March 26, 2018
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, 2017. The annual revenue breakdown is as follows: 2017 revenue from oil and gas production from our fee lands was $103,032 compared to revenue of $81,859 in 2016.
Dividend and interest income for 2017 was $105,771, compared to $120,371 for 2016. In 2017, the Company realized a cumulative gain from the sale of investment securities of $548,455 compared to a cumulative gain in the amount of $895,344 in 2016. The flow-through loss from B&L Exploration, LLC (B&L) reduced the Company’s annual revenue by $741,597 in 2017 compared to $1,594,923 in 2016. Expenses for the year totaled $743,914 and were lower than the prior year’s expenses of $814,362 which represents a reduction in expenses year over year for the past three years.
For the year, the Company had a net loss of $666,368 or $.26 per share compared to a net loss of $1,043,325 or $.41 per share in 2016.
While 6 wells continue to produce from the Company’s fee lands, as of December 31, 2017, the combined net daily production accruing to the Company was minimal. Due to the minimal production from the Company’s fee lands, the Company opted not to commission a reserve study for the period ending December 31, 2017.
Meanwhile, B&L’s net daily production from 6 wells as of December 31, 2017 was approximately 2,171 thousand cubic feet of natural gas (Mcfg) and 31 barrels of oil per day (BOPD). Two independent reserve studies have been completed by separate reservoir engineering firms covering different properties in which B&L holds working interests. These studies estimate that B&L’s proved reserves as of December 31, 2017 were approximately 4.7 billion cubic feet of natural gas (Bcfg), approximately 101 thousand barrels of oil (Mbbl) and approximately 26.6 Mbbl of natural gas liquids. Meanwhile, B&L’s Probable and Possible reserves as of December 31, 2017 are estimated to be approximately 1.9 Bcfg. This compares to B&L’s estimated proved reserves as of December 31, 2016 which were approximately 10.8 Bcfg, approximately 257 Mbbl of oil and approximately 18.0 Mbbl of natural gas liquids.(1)
(1) The reserve estimates were prepared in accordance with the definition and regulations of the U. S. Securities and Exchange Commission (SEC) defined in S-X Part 210.4-10 (a) as revised and adopted effective January 1, 2010.
It should be noted that a significant component of B&L’s proved reserves as of December 31, 2016 were Proved Undeveloped (PUD) attributed to B&L’s leasehold interest in a federal offshore block located in shallow water offshore of Louisiana. Due to the high cost of development of the offshore block, inherent risk of cost overruns and the current lower price of natural gas, B&L’s management opted not to invest in the development of the federal offshore lease during the term of the lease. The five-year lease expired in October of 2017 and the associated PUD reserves are not included in the December 31, 2017 reserve estimates.
During 2017 B&L underwent a realignment of its working interest investments. There were three components to this realignment which impacted B&L’s proved reserves as of December 31, 2017. As previously reported, the first was the sale of a non-operated working interest in a well in South Louisiana. The second was the expiration of a mineral lease in a federal offshore block located in shallow water offshore of Louisiana. The third was the filing of a bankruptcy petition by the operator of a field in South Louisiana in which B&L owned a non-operating working interest. It is uncertain whether the operator’s bankruptcy will have any future negative impact on B&L. This realignment effectively focused B&L’s efforts on south Texas.
Based on information provided by the well’s operator to the Louisiana Department of Natural Resources (LDNR) and published on LDNR’s Strategic Online Natural Resources Information System (SONRIS – www.sonris.com), during December 2017 the Highlander discovery well produced at a flow rate of approximately 44,600 Mcfg per day from the Tuscaloosa sand interval. B&L is contractually entitled to a 1.5% of 8/8ths overriding royalty interest (ORRI) in the Highlander discovery well and in all mineral leases obtained and maintained by Freeport-McMoRan Oil & Gas in its Highlander Project Area located in Assumption, Iberia, Iberville, St. Martin and St. Mary Parishes, Louisiana. During the public hearing held on March 20, 2018 by the State of Louisiana, Office of Conservation, McMoRan Oil & Gas, LLC (McMoRan), the Operator of the Highlander discovery well, presented updated data from the first unit well and the Operator’s progress on the development of its plan for drilling the second unit well within the 9,000 acre – EOC-TUSC BL UDS SUA located in St Martin Parish, Louisiana. Among other information presented by the Operator, a second pipeline connection and meter station have recently been added and this additional capacity should allow the gross production from the Highlander discovery well to be increased to approximately 60,000 Mcfg per day. The unit order (262-T-3) as amended on January 31, 2017 extended the obligation to spud the second unit well to February 6, 2019. During the March 20, 2018 public hearing, McMoRan stated that it has entered into a Purchase and Sale Agreement with a third party for the sale of its interest in the EOC-TUSC BL UDS SUA. McMoRan stated that the closing of the Purchase and Sale Agreement is contingent upon a third party closing an unrelated transaction. McMoRan is not able to guarantee the closing will occur and did not disclose the identity of the third party. In the event the closing occurs, McMoRan stated that it believes that the third party intends to drill a second unit well after closing which is contingently scheduled to take place no later than early July 2018.
B&L continues to develop its Lago Verde project in South Texas. The Welder No. 4 well was placed on production on April 6, 2017. The Welder No. 4 well is the first development well drilled to offset B&L’s Welder No. 3 field discovery well. Continuing its field development, B&L drilled its Welder No. 6 well during July 2017. The Welder No. 6 well was placed on production in November 2017. B&L drilled its Welder No. 8 well during the fourth quarter of 2017. The Welder No. 8 well is scheduled for completion operations at the end of the first quarter of 2018. B&L is the Operator and has a 62.5% working interest in the Lago Verde project. B&L’s current mineral lease position is approximately 2,500 gross acres in South Texas.
As previously disclosed, on January 3, 2017 the Louisiana Coastal Protection and Restoration Authority (CPRA) released a draft of its 2017 Coastal Master Plan (CMP). Disturbingly, as released the draft of the 2017 CMP did not include all the coastal restoration projects that were included in CPRA’s 2012 CMP and did not include all the coastal restoration projects that are included in the U.S. Army Corps of Engineer’s Ecosystem Restoration Plan which was an integral part of the de-authorization for the closure of the MRGO ship channel. More disturbingly, at the time of its release, the draft 2017 CMP stated that a large percentage of Louisiana’s Coastal Zone including the Biloxi Marsh Complex (BMC) was unsustainable with or without action due to a combination of subsidence and sea level rise caused by global warming. Furthermore, the draft 2017 CMP erroneously indicated that the BMC would be essentially nonexistent in 50 years. Upon receiving the foregoing information, Management took immediate steps to build a scientific consensus that CPRA’s draft 2017 CMP was incorrect concerning the BMC. In fact, data collected by CPRA indicates the BMC is accreting in elevation, not subsiding as stated in the draft 2017 CMP. Management retained professors Dr. G. Paul Kemp and Dr. John W. Day with Louisiana State University along with Chris McLindon with the New Orleans Geological Society to prepare reports examining the sustainability of the BMC. On March 24, 2017 the Company submitted official comments concerning CPRA’s draft 2017 CMP (a copy is available on our website www.biloximarshlandscorp.com). The Company’s comments combined with meetings with CPRA’s representatives resulted in the inclusion of the following language on page 162 of the CMP 2017 final draft. “We realize that new information may become available that alters the effectiveness of some of those projects and that there are potentially other innovative project concepts that have not yet been considered. Identifying these projects and concepts is an important next step in the master planning process. To that end, those concepts and certain elements of this plan need to be further refined to assist areas of the coast with recognized critical needs… Another involves the Biloxi Marsh Complex for which recently evaluated specific information suggests local factors (e.g., subsidence, accretion) may result in the area performing better and lasting longer than current estimates suggest. As such, CPRA will continue the Project Development and Implementation Program coordinated with our adaptive management program through which projects like this can be further developed using refined and improved information.” The Company in cooperation with Lake Eugenie Land & Development, Inc. has begun revising and updating The Biloxi Marsh Stabilization and Restoration Plan which was published in 2006. The Company plans to engage CPRA in discussions to make certain that all parties clearly understand the value of our property and that the BMC is sustainable beyond the time frame which was originally set forth in the draft CMP 2017.
As previously reported, on June 15, 2012, the Company filed a claim (Biloxi Marsh Lands Corp., et al. v. United States; Case No. 12-382L) in the U.S. Court of Federal Claims against the US Army Corps of Engineers (“The Biloxi Case”) seeking monetary damages for property damage and losses caused by the Mississippi River Gulf Outlet (MR-GO). A trial solely on the liability portion of the claims was originally set for October of 2017, and was continued to March 19, 2018. In January of 2018 The Biloxi Case was consolidated with other similar landowners’ cases against the US Army Corps of Engineers and will proceed as Biloxi Marsh Lands Corp., et al. v. United States, No. 12-382L. Liability is the first phase of the litigation process with the trial currently scheduled for October of 2018. It should be noted that this is the third continuance of the initial trial on the liability portion of this matter. If the liability portion of this matter is resolved in favor of the Company, there will be a second trial on damages to determine the value of the Company’s claims. At this time the Company cannot predict the timing of resolution or the outcome of this litigation process. While we will continue to aggressively pursue this claim, it is anticipated that this litigation against the federal government will be a long process.
Reluctantly, during 2017 the Company was forced to file suit in Louisiana State District Court (34th Judicial District Court in St. Bernard Parish, LA) against Alta Mesa Holdings LP for specific performance demanding clean up and remediation of the Company’s property.
The Company maintains a stock buyback program. On December 14, 2015, the board of directors authorized the additional purchase of up to 30,000 shares of the Company’s common stock. The purchases will be made from time to time on the open market at the sole discretion of the Company. All shares purchased will be held as treasury stock. As of the date of this press release, the Company has acquired 7,020 shares.
B&L was organized as a limited liability Company (LLC) under the laws of Louisiana in July of 2006. B&L’s members are BLMC and Lake Eugenie Land & Development, Inc. (LKEU), which have membership percentages of 75% and 25%, respectively.
During its meeting held on December 14, 2017, the board of directors declared a dividend of $.10 per outstanding share of common stock payable on Wednesday, January 3, 2018 to shareholders of record at the close of business on Friday, December 29, 2017. This represents a total cash dividend payment of $252,801 or $.10 per share. Since 2002, the Company has paid approximately $55,729,000 in total dividends. With the Company’s fee land based production depleting and no new wells being drilled on its fee lands, it will be difficult to maintain the level of dividends paid since 2002.
Please remember to visit our website, www.biloximarshlandscorp.com, to obtain general information about the Company as well as historical annual reports and all press releases. We strongly recommend that all interested parties become familiar with the information available on the Company’s website: www.biloximarshlandscorp.com .
The Company’s revenue from its fee lands has declined significantly and attracting third parties interested in exploring for and developing the minerals beneath our lands continues to prove difficult. This is due to a combination of factors which include the depth of prospects beneath our property, the current price of natural gas and the difficult environment for oil and gas operators in Louisiana’s coastal zone. With this said, we are continually looking for a catalyst that will create an opportunity to test one of the possibly prospective structures beneath the Company’s fee lands in St. Bernard Parish, Louisiana. These structures, within the Tuscaloosa sand interval, have been identified using 3D seismic data. Meanwhile, B&L’s management realigned its main operating focus to its Lago Verde Project in South Texas. Additionally, B&L’s management is cognizant that the Highlander discovery well continues to produce at significant rates, and based on information provided by the Operator during the March 20, 2018 public hearing, additional capacity should allow the gross production from the Highlander discovery well to be increased from its current range of 45,000 Mcfg per day to approximately 60,000 Mcfg per day.
We believe that we have positioned the Company for the future through our investment in B&L. B&L’s management and staff have the knowledge and experience in the oil and gas sector which uniquely positions it and the Company to seek and take advantage of opportunities as they present themselves, both within the boundaries of the Company’s fee lands and beyond.
William B. Rudolf
President and Chief Executive Officer
Email: [email protected] (2)
(2) 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”, “could”, “should”, “outlook”, “possibly” and “anticipates” and similar expressions as they relate to the Company or its management are intended to identify forward-looking statements.