March 19, 2013
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, 2012. The annual revenue breakdown is as follows: 2012 revenue from oil and gas activity for the Company’s fee lands was $572,559 compared to revenue of $1,503,056 in 2011.
During 2012, total revenues included a $714,604 loss emanating from the Company’s investment in B&L Exploration, LLC (B&L). This compares to a loss of $3,423,042 from B&L in the prior year. As an operating oil and gas entity, B&L’s results included deductions for depreciation, depletion and amortization (DD&A) costs relating to its ongoing drilling and production activities. BLMC’s share of these DD&A expenses was $800,488 and $1,801,797 for 2012 and 2011, respectively.
Meanwhile, dividend and interest income for 2012 was $199,024 compared to $254,128 for 2011. In 2012, we realized a cumulative gain from the sale of investment securities of $23,630 compared to a cumulative gain in the amount of $1,600,569 in 2011. Expenses for the year totaled $983,083 compared to $1,439,114 for the prior year. For the year, the Company incurred a net loss of $460,635 or $0.17 per share compared to a net loss of $695,955 or $.25 per share in 2011.
As of December 31, 2012 the combined gross daily production rate from 4 wells operated by the Company’s mineral lessees was approximately 3.8 million cubic feet (mmcf) of natural gas with net daily production accruing to the Company of approximately .492 mmcf. The Company has been advised by Alta Mesa, one of the Company’s mineral lessees, that the Ducros/SL 17958 well is going to be plugged and abandoned after several unsuccessful attempts to rework the well.
As of December 31, 2012, B&L’s net production breakdown was approximately 1.0 mmcfg and 40 barrels of oil per day from 5 wells. This compares to B&L’s net production of 2.4mmcfg and 100 barrels of oil per day as of December 31, 2011 from 6 wells. As previously reported, Hurricane Isaac impacted production when the storm came through the region in late August. All wells were shut-in prior to the storm. The Goodrich Land and Energy No. 1 well, CL&F No. 1 well, and Harry Bourg No.1 well were placed back on production shortly after the storm and sustained minimal damage. The SL 19061 #1 well and Delacroix #41 ST well sustained damage during the storm, and after repairs, these wells were returned to production during the third quarter. As of December 31, 2012, B&L has working interests in 7 wells capable of production and to which proved reserves are assigned. It should be noted that 2 of the 7 wells in which B&L has a working interest were temporarily shut-in, thus not producing on December 31, 2012.
The SL 19706 No. 1 well located in Coquille Bay in Plaquemines Parish, Louisiana, and operated by Clayton Williams Energy, Inc. (“CWE”) was returned to production on January 22, 2013 and is currently flowing from the 19 sand interval on a 10/64th choke at an approximate rate of 2.0 mmcf per day and 43 barrels of oil per day.
McMoRan Exploration Co. (NYSE:MMR) reported on January 18, 2013 its Fourth-Quarter/Twelve-Month 2012 Results which included an update of MMR’s “Ultra-Deep Exploration and Development Activities” including “The Lomond North ultra-deep prospect, which is located in the Highlander area, primarily in St. Martin Parish, Louisiana, is currently drilling below 13,500 feet. This exploratory well has a proposed total depth of 30,000 feet and is targeting Eocene, Paleocene and Cretaceous objectives below the salt weld. McMoRan controls rights to approximately 80,000 gross acres in Iberia, St. Martin, Assumption and Iberville Parishes, Louisiana. McMoRan is operator and currently holds a 72.0 percent working interest. McMoRan’s investment in Lomond North totaled $40.1 million at December 31, 2012.” The first string of 16” production casing was set in late January of 2013 at 13,697 feet. As of the beginning of March 2013, McMoRan continues the drilling of the Lomond North Well and has reached a depth of approximately 16,704 feet measured depth. As previously reported, B&L is contractually entitled to a 1.5% of 8/8ths overriding royalty interest in the Lomond North prospect exploratory well and in all mineral leases obtained by MMR in this approximately 80,000 gross acre Highlander area located in Iberia, St. Martin, Assumption and Iberville Parishes, Louisiana.
As previously reported, during the June 20, 2012 Central Gulf of Mexico Lease Sale, B&L was the high bidder and successfully obtained the mineral rights to Eugene Island Block 74. Based on B&L’s recently commissioned independent reservoir engineer’s study, this lease block is projected to contain significant natural gas and oil Proved Undeveloped (PUD) reserves with significant additional upside potential in undrilled fault blocks. B&L holds a 60% working interest in Eugene Island Block 74, and it will be necessary to drill wells to access the PUD reserves and additional upside potential. B&L is seeking partners to develop this highly prospective offshore lease block.
Additionally, B&L and its partners have obtained mineral rights to a 1,320 acre lease position in Allen Parish, Louisiana. The objective is to test the Middle and Lower Wilcox sands. B&L is actively seeking industry participants to develop this lease position.
Meanwhile, 2D seismic acquisition operations were completed during the fourth quarter of 2012 on B&L’s Phoenix Prospect in Union Parish, Louisiana. B&L and its operating partner, Greystone Oil & Gas, LLP, are interpreting and mapping the seismic in hopes of developing potential drilling prospects. B&L and Greystone control approximately 7,000 gross acres in Union Parish. The objective in this prospect is the upper Smackover intervals as well as Lower Smackover Brown Dense formation.
As previously reported, in addition to the foregoing projects/prospects, B&L is actively assembling additional prospective acreage on which to explore, exploit and develop the acreage’s mineral interest. The goal is to place a portion of the working interests with industry partners in an effort to mitigate risk. Due to this strategic shift, B&L only participated in drilling 2 wells during 2012 compared to 4 wells drilled during 2011.
A reflection of the success of B&L’s strategy is its recent acquisition of approximately 50 square miles or 30,000 acres of mineral and surface rights in Calhoun and Victoria County, Texas. This project is identified as B&L’s Lago Verde 3D Seismic Project. On September 18, 2012, field operations for the collection of proprietary 3D seismic data over this 50 square mile area commenced. This focus area is situated in the prolific oil rich leg of the Frio trend with adjacent fields having produced in excess of 200 million barrels of oil (MMBO) and 1.8 trillion cubic feet (TCF) of natural gas. The potential targets are Miocene and Oligocene which are relatively shallow ranging from 3,000 feet to 11,000 feet and are drilled with land rigs.
B&L successfully placed a significant working interest in its Lago Verde project with the Bass Group with main offices in Fort Worth, Texas. B&L is operating the 3D seismic survey and BOPCO, the operating company for the Bass Group, will operate any wells that may be drilled within this Lago Verde project area. B&L hopes to have completed seismic data collection operations by the end of March 2013, and 3D data processing is anticipated to take five to six weeks from completion of the 3D data collection operations. B&L maintains a 33.5% working interest in the Lago Verde project.
The final end of the year proved reserve study commissioned by the Company and completed by T. J. Smith & Company, Inc., an independent reservoir engineer, estimates that as of December 31, 2012 BLMC’s “Developed Producing” (PDP) reserves were .297 billion cubic feet (BCF) of natural gas and estimates that the “Developed Non-Producing” (PDNP) reserves were .521 BCF, totaling .818 BCF of estimated proved natural gas reserves. Additionally, this reserve study estimates that approximately 14% of the proved reserves will deplete by the end of 2013.
Please find the following table showing the Company’s proved reserves as of December 31, 2012:
Proved Reserves as of December 31, 2012 (3) ___________
|(Dollars in Thousands)|
|Net Proved Reserves (1):|
|Natural Gas (BCF):||.297||.521||.818|
|Estimated Future Net Revenues (before income taxes) (2):………………….||$ 2,128 (4)|
|Estimated Discounted Future Net Revenues (before income taxes) (2):…….||$ 1,561 (4)|
(1) In general, our engineers based their estimates of economically recoverable oil and natural gas reserves and of the future net revenues therefrom on a number of variable factors and assumptions, such as historical production from the subject properties, the assumed effects of regulation by governmental agencies and assumptions concerning future oil and natural gas prices, all of which may vary considerably from actual results. Therefore, the actual production, revenues, and severance taxes with respect to reserves likely will vary from such estimates, and such variances could be material.
Estimates with respect to proved reserves that may be developed and produced in the future are often based on volumetric calculations and by analogy to similar types of reserves rather than actual production history. Estimates based on these methods are generally less reliable than those based on actual production history, and subsequent evaluation of the same reserves, based on production history, will result in variations, which may be substantial, in the estimated reserves.
In accordance with applicable requirements of the Commission, the estimated discounted future net revenues from estimated proved reserves are based on 12 month average price calculated as the unweighted arithmetic average of the first-day-of-the-month price for each month within the 12 month period prior. Actual future prices may be materially higher or lower. Actual future net revenues also will be affected by factors such as actual production, supply and demand for oil and natural gas, curtailments or increases in consumption by natural gas purchasers, changes in governmental regulations or taxation and the impact of inflation o costs.
(2) The Estimated Discounted Future Net Revenues represents the Estimated Future Net Revenues before income taxes discounted at 10%. For calculating The Estimated Future Net Revenues and the Estimated Discounted Future Net Revenues, we used the base product price based on the 12 month average price calculated as the unweighted arithmetic average of the first-day-of-the-month price for each month within the 12 month period prior to December 31, 2012. The oil price of $94.71 per barrel is based on the West Texas Intermediate (WTI), Cushing, Oklahoma spot prices. The natural gas price of $2.76 per MMBtu is based on the Henry Hub gas daily prices.
(3) The Meridian Resource and Exploration, LLC (now owned by Alta Mesa Holdings, LP) and Manti Jamba, Ltd. separately operate the producing wells. The Company has no control over operations and maintains only a landowner’s mineral royalty interest. Please see footnote (i) following the final paragraph of this letter for a warning concerning forward-looking information.
(4) The value of the proved reserves “Undiscounted, M$” and “Discounted at 10%, M$” includes a minimal amount of Oil and Condensate as well as Natural Gas Liquids.
Additionally, T.J. Smith & Company, Inc. completed a separate proved reserve study in which the final report estimates that B&L’s proved reserves were approximately 8.5 billion cubic feet of natural gas (BCF) and approximately 194 thousand barrels of oil (MBBL) as of December 31, 2012 which compares to 2.4 billion cubic feet (BCF) of natural gas and 81 thousand barrels of oil (MBBL) at the end of 2011. It should be noted that a significant component of B&L’s proved reserves as of December 31, 2012 are Proved Undeveloped (PUD). As is necessary with all PUD reserves, a well or wells must be drilled and completed to fully develop these PUD reserves.
On October 1, 2008 we announced our plans to repurchase up to 27,500 shares of our common stock. On September 13, 2011, we authorized the purchase of an additional 13,000 shares of our common stock. As of December 31, 2012 we have been successful in purchasing a total of 38,400 shares of common stock. As of this time, we plan to continue to repurchase our common stock until we fulfill our goal of acquiring 40,500 shares.
In 2012 the Company filed a claim with the BP Deepwater Horizon Economic and Property Damages Settlement Facility administered by Patrick Juneau for damages to and loss of its wetlands. We have been advised by our legal counsel that a limited recovery under the settlement is expected, but as of this time it is difficult to determine the timing and amount of the settlement, if any.
B&L was organized as a limited liability Company (LLC) under the laws of Louisiana in July of 2006. B&L’s Class A members are BLMC and Lake Eugenie Land & Development, Inc. (LKEU), which have membership percentages of 75% and 25% respectively. The Operating Agreement was amended on November 16, 2009 to create a Class B membership to allow for certain future projects at the discretion of the board of managers to be participated by either Class A or Class B members or a combination of the respective Classes. B&L’s Class B members are BLMC and LKEU, which have membership percentages of 90% and 10%, respectfully. In December 2012, the members approved the consolidation of all the membership classes into a single class of membership, consistent with the Class A membership. All appropriate actions were taken according to the terms of the operating agreement with respect to the consolidation. Effective January 1, 2013, BLMC and LKEU will have membership percentages of 75% and 25%, respectively.
During its meeting held on December 11, 2012, the Board of Directors declared a dividend of $.25 per outstanding share of common stock payable on Thursday, December 27, 2012 to shareholders of record at the close of business on Friday, December 21, 2012. This represents a total cash dividend payment of $679,007 or $.25 per share in 2012. Since 2002, the Company has paid approximately $52,400,000 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. With this said, using 3D seismic data in its possession, the Company is constantly working on developing the minerals located below its fee lands. Meanwhile, the Company is focusing on developing reserves outside of its fee acreage and diversifying into oil production through its investment in B&L. In its current stage of growth and continued reinvestment in its successful drilling program and development of prospects, B&L should not be viewed as a dividend producing entity.
Please remember to visit our website, www.biloximarshlandscorp.com, to obtain general information about the Company as well as recent historical annual reports and all historical press releases. We strongly recommend that all interested parties become familiar with the information available on the Company’s website: www.biloximarshlandscorp.com .
Meanwhile, we are pleased with the results of B&L’s partial strategic shift from participating in the drilling of prospects generated by third parties to acquiring mineral acreage positions and focusing on placing a portion of those interests with industry partners to assist in drilling and development. While this partial shift in strategy has temporarily slowed B&L’s drilling program, thus a reason for the short term decline in daily production, overtime this strategy should prove to mitigate B&L’s drilling risk, improve its economics and lead to an accelerated drilling program during the second half of 2013 and into 2014. Evidence of the success of this shift in strategy is the placement of a significant interest in our Lago Verde 3D Seismic acquisition program with the Bass Group. B&L’s proved reserves have increased significantly year over year from 2.4 billion cubic feet (BCF) of natural gas and 81 thousand barrels of oil (MBBL) at the end of 2011 to approximately 8.5 billion cubic feet of natural gas (BCFG) and approximately 194 thousand barrels of oil (MBBL) as of December 31, 2012. As of December 31, 2012, B&L had working interests in seven producing wells. At the end of the 2012, B&L’s Developed Producing (PDP) and Developed Non-Producing (PDNP) proved reserves had a gross value net of development and operating expenses of approximately $5.8mm, while its Proved Undeveloped (PUD) reserves had a gross value net of development and operating expenses of approximately $17.5mm, totaling approximately $23.3mm in proved reserves. This compares to a gross value of approximately $18mm net of development and operating expenses as of December 31, 2011. It should be noted in addition to the foregoing, B&L has 1.5% overriding royalty interest in McMoRan Exploration’s 80,000 acre Highlander Project area in which McMoRan is currently drilling its Lomond North exploratory well. This overriding royalty interest could represent substantial value to B&L, and thus to the Company.
2013 will be another challenging year, but we are positioning the Company for the future and look forward to the challenge.
William B. Rudolf
President and Chief Executive Officer
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This letter contains forward-looking statements regarding oil and gas discoveries, oil and gas exploration, development and production activities and reserves. Accuracy of the forward-looking statements depends on assumptions about events that change over time and is thus susceptible to periodic change based on actual experience and new developments. The Company cautions readers that it assumes no obligation to update or publicly release any revisions to the forward-looking statements in this report. Important factors that might cause future results to differ from these forward-looking statements include: variations in the market prices of oil and natural gas; drilling results; unanticipated fluctuations in flow rates of producing wells; oil and natural gas reserves expectations; the ability to satisfy future cash obligations and environmental costs; additional drilling, and general exploration and development risks and hazards. Readers are cautioned not to place undue reliance on forward-looking statements made by or on behalf of the Company. Each such statement speaks only as of the day it was made. The factors described above cannot be controlled by the Company. When used in this report, the words “hopeful”, “believes”, “estimates”, “plans”, “expects”, “should”, “outlook”, and “anticipates” and similar expressions as they relate to the Company or its management are intended to identify forward-looking statements.