To the Shareholders of Biloxi Marsh Lands Corporation:
The following is a discussion of the results of operations of the Company for the year ended December 31, 2011. The annual revenue breakdown is as follows: 2011 revenue from oil and gas activity for the Company’s fee lands was $1,503,056 compared to revenue of $7,030,933 in 2010. During 2010, the Company received $5,205,463 in nonrecurring oil and gas revenue which was the result of the settlement of all cases involving disputed ownership of water-bottoms between the Company and the State of Louisiana.
During 2011, total revenues included a $3,423,042 loss emanating from the Company’s investment in B&L Exploration, LLC (B&L). This compares to a loss of $764,018 from B&L in the prior year. As an operating oil and gas entity, B&L’s results included deductions for depreciation, depletion and amortization (DD&A) costs relating to its ongoing drilling and production activities. BLMC’s share of these DD&A expenses was $1,801,797 and $733,934 for 2011 and 2010, respectively. While the Company had the option to capitalize its portion of intangible drilling costs (IDC) incurred by B&L in its 2010 and 2011 drilling programs, the Company elected to expense one hundred percent (100%) of its share of IDC for the years 2010 and 2011. By fully expensing its portion of B&L’s IDC for calendar year 2011, the Company is able to carry back the current year generated loss to prior years and obtain significant refunds of income taxes paid in 2008 and 2009. During 2012, the Company will file carryback claims which will likely result in income tax refunds totaling $742,136.
Meanwhile, dividend and interest income for 2011 was $254,128 compared to $327,475 for 2010. In 2011, we realized a cumulative gain from the sale of investment securities of $1,600,569 compared to a cumulative gain in the amount of $218,149 in 2010. Expenses for the year totaled $1,439,114 compared to $1,649,451 for the prior year. For the year, the Company incurred a net loss of $695,955 or $0.25 per share compared to a net profit of $3,934,262 or $1.44 per share in 2010. It should be noted that the Company’s basis of accounting is the accrual method of tax accounting used for federal income tax purposes.
As of December 31, 2011 the combined gross daily production rate from 6 wells operated by the Company’s mineral Lessees was approximately 6.9 million cubic feet (mmcf) of natural gas with net daily production accruing to the Company of approximately .894 mmcf. As of December 31, 2011, B&L’s net daily production was approximately 4.0 million cubic feet of natural gas equivalents (mmcfge) (15:1 oil to gas ratio) compared to approximately 3.0 mmcfge per day as of December 31, 2010. Combining this daily production with the Company’s proportional share of the daily production from the B&L wells makes the total net daily production accruing to the Company as of December 31, 2011 approximately 4.3 mmcf per day compared to 4.02 mmcfge as of December 31, 2010. This increased daily production was due solely to the increase in B&L’s daily production. It should be noted that B&L has a non-operated working interest in three wells which have been drilled, completed and successfully flow tested, but are yet to be placed on production. All three of these wells, SL 19706 No. 1, CL&F No.1, and the Goodrich Land and Energy No. 1 are expected to be placed on production during the first half of 2012.
In February of 2012 the Goodrich Land and Energy No. 1 well located in St. Martin Parish, Louisiana and operated by Linder Oil Company was drilled, successfully completed and partially flow tested. Electric logs indicated approximately 47 net feet of pay in four sand intervals. The lowest interval, the “J” Sand, was successfully flow tested at a maximum rate of 849 mcfg per day with flowing tubing pressure of 3,135 psi on a 10/64th choke. Based on production history in the field, the Operator anticipates that this “J” sand zone should turn to oil after the natural gas cap is produced. Linder Oil Company advises this well should be placed on production by April 30, 2012. B&L has as 15% non-operated working interest in this well.
Meanwhile, the SL 19706 No. 1 Well operated by Clayton Williams Energy (CWE) and in which B&L has a 15% non-operated working interest is scheduled to be placed on production by April 15, 2012. This well was originally scheduled to be placed on production as of January 1, 2012 but has been delayed due to weather and problems in constructing the sales pipeline tie-in.
The CL&F No. 1 Well which was flow tested on September 27, 2011 and operated by Forza Operating Company is scheduled to be placed on production by June 15, 2012. B&L has a 9.375% non-operated working interest in this well.
The Company commissioned T. J. Smith & Company, Inc., independent reservoir engineers, to complete a proved reserve study. This reserve study estimates that as of December 31, 2011 BLMC’s “Developed Producing” (PDP) reserves were .600 billion cubic feet (BCF) of natural gas and estimates that the “Developed Non-Producing” (PDNP) reserves were .521 BCF, totaling 1.121 BCF of estimated proved natural gas reserves. Additionally, this reserve study estimates that slightly more than 21% of the proved reserves will deplete by the end of 2012.
Please find the following table showing the Company’s proved reserves as of December 31, 2011:
Proved Reserves as of December 31, 2011 (3) ___________
| DevelopedProducing (PDP) | Developed Non-Producing (PDNP) | Total | |
|---|---|---|---|
| (Dollars in Thousands) | |||
| Net Proved Reserves (1): | |||
| Natural Gas (BCF): | .600 | .521 | 1.121 |
| Estimated Future Net Revenues (before income taxes) (2):…………………. | $ 4,410 (4) | ||
| Estimated Discounted Future Net Revenues (before income taxes) (2):……. | $ 3,223 (4) | ||
(1) In general, our engineers based their estimates of economically recoverable oil and natural gas reserves and of the future net revenues therefrom on a number of variable factors and assumptions, such as historical production from the subject properties, the assumed effects of regulation by governmental agencies and assumptions concerning future oil and natural gas prices, all of which may vary considerably from actual results. Therefore, the actual production, revenues, and severance taxes with respect to reserves likely will vary from such estimates, and such variances could be material.
Estimates with respect to proved reserves that may be developed and produced in the future are often based on volumetric calculations and by analogy to similar types of reserves rather than actual production history. Estimates based on these methods are generally less reliable than those based on actual production history, and subsequent evaluation of the same reserves, based on production history, will result in variations, which may be substantial, in the estimated reserves.
In accordance with applicable requirements of the Commission, the estimated discounted future net revenues from estimated proved reserves are based on 12 month average price calculated as the unweighted arithmetic average of the first-day-of-the-month price for each month within the 12 month period prior. Actual future prices may be materially higher or lower. Actual future net revenues also will be affected by factors such as actual production, supply and demand for oil and natural gas, curtailments or increases in consumption by natural gas purchasers, changes in governmental regulations or taxation and the impact of inflation o costs.
(2) The Estimated Discounted Future Net Revenues represents the Estimated Future Net Revenues before income taxes discounted at 10%. For calculating The Estimated Future Net Revenues and the Estimated Discounted Future Net Revenues, we used the base product price based on the 12 month average price calculated as the unweighted arithmetic average of the first-day-of-the-month price for each month within the 12 month period prior to December 31, 2011. The oil price of $96.19 per barrel is based on the West Texas Intermediate (WTI), Cushing, Oklahoma spot prices. The natural gas price of $4.118 per MMBtu is based on the Henry Hub gas daily prices.
(3) The Meridian Resource and Exploration, LLC (now owned by Alta Mesa Holdings, LP) and Manti Jamba, Ltd. separately operate the various producing wells. The Company has no control over operations and maintains only a landowner’s mineral royalty interest. Please see footnote (i) following the final paragraph of this letter for a warning concerning forward-looking information.
(4) The value of the proved reserves “Undiscounted, M$” and “Discounted at 10%, M$” includes a minimal amount of Oil and Condensate as well as Natural Gas Liquids.
Additionally, T.J. Smith & Company, Inc. completed a separate proved reserve study that estimates that B&L’s reserves were 2.4 billion cubic feet (BCF) of natural gas and 81 thousand barrels of oil (MBBL) as of December 31, 2011. The estimated gross value of these proved reserves was $18.2mm. This gross value net of operating expenses, severance taxes, ad valorem taxes, future capital and other costs equates to “Estimated Future Net Revenues” of $13.15mm with an “Estimated Discounted Future Net Revenues” of $9.98mm (see note 2 above) compared to 2.3 BCF and 25 thousand barrels of oil (MBBL) at the end of 2010. B&L maintains a line of credit with Whitney Bank in the amount of $5mm and is partially guaranteed by the Company. During 2011, the line of credit was not utilized.
On October 1, 2008 we announced our plans to repurchase up to 27,500 shares of our common stock. On September 13, 2011, we authorized the purchase of an additional 13,000 shares of our common stock. As of December 31, 2011 we have been successful in purchasing a total of 19,100 shares of common stock. As of this time, we plan to continue to repurchase our common stock until we fulfill our goal of acquiring 40,500 shares.
B&L was organized as a limited liability Company (LLC) under the laws of Louisiana in July of 2006. B&L’s Class A members are BLMC and Lake Eugenie Land & Development, Inc. (LKEU), which have membership percentages of 75% and 25%, respectively. The Operating Agreement was amended on November 16, 2009 to create a Class B membership to allow for certain future projects at the discretion of the board of managers to be participated by either Class A or Class B members or a combination of the respective Classes. B&L’s Class B members are BLMC and LKEU, which have membership percentages of 90% and 10%, respectfully.
During its meeting held on December 6, 2011, the Board of Directors declared a $0.55 per share dividend payable on Wednesday, December 28, 2011 to shareholders of record as of the close of business on Wednesday, December 14, 2011. This represents a total cash dividend payment of $1,505,420 or $0.55 per share. Since 2002, the Company has paid slightly more than $51,500,000 in total dividends. With our fee land based production depleting and no new wells being drilled on our fee lands, it will be difficult to maintain the level of dividends paid since 2002. With this said, using 3D seismic data in our possession, we are constantly working on developing the minerals located below our fee lands. Meanwhile, we are focusing on developing reserves outside of our fee acreage position through our investment in B&L. In its current stage of growth and continued reinvestment in its successful drilling program, B&L should not be viewed as a dividend producing entity.
Please remember to visit our website, www.biloximarshlandscorp.com, to obtain general information about the Company as well as recent historical annual reports and all historical press releases. We strongly recommend that all interested parties become familiar with the information available on the Company’s website: www.biloximarshlandscorp.com .
While the Company has proved reserves assigned to its fee acreage which represent continued significant value, there were no new wells drilled on the Company’s acreage during 2011. Our planned filing of carryback claims that will likely result in income tax refunds totaling $742,136 is a significant strategic financial move. We will continue to work on developing both shallow and deep prospects on the Company’s property, particularly our deep Tuscaloosa Project. With this said, the current depressed price of natural gas is making the marketing of these prospects difficult. Conversely, recent apparent discoveries and continued exploration in ultra-deep natural gas by McMoRan Exploration and others will advance deep drilling and completion technology. If and when natural gas prices rebound, the Company’s acreage should become more attractive and we are positioned to take advantage of the changes in market pricing.
Meanwhile, we continue to be pleased with the results of B&L’s drilling program. B&L exceeded the five million dollar revenue threshold for the first time since its inception and placed two new wells on production during 2011 with three additional wells awaiting the day of first production sales. As of December 31, 2011, B&L had working interests in nine wells to which proved reserves were assigned representing a gross value of over $18mm (see explanation above). B&L plans to continue its drilling program and currently has two additional wells scheduled to be drilled during 2012 and is evaluating additional prospects. Due to the large variance in price between oil and natural gas, B&L is focusing on oil prospects and natural gas prospects with potentially high natural gas liquid yields.
2012 will be a challenging year, but we are positioning the Company for the future and look forward to the challenge.
Sincerely,
William B. Rudolf
President and Chief Executive Officer
Metairie, Louisiana
Email: [email protected]
PLEASE SEE PDF “BUTTON” ABOVE FOR ENTIRE RELEASE INCLUDING FINANCIAL TABLES
This letter contains forward-looking statements regarding oil and gas discoveries, oil and gas exploration, development and production activities and reserves. Accuracy of the forward-looking statements depends on assumptions about events that change over time and is thus susceptible to periodic change based on actual experience and new developments. The Company cautions readers that it assumes no obligation to update or publicly release any revisions to the forward-looking statements in this report. Important factors that might cause future results to differ from these forward-looking statements include: variations in the market prices of oil and natural gas; drilling results; unanticipated fluctuations in flow rates of producing wells; oil and natural gas reserves expectations; the ability to satisfy future cash obligations and environmental costs; additional drilling, and general exploration and development risks and hazards. Readers are cautioned not to place undue reliance on forward-looking statements made by or on behalf of the Company. Each such statement speaks only as of the day it was made. The factors described above cannot be controlled by the Company. When used in this report, the words “hopeful”, “believes”, “estimates”, “plans”, “expects”, “should”, “outlook”, and “anticipates” and similar expressions as they relate to the Company or its management are intended to identify forward-looking statements.