crude oil from the Texas Gulf Coast to points east. Due to competitive pressures during 2014, the opportunitiesopportunity for the Company to capture this location basedlocation-based unit value difference evaporated which reduced earnings. Further, driver commission rates increased in 2014 and 2013 and a combination of higher mileage and higher accident frequencywas eliminated. An adverse claims experience increased insurance costs in beginning 2013.
2015 but this experience cycle did not occur in 2016.
18
- Transportation
The transportation segment revenues and operating earnings were as follows (in thousands):
| 2016 | 2015 | 2014 | ||||||||||||||||||||||
| Amount | Change(1) | Amount | Change(1) | Amount | Change(1) | |||||||||||||||||||
| Revenues | $ | 52,355 | (17.3 | )% | $ | 63,331 | (8.2 | )% | $ | 68,968 | .3 | % | ||||||||||||
| Operating earnings (loss) | $ | (48 | ) | (101.3 | )% | $ | 3,701 | (22.1 | )% | $ | 4,750 | (8.3 | )% | |||||||||||
| Depreciation | $ | 7,249 | (4.0 | )% | $ | 7,554 | 1.9 | % | $ | 7,416 | 4.5 | % | ||||||||||||
| Driver commissions | $ | 11,227 | (15.4 | )% | $ | 13,265 | (1.2 | )% | $ | 13,428 | 2.1 | % | ||||||||||||
| Insurance | $ | 4,952 | 9.0 | % | $ | 4,543 | (18.5 | )% | $ | 5,574 | (6.1 | )% | ||||||||||||
| Diesel fuel | $ | 5,688 | (30.1 | )% | $ | 8,134 | (39.7 | )% | $ | 13,487 | (9.0 | )% | ||||||||||||
| Maintenance Expense | $ | 5,410 | (15.0 | )% | $ | 6,365 | 3.6 | % | $ | 6,143 | 12.4 | % | ||||||||||||
| Mileage (000s) | 22,611 | (10.3 | )% | 25,205 | (4.2 | )% | 26,314 | (3.4 | )% | |||||||||||||||
2014 | 2013 | 2012 | ||||||||||||||||||||||
| Amount | Change(1) | Amount | Change(1) | Amount | Change(1) | |||||||||||||||||||
| Revenues | $ | 68,968 | .3 | % | $ | 68,783 | 2 | % | $ | 67,183 | 6 | % | ||||||||||||
| Operating earnings | $ | 4,750 | (8.3 | )% | $ | 5,180 | (49 | )% | $ | 10,253 | 20 | % | ||||||||||||
| Depreciation | $ | 7,416 | 4.5 | % | $ | 7,099 | 20 | % | $ | 5,921 | 51 | % | ||||||||||||
| Driver commissions | $ | 13,428 | 2.1 | % | $ | 13,152 | 3 | % | $ | 12,773 | 3 | % | ||||||||||||
| Insurance | $ | 5,574 | (6.1 | )% | $ | 5,937 | 20 | % | $ | 4,933 | 2 | % | ||||||||||||
| Diesel fuel | $ | 13,487 | (9.0 | )% | $ | 14,813 | 2 | % | $ | 14,516 | - | |||||||||||||
| Maintenance Expense | $ | 6,143 | 12.4 | % | $ | 5,464 | 24.6 | % | $ | 4,386 | (8 | )% | ||||||||||||
______________
| (1) | Represents the percentage increase (decrease) from the prior year. |
| 2016 | 2015 | 2014 | ||||||||||
| Total transportation revenue | $ | 52,355 | $ | 63,331 | $ | 68,968 | ||||||
| Diesel fuel cost | (5,688 | ) | (8,134 | ) | (13,487 | ) | ||||||
Revenues net of fuel (1) | $ | 46,667 | $ | 55,197 | $ | 55,481 | ||||||
______________
| (1) | Revenues net of fuel is a non-GAAP measure and utilized for internal analysis. |
Revenues net of fuel are reduced in 2016 because of lower demand which is indicative from the comparative periods due to consistent customer demand. Operating earnings for 2014 and 2013 were adversely impacted by increased depreciation, insurance and maintenance costs aschange in miles driven shown above. Maintenance expense increased beginning in 2013 in large part dueThe combination of lower demand and excess industry-wide trucking capacity led to increased environmental compliance costs. Diesel fuel costs began to recede during the fourth quarter of 2014 following crude oil price declines.pressures on volumes and freight rates throughout 2016. The result is an adverse impact on marginsoperating earnings and management is mitigated however dueworking to the fuel surcharge provision in chemical hauling contracts.
maintenance.
Equipment additions and retirement for the transportation fleet were as follows:
| 2016 | 2015 | 2014 | |
| New truck-tractors purchased | 30 units | 60 units | 40 units |
| Truck-tractors retired | - | - | 40 units |
| New trailers purchased | 54 units | 12 units | 30 units |
| Trailers retired | 50 units | - | - |
The sale of retired equipment produced gains of $0.4 million in 2016.
The Company’s predominate customers predominately consist ofare the domestic petrochemical industry. Contributing to customer demand is low natural gas prices (a basic feedstock cost for the petrochemical industry) and high export demand for petrochemicals. With strengthening demand, industry capacity has been strained allowing for rate increasesIncreased operating expenses and an opportunity for increased profitability. However, an industry wide shortage of qualified drivers has affected the Company by suppressing current year revenues and results of operations. In addition,operations during the recent strengtheningheavy demand cycle of 2014 and early 2015. During 2016, the U. S. dollar relativecompetitive landscape in the transportation sector remained difficult and led to foreign currency may weaken demand for U. S. sourced petrochemical products. As transportationlower revenues increase or decrease, operating earnings will typically increase or decrease at an accelerated rate. This trend exists because the fixed cost components of the Company’s operation do not vary with changing revenues. As currently configured, operating earnings achieve break-even levels when annual revenues average approximately $54 million. Above that level, operating earnings will grow and below that level, losses result.in this segment.
| - | Oil and Gas |
Oil and gas segment revenues and operating earnings are primarily a function of crude oil and natural gas production volumes and prices. Comparative amounts for revenues, operating earnings and depreciation and depletionselected expenses were as follows (in thousands):
| 2016 | 2015 | 2014 | ||||||||||||||||||||||
| Amount | Change(1) | Amount | Change(1) | Amount | Change(1) | |||||||||||||||||||
| Revenues | $ | 3,410 | (32.6 | )% | $ | 5,063 | (62.1 | )% | $ | 13,361 | (5.4 | )% | ||||||||||||
Operating earnings (loss)(2) | (533 | ) | (97.2 | )% | (19,016 | ) | 153.2 | % | (7,510 | ) | 255.4 | % | ||||||||||||
| Depreciation and depletion | 1,546 | (69.5 | )% | 5,066 | (33.1 | )% | 7,573 | 1.1 | % | |||||||||||||||
| Dry hole expense | - | (100.0 | )% | 817 | (21.0 | )% | 1,034 | 343.8 | % | |||||||||||||||
| Prospect impairments | 283 | (83.9 | )% | 1,758 | (56.1 | )% | 4,008 | 218.9 | % | |||||||||||||||
| Producing property impairments | 30 | (99.7 | )% | 10,324 | 158.0 | % | 4,001 | 191.4 | % | |||||||||||||||
2014 | 2013 | 2012 | ||||||||||||||||||||||
| Amount | Change(1) | Amount | Change(1) | Amount | Change(1) | |||||||||||||||||||
| Revenues | $ | 13,361 | (5.4 | )% | $ | 14,129 | (11 | )% | $ | 15,954 | 13 | % | ||||||||||||
Operating earnings (loss)(2) | (7,510 | ) | 181.4 | % | (2,113 | ) | 42 | % | (3,632 | ) | (74 | )% | ||||||||||||
| Depreciation and depletion | 7,573 | 1.1 | % | 7,494 | (15 | )% | 8,848 | 7 | % | |||||||||||||||
| Producing property impairments | (4,001 | ) | 77.6 | % | 1,373 | (71 | )% | 4,699 | (34 | )% | ||||||||||||||
______________
(1) | Represents the percentage increase (decrease) from the prior year. |
(2) | Includes gains from property sales of $2.5 million |
20
As shown in the table below, declining crude oil prices and natural gas prices coupled with declining volumes acted to reduce oil and gas earningsrevenues for the comparative years presented. SuchThe sales volume decrease resulted fromfollowed normal production declines as persistently low prices curtailed the development of natural gas and crude oil properties in recent years.2015 and 2016. Contributing to operating losses were producing property impairments as well as increased prospect impairment expense as shown above and in the second table below.above. Property impairments resulted in 2015 and 2014 following a fourth quarter declinedeclines in crude oil prices while impairments in 2013 followed adverse drilling results and the 2012 impairments followed declines in the then current and forward price for natural gas.prices.
Comparative volumes and prices were as follows:
| 2014 | 2013 | 2012 | |||||||||||||
| Production Volumes | |||||||||||||||
| - Crude oil | 127,300 | Bbls | 102,300 | Bbls | 98,100 | Bbls | |||||||||
| - Natural gas | 1,133,000 | Mcf | 1,608,000 | Mcf | 2,608,000 | Mcf | |||||||||
| Average Price | |||||||||||||||
- Crude oil(1) | $ | 63.64 | Bbls | $ | 79.15 | Bbls | $ | 84.39 | Bbls | ||||||
| - Natural gas | $ | 4.65 | Mcf | $ | 3.75 | Mcf | $ | 2.94 | Mcf | ||||||
| 2016 | 2015 | 2014 | |||||||||||||
| Production Volumes | |||||||||||||||
| - Crude oil | 34,200 | Bbls | 50,000 | Bbls | 79,100 | Bbls | |||||||||
| - Natural gas | 662,000 | Mcf | 889,000 | Mcf | 1,133,000 | Mcf | |||||||||
| - Natural gas liquids | 42,500 | Bbls | 42,100 | Bbls | 45,900 | Bbls | |||||||||
| Average Price | |||||||||||||||
| - Crude oil | $ | 38.07 | Bbls | $ | 46.51 | Bbl | $ | 88.42 | Bbl | ||||||
| - Natural gas | $ | 2.26 | Mcf | $ | 2.46 | Mcf | $ | 4.65 | Mcf | ||||||
| - Natural gas liquids | $ | 14.39 | Bbls | $ | 12.70 | Bbl | $ | 28.83 | Bbl | ||||||
2014 | 2013 | 2012 | ||||||||||
| Dry hole expense | $ | 1,034 | $ | 233 | $ | 43 | ||||||
| Prospect impairment | 4,008 | 1,257 | 856 | |||||||||
| Seismic and geological | 12 | 129 | 252 | |||||||||
| Total | $ | 5,054 | $ | 1,619 | $ | 1,151 | ||||||
During 2014,2016, the Company participated in the drilling of 537 wells in Permian Basin with sevenno dry holes. Additionally, the Company had 25There were 9 wells in process onas of December 31, 2014 with completion2016.
An independent evaluation of twoestimated oil and gas reserves and the estimated future income derived from our properties is prepared on an annual basis. See Note (12) to Consolidated Financial Statements. The following estimates of future undiscounted net income before taxes from oil and gas properties based on average prices during 2016 is presented in such wells being held pending crude oil price improvements while completionreport as of the other 23 wells should occur during 2015. Converting natural gas volumes to equate with crude oil volumes at a ratio of six to one, production volumes and proved reserve changes summarizeDecember 31, 2016 as follows on an equivalent barrel (Eq. Bbls) basis:(in thousands):
| As of | ||||
| December 31, 2016 | ||||
| Future net income before taxes | ||||
| - Estimate for the year 2017 | $ | 937 | ||
| - Estimate for the year 2018 | 707 | |||
| - Estimate for the year 2019 | 619 | |||
| - Estimate for the year 2020 | 502 | |||
| - Estimate for the year 2021 | 429 | |||
| Thereafter | 2,285 | |||
| Total future net income before taxes | $ | 5,479 | ||
2014 | 2013 | 2012 | ||||||||||
| (Eq. Bbls.) | (Eq. Bbls.) | (Eq. Bbls.) | ||||||||||
| Proved reserves – beginning of year | 1,416,000 | 1,779,000 | 1,907,000 | |||||||||
| Estimated reserve additions | 131,000 | 267,000 | 537,000 | |||||||||
| Production volumes | (316,000 | ) | (370,000 | ) | (533,000 | ) | ||||||
| Producing properties sold | (104,000 | ) | (5,000 | ) | (71,000 | ) | ||||||
| Revisions of previous estimates | 126,000 | (255,000 | ) | (61,000 | ) | |||||||
| Proved reserves - end of year | 1,253,000 | 1,416,000 | 1,779,000 | |||||||||
| As of | ||||
| December 31, 2016 | ||||
| Net capitalized cost of oil and gas properties | $ | 6,358 | ||
Impairment charges for oil and forgas properties were not significant during the three year period ended December 31, 2014, estimated reserve additions represented 41 percent and 77 percent, respectively,2016 as the forward curve as of production volumes. Such reserve additions resulted from active drilling efforts during the periods presented.
Capitalized oil and gas property costs are amortized in
21
| - | Oil and gas property sales |
During 2014, the Company sold to third parties, its interest in certain Oklahoma and Texas properties for proceeds totaling $2,553,000$2.5 million and half of its interest in certain South Texas (Lavaca County) properties for proceeds totaling $1,509,000.$1.5 million. Combined, the Company recorded a $2,528,000$2.5 million pre-tax gain from these transactions. The Company retained an interest in the South Texas properties as development of such project continues, although the Company chose to reduce its level of risk associated with the development.continues. The other Texas and Oklahoma properties were sold because they were nearing the end of their economic life.
| - | General and administrative expense |
General and administrative expenses and interest income were generally consistentslightly elevated in 2016 as a result of increased use of outside consultants in the fourth quarter of 2016. Expenses in 2015 were elevated due to a $1.1 million lump sum payment made during the periods presented.first quarter of 2015 to the Company’s former President upon retirement and termination of his previous employment agreement. The provision for income taxes is based on federal and state tax rates and variations are consistent with taxable income in the respective accounting periods.
| - | Discontinued operations |
Liquidity and Capital Resources
The Company’s liquidity primarily derives from net cash provided by operating activities and is dependent on the success of future operations. See discussion under ‟Item 1A. Risk Factors”. The most significant source of liquidity, over time, is the cash yield from annual net earnings factoring in the non-cash book expense items for depreciation, depletion, amortization and impairments. The Company has no debt and funds the majority of its capital projects from this annual cash flow. In most annual periods, the cash inflow from this source exceeds capital spending outflows. Should cash inflow subside or turn negative, the Company will evaluate its investments accordingly.
Cash provided from operating activities which was $47,133,000, $43,976,000 and $54,494,000 for each of 2014, 2013 and 2012, respectively. as follows (in thousands):
| 2016 | 2015 | 2014 | ||||||||||
| Net cash provided by operating activities | $ | 6,944 | $ | 25,477 | $ | 47,133 | ||||||
As of December 31, 20142016 and 2013,2015, the Company had no bank debt or other forms of debenture obligations. Cash and cash equivalents totaled $80,184,000 as of December 31, 2014, and such balances are maintained in order to meet the timing of day-to-day cash needs. Workingneeds and such amounts and working capital, the excess of current assets over current liabilities, totaled $82,342,000were as of December 31, 2014. follows (in thousands):
| As of December 31, | ||||||||
| 2016 | 2015 | |||||||
| Cash | $ | 87,342 | $ | 91,877 | ||||
| Working capital | $ | 106,444 | $ | 96,340 | ||||
The Company relies on its ability to obtain open-line trade credit from its suppliers especially with respect to its crude oil marketing operation. In this regard, the Company generally maintains substantial cash balancesbalances. The cash balance decreased during 2016 as capital investments and avoids debt obligations. Cash balances were increased during the current period from $60,733,000 as of year-end 2013 when the Company was able to reduce prepayments and early payments for crude oil supply consistent with the reduced year-end 2014 commodity value for crude oil.dividends exceeded our cash flow.
22
At various times during each month, the Company makesmay make cash prepayments and/or early payments in advance of the normal due date to certain suppliers of crude oil within the marketing operations. Crude oil supply prepayments totaled $7,872,000 as of December 31, 2014 and such amounts will beare recouped and advanced from month to month as the suppliers deliver product to the Company. In addition, in order to secure crude oil supply, the Company may also ‟early pay” its suppliers in advance of the normal payment due date of the twentieth of the month following the month of production. Such ‟early payments” reduce cash and accounts payable as of the balance sheet date and totaled $35,500,000 as of December 31, 2014.date. The Company also requires certain counterpartiescustomers to make similar early payments or to post cash collateral with the Company in order to support their purchases from the Company. Early payments and cash collateral received from customerscustomer’s increases cash and reduces accounts receivable as of the balance sheet date. Early payments received totaled $57,404,000 and cash collateral held by the Company totaled $8,594,000 as of December 31, 2014, respectively.
The Company maintains a stand-by letter of credit facility with Wells Fargo Bank to provide for the issuance of up to $60 million in stand-by letters of credit tofor the benefit of suppliers of crude oil. Stand-by letters of credit are issued as needed and are cancelled when the underlying purchase obligation is satisfied through cash payment when due. The issuance of stand-by letters of credit enables the Company to avoid posting cash collateral when procuring crude oil supply. As of December 31, 2014,2016, the Company had no outstanding letters of credit outstanding totaled $15.3 million. The issued stand-byunder this facility.
Early payments, collateral and letters of credit are cancelledamounts were as the underlying purchase obligations are satisfied by cash payment when due.follows (in thousands):
| As of December 31, | ||||||||
| 2016 | 2015 | |||||||
| Early payments received | $ | 15,032 | $ | 16,770 | ||||
| Cash collateral received | $ | - | $ | 840 | ||||
| Prepayments to suppliers | $ | - | $ | 167 | ||||
| Early payments to suppliers | $ | 14,382 | $ | 11,645 | ||||
| Letters of credit outstanding | $ | - | $ | 1,000 | ||||
The necessity for early payments, collateral posting and letters of credit is substantially reduced as of December 31, 2016, consistent with lower crude commodity prices. Management believes current cash balances, together with expected cash generated from future operations, and the ease of financing truck and trailer additions through leasing arrangements (should the need arise) will be sufficient to meet short-term and long-term liquidity needs. Quarterly dividends of $.22 per common share or $0.9 million per quarter were paid during each quarter of 2016 and 2015.
| - | Capital projects |
The Company utilizes cash from operations and existing cash balances to make discretionary investments in its marketing, transportation and exploration businesses, which comprise substantially all of the Company’s investing cash outflows for each of the periods in this filing. The Company does not look to proceeds from property sales to fund its cash flow needs.oil and gas businesses. Except for commitments totaling $18,273,000$7.2 million associated with barge affreightment contracts, storage tank terminal arrangements and office lease space, the Company’s future commitments and planned investments can be readily adjusted as the Company deems necessary.
23
A five year history of capital spending is as follows (in thousands):
| 2012 | 2013 | 2014 | 2015 | 2016 | ||||||||||||||||
| Crude oil marketing | $ | 12,391 | $ | 11,343 | $ | 13,598 | $ | 2,126 | $ | 1,321 | ||||||||||
| Truck transportation | 15,538 | 3,165 | 8,994 | 6,579 | 6,868 | |||||||||||||||
| Oil and gas exploration | 23,083 | 13,094 | 7,931 | 2,369 | 295 | |||||||||||||||
| Medical management | - | - | - | - | 4,700 | |||||||||||||||
| $ | 51,012 | $ | 27,602 | $ | 30,523 | $ | 11,074 | $ | 13,184 | |||||||||||
Marketing segment spending levels were consistent for 2012 through 2014 backed by crude oil prices remaining strong, in the $90 - $100 per barrel range. In late 2014, crude prices fell and spending was curtailed if operating cash flows contract.in 2015 and 2016.
The Company has de-emphasized the oil and gas exploration segment in recent years and production activities. For 2015, the Company anticipates expending approximately $3.5 million on oil and gas development and exploration projects and approximately $4.6 million within the transportation segment for facilities expansion and upgrades. Capital expenditures in 2015 for the marketing segment will in large part depend on the evolving situation for crude oil prices. Opportunities exist for expansion of both the trucking and barging aspects of the Company’s marketing business and such capital expenditure decision will be made at the time of implementation. Funding for 2015 projects will be from operating cash flow and available working capital.
does not currently have any plans to pursue additional medical-related investments.
Off-balance Sheet Arrangements and Contractual Cash Obligations
The Company maintains certain operating lease arrangements with independent truck owner-operators for use of their equipment and driver services on a month-to-month basis. In addition, the Company has enteredenters into office space and certain lease and terminal access contracts in order to provide tank storage and dock access for its crude oil marketing business. Such storage and access contracts require certain minimum monthly payments for the term of the contracts. All operating lease commitments qualify for off-balance sheet treatment. The Company has no capital lease obligations. Rental expense for the years ended December 31, 2014, 2013, and 2012 was $9,755,000, $8,281,000 and $8,110,000, respectively. as follows (in thousands):
| Year Ended December 31, | ||||||||||||
| 2016 | 2015 | 2014 | ||||||||||
| Rental expense | $ | 11,314 | $ | 11,168 | $ | 9,755 | ||||||
As of December 31, 2014,2016, rental commitmentsobligations under long-term non-cancelable operating leases and terminal arrangements for the next five years and thereafter are payable as follows: 2015 - $6,075,000; 2016 - $6,118,000; 2017 - $4,106,000; 2018 - $1,666,000; 2019 – $308,000 and none thereafter.
| 2017 | 2018 | 2019 | 2020 | 2021 | Thereafter | Total | ||||||||||||||||||||
| $ | 4,768 | $ | 2,018 | $ | 365 | $ | 4 | $ | - | $ | - | $ | 7,155 | |||||||||||||
2015 | 2016 | 2017 | 2018 | 2019 | Thereafter | Total | ||||||||||||||||||||
| $ | 6,075 | $ | 6,118 | $ | 4,106 | $ | 1,666 | $ | 308 | $ | - | $ | 18,273 | |||||||||||||
24
In addition to its lease obligations, the Company is also committed to purchase certain quantities of crude oil in connection with its marketing activities. Such commodity purchase obligations are the basis for commodity sales, which generate the cash flow necessary to meet such purchase obligations. Approximate commodity purchase obligations as of December 31, 20142016 are as follows (in thousands):
| January | Remaining | |||||||||||||||||||||
| 2017 | 2017 | 2018 | 2019 | Thereafter | Total | |||||||||||||||||
| $ | 89,408 | $ | 330 | $ | - | $ | - | $ | - | $ | 89,738 | |||||||||||
| January | Remaining | |||||||||||||||||||||
2015 | 2015 | 2016 | 2017 | Thereafter | Total | |||||||||||||||||
| $ | 172,883 | $ | 420 | $ | - | $ | - | $ | - | $ | 173,303 | |||||||||||
Insurance
From time to time, the marketplace for all forms of insurance enters into periods of severe cost increases. In the past, during such cyclical periods, the Company has seen costs escalate to the point where desired levels of insurance were either unavailable or unaffordable. The Company’s primary insurance needs are workers’ compensation, automobile and umbrella coverage for its trucking fleet and medical insurance for its employees. During each of 2014, 2013 and 2012, insurance costs totaled $14.8 million, $14.9 million and $11.5 million, respectively with 2013 costs elevated due to adverse claims experience. Insurance costs may experience rate increases during 2015 subject to market conditions and claims experience. Because the Company is generally unable to pass on such cost increases, any increase must be absorbed by existing operations.are as follows (in thousands):
| 2016 | 2015 | 2014 | ||||||||||
| Insurance costs | $ | 13,330 | $ | 15,570 | $ | 14,800 | ||||||
Competition
In all phases of its operations, the Company encounters strong competition from a number of entities. Many of these competitors possess financial resources substantially in excess of those of the Company. The Company faces competition principally in establishing trade credit, pricing of available materials and quality of service, as well as for the acquisition of mineral properties. The Company’s marketing division competes with major oil companies and other large industrial concerns that own or control significant refining and marketing facilities. These major oil companies may offer their products to others on more favorable terms than those available to the Company. From time to time in recent years, there have been supply imbalances for crude oil and natural gas in the marketplace. This in turn has led to significant fluctuations in prices for crude oil and natural gas. As a result, there is a high degree of uncertainty regarding both the future market price for crude oil and natural gas and the available margin spread between wholesale acquisition costs and sales realization.
Outlook
Persistently low crude oil prices, coupled with declining oil production, are expected to adversely impact the Company’s crude oil marketing operation. Demand for transportation services remains uncertain. The focus in transportation, therefore, is on both aggressive marketing, diversification strategies and cost containment. For the oil and gas segment, the effort is to reduce cost and optimize cash flow as reserves are produced. During 2017, the Company will be focused on improving our core businesses and working on strategic business development.
The Company has the following major objectives for 2017:
| - | Marketing—manage declining supply volumes and unit margins to maximize cash flow, while looking to expand into new regions. |
| - | Transportation—increase truck utilization, enhance diversification strategies and improve cost efficiencies. |
| - | Strategic business development – deploy a disciplined investment approach to growing existing core areas and funding new growth opportunities. |
| - | Oil and gas— continue to de-emphasize this business unit while preserving the resource value of our oil and gas properties. |
25
Critical Accounting Policies and Use of Estimates
Fair Value Accounting
The Company enters into certain forward commodity contracts that are required to be recorded at fair value 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 during 2014, 20132016, 2015 and 2012.2014.
The Company utilizes a market approach to valuing its commodity contracts. On a contract by contract, forward month by forward month basis, the Company obtains observable market data for valuing its contracts that typically have durations of less than 18 months. As of December 31, 2014,2016, all of the Company’s market value measurements were based on either quoted prices in active markets (Level 1 inputs) or from inputs based on observable market data (Level 2 inputs). See discussion under ‟Fair Value Measurements” in Note (1) to the Consolidated Financial Statements.
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.
Trade Accounts
Due to the volume and 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 and properly supported claims. In addition, the Company maintains and monitors its bad debt allowance. Nevertheless a degree of risk remains due to the custom and practices of the industry.
Oil and Gas Reserve Estimate
The value of the capitalized cost of oil and natural gas exploration and production related assets are dependent on underlying oil and natural gas reserve estimates. Reserve estimates are based on many subjective factors. The accuracy of these estimates depends on the quantity and quality of geological data, production performance data, reservoir engineering data, the pricing assumptions utilized as well as the skill and judgment of petroleum engineers in interpreting such data. The process of estimating reserves requires frequent revision (usually on an annual basis) as additional information becomes available. Calculations of estimated future oil and natural gas revenues are also based on estimates of the timing of oil and natural gas production, and there are no assurances 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 calculations 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 natural gas.
The Company follows the successful efforts method of accounting, so only costs (including development dry hole costs) associated with producing oil and natural gas wells are capitalized. Estimated oil and natural gas reserve quantities are the basis for the rate of amortization under the Company’s units of production method for depreciating, depleting and amortizing oil and natural gas properties. Estimated oil and natural gas reserve values also provide the standard for the Company’s periodic review of oil and natural gas properties for impairment.
26
Contingencies
AREC is named as a defendant in a number of Louisiana based lawsuits involving alleged environmental contamination from prior drilling operations. Such suits typically allege improper disposal of oilfield wastes in earthen pits with one suit alleging oil and gas production subsidence contributing to the formation of a sink hole. AREC is currently named as a defendant in three such suits. While management does not believe that a material adverse effect will result from the claims, significant attorney fees will be incurred to defend these items. As of December 31, 20142016 and 2013,2015, the Company has accrued $500,000 and $200,000, respectively,$0.5 million of future legal and/or settlement costs for these matters.
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 is a party to motor vehicle accidents, worker compensation claims or other items of general liability as are 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 evaluates 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 appropriate accounting literature guidelines.disclosure.
Revenue Recognition
The Company’s crude oil marketing customers are invoiced monthly based on contractually agreed upon terms. Revenue is recognized in the month in which the physical product is delivered to the customer. Where required, the Company also recognizes fair value or mark-to-market gains and losses related to its commodity activities. See discussion under ‟Revenue Recognition” in Note (1) to the Consolidated Financial Statements.
Transportation segment customers are invoiced, and the related revenue is recognized as the service is provided. Oil and natural gas revenue from the Company’s interests in producing wells is recognized as title and physical possession of the oil and natural gas passes to the purchaser.
Recent Accounting Pronouncements
In May 2014, the FASB amendedissued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606),” which supersedes the existing accounting standards for revenue recognition. The amendments arerecognition requirements in “Revenue Recognition (Topic 605).” Topic 606 is based on the core principle that revenue should beis recognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. The new guidanceTopic 606 also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract.
Topic 606 is effective January 1, 2017. Earlyfor fiscal years beginning after December 15, 2017, and interim periods within those years, with early adoption ispermitted in 2017; however we do not permitted. plan to adopt the standard early. Entities will have the option to apply the standard using a full retrospective or modified retrospective adoption method. The amendments may be applied retrospectivelyCompany has not yet selected a transition method. The Company has a team in place to each prior period presented or retrospectively with the cumulative effect recognized as of the date of initial application. Management is currently evaluatinganalyze the impact of these amendmentsUpdate 2014-09, and the related ASU's, across all revenue streams to evaluate the impact of the new standard on revenue contracts. This includes reviewing current accounting policies and practices to identify potential differences that would result from applying the Company’srequirements under the new standard. Our evaluation of the impact on our Consolidated Financial Statements and related disclosures is ongoing and not complete. The Company is continuing our review of contracts relative to the transition alternatives.provisions of Topic 606.
27
In August 2014,July 2015, the FASB issued guidance requiring managementamended the existing accounting standards for inventory to perform interim and annual assessmentsprovide for the measurement of an entity’s ability to continueinventory at the lower of cost or ‟net realizable value,” as a going concern within one year of the date the financial statements are issued. The standard also provides guidance on determining when and how to disclose going-concern uncertaintiesdefined in the financial statements.standard. The new guidance is effective for the annual period ending after December 15, 2016, and interim periods thereafter, with early adoption permitted. Management does not expect theThe adoption of this guidance todid not have an impact on the Consolidated Financial Statements.
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842).” This standard requires, among other things, that lessees recognize the following for all leases (with the exception of short-term leases) at the commencement date: (1) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Lessees and lessors must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The Company expects to adopt this standard in the first quarter of 2019 and is currently evaluating the impact of this standard on our Consolidated Financial Statements and related disclosures. In connection with our assessment work, The Company has a team in place to analyze the impact of ASU 2016-02 and is continuing a review of our contracts relative to the provisions of the lease standard.
In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.” This standard is intended to reduce existing diversity in practice in how certain transactions are presented on the statement of cash flows. The standard is effective for interim and annual reporting periods beginning after December 15, 2017, although early adoption is permitted. The guidance requires application using a retrospective transition method. The Company will adopt ASU No. 2016-15 in the first quarter of 2017 and has determined the amendment will not have a material impact on our Consolidated Financial Statements and related disclosures.
Management believes the impact of other recently issued standards and updates, which are not yet effective, will not have a material impact on the Company’s consolidated financial position, results of operations, or cash flows upon adoption.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company’s exposure to market risk includes potential adverse changes in interest rates and commodity prices.
Interest Rate Risk
The Company had no long-term debt outstanding at December 31, 20142016 and 2013.2015. A hypothetical ten percent adverse change in the floating rate would not have a material effect on the Company’s results of operations for the fiscal year ended December 31, 2014.2016.
28
Commodity Price Risk
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 crude 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 eighteen-month term with no contracts extending longer than two years in duration.
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 in the United States. The fair value of such contracts is reflected in the balance sheet as fair value assets and liabilities and any revaluation is recognized on a net basis in the Company’s results of operations. See discussion under ‟Fair Value Measurements” in Note 1 to the Consolidated Financial Statements.
Historically, prices received for oil and natural gas sales have been volatile and unpredictable with price volatility expected to continue. From January 1, 20132015 through December 31, 2014,2016, the Company’s crude oil monthly average wholesale purchase costs ranged from an average low of $54.60$26.26 per barrel to a monthly average high of $105.44$57.36 per barrel during the same period. A hypothetical ten percent additional adverse change in average hydrocarbon prices, assuming no changes in volume levels, would have reduced earnings by approximately $2,684,000$1.6 million and $4,173,000$1.3 million for the comparative years ended December 31, 20142016 and 2013,2015, respectively.
29
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
| Page | |
| REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM | 31 |
| FINANCIAL STATEMENTS: | |
| Consolidated Balance Sheets as of December 31, | 32 |
| Consolidated Statements of Operations for the Years Ended | |
| December 31, | 33 |
| Consolidated Statements of Shareholders’ Equity for the Years Ended | |
| December 31, | 34 |
| Consolidated Statements of Cash Flows for the Years Ended | |
| December 31, | 35 |
| Notes to Consolidated Financial Statements | 36 |
30
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Adams Resources & Energy, IncInc.
Houston, Texas
We have audited the accompanying consolidated balance sheets of Adams Resources & Energy, Inc. and subsidiaries (the "Company") as of December 31, 20142016 and 2013,2015, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2014.2016. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Adams Resources & Energy, Inc. and subsidiaries atas of December 31, 20142016 and 2013,2015, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2014,2016, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of December 31, 2014,2016, based on the criteria established in Internal Control—Control — Integrated Framework (2013) (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 13, 2015,31, 2017 expressed an unqualifiedadverse opinion on the Company's internal control over financial reporting.reporting because of a material weakness.
/s/ DeloitteDELOITTE & ToucheTOUCHE LLP
Houston, Texas
March 13, 201531, 2017
31
ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
| December 31, | ||||||||
| ASSETS | 2016 | 2015 | ||||||
| CURRENT ASSETS: | ||||||||
| Cash and cash equivalents | $ | 87,342 | $ | 91,877 | ||||
| Accounts receivable, net of allowance for doubtful accounts of | ||||||||
| $225 and $206, respectively | 87,162 | 71,813 | ||||||
| Inventories | 13,070 | 7,671 | ||||||
| Fair value contracts | 112 | - | ||||||
| Income tax receivable | 2,735 | 2,587 | ||||||
| Prepayments | 2,097 | 2,589 | ||||||
| Total current assets | 192,518 | 176,537 | ||||||
| PROPERTY AND EQUIPMENT: | ||||||||
| Marketing | 56,907 | 65,200 | ||||||
| Transportation | 70,849 | 70,732 | ||||||
| Oil and gas (successful efforts method) | 62,784 | 77,117 | ||||||
| Other | 108 | 187 | ||||||
| 190,648 | 213,236 | |||||||
| Less – Accumulated depreciation, depletion and amortization | (144,323 | ) | (153,521 | ) | ||||
| 46,325 | 59,715 | |||||||
| OTHER ASSETS: | ||||||||
| Investments | 2,500 | - | ||||||
| Cash deposits and other | 5,529 | 6,963 | ||||||
| $ | 246,872 | $ | 243,215 | |||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
| CURRENT LIABILITIES: | ||||||||
| Accounts payable | $ | 79,897 | $ | 74,117 | ||||
| Accounts payable – related party | 53 | 40 | ||||||
| Fair value contracts | 64 | 195 | ||||||
| Accrued and other liabilities | 6,060 | 5,845 | ||||||
| Total current liabilities | 86,074 | 80,197 | ||||||
| LONG-TERM DEBT | - | - | ||||||
| OTHER LIABILITIES: | ||||||||
| Asset retirement obligations | 2,329 | 2,469 | ||||||
| Deferred taxes and other liabilities | 7,157 | 8,039 | ||||||
| 95,560 | 90,705 | |||||||
| COMMITMENTS AND CONTINGENCIES (NOTE 6) | ||||||||
| 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 issued and outstanding for all periods presented | 422 | 422 | ||||||
| Contributed capital | 11,693 | 11,693 | ||||||
| Retained earnings | 139,197 | 140,395 | ||||||
| Total shareholders’ equity | 151,312 | 152,510 | ||||||
| $ | 246,872 | $ | 243,215 | |||||
December 31, | ||||||||
| ASSETS | 2014 | 2013 | ||||||
| CURRENT ASSETS: | ||||||||
| Cash and cash equivalents | $ | 80,184 | $ | 60,733 | ||||
| Accounts receivable, net of allowance for doubtful accounts of | ||||||||
| $179 and $252, respectively | 144,434 | 243,930 | ||||||
| Inventories | 13,481 | 27,616 | ||||||
| Fair value contracts | 936 | 395 | ||||||
| Income tax receivable | 970 | 2,097 | ||||||
| Prepayments | 10,940 | 16,779 | ||||||
| Current assets of discontinued operations | - | 180 | ||||||
| Total current assets | 250,945 | 351,730 | ||||||
| PROPERTY AND EQUIPMENT: | ||||||||
| Marketing | 65,865 | 52,996 | ||||||
| Transportation | 63,239 | 59,185 | ||||||
| Oil and gas (successful efforts method) | 88,661 | 98,947 | ||||||
| Other | 186 | 1,305 | ||||||
| 217,951 | 212,433 | |||||||
| Less – Accumulated depreciation, depletion and amortization | (133,080 | ) | (120,568 | ) | ||||
| 84,871 | 91,865 | |||||||
| OTHER ASSETS: | ||||||||
| Cash deposits and other | 4,998 | 4,487 | ||||||
| $ | 340,814 | $ | 448,082 | |||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
| CURRENT LIABILITIES: | ||||||||
| Accounts payable | $ | 160,743 | $ | 266,099 | ||||
| Accounts payable – related party | 51 | 38 | ||||||
| Fair value contracts | 943 | - | ||||||
| Accrued and other liabilities | 6,208 | 5,583 | ||||||
| Current deferred income taxes | 658 | 358 | ||||||
| Current liabilities of discontinued operations | - | 91 | ||||||
| Total current liabilities | 168,603 | 272,169 | ||||||
| LONG-TERM DEBT | - | - | ||||||
| OTHER LIABILITIES: | ||||||||
| Asset retirement obligations | 2,464 | 2,564 | ||||||
| Deferred taxes and other liabilities | 12,250 | 18,664 | ||||||
| 183,317 | 293,397 | |||||||
| COMMITMENTS AND CONTINGENCIES (NOTE 6) | ||||||||
| 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 issued and outstanding | 422 | 422 | ||||||
| Contributed capital | 11,693 | 11,693 | ||||||
| Retained earnings | 145,382 | 142,570 | ||||||
| Total shareholders’ equity | 157,497 | 154,685 | ||||||
| $ | 340,814 | $ | 448,082 | |||||
The accompanying notes are an integral part of these consolidated financial statements.
32
ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
| Years Ended December 31, | ||||||||||||
| 2016 | 2015 | 2014 | ||||||||||
| REVENUES: | ||||||||||||
| Marketing | $ | 1,043,775 | $ | 1,875,885 | $ | 4,050,497 | ||||||
| Transportation | 52,355 | 63,331 | 68,968 | |||||||||
| Oil and natural gas | 3,410 | 5,063 | 13,361 | |||||||||
| 1,099,540 | 1,944,279 | 4,132,826 | ||||||||||
| COSTS AND EXPENSES: | ||||||||||||
| Marketing | 1,016,733 | 1,841,893 | 4,020,017 | |||||||||
| Transportation | 45,154 | 52,076 | 56,802 | |||||||||
| Oil and natural gas operations | 2,084 | 6,931 | 7,817 | |||||||||
| Oil and natural gas property impairments | 313 | 12,082 | 8,009 | |||||||||
| Oil and natural gas property sale (gain) | - | - | (2,528 | ) | ||||||||
| General and administrative | 10,410 | 9,939 | 8,613 | |||||||||
| Depreciation, depletion and amortization | 18,792 | 23,717 | 24,615 | |||||||||
| 1,093,486 | 1,946,638 | 4,123,345 | ||||||||||
| Operating (Loss) Earnings | 6,054 | (2,359 | ) | 9,481 | ||||||||
| Other Income (Expense): | ||||||||||||
| Interest income | 582 | 327 | 301 | |||||||||
| Interest expense | (2 | ) | (13 | ) | (2 | ) | ||||||
| Earnings (loss) before income taxes | ||||||||||||
| and equity investments | 6,634 | (2,045 | ) | 9,780 | ||||||||
| Income Tax (Provision) Benefit: | ||||||||||||
| Current | (2,778 | ) | (4,073 | ) | (9,712 | ) | ||||||
| Deferred | 87 | 4,843 | 6,151 | |||||||||
| (2,691 | ) | 770 | (3,561 | ) | ||||||||
| Earnings (loss) from continuing operations | 3,943 | (1,275 | ) | 6,219 | ||||||||
| Earnings (loss) from equity investments, net of tax benefit | ||||||||||||
| of $770, zero and zero, respectively | (1,430 | ) | - | - | ||||||||
| Earnings (loss) from discontinued operations net of tax | ||||||||||||
| (provision) benefit of zero, zero and $(163) respectively | - | - | 304 | |||||||||
| Net Earnings (Loss) | $ | 2,513 | $ | (1,275 | ) | $ | 6,523 | |||||
| EARNINGS (LOSS) PER SHARE: | ||||||||||||
| From continuing operations | $ | .94 | $ | (.30 | ) | $ | 1.48 | |||||
| From equity investments | (.34 | ) | - | - | ||||||||
| From discontinued operations | - | - | .07 | |||||||||
| Basic and diluted net earnings per share | $ | .60 | $ | (.30 | ) | $ | 1.55 | |||||
| Dividends declared per common share | $ | .88 | $ | .88 | $ | .88 | ||||||
Years Ended December 31, | ||||||||||||
2014 | 2013 | 2012 | ||||||||||
| REVENUES: | ||||||||||||
| Marketing | $ | 4,050,497 | $ | 3,863,057 | $ | 3,292,948 | ||||||
| Transportation | 68,968 | 68,783 | 67,183 | |||||||||
| Oil and natural gas | 13,361 | 14,129 | 15,954 | |||||||||
| 4,132,826 | 3,945,969 | 3,376,085 | ||||||||||
| COSTS AND EXPENSES: | ||||||||||||
| Marketing | 4,020,017 | 3,815,006 | 3,240,858 | |||||||||
| Transportation | 56,802 | 56,504 | 51,009 | |||||||||
| Oil and natural gas operations | 15,826 | 8,748 | 12,941 | |||||||||
| Oil and natural gas property sale (gain) | (2,528 | ) | - | (2,203 | ) | |||||||
| General and administrative | 8,613 | 9,060 | 8,810 | |||||||||
| Depreciation, depletion and amortization | 24,615 | 22,275 | 20,714 | |||||||||
| 4,123,345 | 3,911,593 | 3,332,129 | ||||||||||
| Operating Earnings | 9,481 | 34,376 | 43,956 | |||||||||
| Other Income (Expense): | ||||||||||||
| Interest income | 301 | 198 | 190 | |||||||||
| Interest expense | (2 | ) | (24 | ) | (10 | ) | ||||||
| Earnings from continuing operations before income taxes | 9,780 | 34,550 | 44,136 | |||||||||
| Income Tax (Provision) Benefit: | ||||||||||||
| Current | (9,712 | ) | (9,269 | ) | (11,286 | ) | ||||||
| Deferred | 6,151 | (3,160 | ) | (5,378 | ) | |||||||
| (3,561 | ) | (12,429 | ) | (16,664 | ) | |||||||
| Earnings from continuing operations | 6,219 | 22,121 | 27,472 | |||||||||
| Earnings (loss) from discontinued operations net of tax | ||||||||||||
| (provision) benefit of $(163), $275 and $(172) respectively | 304 | (511 | ) | 319 | ||||||||
| Net Earnings | $ | 6,523 | $ | 21,610 | $ | 27,791 | ||||||
EARNINGS PER SHARE: | ||||||||||||
| From continuing operations | 1.48 | 5.24 | 6.51 | |||||||||
| From discontinued operations | .07 | (.12 | ) | .08 | ||||||||
| Basic and diluted net earnings per share | $ | 1.55 | $ | 5.12 | $ | 6.59 | ||||||
| Dividends declared per common share | $ | .88 | $ | .66 | $ | .62 | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
33
ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(In thousands)
| Total | ||||||||||||||||
| Common | Contributed | Retained | Shareholders’ | |||||||||||||
| Stock | Capital | Earnings | Equity | |||||||||||||
| BALANCE, January 1, 2014 | $ | 422 | $ | 11,693 | $ | 142,570 | $ | 154,685 | ||||||||
| Net earnings | - | - | 6,523 | 6,523 | ||||||||||||
| Dividends paid on common stock | - | - | (3,711 | ) | (3,711 | ) | ||||||||||
| BALANCE, December 31, 2014 | $ | 422 | $ | 11,693 | $ | 145,382 | $ | 157,497 | ||||||||
| Net earnings | - | - | (1,275 | ) | (1,275 | ) | ||||||||||
| Dividends paid on common stock | - | - | (3,712 | ) | (3,712 | ) | ||||||||||
| BALANCE, December 31, 2015 | $ | 422 | $ | 11,693 | $ | 140,395 | $ | 152,510 | ||||||||
| Net earnings (loss) | - | - | 2,513 | 2,513 | ||||||||||||
| Dividends paid on common stock | - | - | (3,711 | ) | (3,711 | ) | ||||||||||
| BALANCE, December 31, 2016 | $ | 422 | �� | $ | 11,693 | $ | 139,197 | $ | 151,312 | |||||||
| Total | ||||||||||||||||
| Common | Contributed | Retained | Shareholders’ | |||||||||||||
| Stock | Capital | Earnings | Equity | |||||||||||||
| BALANCE, January 1, 2012 | $ | 422 | $ | 11,693 | $ | 98,567 | $ | 110,682 | ||||||||
| Net earnings | - | - | 27,791 | 27,791 | ||||||||||||
| Dividends paid on common stock | - | - | (2,615 | ) | (2,615 | ) | ||||||||||
| BALANCE, December 31, 2012 | $ | 422 | $ | 11,693 | 123,743 | 135,858 | ||||||||||
| Net earnings | - | - | 21,610 | 21,610 | ||||||||||||
| Dividends paid on common stock | - | - | (2,783 | ) | (2,783 | ) | ||||||||||
| BALANCE, December 31, 2013 | $ | 422 | $ | 11,693 | $ | 142,570 | $ | 154,685 | ||||||||
| Net earnings | - | - | 6,523 | 6,523 | ||||||||||||
| Dividends paid on common stock | - | - | (3,711 | ) | (3,711 | ) | ||||||||||
| BALANCE, December 31, 2014 | $ | 422 | $ | 11,693 | $ | 145,382 | $ | 157,497 | ||||||||
The accompanying notes are an integral part of these consolidated financial statements.
34
ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
| Years Ended December 31, | ||||||||||||
| 2016 | 2015 | 2014 | ||||||||||
| CASH PROVIDED BY OPERATIONS: | ||||||||||||
| Net earnings (loss) | $ | 2,513 | $ | (1,275 | ) | $ | 6,523 | |||||
| Adjustments to reconcile net earnings to net cash | ||||||||||||
| from operating activities- | ||||||||||||
| Depreciation, depletion and amortization | 18,792 | 23,717 | 24,615 | |||||||||
| Property sales (gains) oil and natural gas | - | - | (2,528 | ) | ||||||||
| Property sale (gains) other | (1,966 | ) | (535 | ) | (1,028 | ) | ||||||
| Dry hole costs incurred | - | 817 | 1,034 | |||||||||
| Impairment of oil and natural gas properties | 313 | 12,082 | 8,009 | |||||||||
| Provision for doubtful accounts | 19 | 27 | (73 | ) | ||||||||
| Deferred income taxes (includes equity investments) | (857 | ) | (4,843 | ) | (6,151 | ) | ||||||
| Net change in fair value contracts | (243 | ) | 188 | 402 | ||||||||
| Equity investment (earnings) losses | 468 | - | - | |||||||||
| Impairment of equity investment | 1,732 | - | - | |||||||||
| Decrease (increase) in accounts receivable | (15,368 | ) | 72,594 | 99,749 | ||||||||
| Decrease (increase) in inventories | (5,399 | ) | 5,810 | 14,135 | ||||||||
| Decrease (increase) in income tax receivable | (148 | ) | (1,617 | ) | 1,127 | |||||||
| Decrease (increase) in prepayments | 492 | 8,351 | 5,839 | |||||||||
| Increase (decrease) in accounts payable | 6,984 | (87,404 | ) | (104,887 | ) | |||||||
| Increase (decrease) in accrued and other liabilities | 52 | (166 | ) | 448 | ||||||||
| Other changes, net | (440 | ) | (2,269 | ) | (81 | ) | ||||||
| Net cash provided by operating activities | 6,944 | 25,477 | 47,133 | |||||||||
| INVESTING ACTIVITIES: | ||||||||||||
| Property and equipment additions | (8,484 | ) | (11,074 | ) | (30,523 | ) | ||||||
| Insurance and state collateral (deposits) refunds | 1,710 | 283 | (493 | ) | ||||||||
| Investments | (4,700 | ) | - | - | ||||||||
| Proceeds from property sales | 3,706 | 719 | 7,045 | |||||||||
| Net cash (used in) investing activities | (7,768 | ) | (10,072 | ) | (23,971 | ) | ||||||
| FINANCING ACTIVITIES: | ||||||||||||
| Dividend payments | (3,711 | ) | (3,712 | ) | (3,711 | ) | ||||||
| Net cash (used in) financing activities | (3,711 | ) | (3,712 | ) | (3,711 | ) | ||||||
| Increase (decrease) in cash and cash equivalents | (4,535 | ) | 11,693 | 19,451 | ||||||||
| Cash and cash equivalents at beginning of year | 91,877 | 80,184 | 60,733 | |||||||||
| Cash and cash equivalents at end of year | $ | 87,342 | $ | 91,877 | $ | 80,184 | ||||||
Years Ended December 31, | ||||||||||||
2014 | 2013 | 2012 | ||||||||||
| CASH PROVIDED BY OPERATIONS: | ||||||||||||
| Net earnings | $ | 6,523 | $ | 21,610 | $ | 27,791 | ||||||
| Adjustments to reconcile net earnings to net cash | ||||||||||||
| from operating activities- | ||||||||||||
| Depreciation, depletion and amortization | 24,615 | 22,275 | 20,714 | |||||||||
| Property sales (gains) oil and gas | (2,528 | ) | - | (2,203 | ) | |||||||
| Property sale (gains) other | (1,028 | ) | (683 | ) | (4,095 | ) | ||||||
| Dry hole costs incurred | 1,034 | 233 | 43 | |||||||||
| Impairment of oil and natural gas properties | 8,009 | 2,630 | 5,555 | |||||||||
| Provision for doubtful accounts | (73 | ) | 46 | (51 | ) | |||||||
| Deferred income taxes | (6,151 | ) | 3,161 | 5,378 | ||||||||
| Net change in fair value contracts | 402 | (389 | ) | 1,377 | ||||||||
| Decrease (increase) in accounts receivable | 99,749 | (4,770 | ) | (4,820 | ) | |||||||
| Decrease (increase) in inventories | 14,135 | 606 | (9,579 | ) | ||||||||
| Decrease (increase) in income tax receivable | 1,127 | (898 | ) | (719 | ) | |||||||
| Decrease (increase) in prepayments | 5,839 | (8,687 | ) | 2,559 | ||||||||
| Increase (decrease) in accounts payable | (104,887 | ) | 7,809 | 10,474 | ||||||||
| Increase (decrease) in accrued and other liabilities | 448 | (516 | ) | 1,227 | ||||||||
| Other changes, net | (81 | ) | 1,549 | 843 | ||||||||
| Net cash provided by operating activities | 47,133 | 43,976 | 54,494 | |||||||||
| INVESTING ACTIVITIES: | ||||||||||||
| Property and equipment additions | (30,523 | ) | (27,602 | ) | (51,012 | ) | ||||||
| Insurance and state collateral (deposits) refunds | (493 | ) | (1,179 | ) | (582 | ) | ||||||
| Proceeds from property sales | 7,045 | 1,082 | 6,342 | |||||||||
| Proceeds from the sale of discontinued operations | - | - | 3,546 | |||||||||
| Net cash (used in) investing activities | (23,971 | ) | (27,699 | ) | (41,706 | ) | ||||||
| FINANCING ACTIVITIES: | ||||||||||||
| Dividend payments | (3,711 | ) | (2,783 | ) | (2,615 | ) | ||||||
| Net cash (used in) financing activities | (3,711 | ) | (2,783 | ) | (2,615 | ) | ||||||
| Increase (decrease) in cash and cash equivalents | 19,451 | 13,494 | 10,173 | |||||||||
| Cash and cash equivalents at beginning of year | 60,733 | 47,239 | 37,066 | |||||||||
| Cash and cash equivalents at end of year | $ | 80,184 | $ | 60,733 | $ | 47,239 | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
35
ADAMS RESOURCES & ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| (1) | Summary of Significant Accounting Policies |
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Adams Resources & Energy, Inc., a Delaware corporation (‟ARE”AE”) together with its wholly owned subsidiaries (the ‟Company”) after elimination of all intercompany accounts and transactions. The impact on the accompanying financial statements of events occurring after December 31, 20142016 was evaluated through the date of issuance of these financial statements.
Nature of Operations
The Company is engaged in the business of crude oil marketing, tank truck transportation of liquid chemicals and dry bulk, and oil and gas exploration and production. Its primary area of operation is within a 1,000 mile radiusthe Gulf Coast region of Houston, Texas.the United States.
Cash and Cash Equivalents
Cash and cash equivalents include any Treasury bill, commercial paper, money market fund or federal funds with maturity of 90 days or less. Depending on cash availability and market conditions, investments in corporate and municipal bonds, which are classified as investments in marketable securities, may also be made from time to time. Cash and cash equivalents are maintained with major financial institutions and such deposits may exceed the amount of federally backed insurance provided. While the Company regularly monitors the financial stability of such institutions, cash and cash equivalents ultimately remain at risk subject to the financial viability of such institutions.
Allowance for Doubtful Accounts
Accounts receivable are the product of sales of crude oil and natural gas and the sale of trucking services. Marketing segment wholesale level sales of crude oil comprise in excess of 90 percent of total accounts receivable and under industry practices, such items are ‟settled” and paid in cash within 20 days of the month following the transaction date. For such receivables, an allowance for doubtful accounts is determined based on specific account identification. The balance of accounts receivable results primarily from the sale of trucking services. For this component of receivables, the allowance for doubtful accounts is determined based on a review of specific accounts combined with a review of the general status of the aging of all accounts.
Inventory consists of crude oil held in storage tanks and at third-party pipelines as part of the Company’s crude oil marketing operations. Crude oil inventory is carried at the lower of average cost or market. Due to declining crude oil prices, for the years ended December 31, 2014 and 2013 the Company recorded inventory liquidation and valuation losses totaling $14,247,000 and $3,824,000, respectively.
36
Prepayments
The components of prepayments and other are as follows (in thousands):
| December 31, | ||||||||
| 2016 | 2015 | |||||||
| Cash collateral deposits for commodity purchases | $ | - | $ | 167 | ||||
| Insurance premiums | 1,403 | 1,609 | ||||||
| Rents, license and other | 694 | 813 | ||||||
| $ | 2,097 | $ | 2,589 | |||||
December 31, | ||||||||
2014 | 2013 | |||||||
| Cash collateral deposits for commodity purchases | $ | 7,872 | $ | 13,705 | ||||
| Insurance premiums | 2,316 | 2,490 | ||||||
| Rents, license and other | 752 | 584 | ||||||
| $ | 10,940 | $ | 16,779 | |||||
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 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 costs of drilling the well are charged to expense. Costs incurred to drill and complete development wells, including dry holes, are capitalized. As of December 31, 20142016 and 2013,2015, the Company had no unevaluated or suspended‟suspended” exploratory drilling costs.
Depreciation, depletion and amortization of the cost of proved oil and gas properties is calculated using the unit-of-production method. The reserve base or denominator used to calculate depreciation, depletion and amortization for leasehold acquisition costs and the cost to acquire proved properties is the sum of proved developed reserves and proved undeveloped reserves. For lease and well equipment, development costs and successful exploration drilling costs, the reserve base includes only proved developed reserves. The numerator for such calculation is actual production volumes for the period. All other property and equipment is depreciated using the straight-line method over the estimated average useful lives of three to twenty years.
The Company reviews its long-lived assets for impairment whenever there is evidence that the carrying value of such assets may not be recoverable. Any impairment recognized is permanent and may not be restored. No impairment triggers were identified for the Company’s Marketing or Transportation property and equipment during the years ending December 31, 2016, 2015 or 2014. Producing oil and gas properties are reviewed on a field-by-field basis. For properties requiring impairment, the fair value is estimated based on an internal discounted cash flow model. Cash flows are developed based on estimated future production and prices and then discounted using a market based rate of return consistent with that used by the Company in evaluating cash flows for other assets of a similar nature. For the years ended December 31, 2014, 2013 and 2012, there were $4,001,000, $1,373,000 and $4,699,000 respectively, of impairment provisions on producing oil and gas properties.
Producing Properties Subject to Fair Value Impairment | ||||||||
2014 | 2013 | |||||||
| Net book value at January 1 | $ | 10,180 | $ | 13,180 | ||||
| Property additions | 469 | 5,661 | ||||||
| Depletion taken | (1,792 | ) | (3,727 | ) | ||||
| Impairment valuation loss | (4,001 | ) | (1,373 | ) | ||||
| Net book value at December 31 | $ | 4,856 | $ | 13,741 | ||||
Importantly, this fair value measure only applies to the write-down of capitalized costs and will never result in an increase to reported earnings.
On a quarterly basis, management evaluates the carrying value of non-producing oil and gas leasehold properties and may deem them impaired based on remaining lease term, area drilling activity and the Company’s plans for the property. This
37
Impairment provisions including in oil and gas segment operating losses were as follows (in thousands):
| 2016 | 2015 | 2014 | ||||||||||
| Producing property impairments | $ | 30 | $ | 10,324 | $ | 4,001 | ||||||
| Non-producing property impairments | $ | 283 | $ | 1,758 | $ | 4,008 | ||||||
| $ | 313 | $ | 12,082 | $ | 8,009 | |||||||
Fair value measurements for producing oil and gas properties that were subject to fair value measure depends highly on management’s assessment of the likelihood of continued exploration efforts in a given area and, as such, data inputs are categorized as ‟unobservable or Level 3” inputs. Importantly, this fair value measure only applies to the write-down of capitalized costs and will never result in an increase to reported earnings. Accordingly, impairment provisions on non-producing properties totaling $4,008,000, $1,257,000 and $856,000 were recorded for the years endingended December 31, 2014, 20132016 and 2012, respectively. 2015 summarize as follows (in thousands):
| Producing Properties | ||||||||
| Subject to Fair | ||||||||
| Value Impairment | ||||||||
| 2016 | 2015 | |||||||
| Net book value at January 1 | $ | 70 | $ | 18,744 | ||||
| Property additions | 2 | 2,117 | ||||||
| Depletion taken | (15 | ) | (4,454 | ) | ||||
| Impairment valuation loss | (30 | ) | (10,324 | ) | ||||
| Net book value at December 31 | $ | 27 | $ | 6,083 | ||||
Capitalized costs for non-producing oil and gas leasehold interests currently represent approximately four percent of remaining unamoritized oil and gas property carrying costs and categorizeare categorized as follows (in thousands):
| December 31, | December 31, | |||||||
| 2016 | 2015 | |||||||
| Napoleonville Louisiana acreage | $ | - | $ | 49 | ||||
| South Texas project acreage | - | - | ||||||
| Wyoming and other acreage | - | 182 | ||||||
| Total Non-producing Leasehold Costs | $ | - | $ | 231 | ||||
| December 31, | December 31, | |||||||
2014 | 2013 | |||||||
| South Texas Project acreage | $ | 357 | $ | 4,217 | ||||
| West Texas Project | - | 116 | ||||||
| Napoleonville Louisiana acreage | 48 | 162 | ||||||
| Other acreage areas | 554 | 411 | ||||||
| Total Non-producing Leasehold Costs | $ | 959 | $ | 4,906 | ||||
| Leasehold Costs | ||||||||
| 2016 | 2015 | |||||||
| Net book value January 1 | $ | 231 | $ | 959 | ||||
| Leasehold additions | 52 | 106 | ||||||
| Advanced royalty payment | - | 529 | ||||||
| In-process wells suspended | - | 395 | ||||||
| Property sales | - | - | ||||||
| Impairments valuation loss | (283 | ) | (1,758 | ) | ||||
| Net book value December 31 | $ | - | $ | 231 | ||||
Leasehold Costs | ||||||||
2014 | 2013 | |||||||
| Net book value January 1 | $ | 411 | $ | 329 | ||||
| Property additions | 580 | 304 | ||||||
| Property sale | - | - | ||||||
| Impairments | (437 | ) | (222 | ) | ||||
| Net book value December 31 | $ | 554 | $ | 411 | ||||
| 2016 | 2015 | 2014 | ||||||||||
| Sales of used trucks and equipment | $ | 1,966 | $ | 535 | $ | 1,028 | ||||||
38
Investments
In December 2015 the Company formed a new wholly owned subsidiary, Adams Resources Medical Management, Inc. (ARMM), and $2,482,000, respectively.in January 2016 ARMM acquired a 30% member interest in Bencap LLC (Bencap) for a $2.2 million cash payment. Bencap provides medical insurance brokerage and medical claims auditing services to employers utilizing ERISA governed employee benefit plans. The Company has accounted for this investment under the equity method of accounting.
During the third quarter of 2016, the Company completed a review of its equity method investment in Bencap and determined there was an other than temporary impairment. Underlying this decision are the terms of the investment agreement where Bencap has the option to request borrowings up to $1.5 million (on or after December 5, 2016 but before October 31, 2018) that the Company must provide or forfeit its 30% member interest. During the third quarter of 2016, management of the Company determined that it was unlikely to provide additional funding due to Bencap’s lower than projected revenue growth and operating losses since investment inception. As a result, the Company recognized a net loss of $1.4 million from its investment in Bencap as of September 30, 2016. This loss included a pre-tax impairment charge of $1.7 million and pre-tax losses from the equity method investment of $0.5 million. In February 2017, Bencap requested additional funding of approximately $0.5 million and the Company declined the additional funding request.
In April 2016 the Company, through its ARMM subsidiary, acquired an approximate 15% equity interest (less than 3% voting interest) in VestaCare, Inc., a California corporation (“VestaCare”), for a $2.5 million cash payment. VestaCare provides an array of software as a service (“SaaS”) electronic payment technologies to medical providers, payers and patients including VestaCare’s most recent product offering, VestaPay™. VestaPay™ allows medical care providers to structure fully automated and dynamically updating electronic payment plans for their patients. The Company does not currently have any plans to pursue additional medical-related investments.
Cash Deposits and Other Assets
The Company has established certain deposits to support participation in its liability insurance program and remittance of state crude oil severance taxes and other state collateral deposits. Insurance collateral deposits are invested at the discretion of the Company’s insurance carrier and such investments primarily consist of intermediate term federal government bonds and bonds backed by federal agencies. This fair value measure relies on inputs from quoted prices for similar assets and is thus categorized as a ‟Level 2” valuation in the fair value hierarchy. Components of cash deposits and other assets are as follows (in thousands):
| As of December 31, | ||||||||
| 2016 | 2015 | |||||||
| Insurance collateral deposits | $ | 5,032 | $ | 6,531 | ||||
| State collateral deposits | 143 | 140 | ||||||
| Materials and supplies | 354 | 292 | ||||||
| $ | 5,529 | $ | 6,963 | |||||
December 31, | ||||||||
2014 | 2013 | |||||||
| Insurance collateral deposits | $ | 4,536 | $ | 3,718 | ||||
| State collateral deposits | 155 | 160 | ||||||
| Materials and supplies | 307 | 609 | ||||||
| $ | 4,998 | $ | 4,487 | |||||
Revenue Recognition
Most all crude oil purchase and sale contracts qualify and are designated as non-trading activities and the Company considers such contracts as normal purchases and sales activity. For normal purchases and sales the Company’s customers are invoiced monthly based upon contractually agreed upon terms with revenue recognized in the month in which the physical product is delivered to the customer. Such sales are recorded gross in the financial statements because the Company takes title, has risk of loss for the products, is the primary obligor for the purchase, establishes the sale price independently with a third party, and maintains credit risk associated with the sale of the product.
39
Certain crude oil contracts may be with a single counterparty to provide for similar quantities of crude oil to be bought and sold at different locations. These contracts are entered into for a variety of reasons, including effecting the transportation of the commodity, to minimize credit exposure, and/or to meet the competitive demands of the customer. Such buy/sell arrangements are reflected on a net revenue basis in the accompanying consolidated financial statements. Reporting such crude oil contracts on a gross revenue basis would increase the Company’s reported revenues by $1,272,034,000, $1,602,626,000 and $1,381,352,000 for the years ended December 31, 2014, 2013 and 2012, respectively.as follows (in thousands):
| 2016 | 2015 | 2014 | ||||||||||
| Revenue gross-up | $ | 314,270 | $ | 480,111 | $ | 1,272,034 | ||||||
Transportation segment 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.
Gains and losses from the sale or disposal of long-lived assets that do not meet the criteria for presentation as a discontinued operation are presented in the accompanying financial statements as a component of operating earnings.
Letter of Credit Facility
The Company maintains a Credit and Security Agreement with Wells Fargo Bank to provide a $60 million stand-by letter of credit facility that is used to support the Company’s crude oil purchases within the marketing segment. This facility is collateralized by the eligible accounts receivable within the segment and certain marketing and transportation equipment.segment. Stand-by letters of credit issued totaled $15.3 million and $14.6 millionwere as of December 31, 2014 and 2013, respectively. follows (in thousands):
| As of December 31, | ||||||||
| 2016 | 2015 | |||||||
| Stand-by letters of credit | $ | - | $ | 1,000 | ||||
The issued stand-by letters of credit are cancelled as the underlying purchase obligations are satisfied by cash payment when due. The letter of credit facility places certain restrictions on the Company’s Gulfmark Energy, Inc. subsidiary. Such restrictions included the maintenance of a combined 1.1 to 1.0 current ratio and the maintenance of positive net earnings excluding inventory valuation changes, as defined, among other restrictions. The Company is currently in compliance with all such financial covenants.
Statement of Cash Flows
| 2016 | 2015 | 2014 | ||||||||||
| Interest paid | $ | 2 | $ | 13 | $ | 2 | ||||||
| Federal and state tax paid | $ | 2,589 | $ | 6,197 | $ | 8,169 | ||||||
| State tax refund | $ | - | $ | - | $ | 18 | ||||||
40
Capitalized amounts included in property and equipment that were not included in amounts reported for cash additions in the Statements of Cash Flows for the applicable report dates were as follows (in thousands):
| As of December 31, | ||||||||||||
| 2016 | 2015 | 2014 | ||||||||||
| Property and equipment additions | $ | 679 | $ | 1,707 | $ | 1,137 | ||||||
Earnings per Share
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 was 4,217,596 for 2014, 20132016, 2015 and 2012.2014. There were no potentially dilutive securities outstanding during those periods.
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 oil and gas reserve volumes that formforming the foundation for calculating depreciation, depletion and amortization and for estimating cash flows to assesswhen assessing impairment triggers and estimatedwhen estimating values associated with oil and gas properties. Other examples include revenue accruals, the provision for bad debts, insurance related accruals, income tax permanent and timing differences, contingencies, and valuation of fair value contracts.
Income Taxes
Income taxes are accounted for using the asset and liability method. Under this approach, deferred tax assets and liabilities are recognized based on anticipated future tax consequences attributable to differences between financial statement carrying amounts of assets and liabilitiessuch items and their respective tax basis (See also Note (2) to consolidated financial statements).
Use of Derivative Instruments
The Company’s marketing segment is involved in the purchase and sale of crude oil. The Company seeks to make a profit by procuring this commodity as it is produced and then delivering the material to end users or the intermediate use marketplace. As is typical for the industry, such transactions are made pursuant to the terms of forward month commodity purchase and/or sale contracts. Some of these contracts meet the definition of a derivative instrument and therefore, the Company accounts for such contracts at fair value, unless the Company foregoes the trading designation and the normal purchase and sale exception is applicable.made. Such underlying contracts are standard for the industry and are the governing document for the Company’s crude oil wholesale distribution businesses. None of the Company’s derivative instruments have been designated as hedging instruments. Derivatives instruments are presented net on the balance sheet where the Company has a legal right of offset. The accounting methodology utilized by the Company for its commodity contracts is further discussed below under the caption ‟Fair Value Measurements”.
41
The estimated fair value of forward month commodity contracts (derivatives) is reflected in the accompanying Consolidated Balance Sheet as of December 31, 20142016 as follows (in thousands):
| Balance Sheet Location and Amount | ||||||||||||||||
| Current | Other | Current | Other | |||||||||||||
| Assets | Assets | Liabilities | Liabilities | |||||||||||||
| Asset Derivatives | ||||||||||||||||
| - Fair Value Commodity | ||||||||||||||||
| Contracts at Gross Valuation | $ | 378 | $ | - | $ | - | $ | - | ||||||||
| Liability Derivatives | ||||||||||||||||
| - Fair Value Commodity | ||||||||||||||||
| Contracts at Gross Valuation | - | - | 330 | - | ||||||||||||
| Less Counterparty Offsets | (266 | ) | - | (266 | ) | - | ||||||||||
| As Reported Fair Value Contracts | $ | 112 | $ | - | $ | 64 | $ | - | ||||||||
Balance Sheet Location and Amount | ||||||||||||||||
| Current | Other | Current | Other | |||||||||||||
Assets | Assets | Liabilities | Liabilities | |||||||||||||
| Asset Derivatives | ||||||||||||||||
| - Fair Value Commodity | ||||||||||||||||
| Contracts at Gross Valuation | $ | 1,332 | $ | - | $ | - | $ | - | ||||||||
| Liability Derivatives | ||||||||||||||||
| - Fair Value Commodity | ||||||||||||||||
| Contracts at Gross Valuation | - | - | 1,339 | - | ||||||||||||
| Less Counterparty Offsets | (396 | ) | - | (396 | ) | - | ||||||||||
| As Reported Fair Value Contracts | $ | 936 | $ | - | $ | 943 | $ | - | ||||||||
As of December 31, 2014, three purchase and sale2016, two contracts comprised the Company’s derivative valuations. The purchase and saleThese contracts encompass approximately 29465 barrels of diesel fuel per day during January through March 2017 and 145,000 barrels of crude oil per day in each ofduring January and February 2015 and 129 barrels of crude oil per day in March2017 through December 2015.April 2017.
The estimated fair value of forward month commodity contracts (derivatives) is reflected in the accompanying Consolidated Balance Sheet as of December 31, 20132015 as follows (in thousands):
| Balance Sheet Location and Amount | ||||||||||||||||
| Current | Other | Current | Other | |||||||||||||
| Assets | Assets | Liabilities | Liabilities | |||||||||||||
| Asset Derivatives | ||||||||||||||||
| - Fair Value Commodity | ||||||||||||||||
| Contracts at Gross Valuation | $ | - | $ | - | $ | - | $ | - | ||||||||
| Liability Derivatives | ||||||||||||||||
| - Fair Value Commodity | ||||||||||||||||
| Contracts at Gross Valuation | - | - | 195 | - | ||||||||||||
| Less Counterparty Offsets | - | - | - | - | ||||||||||||
| As Reported Fair Value Contracts | $ | - | $ | - | $ | 195 | $ | - | ||||||||
Balance Sheet Location and Amount | ||||||||||||||||
| Current | Other | Current | Other | |||||||||||||
Assets | Assets | Liabilities | Liabilities | |||||||||||||
| Asset Derivatives | ||||||||||||||||
| - Fair Value Commodity | ||||||||||||||||
| Contracts at Gross Valuation | $ | 449 | $ | - | $ | - | $ | - | ||||||||
| Liability Derivatives | ||||||||||||||||
| - Fair Value Commodity | ||||||||||||||||
| Contracts at Gross Valuation | - | - | 54 | - | ||||||||||||
| Less Counterparty Offsets | (54 | ) | - | (54 | ) | - | ||||||||||
| As Reported Fair Value Contracts | $ | 395 | $ | - | $ | - | $ | - | ||||||||
As of December 31, 2013,2015, one 100,000 barrel crude oil commodity put option and one commodity purchase and sales contract comprised the Company’s derivative valuations. The purchase and sale contract encompassed 175encompasses approximately 65 barrels of crude oildiesel fuel per day in each of January, February and February 2014.
March 2016.
The Company only enters into commodity contracts with creditworthy counterparties or obtains collateral support for such activities. As of December 31, 20142016 and 2013,2015, the Company was not holding nor had it posted any collateral to support its forward month fair value derivative activity. The Company is not subject to any credit-risk related trigger events. The Company has no other financial investment arrangements that would serve to offset its derivative contracts.
Forward month commodity contracts (derivatives) are reflected in the accompanying Consolidated Statement of Operations for the years ended December 31, 2014, 20132016, 2015 and 20122014 as follows (in thousands):
| Gain (Loss) | ||||||||||||
| Location | 2016 | 2015 | 2014 | |||||||||
| Revenues – marketing | $ | 243 | $ | (188 | ) | $ | 312 | |||||
Gain (Loss) | ||||||||||||
Location | 2014 | 2013 | 2012 | |||||||||
| Revenues – marketing | $ | 312 | $ | (193 | ) | $ | (1,365 | ) | ||||
42
Fair Value Measurements
The carrying amount reported in the Consolidated 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. Marketable securities are recorded at fair value based on market quotations from actively traded liquid markets.
Fair value contracts consist of derivative financial instruments and are recorded as either an asset or liability measured at 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 during any reporting periods.
Fair value estimates are based on assumptions that market participants would use when pricing an asset or liability and the Company uses 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 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. For Level 1 valuation of marketable securities, the Company utilizes market quotations provided by its primary financial institution and for the valuations of derivative financial instruments, the Company utilizes the New York Mercantile Exchange ‟NYMEX” for such valuations. |
| 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. Source data for Level 2 inputs include information provided by the NYMEX, published price data and indices, third party price survey data and broker provided forward price statistics. |
| Level 3 – Unobservable market data inputs for assets or liabilities. |
As of December 31, 2014,2016, the Company’s fair value assets and liabilities are summarized and categorized as follows (in thousands):
| Market Data Inputs | ||||||||||||||||||||
| Gross Level 1 | Gross Level 2 | Gross Level 3 | Counterparty | |||||||||||||||||
| Quoted Prices | Observable | Unobservable | Offsets | Total | ||||||||||||||||
Derivatives (fair value contracts) | ||||||||||||||||||||
| - Current assets | $ | - | $ | 378 | $ | - | $ | (266 | ) | $ | 112 | |||||||||
| - Current liabilities | - | (330 | ) | - | 266 | (64 | ) | |||||||||||||
| Net Value | $ | - | $ | 48 | $ | - | $ | - | $ | 48 | ||||||||||
Market Data Inputs | ||||||||||||||||||||
| Gross Level 1 | Gross Level 2 | Gross Level 3 | Counterparty | |||||||||||||||||
Quoted Prices | Observable | Unobservable | Offsets | Total | ||||||||||||||||
| Derivatives | ||||||||||||||||||||
| - Current assets | $ | - | $ | 1,332 | $ | - | $ | (396 | ) | $ | 936 | |||||||||
| - Current liabilities | - | (1,339 | ) | - | 396 | (943 | ) | |||||||||||||
| Net Value | $ | - | $ | (7 | ) | $ | - | $ | - | $ | (7 | ) | ||||||||
43
As of December 31, 2013,2015, the Company’s fair value assets and liabilities are summarized and categorized as follows (in thousands):
| Market Data Inputs | ||||||||||||||||||||
| Gross Level 1 | Gross Level 2 | Gross Level 3 | Counterparty | |||||||||||||||||
| Quoted Prices | Observable | Unobservable | Offsets | Total | ||||||||||||||||
Derivatives (fair value contracts) | ||||||||||||||||||||
| - Current assets | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||
| - Current liabilities | - | (195 | ) | - | - | (195 | ) | |||||||||||||
| Net Value | $ | - | $ | (195 | ) | $ | - | $ | - | $ | (195 | ) | ||||||||
Market Data Inputs | ||||||||||||||||||||
| Gross Level 1 | Gross Level 2 | Gross Level 3 | Counterparty | |||||||||||||||||
Quoted Prices | Observable | Unobservable | Offsets | Total | ||||||||||||||||
| Derivatives | ||||||||||||||||||||
| - Current assets | $ | - | $ | 449 | $ | - | $ | (54 | ) | $ | 395 | |||||||||
| - Current liabilities | - | (54 | ) | - | 54 | - | ||||||||||||||
| Net Value | $ | - | $ | 395 | $ | - | $ | - | $ | 395 | ||||||||||
When determining fair value measurements, the Company makes credit valuation adjustments to reflect both its own nonperformance risk and its counterparty’s nonperformance risk. When adjusting the fair value of derivative contracts for the effect of nonperformance risk, the impact of netting and applicable credit enhancements, such as collateral postings, thresholds, and guarantees are considered. Credit valuation adjustments utilize Level 3 inputs, such as credit scores to evaluate the likelihood of default by the Company or its counterparties. As of December 31, 20142016 and 2013,2015, credit valuation adjustments were not significant to the overall valuation of the Company’s fair value contracts. As a result, fair value assets and liabilities are included in their entirety in the fair value hierarchy.
The following table illustrates the factors impacting the change in the net value of the Company’s fair value contracts for the year ended December 31, 20142016 (in thousands):
| Level 1 | Level 2 | |||||||||||
| Quoted Prices | Observable | Total | ||||||||||
| Net Fair Value January 1 | $ | - | $ | (195 | ) | $ | (195 | ) | ||||
| - Net realized (gains) losses | - | 195 | 195 | |||||||||
| - Net unrealized gains (losses) | - | 48 | 48 | |||||||||
| Net Fair Value December 31 | $ | - | $ | 48 | $ | 48 | ||||||
| Level 1 | Level 2 | |||||||||||
Quoted Prices | Observable | Total | ||||||||||
| Net Fair Value January 1, | $ | - | $ | 395 | $ | 395 | ||||||
| - Net realized (gains) losses | - | 220 | 220 | |||||||||
| - Option gain | - | 99 | 99 | |||||||||
| - Option collateral | - | (714 | ) | (714 | ) | |||||||
| - Net unrealized gains (losses) | - | (7 | ) | (7 | ) | |||||||
| Net Fair Value December 31, | $ | - | $ | (7 | ) | $ | (7 | ) | ||||
The following table illustrates the factors impacting the change in the net value of the Company’s fair value contracts for the year ended December 31, 20132015 (in thousands):
| Level 1 | Level 2 | |||||||||||
| Quoted Prices | Observable | Total | ||||||||||
| Net Fair Value January 1 | $ | - | $ | (7 | ) | $ | (7 | ) | ||||
| - Net realized (gains) losses | - | 7 | 7 | |||||||||
| - Net unrealized gains (losses) | - | (195 | ) | (195 | ) | |||||||
| Net Fair Value December 31 | $ | - | $ | (195 | ) | $ | (195 | ) | ||||
| Level 1 | Level 2 | |||||||||||
Quoted Prices | Observable | Total | ||||||||||
| Net Fair Value January 1, | $ | - | $ | (27 | ) | $ | (27 | ) | ||||
| - Net realized (gains) losses | - | 27 | 27 | |||||||||
| - Option deposit | - | 615 | 615 | |||||||||
| - Net unrealized gains (losses) | - | (220 | ) | (220 | ) | |||||||
| Net Fair Value December 31, | $ | - | $ | 395 | $ | 395 | ||||||
Asset Retirement Obligations
The Company records 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 asset or the units of production associated with 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):
| 2016 | 2015 | |||||||
| Balance on January 1 | $ | 2,469 | $ | 2,464 | ||||
| -Liabilities incurred | 162 | 39 | ||||||
| -Accretion of discount | 92 | 93 | ||||||
| -Liabilities settled | (394 | ) | (127 | ) | ||||
| Balance on December 31 | $ | 2,329 | $ | 2,469 | ||||
2014 | 2013 | |||||||
| Balance on January 1 | $ | 2,564 | $ | 1,886 | ||||
| -Liabilities incurred | 111 | 431 | ||||||
| -Accretion of discount | 94 | 85 | ||||||
| -Liabilities settled | (305 | ) | (138 | ) | ||||
| -Revisions to estimates | - | 300 | ||||||
| Balance on December 31 | $ | 2,464 | $ | 2,564 | ||||
Recent Accounts PronouncementAccounting Pronouncements
In May 2014, the FASB amendedissued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606),” which supersedes the existing accounting standards for revenue recognition. The amendments arerecognition requirements in “Revenue Recognition (Topic 605).” Topic 606 is based on the core principle that revenue should beis recognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. The new guidanceTopic 606 also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract.
Topic 606 is effective for the annual period endingfiscal years beginning after December 15, 2016. Early2017, and interim periods within those years, with early adoption ispermitted in 2017; however we do not permitted. plan to adopt the standard early. Entities will have the option to apply the standard using a full retrospective or modified retrospective adoption method. The amendments may be applied retrospectivelyCompany has not yet selected a transition method. The Company has a team in place to each prior period presented or retrospectively with the cumulative effect recognized as of the date of initial application. Management is currently evaluatinganalyze the impact of these amendments on the Company’s consolidated financial statementsUpdate 2014-09, and the transition alternatives.related ASU's, across all revenue streams to evaluate the impact of the new standard on revenue contracts. This includes reviewing current accounting policies and practices to identify potential differences that would result from applying the requirements under the new standard. Our evaluation of the impact on our Consolidated Financial Statements and related disclosures is ongoing and not complete. The Company is continuing our review of contracts relative to the provisions of Topic 606.
In August 2014,July 2015, the FASB issued guidance requiring managementamended the existing accounting standards for inventory to perform interim and annual assessmentsprovide for the measurement of an entity’s ability to continueinventory at the lower of cost or ‟net realizable value,” as a going concern within one year of the date the financial statements are issued. The standard also provides guidance on determining when and how to disclose going-concern uncertaintiesdefined in the financial statements.standard. The new guidance is effective for the annual period ending after December 15, 2016, and interim periods thereafter, with early adoption permitted. Management does not expect theThe adoption of this guidance todid not have an impact on the Consolidated Financial Statements.
45
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842).” This standard requires, among other things, that lessees recognize the following for all leases (with the exception of short-term leases) at the commencement date: (1) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Lessees and lessors must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The Company expects to adopt this standard in the first quarter of 2019 and is currently evaluating the impact of this standard on our Consolidated Financial Statements and related disclosures. In connection with our assessment work, The Company has a team in place to analyze the impact of ASU 2016-02 and is continuing a review of our contracts relative to the provisions of the lease standard.
In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.” This standard is intended to reduce existing diversity in practice in how certain transactions are presented on the statement of cash flows. The standard is effective for interim and annual reporting periods beginning after December 15, 2017, although early adoption is permitted. The guidance requires application using a retrospective transition method. The Company will adopt ASU No. 2016-15 in the first quarter of 2017 and has determined the amendment will not have a material impact on our Consolidated Financial Statements and related disclosures.
Management believes the impact of other recently issued standards and updates, which are not yet effective, will not have a material impact on the Company’s consolidated financial position, results of operations, or cash flows upon adoption.
(2) Income Taxes
The following table shows the components of the Company’s income tax (provision) benefit (in thousands):
| Years ended December 31, | ||||||||||||
| 2016 | 2015 | 2014 | ||||||||||
| Current: | ||||||||||||
| Federal | $ | (2,103 | ) | $ | (3,883 | ) | $ | (8,626 | ) | |||
| State | (675 | ) | (190 | ) | (1,249 | ) | ||||||
| (2,778 | ) | (4,073 | ) | (9,875 | ) | |||||||
| Deferred: | ||||||||||||
| Federal | 777 | 5,011 | 5,878 | |||||||||
| State | 80 | (168 | ) | 273 | ||||||||
| 857 | 4,843 | 6,151 | ||||||||||
| $ | (1,921 | ) | $ | 770 | $ | (3,724 | ) | |||||
Years ended December 31, | ||||||||||||
2014 | 2013 | 2012 | ||||||||||
| Current: | ||||||||||||
| Federal | $ | (8,626 | ) | $ | (8,102 | ) | $ | (10,282 | ) | |||
| State | (1,249 | ) | (892 | ) | (1,176 | ) | ||||||
| (9,875 | ) | (8,994 | ) | (11,458 | ) | |||||||
| Deferred: | ||||||||||||
| Federal | 5,878 | (2,682 | ) | (4,940 | ) | |||||||
| State | 273 | (478 | ) | (438 | ) | |||||||
| 6,151 | (3,160 | ) | (5,378 | ) | ||||||||
| $ | (3,724 | ) | $ | (12,154 | ) | $ | (16,836 | ) | ||||
The following table summarizes the components of the income tax (provision) benefit (in thousands):
| Years ended December 31, | ||||||||||||
| 2016 | 2015 | 2014 | ||||||||||
| From continuing operations | $ | (2,691 | ) | $ | 770 | $ | (3,561 | ) | ||||
| From discontinued operations | - | - | (163 | ) | ||||||||
| From equity investments | 770 | - | - | |||||||||
| $ | (1,921 | ) | $ | 770 | $ | (3,724 | ) | |||||
Years ended December 31, | ||||||||||||
2014 | 2013 | 2012 | ||||||||||
| From continuing operations | $ | (3,561 | ) | $ | (12,429 | ) | $ | (16,664 | ) | |||
| From discontinued operations | (163 | ) | 275 | (172 | ) | |||||||
| $ | (3,724 | ) | $ | (12,154 | ) | $ | (16,836 | ) | ||||
46
Taxes computed at the corporate federal income tax rate (inclusive of continuing operations, equity investments and discontinued operations) reconcile to the reported income tax (provision) as follows (in thousands):
| Years ended December 31, | ||||||||||||
| 2016 | 2015 | 2014 | ||||||||||
| Statutory federal income tax (provision) benefit | $ | (1,552 | ) | $ | 716 | $ | (3,587 | ) | ||||
| State income tax (provision) benefit | (387 | ) | (233 | ) | (634 | ) | ||||||
| Federal statutory depletion | 62 | 144 | 549 | |||||||||
| Other | (44 | ) | 143 | (52 | ) | |||||||
| $ | (1,921 | ) | $ | 770 | $ | (3,724 | ) | |||||
Years ended December 31, | ||||||||||||
2014 | 2013 | 2012 | ||||||||||
| Statutory federal income tax (provision) benefit | $ | (3,587 | ) | $ | (11,819 | ) | $ | (15,619 | ) | |||
| State income tax (provision) benefit | (634 | ) | (891 | ) | (1,049 | ) | ||||||
| Federal statutory depletion | 549 | 522 | 36 | |||||||||
| Other | (52 | ) | 34 | (204 | ) | |||||||
| $ | (3,724 | ) | $ | (12,154 | ) | $ | (16,836 | ) | ||||
Deferred income taxes reflect the net difference between the financial statement carrying amounts and the underlying income tax basis in such items. The components of the federal deferred tax asset (liability) are as follows (in thousands):
| Years Ended December 31, | ||||||||
| 2016 | 2015 | |||||||
| Long-term deferred tax asset (liability) | ||||||||
| Prepaid and other insurance | $ | (1,058 | ) | $ | (1,243 | ) | ||
| Property | (7,341 | ) | (7,408 | ) | ||||
| Equity method investment | 606 | - | ||||||
| Uniform capitalization | 729 | 704 | ||||||
| Other | (93 | ) | (51 | ) | ||||
| Net long-term deferred tax liability | (7,157 | ) | (7,998 | ) | ||||
| Net deferred tax liability | $ | (7,157 | ) | $ | (7,998 | ) | ||
Years Ended December 31, | ||||||||
2014 | 2013 | |||||||
| Current deferred tax asset (liability) | ||||||||
| Allowance for doubtful accounts | $ | 62 | $ | 424 | ||||
| Prepaid and other insurance | (719 | ) | (855 | ) | ||||
| Fair value contracts | (1 | ) | 73 | |||||
| Net current deferred liability | (658 | ) | (358 | ) | ||||
| Long-term deferred tax asset (liability) | ||||||||
| Property | (12,673 | ) | (18,964 | ) | ||||
| Uniform capitalization | 661 | 613 | ||||||
| Other | (170 | ) | (283 | ) | ||||
| Net long-term deferred tax liability | (12,182 | ) | (18,634 | ) | ||||
| Net deferred tax liability | $ | (12,840 | ) | $ | (18,992 | ) | ||
Financial statement recognition and measurement of positions taken, or expected to be taken, by an entity in its income tax returns must consider the uncertainty and judgment involved in the determination and filing of income taxes. Tax positions taken in an income tax return that are recognized in the financial statements must satisfy a more-likely-than-not recognition threshold, assuming that the tax position will be examined by taxing authorities with full knowledge of all relevant information. The Company has no significant unrecognized tax benefits. Interest and penalties associated with income tax liabilities are classified as income tax expense.
The earliest tax years remaining open for audit for federal and major states of operations are as follows:
| Earliest Open | |
Tax Year | |
| Federal | |
| Texas | |
| Louisiana | |
| Michigan |
47
(3) Concentration of Credit Risk
Credit risk representsencompasses the amount of loss absorbed should the Company would absorb if itsCompany’s customers fail to perform pursuant to contractual terms. Management ofManaging credit risk involves a number of considerations, such as the financial profile of the customer, the value of collateral held, if any, specific terms and duration of the contractual agreement, and the customer’s sensitivity to economic developments. The Company has established various procedures to manage credit exposure, including initial credit approval, credit limits, and rights of offset. Letters of credit and guarantees are also utilized to limit credit risk.exposure. Accounts receivable associated with crude oil marketing activities comprise approximately 90 percent of the Company’s total receivables and industry practice requires payment for such sales to occur within 20 days of the end of the month following a transaction. The Company’s customer makeup, credit policies and the relatively short duration of receivables mitigate the uncertainty typically associated with receivables management.
An allowance for doubtful accounts is provided where appropriate. An analysis of the changes in the allowance for doubtful accounts is presented as follows (in thousands):
| 2016 | 2015 | 2014 | ||||||||||
| Balance, beginning of year | $ | 206 | $ | 179 | $ | 252 | ||||||
| Provisions for bad debts | 100 | 116 | 50 | |||||||||
| Less: Write-offs and recoveries | (81 | ) | (89 | ) | (123 | ) | ||||||
| Balance, end of year | $ | 225 | $ | 206 | $ | 179 | ||||||
The Company’s largest customers consist of large multinational integrated oil companies and independent domestic refiners of crude oil. In addition, the Company transacts business with independent oil producers, major chemical concerns, crude oil trading companies and a variety of commercial energy users. Within this group of customers, the Company generally derives approximately 50 percent of its revenues from three to five large crude oil refining concerns. While the Company has ongoing established relationships with certain domestic refiners of crude oil, alternative markets are readily available since the Company supplies less than one percent of U.S. domestic refiner demand. As a fungible commodity delivered to major Gulf Coast supply points, the Company’s crude oil sales can be readily delivered to alternative end markets. Management believes that a loss of any of those customers where the Company currently derives more than 10 percent of its revenues would not have a material adverse effect on the Company’s operations.
operations as shown below:
| Individual customer sales | Individual customer receivables in excess | ||||
| in excess of 10% of revenues | of 10% of total receivables as of December 31, | ||||
| 2016 | 2015 | 2014 | 2016 | 2015 | 2014 |
| 18.2% | 24.4% | 20.3% | 20.9% | 20.3% | 16.6% |
| 16.5% | 13.8% | 14.0% | 14.0% | 16.5% | 16.6% |
| 15.9% | - | - | 10.1% | 12.7% | 10.4% |
| 10.6% | - | - | - | - | - |
2014 | 2013 | 2012 | ||||||||||
| Balance, beginning of year | $ | 252 | $ | 206 | $ | 357 | ||||||
| Provisions for bad debts | 50 | 147 | - | |||||||||
| Less: Write-offs and recoveries | (123 | ) | (101 | ) | (151 | ) | ||||||
| Balance, end of year | $ | 179 | $ | 252 | $ | 206 | ||||||
(4) Employee Benefits
The Company maintains a 401(k) savings plan for the benefit of its employees. The Company’s contributory expenses for the plan were $691,000, $674,000 and $645,000 in 2014, 2013 and 2012, respectively. No other pension or retirement plans are maintained by the Company. The Company’s 401K plan contributory expenses were as follows (in thousands):
| 2016 | 2015 | 2014 | ||||||||||
| Contributory expenses | $ | 757 | $ | 768 | $ | 691 | ||||||
48
(5) Transactions with Affiliates
The late Mr. K. S. Adams, Jr., former Chairman of the Board, and certain of his family partnerships and affiliates have participated as working interest owners with the Company’s subsidiary, Adams Resources Exploration Corporation (‟AREC”). Mr. Adams and the affiliates participated on terms similar to those afforded other non-affiliated working interest owners. While the affiliates have generally maintained their existing property interest, they have not participated in any such transactions originating after the death of Mr. Adams in October 2013. As of December 31, 2014 and 2013, the Company owed a combined net total of $51,000 and $38,000, respectively, to these related parties. In connection with the operation of certain of these 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 $151,000, $152,000 and $152,000 for the years ended December 31, 2014, 2013, and 2012, respectively.
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 administrative services. ForIn addition the years ended December 31, 2014, 2013 and 2012, the affiliated entities charged the Company $65,000, $69,000 and $64,000, respectively, of expense reimbursement and the Company charged the affiliates $42,000, $99,000 and $98,000, respectively, for such expense reimbursements. The Company also leases its corporate office space in a building operated byfrom an affiliated entity. Theentity based on a lease rental rate was determined by an independent appraisal. Rental expense paid to the related party for 2014 and 2013 totaled $607,000 and $481,000, respectively. Additionally,
Activities with affiliates were as follows (in 2014, the Company engaged a professional services firm controlled by Townes Pressler, a member of the Company’s Board of Directors, to conduct a crude oil supply availability study. Total study costs incurred were $70,420.thousands):
| 2016 | 2015 | 2014 | ||||||||||
| Overhead recoveries | $ | 32 | $ | 97 | $ | 151 | ||||||
| Affiliate billings to Company | $ | 65 | $ | 68 | $ | 65 | ||||||
| Company billings to affiliate | $ | 5 | $ | 35 | $ | 42 | ||||||
| Rentals paid to affiliate | $ | 628 | $ | 618 | $ | 607 | ||||||
| Fee paid to Bencap | $ | 583 | $ | - | $ | - | ||||||
(6) Commitments and Contingencies
The Company maintains certain operating lease arrangements with independent truck owner-operators for use of their equipment and driver services on a month-to-month basis. In addition, the Company has enteredenters into office space and certain lease and terminal access contracts in order to provide tank storage and dock access for its crude oil marketing business. All operating lease commitments qualify for off-balance sheet treatment. Such contracts require certain minimum monthly payments for the term of the contracts. The Company has no capital lease arrangements. Rental expense for the years ended December 31, 2014, 2013, and 2012 was $9,755,000, $8,281,000 and $8,110,000, respectively. is as follows (in thousands):
| Years ended December 31, | ||||||||||||
| 2016 | 2015 | 2014 | ||||||||||
| Rental expense | $ | 11,314 | $ | 11,168 | $ | 9,755 | ||||||
At December 31, 2014, commitments2016, rental obligations under long-term non-cancelable operating leases and terminal arrangements for the next five years and thereafter are payable as follows: 2015 - $6,075,000; 2016 - $6,118,000; 2017 - $4,106,000; 2018 - $1,666,000; 2019 - $308,000 and none thereafter.follows (in thousands):
| 2017 | 2018 | 2019 | 2020 | 2021 | Thereafter | Total | ||||||||||||||||||||
| $ | 4,768 | $ | 2,018 | $ | 365 | $ | 4 | $ | - | $ | - | $ | 7,155 | |||||||||||||
Under 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, in certain instances the risk of insured losses is shared with a group of similarly situated entities. The Company has appropriately recognized estimated expenses and liabilities related to these policies for losses incurred but not reported to the Company or its insurance carrier of $2,585,000 and $1,796,000 as of December 31, 2014 and 2013, respectively.follows (in thousands):
| As of December 31, | ||||||||||||
| 2016 | 2015 | 2014 | ||||||||||
| Estimated expenses and liabilities | $ | 2,657 | $ | 2,086 | $ | 2,585 | ||||||
49
The Company maintains a self-insurance program for managing employee medical claims. A liability for expected claims incurred but not reported is established on a monthly basis and asbasis. As claims are paid, the liability is relieved. As of December 31, 2014 and 2013, accrued medical claims totaled $1,057,000 and $1,129,000, respectively. The Company also maintains third party insurance stop-loss coverage for annual individual medical claims exceeding $100,000. In addition, the Company maintains $2 million of umbrella insurance coverage for aggregate medical claims exceeding approximately $4.5 million for the calendar years 2014 and 2015.million. Medical accrual amounts are as follows (in thousands):
| As of December 31, | ||||||||||||
| 2016 | 2015 | 2014 | ||||||||||
| Accrued medical claims | $ | 1,411 | $ | 1,107 | $ | 1,057 | ||||||
AREC is named as a defendant in a number of Louisiana based suits involving alleged environmental contamination from prior drilling operations. Such suits typically allege improper disposal of oilfield wastes in earthen pits with one suit alleging subsidence contributing ofto the formation of a sink hole. AREC is currently involved in three such suits. The suits are styled LePetit Chateau Deluxe v. Adams Resources Exploration Corporation dated March 2004, Gustave J. LaBarre, Jr., et. al. v. Adams Resources Exploration Corporation et al dated October 2012 and Henning Management, LLC v. Adams Resources Exploration Corporation dated November 2013. Each suit involves multiple industry defendants with substantially larger proportional interest in the properties exceptproperties. In the LePetit Chateau Deluxe matter, all the larger defendants have settled their claims in the LePetit Chateau Deluxe matter.case. The plaintiffs in each of these matters are seeking unspecified compensatory and punitive damages. In August 2014, AREC was dismissed from a similar suit styled Edward Conner, et al v. Adams Resources Exploration Corporation dated October 2013. While management does not believe that a material adverse effect will result from the claims, significant attorney fees will be incurred to defend these items. As of December 31, 20142016 and 2013,2015 the Company has accrued $500,000 and $200,000, respectively,$0.5 million of future legal and/or settlement costs for these matters.
From time to time as incidental to its operations, the Company may become 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. 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, therefore could potentially represent a material adverse effect on the Company’s financial position or results of operations.
(7) Guarantees
As of December 31, 2014,2016, parental guaranteed obligations are approximately as follows (in thousands):
| 2017 | 2018 | 2019 | 2020 | Thereafter | Total | |||||||||||||||||||
| Commodity purchases | $ | 24,210 | - | - | - | - | $ | 24,210 | ||||||||||||||||
| Letters of credit | - | - | - | - | - | - | ||||||||||||||||||
| $ | 24,210 | $ | - | $ | - | $ | - | $ | - | $ | 24,210 | |||||||||||||
2015 | 2016 | 2017 | 2018 | Thereafter | Total | |||||||||||||||||||
| Commodity purchases | $ | 41,110 | - | - | - | - | $ | 41,110 | ||||||||||||||||
| Letters of credit | 15,300 | - | - | - | - | 15,300 | ||||||||||||||||||
| $ | 56,410 | $ | - | $ | - | $ | - | $ | - | $ | 56,410 | |||||||||||||
Presently, neither AREAE nor any of its subsidiaries has any other types of guarantees outstanding that require liability recognition.
(8) Segment Reporting
The Company is engaged in the business of crude oil marketing 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 Operating | Depreciation Depletion and | Property and Equipment | ||||||||||||||
| Revenues | Earnings (loss) | Amortization | Additions | |||||||||||||
| Year ended December 31, 2016- | ||||||||||||||||
| Marketing | $ | 1,043,775 | $ | 17,045 | $ | 9,997 | $ | 1,321 | ||||||||
| Transportation | 52,355 | (48 | ) | 7,249 | 6,868 | |||||||||||
| Oil and gas | 3,410 | (533 | )(2) | 1,546 | 295 | |||||||||||
| $ | 1,099,540 | $ | 16,464 | $ | 18,792 | $ | 8,484 | |||||||||
| Year ended December 31, 2015- | ||||||||||||||||
| Marketing | $ | 1,875,885 | $ | 22,895 | (1) | $ | 11,097 | $ | 2,126 | |||||||
| Transportation | 63,331 | 3,701 | 7,554 | 6,579 | ||||||||||||
| Oil and gas | 5,063 | (19,016 | )(2) | 5,066 | 2,369 | |||||||||||
| $ | 1,944,279 | $ | 7,580 | $ | 23,717 | $ | 11,074 | |||||||||
| Year ended December 31, 2014- | ||||||||||||||||
| Marketing | $ | 4,050,497 | $ | 20,854 | (1) | $ | 9,626 | $ | 13,598 | |||||||
| Transportation | 68,968 | 4,750 | 7,416 | 8,994 | ||||||||||||
| Oil and gas | 13,361 | (7,510 | )(2) | 7,573 | 7,931 | |||||||||||
| $ | 4,132,826 | $ | 18,094 | $ | 24,615 | $ | 30,523 | |||||||||
| Segment Operating | Depreciation Depletion and | Property and Equipment | ||||||||||||||
| Revenues | Earnings (loss) | Amortization | Additions | |||||||||||||
| Year ended December 31, 2014- | ||||||||||||||||
| Marketing | $ | 4,050,497 | $ | 20,854 | (1) | $ | 9,626 | $ | 13,598 | |||||||
| Transportation | 68,968 | 4,750 | 7,416 | 8,994 | ||||||||||||
| Oil and gas | 13,361 | (7,510 | )(2) | 7,573 | 7,931 | |||||||||||
| $ | 4,132,826 | $ | 18,094 | $ | 24,615 | $ | 30,523 | |||||||||
| Year ended December 31, 2013- | ||||||||||||||||
| Marketing | $ | 3,863,057 | $ | 40,369 | (1) | $ | 7,682 | $ | 11,343 | |||||||
| Transportation | 68,783 | 5,180 | 7,099 | 3,165 | ||||||||||||
| Oil and gas | 14,129 | (2,113 | )(2) | 7,494 | 13,094 | |||||||||||
| $ | 3,945,969 | $ | 43,436 | $ | 22,275 | $ | 27,602 | |||||||||
| Year ended December 31, 2012- | ||||||||||||||||
| Marketing | $ | 3,292,948 | $ | 46,145 | (1) | $ | 5,945 | $ | 12,391 | |||||||
| Transportation | 67,183 | 10,253 | 5,921 | 15,538 | ||||||||||||
| Oil and gas | 15,954 | (3,632 | )(2) | 8,848 | 23,083 | |||||||||||
| $ | 3,376,085 | $ | 52,766 | $ | 20,714 | $ | 51,012 | |||||||||
Segment operating earnings reflect revenues net of operating costs and depreciation, depletion and amortization and are reconciled to earnings from continuing operations before income taxes, as follows (in thousands):
| Years Ended December 31, | ||||||||||||
| 2016 | 2015 | 2014 | ||||||||||
| Segment operating earnings | $ | 16,464 | $ | 7,580 | $ | 18,094 | ||||||
| - General and administrative expenses | (10,410 | ) | (9,939 | ) | (8,613 | ) | ||||||
| Operating earnings (loss) | 6,054 | (2,359 | ) | 9,481 | ||||||||
| - Interest income | 582 | 327 | 301 | |||||||||
| - Interest expense | (2 | ) | (13 | ) | (2 | ) | ||||||
| Earnings (loss) from continuing operations before | ||||||||||||
| income taxes and discontinued operations | $ | 6,634 | $ | (2,045 | ) | $ | 9,780 | |||||
Years Ended December 31, | ||||||||||||
2014 | 2013 | 2012 | ||||||||||
| Segment operating earnings | $ | 18,094 | $ | 43,436 | $ | 52,766 | ||||||
| - General and administrative expenses | (8,613 | ) | (9,060 | ) | (8,810 | ) | ||||||
| Operating earnings | 9,481 | 34,376 | 43,956 | |||||||||
| - Interest income | 301 | 198 | 190 | |||||||||
| - Interest expense | (2 | ) | (24 | ) | (10 | ) | ||||||
| Earnings from continuing operations before | ||||||||||||
| income taxes and discontinued operations | $ | 9,780 | $ | 34,550 | $ | 44,136 | ||||||
Identifiable assets by industry segment are as follows (in thousands):
| Years Ended December 31, | ||||||||||||
| 2016 | 2015 | 2014 | ||||||||||
| Marketing | $ | 107,257 | $ | 96,723 | $ | 189,332 | ||||||
| Transportation | 32,120 | 35,010 | 37,643 | |||||||||
| Oil and gas | 7,279 | 8,930 | 25,888 | |||||||||
| Cash and other | 100,216 | 102,552 | 87,951 | |||||||||
| $ | 246,872 | $ | 243,215 | $ | 340,814 | |||||||
Years Ended December 31, | ||||||||||||
2014 | 2013 | 2012 | ||||||||||
| Marketing | $ | 189,332 | $ | 306,693 | $ | 277,920 | ||||||
| Transportation | 37,643 | 34,406 | 38,940 | |||||||||
| Oil and gas | 25,888 | 37,093 | 35,788 | |||||||||
| Cash and other | 87,951 | 69,890 | 66,853 | |||||||||
| $ | 340,814 | $ | 448,082 | $ | 419,501 | |||||||
Intersegment sales are insignificant and all sales occurred in the United States. Other identifiable assets are primarily corporate cash, corporate accounts receivable, and properties not identified with any specific segment of the Company’s business. Accounting policies for transactions between reportable segments are consistent with applicable accounting policies as disclosed herein.
(9) Discontinued Operations
In February 2012,2014, the Company completed the sale of contracts, inventory and certain equipment associated with the former refined products segment of its marketing business. Revenues from this segment included in net earnings from discontinued operations totaled $25,717,000sold for 2012. The business had experienced marginal results including an operating loss during 2011. The Company received $2$0.7 million in cash proceeds plus a cash payment of $1,546,000 for the agreed value of refined product inventories on the date of sale. A pre-tax gain net of wind-down costs recognized from this transaction in 2012 totaled $808,000. The Company’s fee interest in certain parcels ofwarehouse and real estate were initially retained but were sold in 2014 for cash proceeds totaling $664,000 withused by its former petroleum refined products marketing operation to yield a pre-tax gain of $553,000 included$0.6 million with such gain reported in 2014 results from discontinued operations.operations for 2014.
During the third quarter of 2016, the Company completed an orderly wind-down and closurea review of its natural gas marketing segment effectiveequity method investment in Bencap and determined there was an other than temporary impairment. Underlying this decision are the terms of the investment agreement where Bencap has the option to request borrowings up to $1.5 million (on or after December 5, 2016 but before October 31, 2013. Revenues2018) that the Company must provide or forfeit its 30% member interest. During the third quarter of 2016, management of the Company determined that it was unlikely to provide additional funding due to Bencap’s lower than projected revenue growth and operating losses since investment inception. As a result, the Company recognized a net loss of $1.4 million from this segmentits investment in Bencap as of September 30, 2016. This loss included in net earningsa pre-tax impairment charge of $1.7 million and pre-tax losses from discontinued operations totaled $2,377,000the equity method investment of $0.5 million. In February 2017, Bencap requested additional funding of approximately $0.5 million and $4,879,000 for the years ended December 31, 2013 and 2012, respectively. All obligations were satisfied and no further events are anticipated.Company declined the additional funding request.
Selected quarterly financial data and earnings per share of the Company are presented below for the years ended December 31, 20142016 and 20132015 (in thousands, except per share data):
| Earnings (Loss) from | ||||||||||||||||||||||||||||
| Continuing Operations | Net Earnings (Loss) | Dividends | ||||||||||||||||||||||||||
| Revenues | Amount | Per Share | Amount | Per Share | Amount | Per Share | ||||||||||||||||||||||
| 2016 | ||||||||||||||||||||||||||||
| March 31 | $ | 250,531 | $ | 1,554 | $ | .37 | $ | 1,430 | $ | .34 | $ | 928 | $ | .22 | ||||||||||||||
| June 30 | 293,163 | 3,540 | .84 | 3,404 | .81 | 928 | .22 | |||||||||||||||||||||
| September 30 | 256,877 | (983 | ) | (.23 | ) | (2,153 | ) | (.51 | ) | 928 | .22 | |||||||||||||||||
| December 31 | 298,969 | (168 | ) | (.04 | ) | (168 | ) | (.04 | ) | 927 | .22 | |||||||||||||||||
| Total | $ | 1,099,540 | $ | 3,943 | $ | .94 | $ | 2,513 | $ | .60 | $ | 3,711 | $ | .88 | ||||||||||||||
| 2015 | ||||||||||||||||||||||||||||
| March 31 | $ | 555,573 | $ | 3,097 | $ | .73 | $ | 3,097 | $ | .73 | $ | 928 | $ | .22 | ||||||||||||||
| June 30 | 600,558 | 4,340 | 1.03 | 4,340 | 1.03 | 928 | .22 | |||||||||||||||||||||
| September 30 | 439,893 | (308 | ) | (.07 | ) | (308 | ) | (.07 | ) | 928 | .22 | |||||||||||||||||
| December 31 | 348,255 | (8,404 | ) | (1.99 | ) | (8,404 | ) | (1.99 | ) | 928 | .22 | |||||||||||||||||
| Total | $ | 1,944,279 | $ | (1,275 | ) | $ | (.30 | ) | $ | (1,275 | ) | $ | (.30 | ) | $ | 3,712 | $ | .88 | ||||||||||
| Earnings (Loss) from | ||||||||||||||||||||||||||||||
Continuing Operations | Net Earnings (Loss) | Dividends | ||||||||||||||||||||||||||||
Revenues | Amount | Per Share | Amount | Per Share | Amount | Per Share | ||||||||||||||||||||||||
| 2014 - | ||||||||||||||||||||||||||||||
| March 31 | $ | 949,189 | $ | 5,363 | $ | 1.27 | $ | 5,363 | $ | 1.27 | $ | 928 | $ | .22 | ||||||||||||||||
| June 30 | 1,159,931 | 3,975 | .94 | 3,975 | .94 | 928 | .22 | |||||||||||||||||||||||
| September 30 | 1,173,970 | 3,855 | .92 | 3,855 | .92 | 928 | .22 | |||||||||||||||||||||||
| December 31 | 849,736 | (6,974 | ) | (1.65 | ) | (6,670 | ) | (1.58 | ) | 927 | .22 | |||||||||||||||||||
| Total | $ | 4,132,826 | $ | 6,219 | $ | 1.48 | $ | 6,523 | $ | 1.55 | $ | 3,711 | $ | .88 | ||||||||||||||||
| 2013 - | ||||||||||||||||||||||||||||||
| March 31 | $ | 952,435 | $ | 8,073 | $ | 1.91 | $ | 8,015 | $ | 1.90 | $ | - | $ | - | ||||||||||||||||
| June 30 | 965,098 | 6,521 | 1.55 | 6,330 | 1.50 | 928 | .22 | |||||||||||||||||||||||
| September 30 | 1,060,340 | 7,238 | 1.72 | 7,156 | 1.70 | 927 | .22 | |||||||||||||||||||||||
| December 31 | 968,096 | 289 | .06 | 109 | .02 | 928 | .22 | |||||||||||||||||||||||
| Total | $ | 3,945,969 | $ | 22,121 | $ | 5.24 | $ | 21,610 | $ | 5.12 | $ | 2,783 | $ | .66 | ||||||||||||||||
The above unaudited interim financial data reflect all adjustments that are in the opinion of management necessary to a fair statement of the results for the period presented. All such adjustments are of a normal recurring nature.
52
which 6 are Company operated.
.
Oil and Gas Producing Activities -
Total costs incurred in oil and gas exploration and development activities, all within the United States, were as follows (in thousands):
| For the year Ended December 31, | ||||||||||||
| 2016 | 2015 | 2014 | ||||||||||
| Property acquisition costs | ||||||||||||
| Unproved | $ | 32 | $ | 348 | $ | 1,144 | ||||||
| Proved | - | - | - | |||||||||
| Exploration costs | ||||||||||||
| Expensed | 291 | 1,667 | 5,054 | |||||||||
| Capitalized | - | - | - | |||||||||
| Development costs | - | 370 | 1,745 | |||||||||
| Total costs incurred | $ | 323 | $ | 2,385 | $ | 7,943 | ||||||
For the year Ended December 31, | ||||||||||||
2014 | 2013 | 2012 | ||||||||||
| Property acquisition costs | ||||||||||||
| Unproved | $ | 1,144 | $ | 1,444 | $ | 1,965 | ||||||
| Proved | - | - | - | |||||||||
| Exploration costs | ||||||||||||
| Expensed | 5,054 | 1,619 | 1,151 | |||||||||
| Capitalized | - | - | - | |||||||||
| Development costs | 1,745 | 10,160 | 20,219 | |||||||||
| Total costs incurred | $ | 7,943 | $ | 13,223 | $ | 23,335 | ||||||
The aggregate capitalized costs relative to oil and gas producing activities are as follows (in thousands):
| As of December 31, | ||||||||
| 2016 | 2015 | |||||||
| Unproved oil and gas properties | $ | - | $ | 231 | ||||
| Proved oil and gas properties | 62,784 | 76,886 | ||||||
| 62,784 | 77,117 | |||||||
| Accumulated depreciation, depletion | ||||||||
| and amortization | (56,426 | ) | (69,116 | ) | ||||
| Net capitalized cost | $ | 6,358 | $ | 8,001 | ||||
As of December 31, | ||||||||
2014 | 2013 | |||||||
| Unproved oil and gas properties | $ | 3,104 | $ | 7,578 | ||||
| Proved oil and gas properties | 85,557 | 91,369 | ||||||
| 88,661 | 98,947 | |||||||
| Accumulated depreciation, depletion | ||||||||
| and amortization | (64,682 | ) | (64,169 | ) | ||||
| Net capitalized cost | $ | 23,979 | $ | 34,778 | ||||
Estimated Oil and Natural Gas Reserves -
The following information regarding estimates of the Company’s proved oil and gas reserves, substantially all located onshore in Texas and the south central region of the United States,Louisiana, is based on reports prepared on behalf of the Company by its independent petroleum engineers. Because oil and gas reserve estimates are inherently imprecise and require extensive judgments of reservoir engineering data, they are generally less precise than estimates made in conjunction with financial disclosures. The revisions of previous estimates as reflected in the table below result from changes in commodity pricing assumptions and from more precise engineering calculations based upon additional production histories and price changes.
53
Proved developed and undeveloped reserves are presented as follows (in thousands):
| Years Ended December 31, | ||||||||||||||||||||||||
| 2016 | 2015 | 2014 | ||||||||||||||||||||||
| Natural | Natural | Natural | ||||||||||||||||||||||
| Gas | Oil | Gas | Oil | Gas | Oil | |||||||||||||||||||
(Mcf’s) | (Bbls.) | (Mcf’s) | (Bbls.) | (Mcf’s) | (Bbls.) | |||||||||||||||||||
| Total proved reserves- | ||||||||||||||||||||||||
| Beginning of year | 4,835 | 226 | 5,611 | 318 | 6,286 | 368 | ||||||||||||||||||
| Revisions of previous estimates | 65 | 24 | 27 | (2 | ) | 724 | 6 | |||||||||||||||||
| Oil and gas reserves sold | (175 | ) | (4 | ) | - | (3 | ) | (558 | ) | (11 | ) | |||||||||||||
| Extensions, discoveries and | ||||||||||||||||||||||||
| other reserve additions | 151 | 18 | 86 | 13 | 292 | 82 | ||||||||||||||||||
| Production | (662 | ) | (77 | ) | (889 | ) | (100 | ) | (1,133 | ) | (127 | ) | ||||||||||||
| End of year | 4,214 | 187 | 4,835 | 226 | 5,611 | 318 | ||||||||||||||||||
Years Ended December 31, | ||||||||||||||||||||||||
2014 | 2013 | 2012 | ||||||||||||||||||||||
| Natural | Natural | Natural | ||||||||||||||||||||||
| Gas | Oil | Gas | Oil | Gas | Oil | |||||||||||||||||||
(Mcf’s) | (Bbls.) | (Mcf’s) | (Bbls.) | (Mcf’s) | (Bbls.) | |||||||||||||||||||
| Total proved reserves- | ||||||||||||||||||||||||
| Beginning of year | 6,286 | 368 | 8,837 | 307 | 9,661 | 292 | ||||||||||||||||||
| Revisions of previous estimates | 724 | 6 | (1,438 | ) | (17 | ) | (507 | ) | 29 | |||||||||||||||
| Oil and gas reserves sold | (558 | ) | (11 | ) | (28 | ) | - | (104 | ) | (54 | ) | |||||||||||||
| Extensions, discoveries and | ||||||||||||||||||||||||
| other reserve additions | 292 | 82 | 523 | 180 | 2,395 | 138 | ||||||||||||||||||
| Production | (1,133 | ) | (127 | ) | (1,608 | ) | (102 | ) | (2,608 | ) | (98 | ) | ||||||||||||
| End of year | 5,611 | 318 | 6,286 | 368 | 8,837 | 307 | ||||||||||||||||||
The components of proved oil and gas reserves for the three years ended December 31, 20142016 is presented below. All reserves are in the United States (in thousands):
| Years Ended December 31, | ||||||||||||||||||||||||
| 2016 | 2015 | 2014 | ||||||||||||||||||||||
| Natural | Natural | Natural | ||||||||||||||||||||||
| Gas | Oil | Gas | Oil | Gas | Oil | |||||||||||||||||||
(Mcf’s) | (Bbls.) | (Mcf’s) | (Bbls.) | (Mcf’s) | (Bbls.) | |||||||||||||||||||
| Proved developed reserves | 4,214 | 187 | 4,813 | 223 | 5,482 | 299 | ||||||||||||||||||
| Proved undeveloped reserves | - | - | 22 | 3 | 129 | 19 | ||||||||||||||||||
| Total proved reserves | 4,214 | 187 | 4,835 | 226 | 5,611 | 318 | ||||||||||||||||||
Years Ended December 31, | ||||||||||||||||||||||||
2014 | 2013 | 2012 | ||||||||||||||||||||||
| Natural | Natural | Natural | ||||||||||||||||||||||
| Gas | Oil | Gas | Oil | Gas | Oil | |||||||||||||||||||
(Mcf’s) | (Bbls.) | (Mcf’s) | (Bbls.) | (Mcf’s) | (Bbls.) | |||||||||||||||||||
| Proved developed reserves | 5,482 | 299 | 6,157 | 367 | 8,708 | 306 | ||||||||||||||||||
| Proved undeveloped reserves | 129 | 19 | 129 | 1 | 129 | 1 | ||||||||||||||||||
| Total proved reserves | 5,611 | 318 | 6,286 | 368 | 8,837 | 307 | ||||||||||||||||||
The Company has developed internal policies and controls for estimating and recording oil and gas reserve data. The estimation and recording of proved reserves is required to be in compliance with SEC definitions and guidance. The Company assigns responsibility for compliance in reserve bookings to the office of President of AREC. No portion of this individual’s compensation is directly dependent on the quantity of reserves booked. Reserve estimates are required to be made by qualified reserve estimators, as defined by Society of Petroleum Engineers’ Standards.
The Company employed third party petroleum consultant, Ryder Scott Company, to prepare its oil and gas reserve data estimates as of December 31, 2014, 20132016, 2015 and 2012.2014. The firm of Ryder Scott is well recognized within the industry for more than 50 years. As prescribed by the SEC, such proved reserves were estimated using 12-month average oil and gas prices, based on the first-day-of-the-month price for each month in the period, and year-end production and development costs for each of the years presented, all without escalation.
The process of estimating oil and gas reserves is complex and requires significant judgment. Uncertainties are inherent in estimating quantities of proved reserves, including many factors beyond the estimator’s control. Reserve engineering is a subjective process of estimating subsurface accumulations of oil and gas that cannot be measured in an exact manner, and the accuracy of any reserve estimate is a function of the quality of available data and the interpretation thereof. As a result, assessments by different engineers often vary, sometimes significantly. In addition, physical factors such as the results of drilling, testing and production subsequent to the date of an estimate, as well as economic factors such as changes in product prices, may justify revision of such estimates. Accordingly, oil and gas quantities ultimately recovered will vary from reserve estimates.
54
Standardized Measure of Discounted Future Net Cash Flows from Oil and Gas Operations and Changes Therein -
The standardized measure of discounted future net cash flows was determined based on the economic conditions in effect at the end of the years presented, except in those instances where fixed and determinable gas price escalations are included in contracts. The disclosures below do not purport to present the fair market value of the Company’s oil and gas reserves. An estimate of the fair market value would also take into account, among other things, the recovery of reserves in excess of proved reserves, anticipated future changes in prices and costs, a discount factor more representative of the time value of money and risks inherent in reserve estimates. The standardized measure of discounted future net cash flows is presented as follows (in thousands):
| Years Ended December 31, | ||||||||||||
| 2016 | 2015 | 2014 | ||||||||||
| Future gross revenues | $ | 17,938 | $ | 23,040 | $ | 58,885 | ||||||
| Future costs - | ||||||||||||
| Lease operating expenses | (12,421 | ) | (14,524 | ) | (16,421 | ) | ||||||
| Development costs | (38 | ) | (103 | ) | (1,068 | ) | ||||||
| Future net cash flows before income taxes | 5,479 | 8,413 | 41,396 | |||||||||
| Discount at 10% per annum | (2,002 | ) | (2,987 | ) | (17,175 | ) | ||||||
| Discounted future net cash flows | ||||||||||||
| before income taxes | 3,477 | 5,426 | 24,221 | |||||||||
| Future income taxes, net of discount at | ||||||||||||
| 10% per annum | (1,217 | ) | (1,899 | ) | (8,477 | ) | ||||||
| Standardized measure of discounted | ||||||||||||
| future net cash flows | $ | 2,260 | $ | 3,527 | $ | 15,744 | ||||||
Years Ended December 31, | ||||||||||||
2014 | 2013 | 2012 | ||||||||||
| Future gross revenues | $ | 58,885 | $ | 64,495 | $ | 59,793 | ||||||
| Future costs - | ||||||||||||
| Lease operating expenses | (16,421 | ) | (19,207 | ) | (16,357 | ) | ||||||
| Development costs | (1,068 | ) | (119 | ) | (299 | ) | ||||||
| Future net cash flows before income taxes | 41,396 | 45,169 | 43,137 | |||||||||
| Discount at 10% per annum | (17,175 | ) | (17,729 | ) | (17,976 | ) | ||||||
| Discounted future net cash flows | ||||||||||||
| before income taxes | 24,221 | 27,440 | 25,161 | |||||||||
| Future income taxes, net of discount at | ||||||||||||
| 10% per annum | (8,477 | ) | (9,604 | ) | (8,806 | ) | ||||||
| Standardized measure of discounted | ||||||||||||
| future net cash flows | $ | 15,744 | $ | 17,836 | $ | 16,355 | ||||||
The reserve estimates provided at December 31, 2014, 2013 and 2012 are based on aggregate pricesestimated value of $89.60, $94.99 and $93.85 per barrel for crude oil and $5.42, $4.69 and $3.51 per mcf for natural gas respectively. reserves and future net revenues derived therefrom are highly dependent upon oil and gas commodity price assumptions. For such estimates, the Company’s independent petroleum engineers assumed market prices as presented in the table below:
| Years ended December 31, | ||||||||||||
| 2016 | 2015 | 2014 | ||||||||||
| Market price | ||||||||||||
| Crude oil per barrel | $ | 38.34 | $ | 45.83 | $ | 89.60 | ||||||
| Natural gas per thousand cubic feet (mcf) | $ | 2.56 | $ | 2.62 | $ | 5.42 | ||||||
Such prices were based on the unweighted arithmetic average of the prices in effect on the first day of the month for each month of the respective twelve month periods as required by SEC regulations. The prices reported in the reserve disclosures for natural gas include the value of associated natural gas liquids. Hydrocarbon prices declined significantly during the fourth quarter of 2014. Realized domestic crude oil prices averaged in the $54 per barrel range during the month of December with additional price declines continuing into 2015.Oil and gas reserve values and future net cash flow estimates are very sensitive to pricing assumptions and will vary accordingly.
The effect of income taxes and discounting on the standardized measure of discounted future net cash flows is presented as follows (in thousands):
| Years ended December 31, | ||||||||||||
| 2016 | 2015 | 2014 | ||||||||||
| Future net cash flows before income taxes | $ | 5,479 | $ | 8,413 | $ | 41,396 | ||||||
| Future income taxes | (1,918 | ) | (2,945 | ) | (14,489 | ) | ||||||
| Future net cash flows | 3,561 | 5,468 | 26,907 | |||||||||
| Discount at 10% per annum | (1,301 | ) | (1,941 | ) | (11,163 | ) | ||||||
| Standardized measure of discounted | ||||||||||||
| future net cash flows | $ | 2,260 | $ | 3,527 | $ | 15,744 | ||||||
Years ended December 31, | ||||||||||||
2014 | 2013 | 2012 | ||||||||||
| Future net cash flows before income taxes | $ | 41,396 | $ | 45,169 | $ | 43,137 | ||||||
| Future income taxes | (14,489 | ) | (15,809 | ) | (15,098 | ) | ||||||
| Future net cash flows | 26,907 | 29,360 | 28,039 | |||||||||
| Discount at 10% per annum | (11,163 | ) | (11,524 | ) | (11,684 | ) | ||||||
| Standardized measure of discounted | ||||||||||||
| future net cash flows | $ | 15,744 | $ | 17,836 | $ | 16,355 | ||||||
The principal sources of changes in the standardized measure of discounted future net cash flows are as follows (in thousands):
| Years Ended December 31, | ||||||||||||
| 2016 | 2015 | 2014 | ||||||||||
| Beginning of year | $ | 3,527 | $ | 15,744 | $ | 17,836 | ||||||
| Sale of oil and gas reserves | (350 | ) | (54 | ) | (981 | ) | ||||||
| Net change in prices and production costs | (1,391 | ) | (17,622 | ) | (72 | ) | ||||||
| New field discoveries and extensions, net of future | ||||||||||||
| production costs | 275 | 292 | 4,456 | |||||||||
| Sales of oil and gas produced, net of production costs | 87 | 1,038 | (6,590 | ) | ||||||||
| Net change due to revisions in quantity estimates | 181 | 38 | 2,460 | |||||||||
| Accretion of discount | 194 | 1,116 | 1,773 | |||||||||
| Production rate changes and other | (945 | ) | (3,603 | ) | (4,265 | ) | ||||||
| Net change in income taxes | 682 | 6,578 | 1,127 | |||||||||
| End of year | $ | 2,260 | $ | 3,527 | $ | 15,744 | ||||||
Years Ended December 31, | ||||||||||||
2014 | 2013 | 2012 | ||||||||||
| Beginning of year | $ | 17,836 | $ | 16,355 | $ | 20,931 | ||||||
| Sale of oil and gas reserves | (981 | ) | - | (3,802 | ) | |||||||
| Net change in prices and production costs | (72 | ) | 9,341 | (5,313 | ) | |||||||
| New field discoveries and extensions, net of future | ||||||||||||
| production costs | 4,456 | 9,767 | 9,513 | |||||||||
| Sales of oil and gas produced, net of production costs | (6,590 | ) | (8,373 | ) | (8,953 | ) | ||||||
| Net change due to revisions in quantity estimates | 2,460 | (3,624 | ) | (940 | ) | |||||||
| Accretion of discount | 1,773 | 1,797 | 1,944 | |||||||||
| Production rate changes and other | (4,265 | ) | (6,629 | ) | 511 | |||||||
| Net change in income taxes | 1,127 | (798 | ) | 2,464 | ||||||||
| End of year | $ | 15,744 | $ | 17,836 | $ | 16,355 | ||||||
Results of Operations for Oil and Gas Producing Activities -
The results of oil and gas producing activities, excluding corporate overhead and interest costs, are as follows (in thousands):
| Years Ended December 31, | ||||||||||||
| 2016 | 2015 | 2014 | ||||||||||
| Revenues | $ | 3,410 | $ | 5,063 | $ | 13,361 | ||||||
| Costs and expenses - | ||||||||||||
| Production | (3,337 | ) | (7,022 | ) | (6,771 | ) | ||||||
| Producing property impairment | (30 | ) | (10,324 | ) | (4,001 | ) | ||||||
| Exploration | - | (1,667 | ) | (5,054 | ) | |||||||
| Oil and natural gas property sale gain | - | - | 2,528 | |||||||||
| Depreciation, depletion and amortization | (1,546 | ) | (5,066 | ) | (7,573 | ) | ||||||
| Operating income (loss) before income taxes | (1,503 | ) | (19,016 | ) | (7,510 | ) | ||||||
| Income tax benefit | 526 | 6,656 | 2,628 | |||||||||
| Operating income (loss) | $ | (977 | ) | $ | (12,360 | ) | $ | (4,882 | ) | |||
Years Ended December 31, | ||||||||||||
2014 | 2013 | 2012 | ||||||||||
| Revenues | $ | 13,361 | $ | 14,129 | $ | 15,954 | ||||||
| Costs and expenses - | ||||||||||||
| Production | (6,771 | ) | (5,756 | ) | (7,091 | ) | ||||||
| Producing property impairment | (4,001 | ) | (1,373 | ) | (4,699 | ) | ||||||
| Exploration | (5,054 | ) | (1,619 | ) | (1,151 | ) | ||||||
| Oil and natural gas property sale gain | 2,528 | - | 2,203 | |||||||||
| Depreciation, depletion and amortization | (7,573 | ) | (7,494 | ) | (8,848 | ) | ||||||
| Operating income (loss) before income taxes | (7,510 | ) | (2,113 | ) | (3,632 | ) | ||||||
| Income tax benefit | 2,628 | 739 | 1,271 | |||||||||
| Operating income (loss) | $ | (4,882 | ) | $ | (1,374 | ) | $ | (2,361 | ) | |||
| Item 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
None.
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Item 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
2016. The Company maintains ‟disclosureterm “disclosure controls and procedures”procedures,” as defined in RuleRules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, (the ‟Exchange Act”)or the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that the Companyit files or submits under the Exchange Act areis recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’sSEC’s rules and formsforms.
Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. Based on the Company’sevaluation of our disclosure controls and procedures as of December 31, 2016, our Chief Executive Officer and Chief Financial Officer concluded that, as appropriate, to allow timely discussions regarding required disclosure. Management necessarily applied its judgment in assessing the costs and benefit of such controls and procedures, which, by their nature, can provide only reasonable assurance regarding management’s disclosure control objectives.
In light of the endmaterial weakness in internal control over financial reporting, we completed additional substantive procedures to validate the completeness and accuracy of the period coveredfinancial data impacted by the deficiency. These additional procedures have allowed us to conclude that, notwithstanding the material weakness in our internal control over financial reporting, the consolidated financial statements included in this report.Annual Report on Form 10-K fairly present, in all material respects, our financial position, results of operations and cash flows for the periods presented in conformity with accounting principles generally accepted in the United States of America.
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in RuleExchange Act Rules 13a-15(f) and 15d-15(f) under. Our management assessed the Exchange Act. The Company’seffectiveness of our internal control over financial reporting is a process designed underas of December 31, 2016, using the supervisioncriteria set forth in the Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Company’s Chief Executive Officer and the Chief Financial OfficerTreadway Commission (COSO) to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our consolidated financial statements for external purposes in accordance with U.S. generally accepted accounting principles. Internal control over financial reporting includes those policies and procedures that: (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company, (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, generally acceptedand that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the United States.Company, and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company's assets that could have a material effect on the financial statements.
Financial Close Process. We identified a design deficiency, which also prevented the control from operating effectively, related to the risk that controls may become inadequate becausecontrol over the review and approval of manual journal entries in one of our segments. The design deficiency related to the same personnel reviewing, approving and posting journal entries. If not remediated, the control deficiency could potentially impact the accuracy and completeness of our financial statements.
Deloitte & Touche LLP, our independent registered public accounting firm, has issued a report on our internal control over financial reporting, which is included herein.
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Changes in Internal Control over Financial Reporting
Other than the material weakness described above, there have been no changes in conditions,our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the three months ended December 31, 2016 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Remediation Efforts to Address Identified Material Weaknesses
Management is dedicating time and resources to remediate the control deficiency that gave rise to the degreematerial weakness in our internal control over financial reporting.
The following steps are among the measures that we are implementing to address our material weakness as of compliance withDecember 31, 2016:
| · | We are performing a review to ensure that no personnel signs off as the reviewer and subsequently posts the journal entry to the general ledger. |
| · | We are considering repositioning the personnel in the financial close group to allow for more segregation of duties within the group. |
| · | We are addressing the control gap relating to the segregation of duties by requiring review of the manual journal entry to occur after the journal entry is independently posted. Review after posting restricts the ability to edit the journal entry. |
We are committed to maintaining a strong internal control environment. Management has updated the Audit Committee and is developing a detailed plan and timetable for the completion of the implementation of the remedial measures outlined above and will continue to monitor such implementation. In addition, under the direction of the Audit Committee, management will continue to review and make necessary changes to the overall design of our financial close process, as well as to our policies and procedures may deteriorate.
in order to improve the overall effectiveness of our internal control over financial reporting.
As we implement these remediation efforts, we may determine that additional steps may be necessary to remediate the Company’s Chief Executive Officer and Chief Financial Officer, assessedmaterial weakness. We cannot assure you that these remediation efforts will be successful or that our internal control over financial reporting will be effective in accomplishing all control objectives all of the time. We will continue to assess the effectiveness of our remediation efforts in connection with our evaluations of internal control over financial reporting.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Company’sBoard of Directors and Stockholders of
Adams Resources & Energy, Inc.
Houston, Texas
We have audited Adams Resources & Energy, Inc. and subsidiaries' (the "Company") internal control over financial reporting as of December 31, 2014. In making this assessment, management used the criteria described in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, management, including the Company’s Chief Executive Officer and Chief Financial Officer, concluded that internal control over financial reporting was effective at a reasonable assurance level as of December 31, 2014.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on that risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material weakness has been identified and included in management's assessment: the control over the review and approval of manual journal entries in one of the Company’s segments was not designed appropriately. This material weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of the consolidated financial statements as of and for the year ended December 31, 2016, of the Company and this report does not affect our report on such financial statements.
In our opinion, because of the effect of the material weakness identified above on the achievement of the objectives of the control criteria, the Company has not maintained in all material respects, effective internal control over financial reporting as of December 31, 2014,2016, based on the criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
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We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended December 31, 20142016, of the Company and our report dated March 13, 201531, 2017 expressed an unqualified opinion on those financial statements.
/s/Deloitte DELOITTE & ToucheTOUCHE LLP
Houston, Texas
March 13, 201531, 2017
Item 9B. OTHER INFORMATION
None.
PART III
| Item 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
The information concerning directors, corporate governance and executive officers of the Company is incorporated by reference from the Company’s definitive Proxy Statement for the Annual Meeting of Shareholders to be held Thursday,Wednesday, May 14, 2015,3, 2017, under the heading ‟Election of Directors” and ‟Executive Officers”, respectively, to be filed with the Commission not later than 120 days after the end of the fiscal year covered by this Form 10-K.
| Item 11. | EXECUTIVE COMPENSATION |
The information required by Item 11 is incorporated by reference from the Company’s definitive Proxy Statement for the Annual Meeting of Shareholders to be held Thursday,Wednesday, May 14, 2015,3, 2017, under the heading ‟Executive Compensation” to be filed with the Commission not later than 120 days after the end of the fiscal year covered by this Form 10-K.
| Item 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
The information required by Item 12 is incorporated by reference from the Company’s definitive Proxy Statement for the Annual Meeting of Shareholders to be held Thursday,Wednesday May 14, 2015,3, 2017, under the heading ‟Voting Securities and Principal Holders Thereof” to be filed with the Commission not later than 120 days after the end of the fiscal year covered by this Form 10-K.
| Item 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
The information required by Item 13 is incorporated by reference from the Company’s definitive Proxy Statement for the Annual Meeting of Shareholders to be held Thursday,Wednesday May 14, 2015,3, 2017, under the headings ‟Transactions with Related Parties” and ‟Director Independence” to be filed with the Commission not later than 120 days after the end of the fiscal year covered by this Form 10-K.
| Item 14. | PRINCIPAL ACCOUNTING FEES AND SERVICES |
The information required by Item 14 is incorporated by reference from the Company’s definitive Proxy Statement for the Annual Meeting of Shareholders to be held Thursday,Wednesday May 14, 2015,3, 2017, under the heading ‟Principal Accounting Fees and Services” to be filed with the Commission not later than 120 days after the end of the fiscal year covered by this Form 10-K.
PART IV
| Item 15. | EXHIBITS, FINANCIAL STATEMENT SCHEDULES |
(a) The following documents are filed as a part of this Form 10-K:
1. Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 20142016 and 20132015
Consolidated Statements of Operations for the Years Ended
December 31, 2014, 20132016, 2015 and 20122014
Consolidated Statements of Shareholders’ Equity for the Years Ended
December 31, 2014, 20132016, 2015 and 20122014
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2014, 20132016, 2015 and 20122014
Notes to Consolidated Financial Statements
2.All financial schedules have been omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.
3.Exhibits required to be filed
| 3(a) | - | Certificate of Incorporation of the Company, as amended. (Incorporated by reference to Exhibit 3(a) filed with the Annual Report on Form 10-K (-File No. 1-7908) of the Company for the fiscal year ended December 31, 1987). |
| 3(b) | - | Bylaws of the Company, as amended. (Incorporated by reference to Exhibit 3(b) filed with the Annual Report on Form 10-K for the year ended December 31, 2012 (-File No. 1-7908). |
| 3(c) | - | Adams Resources & Energy, Inc. and Subsidiaries’ Code of Ethics (Incorporated by reference to Exhibit 3(d) of the Annual Report on Form 10-K (-File No. 1-7908) of the Company for the fiscal year ended December 31, 2002). |
| 4(a) | - | Specimen common stock Certificate (Incorporated by reference to Exhibit 4(a) of the Annual Report on Form 10-K of the Company (-File No. 1-7908) for the fiscal year ended December 31, 1991). |
| 4(b) | - | Credit and Security Agreement between Gulfmark Energy, Inc., Adams Resources Marketing, Ltd., and Wells Fargo Bank, National Association dated August 27, 2009 (Incorporated by reference to Exhibit 4(b) of the Quarterly Report on Form 10-Q for the period ended September 30, 2009). |
| - |
| 10.2 | - | Retirement Agreement, dated |
63
| 21* | - | Subsidiaries of the Registrant |
| 23.1* | - | Consent of Ryder Scott Company |
| 31.1* | - | Adams Resources & Energy, Inc. Certification Pursuant to 17 CFR 13a-14 (a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| 31.2* | - | Adams Resources & Energy, Inc. Certification Pursuant to 17 CFR 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| 32.1* | - | Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| 32.2* | - | Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| 99.1* | - | Ryder Scott Company Report |
| 101.INS* | |
| 101.SCH* | - XBRL Schema Document |
| 101.CAL* | - XBRL Calculation Linkbase Document |
| 101.LAB* | - XBRL Label Linkbase Document |
| 101.PRE* | - XBRL Presentation Linkbase Document |
| 101.DEF* | - XBRL Definition Linkbase Document |
*- Filed herewith
| +- Management contract or compensation plan or arrangement |
| **-Attached as Exhibit 101 to this report are the following documents formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Statements of Income – Year Ended December 31, 2016, 2015 and 2014 (ii) the Consolidated Balance Sheets – December 31, 2016 and December 31, 2015, (iii) the Consolidated Statements of Cash Flows – Year Ended December 31, 2016, 2015 and 2014 |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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) | |
By /s/ | By /s/ Thomas S. Smith |
| Thomas S. Smith | |
| Executive Vice President and Chief Financial Officer | Chief Executive Officer |
| (Principal Financial Officer and Principal Accounting Officer) | (Principal Executive Officer) |
Date: March 13, 201531, 2017
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated.
By /s/ Thomas S. Smith | |
Thomas S. Smith, Director | By /s/ Townes G. Pressler Townes G. Pressler, Director |
| (Chairman) | |
By /s/ Murray E. Brasseux | By /s/ E. C. Reinauer, Jr. |
| E. C. Reinauer, Jr., Director | |
By /s/ Larry E. Bell | By /s/ |
| Larry E. Bell, Director | |
By /s/ Richard C. Jenner | By /s/ W. R. Scofield |
| Richard C. Jenner, Director | W. R. Scofield, Director |
EXHIBIT INDEX
| Exhibit | |
| Number | Description |
| 3(a) | - Certificate of Incorporation of the Company, as amended. (Incorporated by reference to Exhibit 3(a) filed with the Annual Report on Form 10-K of the Company for the fiscal year ended December 31, 1987). |
| 3(b) | - Bylaws of the Company, as amended. (Incorporated by reference to Exhibit 3(b) filed with the Annual Report on Form 10-K for the year ended December 31, 2012 (-File No. 1-7908). |
| 3(c) | - Adams Resources & Energy, Inc. and Subsidiaries’ Code of Ethics (Incorporated by reference to Exhibit 3(d) of the Annual Report on Form 10-K of the Company for the fiscal year ended December 31, 2002). |
| 4(a) | - Specimen common stock Certificate (Incorporated by reference to Exhibit 4(a) of the Annual Report on Form 10-K of the Company for the fiscal year ended December 31, 1991). |
| 4(b) | - Credit and Security Agreement between Gulfmark Energy, Inc., Adams Resources Marketing, Ltd and Wells Fargo Bank, National Association dated August 27, 2010 (Incorporated by reference to Exhibit 4(b) of the Quarterly Report on Form 10-Q for the period ended September 30, 2009). |
| 10.1 | - |
| Reference to Exhibit 10.1 of | |
| 10.2 | - Retirement Agreement, dated |
| Current Report on Form | |
| 21* | - Subsidiaries of the Registrant |
| 23.1* | - Consent of Ryder Scott Company |
| 31.1* | - Certification Pursuant to 17 CFR 13a-14(a)/15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| 31.2* | - Certification Pursuant to 17 CFR 13a-14(a)/15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| 32.1* | - Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| 32.2* | - Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| 99.1* | - Ryder Scott Company Report |
66
| 101.INS* | - XBRL Instance Document |
| 101.SCH* | - XBRL Schema Document |
| 101.CAL* | - XBRL Calculation Linkbase Document |
| 101.LAB* | - XBRL Label Linkbase Document |
| 101.PRE* | - XBRL Presentation Linkbase Document |
| 101.DEF* | - XBRL Definition Linkbase Document |
| *- Filed herewith |
| +- Management contract or compensation plan or arrangement. |
| **- Attached as Exhibit 101 to this report are the following documents formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Statements of Income – Year Ended December 31, 2016, 2015 and 2014, (ii) the Consolidated Balance Sheets – December 31, 2016 and December 31, 2015, (iii) the Consolidated Statements of Cash Flows – Year Ended December 31, 2016, 2015 and 2014 |
67