Pardee Resources Company 3rd Quarter 2015

7/23/2019 Pardee Resources Company 3rd Quarter 2015

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P RDEE RESOURCES COMP NY

3RD QUARTER 2 0 1 5

Responsible Development of Natural Resource Properties

Integri ty Creativi ty Excel lence Respect Teamwork Family


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To Our Shareholders:

During the third quarter of 2015, Pardee Resources Company earned $1.63 per share, compared wi th

$6.08 per share earned in the thi rd quarter o f 2014, a decrease of 73.2% percent, as our operating results

continue to be impacted by the significant weakness in the energy markets. A meaningful increase in our

oil and gas production was not suffic ient to offset the sharp decline in prices, as the markets remain

hampered by oversupply. In contrast, coal prices weakened only moderately during the period, while

production was off 43% following the expected cessation of mining operations on our Courtney property,

as previously reported. Addit ionally, as described below, during the period we recognized a reduction in

pre-tax earnings totaling $1.31 million coming from three non-cash expenses: a dry hole expense in the

Gulf Coast, a minor adjustment of our natural gas reserves, and the bankruptcy of our coal lessee at

Courtney. Nevertheless, our cash f low remains strong, demonstrating the resiliency o f our business model

during these trying times. EBITDA, a common measure of operating cash flow, was $6.22 per share during

the quarter.

Oil & Gas Division:

A drop in active dri lling rigs in the Marcellus Region has led to a moderate production

decline during August and September; however, the Region remains significantly oversupplied, with the

lack of pipeline infrastructure leading to a steep price discount to the NYMEX averages. Several major

pipeline projects are nearing completion which should help to balance the markets in the months ahead.

We have significantly reduced our Gulf Coast dril ling activity due to current prices, and while we realized a

$258,000 dry hole expense during the period, our investment returns from the Gulf Coast remain

marginally positive. As part of our periodic updating of our Company-wide oil and natural gas reserves,

Ryder Scott, a Houston-based, independent oil and gas consulting firm, completed a reserve study dur ing

the quarter, leading to a $456,000 wri te-down of our reserve base, or less than 1%. While our oil and

natural gas production increased 18.7% during the period, our realized price fo r natural gas averaged

$1.98 per thousand cubic feet (Mcf), 45.3% below the $3.62 per Mcf realized during the thi rd quarter of

2014. Despite the current weakness, we remain confident that with time, natural gas prices will recover,

and meanwhile production from our properties remains strong, providing positive earnings and cash flow.

Coal & Minerals Division:

Total U.S. coal production fell 7% during the quarter versus 2014, due to a

confluence of negative factors, including a strong dollar which hampered exports, low natural gas prices

which led to fuel switching by utilities, and the permanent shut-down of several older coal fired power

plants as util ities react to the 2015-2016 deadline imposed by the Mercury and Air Toxics Standards

(MATS). The Central Appalachian Basin (CAPP), where Pardee's reserves are located, experienced an even

more severe 26% production decline. Due to the Basin's high cost structure and its geographic location, i t

has suffered a greater impact f rom plant closures, low natural gas prices, and weak export markets.

Leading CAPP producers have reduced ou tput as average coal prices have reached a 10-year low. These

adjustments are painful but necessary for the markets to rebalance and again reach equi librium.

Following the exhaustion of surface mine reserves, production on our Courtney property ceased earlier

this year. The lessee subsequently filed for bankruptcy protection, leading to the write-of f of $600,000 in

receivables this quarter. Despite this, it should be noted tha t overall, the Courtney property has delivered

an extraordinary return on investment since it was acquired in 2007. Many of our other coal properties

have favorable economics even in the present environment, and we are working on a number of initiatives

to increase production. We are heartened by the initial success of a new deep mine at our Pardee &.

Curtin property, which opened earlier this year and has recently increased tonnage output.

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Timber & Surface Division: Both hardwood and softwood market prices continued to decline during the

quarter as the export markets weakened due to the strong dollar and softening demand f rom China,

Europe and Latin America. Meanwhile, the domestic housing market continues to improve with 2015

single-family new home sales through September up 17.6% versus the same period in 2014. We expect

timber markets to stabilize during the coming months as producers reduce output . Due to planned

harvest schedules, there was no production from our Virginia softwood properties during the quarter,

accounting for the majority of the 21.6% decline in Division revenues; however, softwood harvesting

operations are currently underway and should continue through year-end. The fire damage at our

Curtin, West Virginia sawmill is ful ly repaired, and we expect our lessee to regain lost production by

year-end, weather permitting.

Alternative Energy Division: Total solar energy capacity in the U.S. grew 14% during the first half of

2015, accounting for 40% of U.S. electric generation addit ions during the period. In order to maximize

our after-tax returns, our 2015 solar investments have focused on partnership interests which leverage

our abili ty to utilize the 30% Federal Investment Tax Credit. Consequently, the majori ty of our return is

through a reduction in corporate taxes rather than an increase in Division revenues. Therefore, even

though the Division's production and revenues in 2015 are roughly flat when compared to the same

quarter 2014, year-to-date solar investments of $2.1 million are expected to reduce our 2015 corporate

taxes by $1.6 million in addition to other benefits.

Strategic Focus: Given the current situation in the energy markets, we are reviewing all Company

expenses to insure that they are aligned with our businesses going forward, and we wil l reduce expenses

wherever possible. Looking forward, we remain focused on creating value for our shareholders through

the ownership and management of natural resources properties. Our conservative balance sheet,

together with our non-operating business model, provide us with the abi lity to both weather the current

downturn and pursue new investment opportunities for growth. During recent weeks, we have finalized

two such investmentsthe $17 million purchase o f Virginia softwood timberlands, and the $7 mill ion

investment in a surface, timber and mineral property in West Virginiaboth of which are more fu lly

described in recent press releases.

'Please see page 6 for an update of legal matters.

Sincerely yours.

Chairman

William G. Foulke

Corporate Office

Pardee Resources Company

1717 Arch Street, Suite 401 0

Philadelphia, PA 191 03

(215)405-1260

[email protected]

www pardee com

President & CEO

Carleton P Erdman
mailto:[email protected]://www.pardee.com/http://www.pardee.com/mailto:[email protected]


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Pardee Resources Company

Unaudited Consolidated Balance Sheets

(Dollars in Thousands)

ASSETS 09-30-15 12-31-14

Current Assets:

Cash & Cash Equivalents $14,751 $15,460

Accounts Receivable 8,389 10,117

Prepaid Taxes 801 0

Deferred Income Tax 483 483

Other 866 80 1

25,290 26,861

Fixed Assets: (Net o f Depl. & Deprec.)

Land & Right of Ways

24,789 23,627

Mineral Rights - Coal 29,297 29,717

Timber

5,162 5,476

Solar Equipment

27,392 28,231

Building & Structures 188 219

Timber Operations 43 45

Office Equipment 256 402

Automobiles 184 228

Other Fixed Assets

446

434

87,757 88,379

Investments:

Oil & Gas Investments (Net o f Depl. & Deprec.) 56,273 59,559

Equity Investments - Alternative Energy 2,020 0

Other 2,432 143

Total Assets $173.772 5174.942

LIABILITIES & STOCKHOLDERS' EQUITY

Liabilities:

Accounts Payable

$1,576

$2,262

Taxes Payable

0

471

Other Liability

1,302

1,324

Non-recourse Bank Debt

5,272 5,566

Supplemental Pension Plan

215 215

Deferred Revenue

4,209

4,994

Deferred Taxes

18,778

18,778

31,352 33,610

Stockholders' Equity:

Common Stock

775

775

Additional Paid in Capital

15,530

14,327

Retained Earnings

147,769

147,858

Treasury Stock

(21,654)

(21,628)

142,420

141,332

Total Liabilities & Equity

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Pardee Resources Com pan y

Unaudited Consolidated Income Statements

(Dollars in Thousands)

Current

Year

Quarter

Ended

09-30-15

Prior

Year

Quarter

Ended

09-30-14

Divisional Revenues:

Coal & Minerals

Oil & Gas

Timber & Surface

Alternative Energy

$3,379

2,226

1,273

1,432

$5,826

3,348

1,615

1,441

8,310 12,230

Divisional Expenses:

Coal & Minerals

Oil & Gas

Timber & Surface

Alternative Energy

995

2,518

829

603

614

2,014

733

529

4,945 3,890

Net Operating Income $3,365 $8,340

Interest and Other Income

General and Administrative

Interest Expense

10

(1,582)

(75)

11

(1,623)

(80)

Income Before Taxes

$1 ,718 $6 ,648

Taxes

601

2,381

NET INCOME

$1,117

$4,267

EARNINGS PER SHARE

$1.63

$6 .08

EBITDA PER SHARE

(earnings before interest, taxes, depreciation,

amortization and dry hole/write-down expense)

_ $6.22

$12.73

Weighted Average Number of

Common Shares Outstanding

684,995

701,629

Common Dividend Per Share

$1.80 $1.75

Total Shareholder Return (dividend paid

plus change in stock price)

Nine Nine

Months Months

Ended Ended

09-30-15 09-30-14

$11,795 $16,647

5,912 10,147

3,401 4,118

3,583

3,416

24,691 34,328

1,928 1,896

7,350 5,774

2,234 2,167

1,712 1,587

13,224 11,424

$11 ,467 $22 ,904

33

32

(5,686)

(5,315)

(228) (200)

$5,586

$17 ,421

1,955 6,259

$ 3 ,6 3 1

$11,162

$ 5 .3 0 $ 1 5 .9 1

$18.80

$33.68

684.995

701.629

$5.40 $5.25

-17.92% 31.95%


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Pardee Resources Com pan y

Comparison Data Sheet

Current Prior

EBITDA - Mil lions

(earnings before interest, taxes, depreciat ion,

amortization and dry hole /write -do wn expense)

$4.26 $8.93

-52.3%

Year Year

%

Year

Year

%

Quarter Quarter Change

To Date To Date Change

Coal & Minerals

Revenues - Millions

$3.38 $5.83 -42.0%

$11.80 $16.65 -29.1%

Production - Coal Tons - Millions

1.06 1.86 -43.0%

3.60 5.08 -29.1%

Royalty/Coal Ton

$2.79

$2.97 -6.1% $2.92 $3.11 -6.1%

Oil & Gas

Revenues - Mill ions

$2.23 $3.35 -33.4% $5.91 $10.15 -41.8%

Production - Bcfe 0.89 0.75 18.7% 2.36 2.03 16.3%

Price/Mcf

$1.98 $3.62 -45.3% $2.12 $4.12 -48.5%

Timber & Surface

Revenues - Mill ions $1.27 $1.62 -21.6% $3.40

$4.12 -17.5%

Production - Board feet - Mill ions 3.66 3.54 3.4% 9.52 9.50 0.2%

Stumpage Price/Thousand Bd. Ft. $269 $305

-11.8%

$280 $288 -2.8%

Product ion - Softwood Tons - Thousands 0.00 17.28 -100.0% 0.00 38.63 -100.0%

Stumpage Price/Ton Softwood

-

$15.70 n/a

-

$15.78 n/a

Production - Hardwood Tons - Thousands 17.91 18.20 -1.6%

51.10

55.06

-7.2%

Stumpage Price/Ton Hardwood

$2.84

$2.51 13.1%

$2.71 $2.42

12.0%

Alternative Energy

Revenues - Mill ions $1.43

$1.44

-0.7%

$3.58 $3.42 4.7%

Production - k /w - Millions 5.74 5.51 4.2% 14.44 13.73 5.2%

Electric Sales Price / k /w $0,112

$0,114 -1.8%

$0,114 $0,116 -1.7%

SREC Price/Credit

$137 $148 -7.4% $133

$133

0.0%

NET DIVISIONAL OPERATING INCOME:

(Dollars in Millions)

Coal & Minerals $2.38

$5.21 -54.3%

$9.87 $14.75 -33.1%

Oil & Gas

(0.29) 1.33 -121.8%

(1.44) 4.37 -133.0%

Timber & Surface

0.44 0.88 -50.0%

1.17 1.95

-40.0%

Alternative Energy 0.83

0.91 -8.8%

1.87 1.83 2.2%

Net Operating Income $ 33 6

$8.33 -59.7%

$11.47

$22.90

-49.9%

et Operating Income

-59.7%

$11.47

-49.9%

Current Prior

$12.88 $23.63 -45.5%


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FORWARD-LOOKING STATEMENTS

Certain o f the statements contained herein (other than statements of historical facts) are forward-

looking statements. Such forward-looking statements include estimates and assumptions related to the

Company's growth, reserves, the state of future markets for natural resource and renewable products,

and the abil ity of the Company to sell its natural resource and renewable products on a prof itable basis.

These forward-looking statements are subject to change and uncertainty which are, in many instances,

beyond the Company's control and have been made based upon management's expectations and beliefs

concerning future developments and their potential effect on the Company. There can be no assurance

tha t future developments will be in accordance wi th management's expectations or that the effect of

future developments on the Company wil l be those anticipated by management. Actual financial results

including revenue growth and earnings results could differ materially from those anticipated by the

Company depending on the outcome of certain factors, which may include, among others, changes in the

wholesale prices for timber, oil, natural gas, coal and renewables; increases in property acquisition costs;

adverse weather conditions; failures of our lessees to mine, drill and harvest at rates we currently

anticipate; differences between actual reserves and estimated amounts; legislative changes or

government regulations which make it more difficul t or expensive to sell our renewable products, to

extract or harvest our natural resource products or impose greater financial burdens on the users of such

products; and unanticipated costs fo r remediation and reclamation.

Kings Do me

As we have previously reported, a legal challenge has been made to the Company's long time ownership

of the Kings Dome mineral servitude and this issue remains unresolved. In 2012, the Company settled

with one o f the two plaintiffs in this litigation fo r an immaterial amount. We expect the case with the

remaining plaintiff t o be set for tr ial in 2016. While the Company continues to vigorously defend itself in

this litigation, i t cannot currently predict the manner and timing of the final resolution o f this matter.

Lexin gton v. Zinn

On December 7, 2007 Lexington Land Development, LLC ( Lexington ) filed an action against certain

parties in East Baton Rouge Parish, Louisiana. Lexington claims that their 48 acre parcel was

contaminated by a Shell Pipeline Company ( Shell ) release and the oil and gas exploration and

production activities of other various defendants including Zinn Petroleum Company ( Zinn ). Lexington

seeks various remedies, including remediation and damages. Pardee is not a defendant in this case;

however, Pardee has a minority interest in certain leases and wells operated by Zinn, and, under joint

operating agreements, Pardee and certain other interest owners are responsible for their respective

shares of any damages or judgments sustained by Zinn. While Zinn is vigorously defending itself in the

matter, this action is subject to substantial uncertainties concerning the outcome of material factual and

legal issues related to the litigation. Accordingly, we cannot currently predict the manner and timing of

the resolution of these matters and are unable to estimate the amount o f any possible losses which

could be material.

'Not ice of ntent to Sue

On December 8, 2014, one of the Company's subsidiaries received a notice letter from various

environmental groups alleging violations of the Clean Water Act at one of the subsidiary's properties in

West Virginia. The notice let ter alleges that certain pollutants have been discharged from that location

and expresses the intention of these groups to file suit against the subsidiary after a statutory waiting

period, which has passed. The Company is in the process of evaluating the allegations set forth in this

notice letter. If a lawsuit is filed, the Company believes that i t has defenses to the claims in the notice.

Given the preliminary stage, it is not possible to estimate any potential loss related to these claims.

We wil l promptly advise our shareholders of any significant developments concerning these matters.

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Pardee Resources Company 3rd Quarter 2015

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