Saratoga Resources ‘cash constrained,’ going-concern status in doubt

By Caroline Salls

Pittsburgh, April 16 – Saratoga Resources, Inc.’s audited consolidated financial statements for the fiscal year ended Dec. 31 contained a going-concern qualification from its independent registered public accounting firm, according to a news release.

As a result of a steep decline in commodity prices during the second half of 2014 and continuing into 2015, compounded by production declines associated with run time issues in early 2014, Saratoga said it is operating in a cash constrained environment and has undertaken strategic initiatives to address operations in the current climate.

The company said those initiatives include forbearance agreements with principal lenders, an extensive cost-cutting program with targeted savings of $13.3 million for 2015 compared to 2014 and the hiring of Conway MacKenzie Management Services, LLC to assist in efforts to restructure or repay secured debt.

According to the release, Saratoga is working closely with its secured lenders to address liquidity issues with a view to either restructure or repay existing debt.

The company said it is operating under forbearance agreements with its first-lien and second-lien debtholders under which interest due on the second-lien debt was not paid in January and subsequent interest payments are not presently being made. The forbearance period ends April 30.

In conjunction with efforts to explore alternatives, Saratoga said it has undertaken extensive cost-cutting efforts.

Impairment charge

The company said it is reporting a loss including a non-cash, impairment charge totaling $107.8 million. The charge reflects reclassification of reserves out of the proved undeveloped category and into the probable category resulting from application of the Securities and Exchange Commission’s “five-year rule.”

Saratoga said this reclassification accounts for $95.3 million, or 88.4%, of the impairment charge.

The charge also reflects a steep decline in commodity prices. As a result, the company said undiscounted future cash flows at a producing field level are expected to be less than the unamortized capitalized cost of assets in several of Saratoga’s fields.

With the drop in commodity prices during the second half of 2014, the company said it puts its efforts to seek joint venture partners to drill four initial prospects on hold.

Capital budget reduced

In addition, Saratoga said the 2015 capital expenditure budget is expected to be severely reduced as a result of the continuing low commodity price environment. The company said it will concentrate its efforts on low-cost recompletions and workovers together with continued cost reduction and production optimization.

“The early part of 2014 presented challenges relating to our field operations while the latter part of 2014 presented challenges relating to commodity prices,” president Andy C. Clifford said in the release.

“Exhaustive initiatives undertaken in the field have remedied the field operating issues encountered in early 2014, and an ongoing cost containment program is bringing down operating costs to address this lower commodity price environment.

“Production optimization initiatives and infrastructure improvements undertaken throughout the year, including a successfully executed complete field shutdown of Grand Bay, have addressed the principal causes of decreased run times, gas lift gas shortages, mechanical issues and flow line capacity constraints.

“In response to the dramatically lower commodity price environment, we have met this challenge by dramatically reducing lease operating expenses and G&A.

“The field operating issues early in the year and declining prices late in the year each had a substantial negative effect on our operating results for the year, compounded by an impairment charge of $107.8 million.”

Saratoga Resources is an oil and gas development and exploration company with operations in southern Louisiana and offices in Houston and Covington, La.

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