March 19, 2014
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, 2013. The annual revenue breakdown is as follows: 2013 revenue from oil and gas activity for the Company’s fee lands was $636,189 compared to revenue of $572,559 in 2012.
During 2013, total revenues included a $1,740,193 loss emanating from the Company’s investment in B&L Exploration, LLC (B&L). This compares to a loss of $714,604 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 $927,415 and $800,488 for 2013 and 2012, respectively.
Meanwhile, dividend and interest income for 2013 was $164,275 compared to $199,024 for 2012. In 2013, we realized a cumulative gain from the sale of investment securities of $2,072,125 compared to a cumulative gain in the amount of $23,630 in 2012. During the fourth quarter of 2013, the Company recognized a gain in the amount of $3,189,681 from a partial settlement of its BP Deepwater Horizon claim. Expenses for the year totaled $1,116,014 compared to $983,083 for the prior year. For the year, the Company had net income of $2,450,729 or $0.90 per share compared to a net loss of $460,635 or $.17 per share in 2012.
As of December 31, 2013 the combined gross daily production rate from 4 wells operated by the Company’s mineral lessees was approximately 3.02 million cubic feet (mmcf) of natural gas with net daily production accruing to the Company of approximately .359 mmcf. Meanwhile, as of December 31, 2013, B&L’s gross production was approximately 4.716 mmcfg and 312 barrels of oil from 5 wells with .804 mmcfg and 31 barrels of oil per day accruing to B&L.
Freeport-McMoRan Oil and Gas (FM O&G), a wholly owned subsidiary of Freeport-McMoRan Copper and Gold Inc. (NSYE:FCX), in FCX’s January 22, 2014 news release stated that: “The Lomond North exploratory well in the Highlander area,……,located in St. Martin Parish, Louisiana, is currently drilling and has encountered gas pay in several Wilcox and Cretaceous aged sands between 24,000 feet and 29,000 feet. The wireline log and core data obtained from the Wilcox and Cretaceous sand packages evaluated to date indicate favorable reservoir characteristics with approximately 150 feet of net pay. FM O&G will continue drilling the Lomond North well in the Cretaceous to test deeper prospective targets. FM O&G plans to commence completion operations in mid-2014 followed by a flow test. FM O&G has identified multiple exploratory prospects in the Highlander area where it controls rights to approximately 56,000 gross acres.”
Subsequently, during the 2014 Credit Suisse Energy Summit held in February 2014, FM O&G presented the Lomond North Well log, structure map and the proposed location of the second well to be drilled in the Highlander area. FM O&G illustrated that the “Lomond North Discovery” is the first discovery in the Highlander area and is a discovery within the “Cretaceous Tuscaloosa” sand interval. The presentation stated that the Highlander area has “3.0 TCF Gross Resource Potential.” While B&L’s management is encouraged by FM O&G reports, B&L does not have access to information beyond that which is made public by FM O&G and its working interest partners. B&L is awaiting the scheduled flow test of the Lomond North well with cautious optimism. In the event that the flow test is successful and the well is placed on production at rates estimated by FM O&G and/or its working interest partners, the revenue derived from the overriding royalty interest could be relatively significant to B&L.
As previously reported, B&L has been assigned and is contractually entitled to a 1.5% of 8/8ths overriding royalty interest (ORRI) in the Lomond North discovery well and in all mineral leases obtained by FM O&G in its Highlander project area located in Iberia, St. Martin, Assumption and Iberville Parishes, Louisiana.
As previously reported, 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 third party industry partners in an effort to mitigate risk. In addition to the Lomond North discovery well in which B&L has an ORRI, B&L participated in the drilling of the Williams C-4 ST1 well during the third quarter of 2013. On September 26, 2013 electric logs were run in the Williams C-4 ST1 well. Electric logs indicated approximately 22’ of net oil pay sand in the “J” sand interval. In the subsequent flow test, the well flowed at a maximum rate of 665.9 barrels of oil per day (BOPD) and 0.0 barrels of water per day (BWPD), with flowing tubing pressure (FTP) of 1318 psi on a 13/64” choke. B&L has a 16.59% working interest in this well. On March 14, 2014 Linder Oil and Gas, the Operator, began the process of placing this well on production. The planned production rate is approximately 400 barrels of oil per day and associated natural gas. Over the past two days this well has been flowing at an average rate of approximately 375 BOPD and approximately 300 thousand cubic feet of natural gas per day.
B&L’s acquisition of approximately 50 square miles or approximately 30,000 acres of mineral and surface rights in Calhoun and Victoria County, Texas is identified as B&L’s Lago Verde 3D Seismic Project. As previously reported, B&L successfully placed a significant working interest in its Lago Verde project with the Bass Group with main offices in Fort Worth, Texas. BOPCO, the operating company for the Bass Group, will the wells drilled within this Lago Verde project area. B&L retained a 33.5% ground floor working interest in the Lago Verde project. As of this time, it is anticipated that drilling operations on the Lago Verde multi-well drilling program should commence during the latter part of the second quarter or the early part of the third quarter of 2014. In the initial round of drilling, B&L and the other working interest owners plan to drill four to five prospects. In the ordinary course of any exploration program, the success or failure of the initial round of drilling could lead to the drilling of additional or fewer wells.
As previously reported, B&L has obtained the mineral rights to Eugene Island Block 74. B&L currently holds a 60% working interest in Eugene Island Block 74. We reported that B&L hoped to commence drilling operations during 2014. Due to other exploratory priorities, B&L’s management has decided to delay drilling operations in the Eugene Island Block 74 prospect area until 2015.
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, 2013 BLMC’s “Developed Producing” (PDP) reserves were .267 billion cubic feet (BCF) of natural gas and estimates that the “Developed Non-Producing” (PDNP) reserves were .521 BCF, totaling .788 BCF of estimated proved natural gas reserves. Additionally, this reserve study estimates that approximately 13% of the proved reserves will deplete by the end of 2014.
Please find the following table showing the Company’s proved reserves as of December 31, 2013:
Proved Reserves as of December 31, 2013 (3) ___________
Net Proved Reserves (1):
Developed Producing (PDP) Natural Gas (BCF):…….0.267
Developed Non-Producing Natural Gas (BCF):……..0.521
In Thousands $
Estimated Future Net Revenues (before income taxes) (2): $ 2,761 (4)
Estimated Discounted Future Net Revenues (before income taxes) (2): $ 1,941 (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, 2013. The oil price of $96.78 per barrel is based on the West Texas Intermediate (WTI), Cushing, Oklahoma spot prices. The natural gas price of $3.67 per MMBtu is based on the Henry Hub gas daily prices.
(3) Alta Mesa Holdings, LP and Manti Jamba, Ltd. separately operate the producing wells. The Company has no control over operations and maintains only a landowner’s mineral royalty interest. Please see footnote (i) following the final paragraph of this letter for a warning concerning forward-looking information.
(4) The value of the proved reserves “Undiscounted, M$” 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 9.0 billion cubic feet of natural gas (BCF) and approximately 215,000 barrels of oil as of December 31, 2013 which compares to 8.5 BCF of natural gas and 194,000 barrels of oil at the end of 2012. It should be noted that a significant component of B&L’s proved reserves as of December 31, 2013 are Proved Undeveloped (PUD). As is necessary with all PUD reserves, a well or wells must be drilled and completed with the necessary infrastructure installed to fully develop the PUD reserves.
Beginning on October 1, 2008 the Company announced its initial stock repurchase plan to purchase up to 27,500 shares of our common stock. Since that time we have authorized the purchase of additional shares, thus bringing the total authorized amount of shares under the plan to 67,500. As of December 31, 2013 we have been successful in purchasing a total of 39,400 shares of common stock as authorized by our Board of Directors. We plan to continue to repurchase our common stock during 2014.
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. During 2013, the Company received a partial settlement payment for its wetlands real property claim. We have been advised by our legal counsel that an additional limited recovery under the settlement is expected, but as of this time it is difficult to determine the timing and amount of the additional settlement, if any.
As previously reported, the Company has filed a claim against the US Army Corps of Engineers (USACE) for property damage and loss caused by the Mississippi River Gulf Outlet (MRGO). We are continuing to pursue this claim and will keep our shareholder advised as things progress.
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 have membership percentages of 75% and 25%, respectively.
During its meeting held on December 13, 2013, the Board of Directors declared a dividend of $.55 per outstanding share of common stock payable on Friday, December 27, 2013 to shareholders of record at the close of business on Tuesday, December 24, 2013. This represents a total cash dividend payment of $1,493,265 or $.55 per share in 2013. Since 2002, the Company has paid approximately $53,900,000 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 historical annual reports and all press releases. We strongly recommend that all interested parties become familiar with the information available on the Company’s website: www.biloximarshlandscorp.com .
We are awaiting the flow test on FM O&G’s Lomond North well with cautious optimism. In the event that this well flows natural gas and condensate at commercial rates from the Tuscaloosa sand interval, it could mean an increase in drilling activity throughout coastal Louisiana, including on the Company’s fee lands. We are watching closely the significant draw down in natural gas storage and the current increase in natural gas pricing. In the event that natural gas pricing remains at higher levels and the Lomond North well produces at commercial rates, we intend to concentrate our efforts on marketing the deep gas prospects beneath the Company’s fee lands, including Alpha and Beta prospects.
The combination of our approximately 90,000 acre fee land mineral position, approximately 30,000 acre Lago Verde mineral acreage position in south Texas, 5,000 acre Eugene Island Block 74 in offshore Louisiana waters, plus the over 56,000 acre Highlander project area in south central Louisiana in which B&L is contractually entitled to a 1.5% overriding royalty interest gives the Company and its shareholders exposure to opportunities which we have not seen in the past. We are hopeful that this diversity of mineral interest created by the Company’s investment in B&L will ultimately lead to significant increase in shareholder value. The recent increase in the price of the company’s common stock is hopefully the beginning of good things to come. Additionally, we are pleased that B&L’s proved reserves have increased in both volume and value, despite the fact that B&L only participated in the drilling of one well during 2013. It should be noted that no reserves are assigned to the Lomond North well in B&L’s proved reserve report.
We look forward to 2014 as an exciting and challenging year for our company.
William B. Rudolf
President and Chief Executive Officer
PLEASE SEE PDF “BUTTON” ABOVE FOR ENTIRE RELEASE INCLUDING FINANCIAL TABLES
This letter contains forward-looking statements regarding oil and gas discoveries, oil and gas exploration, development and production activities and reserves. Accuracy of the forward-looking statements depends on assumptions about events that change over time and is thus susceptible to periodic change based on actual experience and new developments. The Company cautions readers that it assumes no obligation to update or publicly release any revisions to the forward-looking statements in this report. Important factors that might cause future results to differ from these forward-looking statements include: variations in the market prices of oil and natural gas; drilling results; unanticipated fluctuations in flow rates of producing wells; oil and natural gas reserves expectations; the ability to satisfy future cash obligations and environmental costs; additional drilling, and general exploration and development risks and hazards. Readers are cautioned not to place undue reliance on forward-looking statements made by or on behalf of the Company. Each such statement speaks only as of the day it was made. The factors described above cannot be controlled by the Company. When used in this report, the words “hopeful”, “believes”, “estimates”, “plans”, “expects”, “could”, “should”, “outlook”, and “anticipates” and similar expressions as they relate to the Company or its management are intended to identify forward-looking statements.