XNAS:ISRL Isramco Inc Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 

 
FORM 10-Q
 

 
 
Check One
 
 
x
Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended June 30, 2012
     
   
or
     
 
o
Transition report under Section 13 or 15(d) of the Securities Exchange Act of 1934
 
Commission File Number 0-12500
 
ISRAMCO, INC
(Exact Name of registrant as Specified in its Charter)
 
Delaware
 
13-3145265
(State or other Jurisdiction of Incorporation or Organization)
 
I.R.S. Employer Number
 
2425 West Loop South, Suite 810, HOUSTON, TX 77027
 (Address of Principal Executive Offices)
 
713-621-5946
(Registrant’s Telephone Number, Including Area Code)
 
Indicate by check whether the registrant: (1) filed all reports required to be filed by Section 13 or 15(d) of the 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 such filing requirements for the past 90 days.  Yes x No o

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 o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer o Accelerated filer x Non-accelerated filer o (Do not check if a smaller reporting company)  Smaller reporting company o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
 
The number of shares outstanding of the registrant’s Common Stock as August 9, 2012 was 2,717,691.
 
 
TABLE OF CONTENTS

   
Page
PART I.  FINANCIAL INFORMATION
 
     
Item 1.
4
 
4
 
5
 
6
 
7
Item 2.
14
Item 3.  
24
Item 4.
24
     
PART II.  OTHER INFORMATION
 
     
Item 1.
25
Item 1A.
25
Item 2
25
Item 3.
25
Item 4
25
Item 5.
26
Item 6.
26
 
27

 
Forward Looking Statements
 
CERTAIN STATEMENTS MADE IN THIS QUARTERLY REPORT ON FORM 10-Q ARE “FORWARD-LOOKING STATEMENTS” WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. FORWARD-LOOKING STATEMENTS CAN BE IDENTIFIED BY TERMINOLOGY SUCH AS “MAY”, “WILL”, “SHOULD”, “EXPECTS”, “INTENDS”, “ANTICIPATES”, “BELIEVES”, “ESTIMATES”, “PREDICTS”, OR “CONTINUE” OR THE NEGATIVE OF THESE TERMS OR OTHER COMPARABLE TERMINOLOGY AND INCLUDE, WITHOUT LIMITATION, STATEMENTS BELOW REGARDING EXPLORATION AND DRILLING PLANS, FUTURE GENERAL AND ADMINISTRATIVE EXPENSES, FUTURE GROWTH, FUTURE EXPLORATION, FUTURE GEOPHYSICAL AND GEOLOGICAL DATA, GENERATION OF ADDITIONAL PROPERTIES, RESERVES, NEW PROSPECTS AND DRILLING LOCATIONS, FUTURE CAPITAL EXPENDITURES, SUFFICIENCY OF WORKING CAPITAL, ABILITY TO RAISE ADDITIONAL CAPITAL, PROJECTED CASH FLOWS FROM OPERATIONS, OUTCOME OF ANY LEGAL PROCEEDINGS, DRILLING PLANS, THE NUMBER, TIMING OR RESULTS OF ANY WELLS, INTERPRETATION AND RESULTS OF SEISMIC SURVEYS OR SEISMIC DATA, FUTURE PRODUCTION OR RESERVES, LEASE OPTIONS OR RIGHTS, PARTICIPATION OF OPERATING PARTNERS, CONTINUED RECEIPT OF ROYALTIES, AND ANY OTHER STATEMENTS REGARDING FUTURE OPERATIONS, FINANCIAL RESULTS, OPPORTUNITIES, GROWTH, BUSINESS PLANS AND STRATEGY. BECAUSE FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTIES, THERE ARE IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE EXPRESSED OR IMPLIED BY THESE FORWARD-LOOKING STATEMENTS. ALTHOUGH THE COMPANY BELIEVES THAT EXPECTATIONS REFLECTED IN THE FORWARD-LOOKING STATEMENTS ARE REASONABLE, IT CANNOT GUARANTEE FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS. MOREOVER, NEITHER THE COMPANY NOR ANY OTHER PERSON ASSUMES RESPONSIBILITY FOR THE ACCURACY AND COMPLETENESS OF THESE FORWARD-LOOKING STATEMENTS. THE COMPANY IS UNDER NO DUTY TO UPDATE ANY FORWARD-LOOKING STATEMENTS AFTER THE DATE OF THIS REPORT TO CONFORM SUCH STATEMENTS TO ACTUAL RESULTS.
 

 
 
PART I - Financial Information
 
ITEM 1.       Financial Statements
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
 (Unaudited) 
 
   
As of
June 30, 2012
   
As of
December 31, 2011
 
ASSETS
 
Current Assets:
           
Cash and cash equivalents
 
$
1,473
   
$
2,122
 
Accounts receivable, net
   
8,556
     
6,459
 
Restricted and designated cash
   
61
     
290
 
Deferred tax assets
   
2,749
     
2,539
 
Derivative asset
   
1,562
     
961
 
Prepaid expenses and other
   
307
     
706
 
Total Current Assets
   
14,708
     
13,077
 
                 
Property and Equipment, at cost – successful efforts method:
               
Oil and Gas properties
   
228,823
     
225,108
 
Advanced payment for equipment
   
300
     
650
 
Service Equipment and other
   
12,801
     
6,860
 
Total Property and Equipment
   
241,924
     
232,618
 
Accumulated depreciation, depletion and amortization
   
(110,698
)
   
(105,224
)
Net Property and Equipment
   
131,226
     
127,394
 
                 
Marketable securities, at market
   
-
     
4,554
 
Derivative asset
   
1,807
     
1,421
 
Deferred tax assets and other
   
4,294
     
5,461
 
Total assets
 
$
152,035
   
$
151,907
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
Current liabilities:
           
Accounts payable and accrued expenses
 
$
11,684
   
$
9,360
 
Bank overdraft
   
-
     
823
 
Current maturities of long-term debt
   
-
     
20,000
 
Due to related party and accrued interest
   
60,299
     
25,518
 
Total current liabilities
   
71,983
     
55,701
 
                 
Due to related party and accrued interest
   
42,075
     
60,408
 
                 
Other Long-term Liabilities:
               
Asset retirement obligations
   
17,549
     
17,250
 
                 
Commitments and contingencies
               
                 
Shareholders’ equity:
               
Common stock $0.0l par value; authorized 7,500,000 shares;  issued 2,746,958 shares; outstanding 2,717,691 shares
   
27
     
27
 
Additional paid-in capital
   
23,194
     
23,194
 
Accumulated deficit
   
(2,736
)
   
(6,768
)
Accumulated other comprehensive income
   
-
     
2,254
 
Treasury stock, 29,267 shares at cost
   
(164
)
   
(164
)
Total Isramco, Inc. shareholders’ equity
   
20,321
     
18,543
 
Non controlling interest
   
107
     
5
 
Total equity
   
20,428
     
18,548
 
Total liabilities and shareholders’ equity
 
$
152,035
   
$
151,907
 
 
See notes to the unaudited condensed consolidated financial statements. 
 
 
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share amounts)
(Unaudited)
 
   
Three Months Ended June 30
   
Six Months Ended June 30
 
   
2012
   
2011
   
2012
   
2011
 
                         
Revenues
                       
Oil and gas sales
 
$
10,282
   
$
11,571
   
$
20,499
   
$
22,553
 
Production Services
   
2,368
     
-
     
3,481
     
-
 
Office services
   
147
     
152
     
252
     
305
 
Other
   
31
     
24
     
60
     
39
 
Total revenues
   
12,828
     
11,747
     
24,292
     
22,897
 
                                 
Operating expenses
                               
Lease operating expense, transportation and taxes
   
4,841
     
6,610
     
9,458
     
11,738
 
Depreciation, depletion and amortization
   
2,981
     
2,923
     
5,474
     
5,920
 
Accretion expense
   
217
     
210
     
434
     
418
 
Production Services
   
1,483
     
-
     
2,329
     
-
 
Loss from plug and abandonment
   
149
     
57
     
324
     
170
 
General and administrative
   
892
     
927
     
2,082
     
2,012
 
Total operating expenses
   
10,563
     
10,727
     
20,101
     
20,258
 
Operating income
   
2,265
     
1,020
     
4,191
     
2,639
 
                                 
Other expenses (income)
                               
Interest expense, net
   
1,553
     
1,950
     
3,112
     
4,103
 
Realized gain on marketable securities
   
-
     
-
     
(3,650
)
   
-
 
Net (gain) loss on derivative contracts
   
(3,222
)
   
(2,931
)
   
(1,560
)
   
3,158
 
Currency exchange rate differences
   
-
     
-
     
(16
)
   
-
 
Total other expenses (income)
   
(1,669)
     
(981
)
   
(2,114
)
   
7,261
 
                                 
Income (Loss) before income taxes
   
3,934
     
2,001
     
6,305
     
(4,622
)
Income tax (expense) benefit
   
(1,342
)
   
(700
)
   
(2,171
)
   
1,617
 
                                 
Net Income (loss)
 
$
2,592
   
$
1,301
   
$
4,134
   
$
(3,005
)
Net income attributable to non-controlling interests
   
102
     
     
102
     
 
Net Income (loss) attributable to Isramco
 
$
2,490
   
$
1,301
   
$
4,032
   
$
(3,005
)
                                 
Earnings (loss) per share – basic:
 
$
0.92
   
$
0.48
   
$
1.48
   
$
(1.11
)
                                 
Earnings (loss) per share – diluted:
 
$
0.92
   
$
0.48
   
$
1.48
   
$
 (1.11
)
                                 
Weighted average number of shares outstanding  basic:
   
2,717,691
     
2,717,691
     
2,717,691
     
2,717,691
 
Weighted average number of shares outstanding diluted:
   
2,717,691
     
2,717,691
     
2,717,691
     
2,717,691
 
 
See notes to the unaudited condensed consolidated financial statements.
 
 
ISRAMCO INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
   
Six Months Ended June 30
 
   
2012
   
2011
 
             
Cash Flows From Operating Activities:
           
Net income (loss)
 
$
4,134
   
$
(3,005
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
               
                 
Depreciation, depletion, amortization and impairment
   
5,474
     
5,920
 
Accretion expense
   
434
     
418
 
Realized gain on marketable securities
   
(3,650
)    
-
 
Changes in deferred taxes
   
2,171
     
(1,617
)
Net unrealized gain on derivative contracts
   
(987
)
   
(3,224
)
Amortization of debt cost
   
70
     
126
 
Changes in components of working capital and other assets and liabilities
               
Accounts receivable
   
(2,097
)
   
384
 
Prepaid expenses and other current assets
   
329
     
244
 
Due to related party
   
2,949
     
2,089
 
Accounts payable and accrued liabilities
   
550
     
(643
)
Net cash provided by operating activities
   
9,377
     
692
 
                 
Cash flows from investing activities:
               
Addition to property and equipment, net
   
(7,669
)
   
(1,655
)
Proceeds from sale of marketable securities
   
4,737
     
-
 
Restricted cash and deposit, net
   
229
     
(2,000
)
Net cash used in investing activities
   
(2,703
)    
(3,655
)
                 
Cash flows from financing activities:
               
Repayment on loans – related parties, net
   
-
     
(954
)
Proceeds on loans – related parties, net
   
13,500
     
11,000
 
Repayment of long-term debt
   
(20,000
)
   
(11,200
)
Borrowings (repayment) of short - term debt, net
   
(823
)
   
167
 
Net cash used in financing activities
   
(7,323
)
   
(987
)
                 
Net decrease in cash and cash equivalents
   
(649
)
   
 (3,950
)
Cash and cash equivalents at beginning of period
   
2,122
     
5,657
 
Cash and cash equivalents at end of period
 
$
1,473
   
$
1,707
 
 
See notes to the unaudited condensed consolidated financial statements.
 
 
Isramco Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
 
Note 1 - Financial Statement Presentation
 
Isramco, Inc. and its subsidiaries and affiliated companies ( together referred to as “We”, “Our”, “Isramco” or the “Company") is predominately an independent oil and natural gas company engaged in the exploration, development and production of oil and natural gas properties located onshore in the United States and ownership of various royalty interests in oil and gas concessions located offshore Israel. The Company also operates a well service company that provides well maintenance and workover services, well completion and recompletion services.
 
The accompanying unaudited financial statements and notes of Isramco have been prepared pursuant to the rules and regulations of the United States Securities and Exchange Commission. Pursuant to such rules and regulations, certain disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted. The accompanying financial statements and notes should be read in conjunction with the accompanying financial statements and notes included in Isramco’s 2011 Annual Report on Form 10-K.
 
The accompanying unaudited interim financial statements furnished in this report reflect all adjustments that are, in the opinion of management, necessary to a fair statement of Isramco’s results of operations and cash flows for the three-month and six-month periods ended June 30, 2012 and 2011 and Isramco’s financial position as of June 30, 2012.

Use of Estimates

The preparation of the Company’s condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States requires the Company’s management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities, if any, at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the respective reporting periods. The Company bases its estimates and judgments on historical experience and on various other assumptions and information that are believed to be reasonable under the circumstances. Estimates and assumptions about future events and their effects cannot be perceived with certainty and, accordingly, these estimates may change as new events occur, as more experience is acquired, as additional information is obtained and as the Company’s operating environment changes. Actual results may differ from the estimates and assumptions used in the preparation of the Company’s condensed consolidated financial statements.
 
Consolidated interim period results are not necessarily indicative of results of operations or cash flows for the full year and accordingly, certain information normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States has been condensed or omitted. The Company has evaluated events or transactions through the date of issuance of these condensed consolidated financial statements.
 
Risk Management Activities

The Company follows Accounting Standards Codification (ASC) 815, Derivatives and Hedging. From time to time, the Company may hedge a portion of its forecasted oil and natural gas production. Derivative contracts entered into by the Company have consisted of transactions in which the Company hedges the variability of cash flow related to a forecasted transaction. The Company has elected to not designate any of its positions for hedge accounting. Accordingly, the Company records the net change in the mark-to-market valuation of these positions, as well as payments and receipts on settled contracts, in “Net loss (gain) on derivative contracts” in the consolidated statements of operations.
 
Consolidation
 
The condensed consolidated financial statements include the accounts of Isramco and its subsidiaries. Inter-company balances and transactions have been eliminated in consolidation.
 
Non Controlling Interests

Non controlling interests represent third-party ownership in the net assets of the Company’s consolidated well service subsidiary and are presented as a component of equity.

Recently Issued Accounting Pronouncements

There were no new accounting pronouncements that had a significant impact on the Company’s operating results or financial position.
 

Note 2 - Supplemental Cash Flow Information
 
Cash paid for interest and income taxes was as follows for the six months ended June 30 (in thousands):
 
 
Six Months Ended June 30
 
 
2012
   
2011
 
Interest
 
$
176
   
$
1,918
 
                 
Income taxes
   
     
 
 
The consolidated statements of cash flows for the period ended June 30, 2012 exclude the following non-cash transactions:
 
·  
Property and equipment of $1,624,000 included in accounts payable

Note 3 - Derivative Contracts
 
At June 30, 2012, the Company had a $3.37 million commodity derivative asset, of which $1.6 million was classified as current. For the six months ended June 30, 2012, the Company recorded a net derivative gain of $1.56 million ($0.99 million unrealized gain and a $0.57 million gain from net cash received on settled contracts).

At June 30, 2011, the Company had a $2.2 million commodity derivative asset, of which $1.7 million was classified as current. For the six months ended June 30, 2011, the Company recorded a net derivative loss of $3.2 million ($3.2 million unrealized gain and a $6.4 million loss from net cash paid on settled contracts).
 
Crude Oil
 
At June 30, 2012, the Company had the following crude oil swap positions:
 
    Swaps  
Period
 
Volume in
Bbls
   
Price /
Price Range
   
Weighted
Average Price
 
July 2012 – December 2012
   
47,760
     
103.51
     
103.51
 
January 2013 – December 2013
   
89,400
     
103.51
     
103.51
 
January 2014 – December 2014
   
66,000
     
103.51
     
103.51
 
 
Note 4 - Long-Term Debt and Interest Expense
 
Long-Term Debt as of June 30, 2012 and December 31, 2011 consisted of the following (in thousands):
 
   
As of
June 30, 2012
   
As of
December 31, 2011
 
Libor + 2% Bank Revolving Credit Facility due 2012
   
-
     
20,000
 
Libor + 6% Related party Debt
   
12,000
     
12,000
 
Libor + 5.5% Related party Debt
   
3,500
     
-
 
Libor + 5.5% Related party Debt
   
10,000
     
-
 
Libor + 6% Related party Debt
   
11,500
     
11,500
 
Libor + 6% Related party Debt
   
6,000
     
6,000
 
Libor + 6% Related party Debt
   
41,861
     
41,861
 
Libor + 5.5% Related party Debt
   
6,456
     
6,456
 
     
91,317
     
97,817
 
Less: Current Portion of Long-Term Debt
   
(49,242
)
   
(37,642
)
Total
   
42,075
     
60,175
 
 
 
 
Senior Secured Revolving Credit Agreements
 
The Company entered into a Senior Secured Revolving Credit Agreement, dated as of March 27, 2008 and Amended and Restated as of December 19, 2008 (such Agreement as amended, “Senior Credit Agreement”), with each of the lenders from time to time party thereto (the “Lenders”).  The Bank of Nova Scotia is the administrative agent for the Lenders. The Senior Credit Agreement originally provided for a $150 million facility due in 2012 with a borrowing base of $54 million that was redetermined from time to time and adjusted based on the Company’s oil and gas properties, reserves, other indebtedness and other relevant factors (such credit facility, as redetermined, the “Senior Credit Facility”). During the fourth quarter of 2011 the Lenders reduced the borrowing base to zero.

On April 27, 2012, the Company entered into the Fourth Amendment to the Credit Agreement with The Bank of Nova Scotia, formalizing the election to pay the $20,000,000 borrowing base deficiency in six monthly installments of $3,333,333.33.
The amendment also changed the termination date of credit agreement to June 29, 2012.
 
As of June 29, 2012 the Company has fully paid all amounts owed and terminated the Senior Credit Facility with the Lenders
 
Related Party Debt
 
On March 29, 2012, the Company entered into a Loan Agreement with I.O.C. Israel Oil Company, Ltd., a related party (“IOC”) pursuant to which it borrowed $3,500,000. The loan bears interest at a rate of Libor + 5.5% per annum and matures on March 29, 2013, when all accrued interest and principal is due and payable. The loan may be prepaid at any time without penalty or premium. The loan is unsecured. The purpose of the loan was to provide funds to Isramco for the payment of amounts were due to the Lenders under the Senior Credit Facility.

On April 29, 2012, the Company entered into another Loan Agreement with IOC, pursuant to which it borrowed an amount of $10,000,000. The loan bears interest of Libor+5.5% per annum and payable on April 30, 2013, when all accrued interest and principal is due and payable. The loan may be prepaid at any time without penalty or premium. The loan was funded by the Lender in three monthly installments starting April 2012. The loan is unsecured. The purpose of the loan was to provide funds to Isramco for the payment of the amounts that were due to the Lenders under the Senior Credit Facility during the remainder of 2012.
 
Interest expense
 
The following table summarizes the amounts included in interest expense for the six month ended June 30, 2012 and 2011 (in thousands):
 
   
Six Months Ended
June 30
 
   
2012
   
2011
 
Current debt, long-term debt and other - banks corporation
 
$
242
   
$
887
 
Long-term debt – related parties
   
2,870
     
3,216
 
   
$
3,112
   
$
4,103
 
 
Note 5 - Sale of Marketable Securities

During February 2012 the Company has sold all of its investment in shares of Jerusalem Oil Exploration Ltd. (“JOEL”) to Equital Ltd. Both JOEL and Equital Ltd. are related parties of Isramco Inc.  JOEL is also a subsidiary of Equital Ltd. The Company received net proceeds of $4,737,000 and recorded a net gain of $3,650,000.

Note 6 - Comprehensive Income

   
Three Months Ended June 30
   
Six Months Ended June 30
 
   
2012
   
2011
   
2012
   
2011
 
Net income (loss)
 
$
2,592
   
$
1,301
   
$
4,134
   
$
(3,005
Other comprehensive income
                               
Available-for-sale securities, net of taxes
   
-
     
3,292
     
(2,254
)
   
3,150
 
Change in unrealized gains on hedging instruments, net of taxes
   
-
     
-
     
-
     
22
 
Comprehensive income
 
$
2,592
   
$
4,593
   
$
1,880
   
$
167
 
 
 
Note 7 - Fair Value of Financial Instruments

Pursuant to ASC 820, Fair Value Measurements and Disclosures (ASC 820) the Company's determination of fair value incorporates not only the credit standing of the counterparties involved in transactions with the Company resulting in receivables on the Company's consolidated balance sheets, but also the impact of the Company's nonperformance risk on its own liabilities. ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The Company utilizes market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable. The Company classifies fair value balances based on the observability of those inputs.
 
The following tables set forth by level within the fair value hierarchy the Company's financial assets and liabilities that were accounted for at fair value as of June 30, 2012 and December 31, 2011. As required by ASC 820, a financial instrument's level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The Company's assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels. There were no transfers between fair value hierarchy levels for the six months ended June 30, 2012.

  
 
June 30, 2012
 
   
Level 1
   
Level 2
   
Level 3
   
Total
 
Assets
                       
Commodity derivatives
  $
    $
3,369
    $
    $
3,369
 
                                 
    Total
 
$
   
$
3,369
   
$
   
$
3,369
 
 
  
 
December 31, 2011
 
   
Level 1
   
Level 2
   
Level 3
   
Total
 
Assets
                       
Marketable securities
 
4,554
   
   
   
4,554
 
Commodity derivatives
   
     
2,382
     
     
2,382
 
                                 
    Total
 
$
4,554
   
$
2,382
   
$
   
$
6,936
 

Marketable securities listed above are carried at fair value. The Company is able to value its marketable securities based on quoted fair values for identical instruments, which resulted in the Company reporting its marketable securities as Level 1.
 
Derivatives listed above include swaps that are carried at fair value. The Company records the net change in the fair value of these positions in “Net gain on derivative contracts” in the Company’s consolidated statements of operations, in case of commodity derivatives, and in “Other comprehensive income”, in case of  interest rate derivatives. The Company is able to value these assets and liabilities based on observable market data for similar instruments, which resulted in the Company reporting its derivatives as Level 2. This observable data includes the forward curve for commodity prices based on quoted market prices and prospective volatility factors related to changes in the forward curves.
 
As of June 30, 2012 and December 31, 2011, the Company’s derivative contracts were with major financial institutions with investment grade credit ratings which are believed to have a minimal credit risk. As such, the Company is exposed to credit risk to the extent of nonperformance by the counterparties in the derivative contracts discussed above; however, the Company does not anticipate such nonperformance. Each of the counterparties to the Company’s derivative contracts is a lender in the Company’s Senior Credit Agreement. The Company did not post collateral under any of these contracts as they are secured under the Senior Credit Agreements.
 
 
Note 8 – Segment information
 
Isramco’s primary business segments are vertically integrated within the oil and gas industry. These segments are separately managed due to distinct operational differences, and unique technology, distribution and marketing requirements. The Company’s two reporting segments are oil and gas exploration and production and well service. The oil and gas exploration and production segment explores for and produces natural gas, crude oil, condensate, and NGLs. The well service segment is engaged in rig-based and workover services, well completion and recompletion services, plugging and abandonment of wells and other ancillary oilfield services.
 
Oil and Gas Exploration and Production Segment
 
Oil and Gas segment is engaged in the exploration, development and production of oil and natural gas properties located onshore in the United States and ownership of various royalty interests in oil and gas concessions located offshore Israel. We own varying working interests in oil and gas wells in Louisiana, Texas, New Mexico, Oklahoma, Wyoming, Utah and Colorado and currently serve as operator of approximately 589 wells located mainly in Texas in New Mexico.
 
Well Service Segment
 
Our rig-based services include the completion of newly drilled wells, workover and recompletion of existing oil and natural gas wells, well maintenance, and the plugging and abandonment of wells at the end of their useful lives.
 
The completion and recompletion services provided by our rigs prepare a newly drilled well, or a well that was recently extended through a workover, for production. The completion process may involve selectively perforating the well casing to access production zones, stimulating and testing these zones, and installing tubular and downhole equipment. We typically provide a well service rig and may also provide other equipment to assist in the completion process. The completion process usually takes a few days to several weeks, depending on the nature of the completion.
 
The workover services that we provide are designed to enhance the production of existing wells and generally are more complex and time consuming than normal maintenance services. Workover services can include deepening or extending wellbores into new formations by drilling horizontal or lateral wellbores, sealing off depleted production zones and accessing previously bypassed production zones, converting former production wells into injection wells for enhanced recovery operations and conducting major subsurface repairs due to equipment failures. Workover services may last from a few days to several weeks, depending on the complexity of the workover.
 
The maintenance services that we provide with our rig fleet are generally required throughout the life cycle of an oil or natural gas well. Examples of these maintenance services include routine mechanical repairs to the pumps, tubing and other equipment, removing debris and formation material from wellbores, and pulling the rods and other downhole equipment from wellbores to identify and resolve production problems. Maintenance services generally take less than 48 hours to complete. Our rig fleet is also used in the process of permanently shutting-in oil or natural gas wells that are at the end of their productive lives. These plugging and abandonment services generally require auxiliary equipment in addition to a well servicing rig. The demand for plugging and abandonment services is not significantly impacted by the demand for oil and natural gas because well operators are required by state and federal regulations to plug wells that are no longer productive.
 
 
Note 8 – Segment information (Continuing)
 
thousands
 
Oil and Gas
Exploration
 & Production
   
Well Service
   
Eliminations
   
Total
 
Three Months Ended June 30, 2012:
                       
Sales revenues
 
$
10,282
   
$
2,368
   
$
-
   
$
12,650
 
Intersegment revenues
   
-
     
324
     
(324
)
   
-
 
Office services and other
   
208
     
-
     
(30
)
   
178
 
                                 
Total revenues and other
   
10,490
     
2,692
     
(354
)
   
12,828
 
                                 
Operating costs and expenses
   
8,910
     
2,007
     
(354
)
   
10,563
 
Net gains on derivatives, contracts
   
(3,222
)
   
-
     
-
     
(3,222
)
Realized gain on marketable securities
   
-
     
-
     
-
     
-
 
Interest expenses, net
   
1,374
     
179
     
-
     
1,553
 
                                 
Total expenses and other
   
7,062
     
2,186
     
(354
)
   
8,894
 
                                 
Income before income taxes
 
$
3,428
   
$
506
   
$
-
   
$
3,934
 
Net Income
   
2,227
     
365
     
-
     
2,592
 
Net income attributable to noncontrolling interests
   
-
     
102
     
-
     
102
 
Net Income attributable to Isramco
   
2,227
     
263
     
-
     
2,490
 
Total Assets
 
$
137,778
   
$
14,257
   
$
  -    
$
152,035
 
 
thousands   Oil and Gas
Exploration
& Production
    Well Service     Eliminations     Total  
Three Months Ended June 30, 2011:
                       
Sales revenues
  $ 11,571     $ -     $ -     $ 11,571  
Intersegment revenues
    -       -       -       -  
Office services and other
    176       -       -       176  
                                 
Total revenues and other
    11,747       -       -       11,747  
                                 
Operating costs and expenses
    10,727       -       -       10,727  
Net gains on derivatives, contracts
    (2,931 )     -       -       (2,931 )
Realized gain on marketable securities
    -       -       -       -  
Interest expenses, net
    1,950       -       -       1,950  
                                 
Total expenses and other
    9,746       -       -       9,746  
                                 
Income before income taxes
  $ 2,001     $ -     $ -     $ 2,001  
Net Income
    1,301       -       -       1,301  
Net income attributable to noncontrolling interests
    -       -       -       -  
Net Income attributable to Isramco
    1,301       -        -       1,301  
Total Assets
  $
169,433
    $ -    
$
 -     $
169,433
 

 
thousands
 
Oil and Gas
Exploration
 & Production
   
Well Service
   
Eliminations
   
Total
 
Six Months Ended June 30, 2012:
                       
Sales revenues
 
$
20,499
   
$
3,481
   
$
-
   
$
23,980
 
Intersegment revenues
   
-
     
658
     
(658
)
   
-
 
Office services and other
   
372
     
-
     
(60
)
   
312
 
                                 
Total revenues and other
   
20,871
     
4,139
     
(718
)
   
24,292
 
                                 
Operating costs and expenses
   
17,489
     
3,330
     
(718
)
   
20,101
 
Net gains on derivatives, contracts
   
(1,560
)
   
-
     
-
     
(1,560
)
Realized gain on marketable securities
   
(3,650
)
   
-
     
-
     
(3,650
)
Interest expenses, net
   
2,811
     
301
     
-
     
3,112
 
Other income, net
   
(16
)
   
-
     
-
     
(16
)
                                 
Total expenses and other
   
15,074
     
3,631
     
(718
)
   
17,987
 
                                 
Income before income taxes
 
$
5,797
   
$
508
   
$
-
   
$
6,305
 
Net Income
   
3,768
     
366
     
-
     
4,134
 
Net income attributable to noncontrolling interests
   
-
     
102
     
-
     
102
 
Net Income attributable to Isramco
   
3,768
     
264
        -      
4,032
 
Total Assets
 
$
137,778
   
$
14,257
   
$
  -    
$
152,035
 
 
thousands
 
Oil and Gas
Exploration
 & Production
   
Well Service
   
Eliminations
   
Total
 
Six Months Ended June 30, 2011:
                       
Sales revenues
 
$
22,553
   
$
-
   
$
-
   
$
22,553
 
Intersegment revenues
   
-
     
-
     
-
     
-
 
Office services and other
   
344
     
-
     
-
     
344
 
                                 
Total revenues and other
   
22,897
     
-
     
-
     
22,897
 
                                 
Operating costs and expenses
   
20,258
     
-
     
-
     
20,258
 
Net losses on derivatives, contracts
   
3,158
     
-
     
-
     
3,158
 
Realized gain on marketable securities
   
-
     
-
     
-
     
-
 
Interest expenses, net
   
4,103
     
-
     
-
     
4,103
 
                                 
Total expenses and other
   
27,519
     
-
     
-
     
27,519
 
                                 
Loss before income taxes
 
$
(4,622
)
 
$
-
   
$
-
   
$
(4,622
)
Net Income
   
(3,005
)
   
-
     
-
     
(3,005
)
Net income attributable to noncontrolling interests
   
-
     
-
     
-
     
-
 
Net Income attributable to Isramco
   
(3,005
)
   
-
             
(3,005
)
Total Assets
 
$
169,433
   
$
-
   
$
-
   
$
169,433
 
 

ITEM 2.       Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
THE FOLLOWING COMMENTARY SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES CONTAINED ELSEWHERE IN THIS REPORT ON FORM 10-Q. THE DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THESE STATEMENTS RELATE TO FUTURE EVENTS OR OUR FUTURE FINANCIAL PERFORMANCE. IN SOME CASES, YOU CAN IDENTIFY THESE FORWARD-LOOKING STATEMENTS BY TERMINOLOGY SUCH AS “MAY,” “WILL,” “SHOULD,” “EXPECT,” “PLAN,” “ANTICIPATE,” “BELIEVE,” “ESTIMATE,” “PREDICT,” “POTENTIAL,” “INTEND,” OR “CONTINUE,” AND SIMILAR EXPRESSIONS. THESE STATEMENTS ARE ONLY PREDICTIONS. OUR ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF A VARIETY OF FACTORS, INCLUDING, BUT NOT LIMITED TO, THOSE SET FORTH UNDER “RISK FACTORS” AND ELSEWHERE IN THIS REPORT ON FORM 10-Q. ISRAMCO INC. DISCLAIMS ANY OBLIGATION TO UPDATE SUCH FORWARD LOOKING STATEMENTS.
 
Overview
 
Isramco is predominately independent oil and natural gas Company engaged in the exploration, development and production of oil and natural gas properties located onshore in the United States and ownership of various royalty interests in oil and gas concessions located offshore Israel. The Company also operates a well service company that provides well maintenance, workover services, well completion and recompletion services. Our properties are primarily located in Texas, New Mexico and Oklahoma. We also act as the operator of certain of these properties. Historically, we have grown through acquisitions, with a focus on properties within our core operating areas that we believe have significant development and exploration opportunities and where we can apply our technical experience and economies of scale to increase production and proved reserves, while lowering lease operating costs.

Our financial results depend upon many factors, but are largely driven by the volume of our oil and natural gas production and the price that we receive for that production. Our production volumes will decline as reserves are depleted unless we expend capital in successful development and exploration activities or acquire additional properties with existing production. The amount we realize for our production depends predominantly upon commodity prices, which are affected by changes in market demand and supply, as impacted by overall economic activity, weather, pipeline capacity constraints, inventory storage levels, basis differentials and other factors, and secondarily upon our commodity price hedging activities. Accordingly, finding and developing oil and natural gas reserves at economical costs is critical to our long-term success. Our future drilling plans are subject to change based upon various factors, some of which are beyond our control, including drilling results, oil and natural gas prices, the availability and cost of capital, drilling and production costs, availability of drilling services and equipment, gathering system and pipeline transportation constraints and regulatory approvals. To the extent these factors lead to reductions in our drilling plans and associated capital budgets in future periods, our financial position, cash flows and operating results could be adversely impacted.
 
Liquidity and Capital Resources
  
Our primary source of cash during the six months ended June 30, 2012 was cash flow from operating activities, loans from related party lender (“Related Party Loans”) and net proceeds from sale of our investment in shares of JOEL Jerusalem Oil Exploration Ltd, (“JOEL”) a related party. We continuously monitor our liquidity and evaluate our development plans in light of a variety of factors, including, but not limited to, our cash flows, capital resources and drilling success.

In February 2012 the Company sold all of its shares of an investment in a company called JOEL. The net proceeds of $4,737,000 from sale were used to reduce principal amounts owed under our Senior Credit Agreement.
 
Our future capital resources and liquidity may depend, in part, on our success in developing the leasehold interests that we have acquired. Cash is required to fund capital expenditures necessary to offset inherent declines in production and proven reserves, which is typical in the capital-intensive oil and gas industry. Future success in growing reserves and production will be highly dependent on the capital resources available and our success in finding and acquiring additional reserves. Our oil well service subsidiary also requires capital resources to acquire and maintain equipment and continue growth. We expect to fund our future capital requirements through internally generated cash flows, borrowings under loans, and a future credit facility. Long-term cash flows are subject to a number of variables, including the level of production, prices, amount of work orders received, and our commodity price hedging activities, as well as various economic conditions that have historically affected the oil and natural gas industry.
 
 
Debt
 
    As of June 30,     As of December 31,  
   
2012
   
2011
 
Long – term debt – related party
 
42,075
   
60,211
 
Short – term debt – related party
   
19,955
     
6,456
 
Current maturities of long-term debt, short-term debt and bank overdraft
   
29,287
     
32,009
 
Total debt
   
91,317
     
98,676
 
                 
Stockholders’ equity
   
20,428
     
18,548
 
                 
Debt to capital ratio
   
81.7
%
   
84
%
 
As of June 30, 2012, our total debt was $91,317,000, compared to total debt of $98,676,000 at December 31, 2011. During the six month ended June 30, 2012 the Company repaid all outstanding balance under its Senior Credit Facility.

On March 29, 2012, the Company entered into a Loan Agreement with I.O.C, pursuant to which it borrowed the sum of $3,500,000. The loan bears interest at a rate of Libor + 5.5% per annum and matures on March 29, 2013, when all accrued interest and principal is due and payable. The loan may be prepaid at any time without penalty or premium. The loan is unsecured. The purpose of the loan was to provide funds to Isramco for the payment of certain of the amounts were due under the Senior Credit Facility at maturity, which was extended to June, 2012.

On April 29, 2012 the Company entered into a Loan Agreement with I.O.C, pursuant to which it borrowed an additional $10,000,000. The loan bears interest of Libor+5.5% per annum and payable on April 30, 2013, when all accrued interest and principal is due and payable. The loan may be prepaid at any time without penalty or premium. The loan was funded by Lender in three monthly installments starting April 2012. The loan is unsecured. The purpose of the loan was to provide funds to Isramco for the payment of amounts due under the Senior Credit Facility through June, 2012.

Cash Flow
 
Our primary source of cash during the six months ended June 30, 2012 was cash flow from operating activities, loans from related party and proceeds from sale of marketable securities. In 2012 cash received from operations, sale of marketable securities, proceeds from loan of related party was used primarily to repay borrowings under our Senior Credit Facility and investing in equipment for well service subsidiary. In 2011 our primary source of cash during the six month ended June 30, 2011 was cash flow from operating activities and loans from related parties. In 2011 cash received from operations and from related party was offset by repayments of borrowings under our Senior Credit Agreements and payments made on settled derivatives contracts.
 
Operating cash flow fluctuations were substantially driven by changes in commodity prices and changes in our production volumes. Working capital was substantially influenced by these variables. Fluctuation in commodity prices and our overall cash flow may result in an increase or decrease in our future capital expenditures. Prices for oil and natural gas have historically been subject to seasonal fluctuations characterized by peak demand and higher prices in the winter heating season; however, the impact of other risks and uncertainties have influenced prices throughout recent years. See Results of Operations below for a review of the impact of prices and volumes on sales. 
 
   
Six months Ended June 30,
 
   
2012
   
2011
 
   
(In thousands)
 
Cash flows provided by operating activities
 
$
9,377
   
$
692
 
Cash flows used in investing activities
   
(2,703
   
(3,655
Cash flows used in financing activities
   
(7,323
)
   
(987
)
Net decrease in cash
 
$
(649)
   
$
(3,950)
 
 
 
Operating Activities, During the first six months of 2012, compared to the first six months of 2011, net cash flow provided by operating activities increased by $8,685,000 to $9,377,000 This increase was primarily attributable to a net cash onetime payment in 2011 on settled derivatives contracts of $7,007,000, lower lease operating expenses which were partially offset by decrease in natural gas and natural gas liquids (“NGLs) revenues. The decrease in natural gas and NGLs revenues was caused by both decrease in natural gas and NGLs prices and as well as decrease in production volumes of natural gas and NGLs.  The decrease in revenues was primarily attributable to lower average gas prices for the quarter ended June 30, 2012 of $3.51/Mcf, compared to $4.93/Mcf and natural gas liquids average prices for the six month ended June 30, 2012 of $40.03/Bbl, compared to $45.41/ Bbl to the corresponding period in 2011.
 
Investing Activities, Net cash flows used in investing activities for the six months ended June 30, 2012 and 2011 were $2,703,000 and $3,655,000, respectively. During the first six month of 2012 the Company invested in equipment for its well service subsidiary and oil and gas properties in the amount of $7,669,000 which were partially offset by proceeds from sale of investment in marketable securities in the amount of $4,373,000.

Financing Activities, Net cash flows used in financing activities were $7,323,000 and $987,000 for the six months ended June 30, 2012 and 2011, respectively. The Company has fully repaid the outstanding debt under Senior Credit Facility in the amount of $20,000,000 which was partially offset by new borrowings of $13,500,000 from a related party.
 
Results of Operations

Three Months Ended June 30, 2012 Compared to Three Months Ended June 30, 2011
 
Selected Data

 
   
Three Months Ended June 30,
 
   
2012
   
2011
 
   
(In thousands except per share
and MBOE amounts)
 
Financial Results
           
Oil and Gas sales
 
$
10,282
   
$
11,571
 
Production Services
   
2,368
     
-
 
Other
   
178
     
176
 
Total revenues and other
   
12,828
     
11,747
 
                 
Cost and expenses
   
10,563
     
10,727
 
Other income
   
(1,669
   
(981
Income tax expenses
   
1,342
 
   
700
 
Net income attributable to common shareholders
   
2,592
     
1,301
 
Net income attributable to common non-controlling interests
   
102
     
-
 
Net income attributable to Isramco
   
2,490
     
1,301
 
Earnings per common share – basic
 
$
0.92
   
$
0.48
 
Earnings per common share – diluted
 
$
0.92
   
$
0.48
 
                 
Weighted average number of shares outstanding- basic
   
2,717,691
     
2,717,691
 
Weighted average number of shares outstanding- diluted
   
2,717,691
     
2,717,691
 
                 
Operating Results
               
Adjusted EBITDAX (1)
 
$
5,322
   
$
4,309
 
Sales volumes (MMBOE)
   
205
     
200
 
                 
Average cost per MBOE:
               
Production (excluding transportation and taxes)
 
$
18.78
   
$
26.46
 
General and administrative
 
$
4.34
   
$
4.63
 
Depletion
 
$
14.51
   
$
14.60
 
 
(1) See Adjusted EBITDAX for a description of Adjusted EBITDAX, which is not a Generally Accepted Accounting Principles (GAAP) measure, and a reconciliation of Adjusted EBITDAX to income from operations before income taxes, which is presented in accordance with GAAP.
 
 
Financial Results

Net Income, in the second quarter of 2012, our net income was $2,490,000 or $0.92 per share. This compares to net income of $1,301,000 or $0.48 per share, for the second quarter of 2011.
 
This increase was primarily due to an increase in revenues from well service activities, a decrease in lease operating expenses and a decrease in interest expenses which were partially offset by a decrease of natural gas and natural gas liquids ("NGLs") sales compared to the second quarter of 2011

Revenues, Volumes and Average Prices
 
Sales Revenues
 
   
Three Months Ended June 30,
 
In thousands except percentages
 
2012
   
2011
   
D vs. 2011
 
Gas sales
 
$
1,853
   
$
3,008
     
(38
)%
Oil sales
   
7,357
     
6,894
     
7
 
Natural gas liquid sales
   
1,072
     
1,669
     
(36
Total
 
$
10,282
   
$
11,571
     
(11
)%
 
Our sales revenues for the second quarter of 2012 decreased by 11% when compared to same period in 2011, due to lower prices received for oil, gas, and NGLs and decrease in volume produced for natural gas and NGLs. That was partially offset by increase in crude oil production volume.
 
Volumes and Average Prices
 
   
Three Months Ended June 30,
 
   
2012
   
2011
   
D vs. 2011
 
Natural Gas
                 
Sales volumes Mmcf
   
552.44
     
564.27
     
(2
)%
Average Price per Mcf (1)
 
$
3.35
   
$
5.33
     
(37
)
Total gas sales revenues (thousands)
 
$
1,853
   
$
3,008
     
(38
)%
                         
Crude Oil
                       
Sales volumes MBbl
   
80.83
     
68.40
     
18
%
Average Price per Bbl (1)
 
$
91.02
   
$
100.80
     
(10
)
Total oil sales revenues (thousands)
 
$
7,357
   
$
6,894
     
7
%
                         
Natural gas liquids
                       
Sales volumes MBbl
   
32.60
     
37.71
     
(14
)%
Average Price per Bbl (1)
 
$
32.89
   
$
44.25
     
(26
)
Total natural gas liquids sales revenues (thousands)
 
$
1,072
   
$
1,669
     
(36
)%
 
(1) Amounts exclude the impact of cash paid/received on settled contracts as we did not elect to apply hedge accounting
 
 
The company’s natural gas sales volumes decreased by 2%, crude oil sales volumes increased by 18% and natural gas liquids sales volumes decreased by 14% for the second quarter of 2012 compared to the same period of 2011.
 
Our average natural gas price received for the second quarter of 2011 decreased by 37%, or $1.98 per Mcf, when compared to the same period of 2011. Our average crude oil price for the second quarter of 2011 decreased by 10%, or $9.78 per Bbl, when compared to the same period of 2011. Our average natural gas liquids price for the second quarter of 2012 decreased by 26%, or $11.36 per Bbl, when compared to the same period of 2011.
 
Analysis of Oil and Gas Operations Sales Revenues

The following table provides a summary of the effects of changes in volumes and prices on Isramco’s sales revenues for the three months ended June 30, 2012 compared to the same period of 2011.

In thousands
 
Natural Gas
   
Oil
   
Natural gas liquids
 
2011 sales revenues
 
$
3,008
   
$
6,894
   
$
1,669
 
Changes associated with sales volumes
   
(201
)
   
655
     
(339
Changes in prices
   
(954
   
(192
   
(258
2012 sales revenues
 
$
1,853
   
$
7,357
   
$
1,072
 

Operating Expenses

   
Three Months Ended June 30,
In thousands except percentages
 
2012
   
2011
   
D vs. 2011
Lease operating expense, transportation and taxes
 
$
4,841
   
$
6,610
     
(27
%)
Depreciation, depletion and amortization
   
2,981
     
2,923
     
2
 
Accretion expense
   
217
     
210
     
3
 
Loss from plugging and abandonment of wells
   
149
     
57
     
161
 
General and administrative
   
892
     
927
     
(4
   
$
9,080
   
$
10,727
     
(15
)%
 
During three months ended June 30, 2012, our operating expenses decreased by 15% when compared to the same period of 2011 due to the following factors:

·
Lease operating expense, transportation cost and taxes decreased by 27%, or $1,769,000, in 2012 when compared to 2011.  This decrease was the result of lower number of workovers performed on our operated properties than in the first half of 2011.  On a per unit basis, lease operating expenses (excluding transportation and taxes) decreased by $7.68 per MBOE to $18.78 per MBOE in 2012 from $26.46 per MBOE in 2011.

·
Depreciation, Depletion & Amortization (“DD&A”) of the cost of proved oil and gas properties is calculated using the unit-of-production method. Our DD&A rate and expense are the composite of numerous individual field calculations. There are several factors that can impact our composite DD&A rate and expense, including but not limited to field production profiles, drilling or acquisition of new wells, disposition of existing wells, and reserve revisions (upward or downward) primarily related to well performance, commodity prices, and impairments. Changes in these factors may cause our composite DD&A rate and expense to fluctuate from period to period.  DD&A increased by 2%, or $58,000 in 2012 when compared to 2011, primarily due to higher production (MBOE) which was partially offset by higher prices in 2011 (per MBOE) that impacted our estimated total reserves, which are the basis for the depletion calculation, and the impact of a 2011 impairment of $4,034,000 on the depletable base used to calculate DD&A. On a per unit basis, depletion expense decreased by $(0.09) per MBOE to $14.51 per MBOE in 2012 from $14.60 per MBOE in 2011.
 
·
Accretion expense for asset retirement obligations slightly increased by 3%, or $7,000, in 2012 when compared to 2011.
 
·
Loss from plugging and abandonment expenses increased by 161%, or $92,000 in 2012 when compared to 2011 primarily due to work resulting from plugging operations in compliance with requirements of state and federal regulations governing our wells.
 
·
General and administrative expenses decreased by 4%, or $35,000 in 2012 when compared to 2011.
 

Other expenses

   
Three Months Ended June 30,
In thousands except percentages
 
2012
   
2011
   
D vs. 2011
 
Interest expense, net
 
$
1,553
   
$
1,950
     
(20
)%
Net gain on derivative contracts
   
(3,222
   
(2,931
   
10
 
   
$
(1,669
 
$
(981
   
70
%
 
Interest expense.  Isramco’s interest expense decreased by 20%, or $397,000, for the three months ended June 30, 2012 compared to the same period of 2011.  This decrease was primarily due to lower average outstanding loans balance during the second quarter of 2012 comparing to 2011.

Net gain on derivative contracts. We enter into derivative commodity instruments to economically hedge our exposure to price fluctuations on our anticipated oil and natural gas production. Consistent with the prior year, we have elected not to designate any positions as cash flow hedges for accounting purposes. Accordingly, we recorded the net change in the mark-to-market value of these derivative contracts in our consolidated statement of operations.

At June 30, 2012, the Company had a $3.37 million commodity derivative asset, of which $1.6 million was classified as current. For the three months ended June 30, 2012, the Company recorded a net derivative gain of $3.22 million ($3.35 million unrealized gain and a $0.13 million loss from net cash paid on settled contracts).

At June 30, 2011, the Company had a $2.2 million commodity derivative asset, of which $1.7 million was classified as current. For the three months ended June 30, 2011, the Company recorded a net derivative gain of $2.9 million ($2.8 million unrealized gain and a $0.1 million gain from net cash received on settled contracts).
 
Adjusted EBITDAX.
 
To assess the operating results of Isramco, management analyzes income from operations before income taxes, interest expense, exploration expense, unrealized gain (loss) on derivative contracts and DD&A expense and impairments (“Adjusted EBITDAX”). Adjusted EBITDAX is not a GAAP measure. Isramco’s definition of Adjusted EBITDAX excludes exploration expense because exploration expense is not an indicator of operating efficiency for a given reporting period, but rather is monitored by management as a part of the costs incurred in exploration and development activities. Similarly, Isramco excludes DD&A expense and impairments from Adjusted EBITDAX as a measure of segment operating performance because capital expenditures are evaluated at the time capital costs are incurred. The Company’s definition of Adjusted EBITDAX also excludes interest expense to allow for assessment of segment operating results without regard to Isramco’s financing methods or capital structure. Adjusted EBITDAX is a widely accepted financial indicator of a company’s ability to incur and service debt, fund capital expenditures and make payments on its long term loans. Management believes that the presentation of Adjusted EBITDAX provides information useful in assessing the Company’s financial condition and results of operations.
 
However, Adjusted EBITDAX, as defined by Isramco, may not be comparable to similarly titled measures used by other companies. Therefore, Isramco’s consolidated Adjusted EBITDAX should be considered in conjunction with income (loss) from operations and other performance measures prepared in accordance with GAAP, such as operating income or cash flow from operating activities. Adjusted EBITDAX has important limitations as an analytical tool because it excludes certain items that affect income from continuing operations and net cash provided by operating activities. Adjusted EBITDAX should not be considered in isolation or as a substitute for an analysis of Isramco’s results as reported under GAAP. Below is a reconciliation of consolidated Adjusted EBITDAX to income (loss) from operations before income taxes.
 
   
Three Months Ended June 30,
In thousands
 
2012
   
2011
 
Income from operations before income taxes
 
$
3,934
   
$
2,001
 
Depreciation, depletion and amortization expense
   
2,981
     
2,923
 
Interest expense
   
1,553
     
1,950
 
Unrealized loss (gain) on derivative contract
   
(3,363
   
(2,775
Accretion Expenses
   
217
     
210
 
Consolidated Adjusted EBITDAX
 
$
5,322
   
$
4,309
 
 
 
Six Months Ended June 30, 2012 Compared to Six Months Ended June 30, 2011
 
Selected Data

 
   
June 30,
 
   
2012
   
2011
 
   
(In thousands except per share
and MBOE amounts)
 
Financial Results
           
Oil and Gas sales
 
$
20,499
   
$
22,553
 
Production Services
   
3,481
     
-
 
Other
   
312
     
344
 
Total revenues and other
   
24,292
     
22,897
 
                 
Cost and expenses
   
20,101
     
20,258
 
Other expense (income)
   
(2,114
)
   
7,261
 
Income tax expense (benefit)
   
2,171
     
(1,617
Net income (loss) attributable to common shareholders
   
4,134