Attached files

file filename
EXCEL - IDEA: XBRL DOCUMENT - DUNE ENERGY INCFinancial_Report.xls
XML - IDEA: XBRL DOCUMENT - DUNE ENERGY INCR5.htm
XML - IDEA: XBRL DOCUMENT - DUNE ENERGY INCR3.htm
XML - IDEA: XBRL DOCUMENT - DUNE ENERGY INCR6.htm
XML - IDEA: XBRL DOCUMENT - DUNE ENERGY INCR1.htm
XML - IDEA: XBRL DOCUMENT - DUNE ENERGY INCR9.htm
XML - IDEA: XBRL DOCUMENT - DUNE ENERGY INCR4.htm
XML - IDEA: XBRL DOCUMENT - DUNE ENERGY INCR7.htm
XML - IDEA: XBRL DOCUMENT - DUNE ENERGY INCR8.htm
XML - IDEA: XBRL DOCUMENT - DUNE ENERGY INCR2.htm
XML - IDEA: XBRL DOCUMENT - DUNE ENERGY INCR14.htm
XML - IDEA: XBRL DOCUMENT - DUNE ENERGY INCR13.htm
XML - IDEA: XBRL DOCUMENT - DUNE ENERGY INCR11.htm
XML - IDEA: XBRL DOCUMENT - DUNE ENERGY INCR15.htm
XML - IDEA: XBRL DOCUMENT - DUNE ENERGY INCR12.htm
XML - IDEA: XBRL DOCUMENT - DUNE ENERGY INCR10.htm
EX-31.1 - SECTION 302 CERTIFICATION OF CEO - DUNE ENERGY INCd231584dex311.htm
EX-32.1 - SECTION 906 CERTIFICATION OF CEO - DUNE ENERGY INCd231584dex321.htm
EX-31.2 - SECTION 302 CERTIFICATION OF CFO - DUNE ENERGY INCd231584dex312.htm
EX-32.2 - SECTION 906 CERTIFICATION OF CFO - DUNE ENERGY INCd231584dex322.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC20549

 

 

Form 10-Q

 

 

 

x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2011

 

¨ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from                     to                    

Commission file number 001-32497

 

 

DUNE ENERGY, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   95-4737507

(State or other jurisdiction of

incorporation or organization)

 

(IRS Employer

Identification No.)

 

Two Shell Plaza, 777 Walker Street,

Suite 2300, Houston, Texas

  77002
(Address of principal executive offices)   (Zip Code)

(713) 229-6300

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant (1) has 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  ¨

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 to submit and post such files).    Yes  x    No  ¨

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 definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large Accelerated Filer   ¨    Accelerated Filer   ¨
Non-Accelerated Filer   ¨  (Do not check if a smaller reporting company)    Smaller Reporting Company   x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.    Yes  ¨    No  x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 48,787,068 shares of Common Stock, $.001 par value per share, as of October 31, 2011.

 

 

 


PART 1

FINANCIAL INFORMATION

 

Item 1. Financial Statements.

Dune Energy, Inc.

Consolidated Balance Sheets

(Unaudited)

 

      September 30,
2011
    December 31,
2010
 

ASSETS

    

Current assets:

    

Cash

   $ 21,696,026      $ 23,670,192   

Restricted cash

     —        $ 15,753,441   

Accounts receivable

     6,745,941        9,862,849   

Prepayments and other current assets

     3,727,934        2,542,624   
  

 

 

   

 

 

 

Total current assets

     32,169,901        51,829,106   
  

 

 

   

 

 

 

Oil and gas properties, using successful efforts accounting—proved

     531,907,171        526,760,643   

Less accumulated depreciation, depletion, amortization and impairment

     (305,047,545     (294,566,739
  

 

 

   

 

 

 

Net oil and gas properties

     226,859,626        232,193,904   
  

 

 

   

 

 

 

Property and equipment, net of accumulated depreciation of $3,111,446 and $2,817,158

     276,590        527,357   

Deferred financing costs, net of accumulated amortization of $1,896,395 and $1,456,592

     346,284        786,087   

Other assets

     11,517,946        12,049,829   
  

 

 

   

 

 

 
     12,140,820        13,363,273   
  

 

 

   

 

 

 

TOTAL ASSETS

   $ 271,170,347      $ 297,386,283   
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ DEFICIT

    

Current liabilities:

    

Accounts payable

   $ 4,103,272      $ 6,953,863   

Accrued liabilities

     20,632,740        13,367,402   

Current maturities of long-term debt (see Note 3)

     337,632,131        —     

Preferred stock dividend payable

     1,597,000        2,206,000   

Other current liabilities

     —          1,395,237   
  

 

 

   

 

 

 

Total current liabilities

     363,965,143        23,922,502   

Long-term debt, net of current maturities (see Note 3)

     —          335,218,690   

Other long-term liabilities

     12,889,249        12,548,062   
  

 

 

   

 

 

 

Total liabilities

     376,854,392        371,689,254   
  

 

 

   

 

 

 

Commitments and contingencies

     —          —     

Redeemable convertible preferred stock, net of discount of $3,172,203 and $4,964,014, liquidation preference of $1,000 per share, 750,000 shares designated, 159,735 and 207,912 shares issued and outstanding

     156,562,797        202,947,986   

STOCKHOLDERS’ DEFICIT

    

Preferred stock, $.001 par value, 1,000,000 shares authorized, 250,000 shares undesignated, no shares issued and outstanding

     —          —     

Common stock, $.001 par value, 300,000,000 shares authorized, 48,937,830 and 41,912,723 shares issued

     48,938        41,912   

Treasury stock, at cost (150,762 and 128,388 shares)

     (68,357     (62,920

Additional paid-in capital

     128,487,108        81,040,691   

Accumulated deficit

     (390,714,531     (358,270,640
  

 

 

   

 

 

 

Total stockholders’ deficit

     (262,246,842     (277,250,957
  

 

 

   

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT

   $ 271,170,347      $ 297,386,283   
  

 

 

   

 

 

 

See notes to consolidated financial statements.

 

2


Dune Energy, Inc.

Consolidated Statements of Operations

(Unaudited)

 

    Three months ended
September 30,
    Nine months ended
September 30,
 
    2011     2010     2011     2010  

Revenues

  $ 15,106,459      $ 15,600,205      $ 48,415,854      $ 48,521,721   
 

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

       

Lease operating expense

    6,144,112        5,259,215        20,098,475        19,478,783   

Exploration expense

    864,011        —          6,047,841        —     

Accretion of asset retirement obligation

    329,379        456,101        988,137        1,376,250   

Depletion, depreciation and amortization

    5,517,089        7,534,943        17,062,122        21,935,896   

General and administrative expense

    2,367,095        2,382,323        6,532,214        8,731,220   

Impairment of oil and gas properties

    —          —          —          16,071,871   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expense

    15,221,686        15,632,582        50,728,789        67,594,020   
 

 

 

   

 

 

   

 

 

   

 

 

 

Operating loss

    (115,227     (32,377     (2,312,935     (19,072,299
 

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expense):

       

Interest income

    4,183        —          40,632        612   

Interest expense

    (10,127,742     (9,063,778     (30,171,588     (27,174,230

Gain on derivative liabilities

    —          63,877        —          1,759,141   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (expense)

    10,123,559     (8,999,901     (30,130,956     (25,414,477
 

 

 

   

 

 

   

 

 

   

 

 

 

Loss on continuing operations

    (10,238,786     (9,032,278     (32,443,891     (44,486,776

Loss on discontinued operations

    —          (63,528     —          (3,473,657
 

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

    (10,238,786     (9,095,806     (32,443,891     (47,960,433

Preferred stock dividend

    (5,316,442     (6,504,810     (15,293,811     (19,376,286
 

 

 

   

 

 

   

 

 

   

 

 

 

Net loss available to common shareholders

  $ (15,555,228   $ (15,600,616   $ (47,737,702   $ (67,336,719
 

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share:

       

Basic and diluted from continuing operations

  $ (0.32   $ (0.39   $ (0.99   $ (1.58

Basic and diluted from discontinued operations

    —          —          —          (0.09
 

 

 

   

 

 

   

 

 

   

 

 

 

Total basic and diluted

  $ (0.32   $ (0.39   $ (0.99   $ (1.67
 

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares outstanding:

       

Basic and diluted

    48,945,500        40,365,873        48,164,172        40,327,091   

See notes to consolidated financial statements.

 

3


Dune Energy, Inc.

Consolidated Statements of Cash Flows

(Unaudited)

 

     Nine months ended September 30,  
     2011     2010  

CASH FLOWS FROM OPERATING ACTIVITIES

    

Net loss

   $ (32,443,891   $ (47,960,433

Adjustments to reconcile net loss to net cash used in operating activities:

    

Loss on discontinued operations

     —          3,473,657   

Depletion, depreciation and amortization

     17,062,122        21,935,896   

Impairment of oil and gas properties

     —          16,071,871   

Amortization of deferred financing costs and debt discount

     2,878,924        3,026,141   

Stock-based compensation

     459,254        1,477,410   

Accretion of asset retirement obligation

     988,137        1,376,250   

Gain on derivative liabilities

     —          (1,651,797

Changes in:

    

Accounts receivable

     3,111,471        5,130,533   

Prepayments and other assets

     (1,185,310     2,064,927   

Payments made to settle asset retirement obligations

     (646,950     (218,481

Accounts payable and accrued liabilities

     4,414,747        (5,025,218
  

 

 

   

 

 

 

NET CASH USED IN CONTINUED OPERATIONS

     (5,361,496     (299,244

NET CASH PROVIDED BY DISCONTINUED OPERATIONS

     —          2,857,240   
  

 

 

   

 

 

 

NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES

     (5,361,496     2,557,996   
  

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

    

Investment in proved and unproved properties

     (11,384,325     (6,746,352

Decrease in restricted cash

     15,740,247        —     

Purchase of furniture and fixtures

     (92,752     (13,704

Decrease in other assets

     545,077        338,980   
  

 

 

   

 

 

 

NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES—CONTINUED OPERATIONS

     4,808,247        (6,421,076

NET CASH PROVIDED BY INVESTING ACTIVITIES—DISCONTINUED OPERATIONS

     —          29,347,980   
  

 

 

   

 

 

 

NET CASH PROVIDED BY INVESTING ACTIVITIES

     4,808,247        22,926,904   
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

    

Proceeds from short-term debt

     —          6,000,000   

Increase in loan costs

     —          (1,133,662

Payments on short-term debt

     (1,420,917     (31,579,308
  

 

 

   

 

 

 

NET CASH USED IN FINANCING ACTIVITIES

     (1,420,917     (26,712,970
  

 

 

   

 

 

 

NET CHANGE IN CASH BALANCE

     (1,974,166     (1,228,070

Cash balance at beginning of period

     23,670,192        15,053,571   
  

 

 

   

 

 

 

Cash balance at end of period

   $ 21,696,026      $ 13,825,501   
  

 

 

   

 

 

 

SUPPLEMENTAL DISCLOSURES

    

Interest paid

   $ 19,334,652      $ 16,327,192   

Income taxes paid

     —          —     

NON-CASH DISCLOSURES

    

Common stock issued for conversion of preferred stock

   $ 62,288,000      $ 2,448,000   

Redeemable convertible preferred stock dividends

     13,502,000        17,692,739   

Accretion of discount on preferred stock

     1,791,811        1,683,547   

See notes to consolidated financial statements.

 

4


DUNE ENERGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1—ACCOUNTING POLICIES AND BASIS OF PRESENTATION

Dune Energy, Inc., a Delaware corporation (“Dune” or the “Company”), is an independent energy company that was formed in 1998. Since May 2004, we have been engaged in the exploration, development, exploitation and production of oil and natural gas. Dune sells its oil and gas production primarily to domestic pipelines and refineries. Its operations are presently focused in the states of Texas and Louisiana.

Dune prepared these financial statements according to the instructions for Form 10-Q. Therefore, the financial statements do not include all disclosures required by generally accepted accounting principles in the United States. However, Dune has recorded all transactions and adjustments necessary to fairly present the financial statements included in this Form 10-Q. The adjustments made are normal and recurring. The following notes describe only the material changes in accounting policies, account details or financial statement notes during the first nine months of 2011. Therefore, please read these financial statements and notes to the financial statements together with the audited financial statements and notes thereto in our Annual Report on Form 10-K for the year ended December 31, 2010. The income statement for the nine months ended September 30, 2011 cannot necessarily be used to project results for the full year.

Discontinued operations

On June 30, 2010, the Company closed the sale of its South Florence Properties located in Vermilion Parish, Louisiana. In accordance with FASB ASC 360-10—Accounting for the Impairment or Disposal of Long-lived Assets, the results of operations of this divestiture have been reflected as discontinued operations. See Note 8 for additional information regarding discontinued operations.

Loss per share

Basic earnings per share amounts are calculated based on the weighted average number of shares of common stock outstanding during each period. Diluted earnings per share is based on the weighted average numbers of shares of common stock outstanding for the periods, including dilutive effects of stock options, warrants granted and convertible preferred stock. Dilutive options and warrants that are issued during a period or that will expire or are canceled during a period are reflected in the computations for the time they were outstanding during the periods being reported. Since Dune incurred losses for all other periods, the impact of the common stock equivalents would be antidilutive and therefore are not included in the calculation.

Impact of recently issued accounting standards

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

NOTE 2—LIQUIDITY AND GOING CONCERN

The accompanying financial statements have been prepared assuming Dune will continue as a going concern. At September 30, 2011, Dune’s cash balance was $21.7 million while the Company also registered a net loss available to common shareholders of $47.7 million for the first nine months of fiscal year 2011. In addition, as of September 30, 2011, Dune has negative working capital of $331.8 million resulting from the $40 million term loan facility and $297.6 million senior secured notes being classified as current liabilities with maturity dates of March 15, 2012 and June 1, 2012, respectively. Management is and will continue to strive to raise additional capital and/or restructure its debt obligations prior to their due dates. However, should these efforts prove unsuccessful, Dune’s ability to continue to operate as a going concern in 2012 would be substantially in doubt. See Note 10 for a discussion of the Company’s restructuring plan.

 

5


NOTE 3—DEBT FINANCING

Long-term debt consists of:

 

     September 30, 2011     December 31, 2010  

Term Loan

   $ 39,974,320      $ 40,000,000   

Senior Secured Notes, net of discount of $2,342,189 and $4,781,310

     297,657,811        295,218,690   
  

 

 

   

 

 

 

Total long-term debt

     337,632,131        335,218,690   

Less: current maturities

     (337,632,131     —     
  

 

 

   

 

 

 

Long-term debt, net of current maturities

   $ —        $ 335,218,690   
  

 

 

   

 

 

 

Wells Fargo Foothill Credit Agreement

On May 15, 2007, Dune entered into a credit agreement among it, each of Dune’s subsidiaries named therein as borrowers, each of Dune’s subsidiaries named therein as guarantors, certain lenders and Wells Fargo Capital Finance, Inc. formerly Wells Fargo Foothill (“Wells Fargo”), as arranger and administrative agent (the “WF Agreement”). On December 7, 2010, Wells Fargo assigned to Wayzata Opportunities Fund II, L.P. (“Wayzata”) its rights, obligations and commitment under this Credit Agreement with Dune. In connection with this assignment, the Company as a borrower entered into the Amended and Restated Credit Agreement (the “Credit Agreement”) with Wayzata as the sole lender and Wells Fargo as the administrative agent. The Credit Agreement is a $40 million term loan facility which will mature on March 15, 2012. Pursuant to the Credit Agreement, (i) interest is 15% per annum which is due and payable, in arrears, on the first day of each month at any time that obligations are outstanding and (ii) if any or all of the $40 million term loan is prepaid (whether mandatory or voluntary prepayment) on or prior to November 15, 2011, the Company shall owe a prepayment premium equal to 10% of the principal amount prepaid.

As security for its obligations under the Credit Agreement, Dune and certain of its operating subsidiaries continue to grant Agent a security interest in and a first priority lien on all of its oil and gas properties and certain deposit accounts. In addition, its subsidiary, Dune Operating Company has guaranteed the obligations.

The Credit Agreement also continues to contain various covenants that limit the Company’s ability to: incur indebtedness; dispose of assets; grant certain liens; enter into certain swaps; make certain investments; prepay any subordinated debt; merge, consolidate, recapitalize, consolidate or allow any material change in the character of our business; enter into farm-out agreements; enter into forward sales; enter into agreements which (i) warrant production of hydrocarbons (other than permitted hedges) and (ii) shall not allow gas imbalances, take-or-pay or other prepayment with respect to its oil and gas properties; and; enter into certain marketing activities.

The Credit Agreement modifies the definition of Change in Control to mean (i) that any “person” or “group”, other than Permitted Holders or Wayzata and its Affiliates, becomes the beneficial owner, directly or indirectly, of 35%, or more, of the Stock of the Company having the right to vote for the election of members of the Board of Directors, (ii) that a majority of the members of the Board of Directors do not constitute Continuing Directors, (iii) that the Company ceases to own and control, directly or indirectly, 100% of the outstanding Stock of each other Loan Party, (iv) either James Watt or Frank Smith shall cease to be involved in the day to day operations and management of the business of the Company, and a successor reasonably acceptable to Agent and Lenders is not appointed on terms reasonably acceptable to Agent and Lenders within 60 days of such cessation of involvement, or (v) any “Change of Control” or similar term, as defined in the Second Secured Debt Documents.

The Credit Agreement has a new financial covenant that requires Dune to maintain the following ratio: the total present value of future net revenues discounted at 10% of the proved developed reserves must be greater than two times the value of the face amount of the term loan.

 

6


If an event of default exists under the Credit Agreement, the Lenders will be able to accelerate the maturity of the Credit Agreement and exercise other rights and remedies. Each of the following would continue to be an event of default: failure to pay any principal when due or any reimbursement amount, interest, fees or other amount within certain grace periods; a representation or warranty is proven to be incorrect when made; failure to perform or otherwise comply with the covenants, including, but not limited to maintenance of (i) required cash management activities and (ii) the interest reserve account, or conditions contained in the Credit Agreement or other loan documents, subject, in certain instances, to certain grace periods; default by the Company on the payment of any other indebtedness or results in the third party’s right to accelerate the maturity of such indebtedness; bankruptcy or insolvency events involving the Company or any of its subsidiaries; the loan documents cease to be in full force and effect; our failing to create a valid lien, except in limited circumstances; the occurrence of a Change in Control; the entry of, and failure to pay or have stayed pending appeal, one or more adverse judgments in excess of an aggregate amount of $5.0 million or more.

In connection with entering into the Credit Agreement on December 7, 2010, standby letters of credit totaling $8.5 million were taken down as the Company cash collateralized these obligations through a bonding agent and has reduced the obligation to $8 million at September 30, 2011.

On March 1, 2011, the Credit Agreement was amended, effective as of December 7, 2010, to permit “the repurchase or other acquisition by Parent of shares of common stock of Parent from employees, former employees, directors or former directors of Parent or its Subsidiaries or permitted transferees of such employees, former employees, directors or former directors, in each case pursuant to the terms of the agreements (including employment agreements) or plans (or amendments thereto) or other arrangements approved by the Board of Directors of the Parent under which such shares were granted, issued or sold; provided, that (A) no Default or Event of Default has occurred and is continuing or would exist after giving effect to such repurchase or other acquisition, and (B) the aggregate amount of all such repurchases and other acquisitions following the Restatement Date shall not exceed $500,000.” This amendment also waived any misrepresentation that may have inadvertently arisen as a result of any such repurchase prior to the date of the amendment.

On June 1, 2011, in connection with the liquidation of the escrow balance of $15.7 million established for the June 2011 bond interest payment on the Senior Secured Notes, the Company applied the remaining escrow balance of $25,680 to the term loan facility reducing the balance to $39,974,320 at September 30, 2011. Additionally, a 10% prepayment premium of $2,568 was made in accordance with the terms of the agreement.

Senior Secured Notes

On May 15, 2007, Dune sold to Jefferies & Company, Inc. $300 million aggregate principal amount of 10 1/2% Senior Secured Notes due 2012 (“Senior Secured Notes”) at a purchase price of $285 million. The Senior Secured Notes, bearing interest at the rate of 10 1/2 % per annum, were issued under that certain indenture, dated May 15, 2007, among Dune, the guarantors named therein, and The Bank of New York Trust Company NA, as trustee (the “Indenture”). The Indenture contains customary representations and warranties by the Company as well as typical restrictive covenants whereby Dune has agreed, among other things, to limitations to incurrence of additional indebtedness, declaration of dividends, issuance of capital stock, sale of assets and corporate reorganizations.

The Senior Secured Notes are subject to redemption by Dune, at a repurchase price equal to 100% of the aggregate principal amount plus accrued interest. Holders of the Senior Secured Notes may put such notes to the Company for repurchase, at a repurchase price of 101% of the principal amount plus accrued interest, upon a change in control as defined in the Indenture.

The Senior Secured Notes are secured by a lien on substantially all of Dune’s assets, including without limitation, those oil and gas leasehold interests located in Texas and Louisiana held by Dune’s operating subsidiaries. The Senior Secured Notes are unconditionally guaranteed on a senior secured basis by each of Dune’s existing and future domestic subsidiaries. The collateral securing the Senior Secured Notes is subject to, and made subordinate to, the lien granted to Wayzata under the Credit Agreement.

 

7


The debt discount is being amortized over the life of the notes using the effective interest method. Amortization expense associated with the debt discount amounted to $876,594 and $2,439,121 and is included in interest expense in the consolidated statements of operations for the three and nine months ended September 30, 2011, respectively.

NOTE 4—REDEEMABLE CONVERTIBLE PREFERRED STOCK

During the quarter ended June 30, 2007, Dune sold to Jefferies & Company, Inc. pursuant to the Purchase Agreement dated May 1, 2007, 216,000 shares of its Senior Redeemable Convertible Preferred Stock (“preferred stock”) for gross proceeds of $216 million less a discount of $12.3 million yielding net proceeds of $203.7 million. As provided in the Certificate of Designations, the preferred stock has a liquidation preference of $1,000 per share and a dividend at a rate of 12% per annum, payable quarterly, at the option of Dune in additional shares of preferred stock, shares of common stock (subject to the satisfaction of certain conditions) or cash.

The conversion price of the preferred stock is subject to adjustment pursuant to customary anti-dilution provisions and may also be adjusted upon the occurrence of a fundamental change as defined in the Certificate of Designations. The preferred stock is redeemable at the option of the holder on December 1, 2012 and subject to the terms of any of the Company’s indebtedness or upon a change of control. In the event Dune fails to redeem shares of preferred stock “put” to Dune by a holder, then the conversion price shall be lowered and the dividend rate increased. After December 1, 2012, Dune may redeem shares of preferred stock. The Company analyzed the adjustment of the conversion right for derivative accounting under FASB ASC 815—Derivatives and Hedges and determined that it was not applicable.

The preferred stock discount is deemed a preferred stock dividend and is being amortized over five years using the effective interest method and is charged to additional paid-in capital as the Company has a deficit balance in retained earnings. Charges to additional paid-in capital for the three and nine months ended September 30, 2011 amounted to $617,442 and $1,791,811, respectively.

During the nine months ended September 30, 2011, holders of 62,288 shares of the preferred stock converted their shares into 7,118,641 shares of common stock.

During the nine months ended September 30, 2011 and 2010, Dune paid dividends on the preferred stock in the amount of $14,111,000 and $17,660,000, respectively. In lieu of cash, the Company elected to issue 14,111 and 17,660 additional shares of preferred stock, respectively.

NOTE 5—HEDGING ACTIVITIES

As a result of entering into the Credit Agreement, the Company is no longer required to hedge and all hedge balances were settled. Prior to this event, Dune accounted for its production hedge derivative instruments as defined in FASB ASC 815-Derivatives and Hedging. Accordingly, the Company designated derivative instruments as fair value hedges and recognized gain or losses in current earnings.

For the three and nine months ended September 30, 2010, Dune recorded a gain on the derivatives of $63,877 and $1,759,141, composed of an unrealized gain (loss) on changes in mark-to-market valuations of ($97,433) and $1,651,797 and a realized gain on cash settlements of $161,310 and $107,344, respectively.

NOTE 6—RESTRICTED STOCK, STOCK OPTIONS AND WARRANTS

The Company utilizes restricted stock, stock options and warrants to compensate employees, officers, directors and consultants. Total stock-based compensation expense including options, warrants and restricted stock was $93,763 and $459,254 for the three and nine months ended September 30, 2011 and $307,413 and $1,447,410 for the three and nine months ended September 30, 2010, respectively.

 

8


The 2007 Stock Incentive Plan, which was approved by Dune’s shareholders, authorizes the issuance of up to 3,200,000 shares of common stock for issuance to employees, officers and non-employee directors. The Plan is administered by Dune’s Compensation Committee. The following table reflects the vesting activity associated with restricted stock awards at September 30, 2011:

 

Grant Date

   Shares
Awarded
     Shares
Canceled
    Shares
Vested
    Shares
Unvested
 

December 17, 2007

     248,591         (71,471     (177,120     —     

March 13, 2008

     105,412         —          (105,412     —     

August 1, 2008

     622,700         (111,429     (511,271     —     

October 1, 2009

     450,000         —          (100,499     349,501   

December 31, 2009

     573,780         (143,333     (163,921     266,526   

November 11, 2010

     938,900         (55,200     —          883,700   

December 30, 2010

     4,445         —          (4,445     —     
  

 

 

    

 

 

   

 

 

   

 

 

 
     2,943,828         (381,433     (1,062,668     1,499,727   
  

 

 

    

 

 

   

 

 

   

 

 

 

Common shares available to be awarded at September 30, 2011 are as follows:

 

Total shares authorized

     3,200,000   

Total shares issued

     (2,943,828

Total shares canceled

     381,433   
  

 

 

 

Total shares available

     637,605   
  

 

 

 

NOTE 7—INCOME TAXES

Dune is in a position of cumulative reporting losses for the current and preceding reporting periods. The volatility of energy prices and uncertainty of when energy prices may rebound is not readily determinable by management. At this date, this general fact pattern does not allow the Company to project sufficient sources of future taxable income to offset tax loss carryforwards and net deferred tax assets. Under these current circumstances, it is management’s opinion that the realization of these tax attributes does not reach the “more likely than not criteria” under FASB ASC 740—Income Taxes. As a result, the Company’s taxes through September 30, 2011 are subject to a full valuation allowance.

NOTE 8—DISCONTINUED OPERATIONS

On June 30, 2010, Dune consummated the sale of the South Florence field located in Vermilion Parish, Louisiana. The disposition of the South Florence Properties allowed the Company to repay all outstanding borrowings under the WF Agreement and to invest in new assets or fund maintenance, repair or improvement of existing properties and assets. The effective date of the sale was May 1, 2010.

Consideration received by the Company for the South Florence Properties aggregated $29,189,243, consisting of the purchase price of $30 million, as adjusted to account for the sale of hydrocarbons and various related costs, expenses and charges incurred between the execution and the Purchase and Sale Agreement and completion of the sale.

 

9


Pursuant to accounting rules for discontinuing operations, Dune has classified 2010 and prior reporting periods to present the activity related to the South Florence Properties as a discontinued operation. Discontinued operations for the three and nine months ended September 30, 2010 are summarized as follows:

 

     Three months
ended
September 30, 2010
    Nine months
ended
September 30, 2010
 

Revenues

     —        $ 4,372,648   
  

 

 

   

 

 

 

Costs and expenses:

    

Lease operating expense

     (125     1,329,475   

Depletion, depreciation and amortization

     —          1,502,433   

Impairment on asset

     63,653        5,014,397   
  

 

 

   

 

 

 

Total operating expense

     63,528        7,846,305   
  

 

 

   

 

 

 

Loss from discontinued operations

   $ (63,528   $ (3,473,657
  

 

 

   

 

 

 

Production:

    

Oil (Bbl)

     —          38,474   

Gas (Mcf)

     —          254,537   

Total (Mcfe)

     —          485,381   

NOTE 9—COMMITMENTS AND CONTINGENCIES

The Company, as an owner or lessee and operator of oil and gas properties, is subject to various federal, state and local laws and regulations relating to discharge of materials into, and protection of, the environment. These laws and regulations may, among other things, impose liability on the lessee under an oil and gas lease for the cost of pollution clean-up resulting from operations and subject the lessee to liability for pollution damages. In some instances, the Company may be directed to suspend or cease operations in the affected area. Dune maintains insurance coverage, which it believes is customary in the industry, although Dune is not fully insured against all environmental risks.

In connection with the acquisition of Goldking, the Company inherited an environmental contingency which after conducting its due diligence and subsequent testing believes is the responsibility of a third party. However, federal and state regulators have determined Dune is the responsible party for clean up of this area. Dune has maintained a passive maintenance of this site since it was first discovered after Hurricane Katrina. Cost to date of approximately $1,200,000 has been covered by the Company’s insurance minus the standard deductibles. The Company still feels another party has the primary responsibility for this occurrence but is committed to working with the various state and federal authorities on resolution of this issue. At this time no estimate of the final cost of remediation of this site can be determined or if the Company’s insurance will continue to cover the clean up costs or if the Company can be successful in proving the other party should be primarily responsible for the cost of remediation.

NOTE 10—SUBSEQUENT EVENT

On October 7, 2011, the Company announced that it has entered into a restructuring plan support agreement

with noteholders (the “supporting noteholders”) who together hold approximately 90% of the aggregate principal

amount of Dune’s outstanding 10- 1/2% Senior Secured Notes due 2012 (the “notes”) as well as similar

restructuring plan support agreement with a holder (the “supporting preferred stockholder”) of approximately

64% of Dune’s issued and outstanding 10% Senior Redeemable Convertible Preferred Stock (the “preferred

stock”). Pursuant to the support agreement, which sets forth the terms of Dune’s capital restructuring plan, Dune

intends to seek to eliminate all of the notes and the related cash interest expense, through consummation of an

exchange offer to acquire all of the notes in exchange for a combination of Dune equity securities and either cash

or new debt securities in an aggregate amount of $50 million (if the offer is fully subscribed). If fully subscribed,

 

10


the exchange offer would result in the ownership of 97.25% of Dune’s common stock on a post-restructuring

basis by the noteholders. The support agreements also contemplate conversion of all of the outstanding preferred

stock into $4.0 million in cash and 1.5% of Dune’s common stock on a post-restructuring basis. In addition, the

contemplated restructuring would result in Dune’s current common stockholders holding 1.25% of Dune’s common stock on a post-restructuring basis. Dune plans to launch this out-of-court exchange offer in the first half of November, 2011.

As an alternative to the out-of-court exchange offer, Dune has also agreed in the support agreements to

solicit consents from its noteholders to approve a prepackaged plan of reorganization in a bankruptcy proceeding

(the “prepackaged plan”). In the event certain conditions to the exchange offer are not satisfied, Dune intends to

pursue the prepackaged plan. If confirmed, the prepackaged plan would have principally the same effect as if

100% of the noteholders had tendered their notes in the exchange offer. If all conditions to consummating the exchange offer are satisfied, Dune will cease seeking support for the prepackaged plan.

 

11


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion will assist in the understanding of our financial position and results of operations. The information below should be read in conjunction with the consolidated financial statements, the related notes to consolidated financial statements and our Annual Report on Form 10-K for the year ended December 31, 2010. Our discussion contains both historical and forward-looking information. We assess the risks and uncertainties about our business, long-term strategy and financial condition before we make any forward-looking statements but we cannot guarantee that our assessment is accurate or that our goals and projections can or will be met. Statements concerning results of future exploration, exploitation, development and acquisition expenditures as well as revenue, expense and reserve levels are forward-looking statements. We make assumptions about commodity prices, drilling results, production costs, administrative expenses and interest costs that we believe are reasonable based on currently available information.

Our primary focus will continue to be the development and exploration efforts in our Gulf Coast properties. We believe that our acreage position will allow us to grow organically through low risk drilling in the near term. This position continues to present attractive opportunities to expand our reserve base through field extensions and high risk/high reward exploratory drilling opportunities. In addition, we will constantly review, rationalize and “high-grade” our properties in order to optimize our existing asset base.

We expect to maintain and utilize our technical and operations teams’ knowledge of salt-dome structures and multiple stacked producing zones common in the Gulf Coast to enhance our growth prospects and reserve potential. We expect to employ technical advancements, including 3-D seismic data, pre-stack depth migration and directional drilling, to identify and exploit new opportunities in our asset base. We also plan to employ the latest drilling, completion and fracturing technology in all of our wells to enhance recoverability and accelerate cash flows associated with these wells.

We continually review opportunities to acquire producing properties, leasehold acreage and drilling prospects that are in core operating areas. We are seeking to acquire operational control of properties that we believe have a solid proved reserve base coupled with significant exploitation and exploration potential.

Liquidity and Capital Resources

During the first nine months of 2011 compared to the first nine months of 2010, net cash flow used in continuing operations declined by $5.0 million to ($5.4) million. This decline was primarily attributable to the Company’s decision to expense $6.0 million of costs associated with an exploratory well.

Our current assets were $32.2 million on September 30, 2011. Cash on hand comprised approximately $21.7 million of this amount. This compared to cash on hand of $23.7 million at the end of the calendar year 2010 and $13.8 million at the end of the third quarter of 2010. Accounts payable have decreased from $7.0 million at year end 2010 to $4.1 million at September 30, 2011. Accounts payable were $4.0 million at September 30, 2010.

The financial statements continue to reflect a modest but ongoing drilling and facilities upgrade program which amounted to $17.4 million during the first nine months of 2011. The increased spending reflects drilling activity at the S and Deep Salt prospects in Garden Island Bay. We expect to spend approximately $4.8 million during the final three months of 2011 on continuing development and exploitation of our asset base. This would represent a $13.5 million increase over our almost $8.7 million of capital investment in 2010. However, the exact amount will depend upon individual well performance results, cash flow and, where applicable, partners negotiations on the timing of drilling obligations.

During the fourth quarter of 2010, Dune replaced its $40 million revolving credit facility from Wells Fargo Foothill with a new $40 million term loan facility from Wayzata. The new facility matures on March 15, 2012 and provides for Wells Fargo Foothill to remain as agent for the facility. The Company has received all of the funds associated with the facility and has placed $8.0 million in escrow to cash collateralize standby letters of

 

12


credit. The Company is deploying the remaining funds from the term loan and available cash flow from operations to cover anticipated drilling and recompletion projects in 2011. Additionally, all hedging contracts were settled in 2010 and the Company no longer hedges its oil and gas production.

Semi-annual interest of $15.75 million on our 10 1/2% Senior Secured Notes due 2012 was paid on June 1, 2011 and is due on December 1 and June 1 thereafter. The principal on the Senior Secured Notes is not due until June 1, 2012.

Shares of our Senior Redeemable Convertible Preferred Stock are not redeemable until the later of December 1, 2012 or the repayment in full of all senior secured debt or upon a change in control. Dividends are payable quarterly with the Company having the option of paying any dividend on the preferred stock in shares of common stock, shares of preferred stock or cash, subject to certain restrictions in the Credit Agreement.

As noted in Note 2 to the Consolidated Financial Statements, our current liabilities exceed our current assets by $331.8 million. This is the result the movement into the current maturity category of our $40 million term loan facility due March 15, 2012 and $297.7 million of Senior Secured Notes due June 1, 2012. If the Company is unable to obtain financing from third parties or otherwise restructure its debt obligations prior to maturity, our ability to fund operations and execute our business plan will be impaired. Consequently, the Company’s ability to continue to operate as a going concern in 2012 would be doubtful. There is no assurance that we can raise additional capital from external sources or restructure our long-term obligations, the failure of which could cause us to consider other strategic solutions including, among other things, the sale of key assets and/ or the material curtailment of operations.

On October 7, 2011, the Company announced that it has entered into a restructuring plan support agreement with noteholders (the “supporting noteholders”) who together hold approximately 90% of the aggregate principal amount of Dune’s outstanding 10-1/2% Senior Secured Notes due 2012 (the “notes”) as well as similar restructuring plan support agreement with a holder (the “supporting preferred stockholder”) of approximately 64% of Dune’s issued and outstanding 10% Senior Redeemable Convertible Preferred Stock (the “preferred stock”). Pursuant to the support agreement, which sets forth the terms of Dune’s capital restructuring plan, Dune intends to seek to eliminate all of the notes and the related cash interest expense, through consummation of an exchange offer to acquire all of the notes in exchange for a combination of Dune equity securities and either cash or new debt securities in an aggregate amount of $50 million (if the offer is fully subscribed). If fully subscribed, the exchange offer would result in the ownership of 97.25% of Dune’s common stock on a post-restructuring basis by the noteholders. The support agreements also contemplate conversion of all of the outstanding preferred stock into $4.0 million in cash and 1.5% of Dune’s common stock on a post-restructuring basis. In addition, the contemplated restructuring would result in Dune’s current common stockholders holding 1.25% of Dune’s common stock on a post-restructuring basis. Dune plans to launch this out-of-court exchange offer in the first half of November, 2011.

As an alternative to the out-of-court exchange offer, Dune has also agreed in the support agreements to solicit consents from its noteholders to approve a prepackaged plan of reorganization in a bankruptcy proceeding (the “prepackaged plan”). In the event certain conditions to the exchange offer are not satisfied, Dune intends to pursue the prepackaged plan. If confirmed, the prepackaged plan would have principally the same effect as if 100% of the noteholders had tendered their notes in the exchange offer. If all conditions to consummating the exchange offer are satisfied, Dune will cease seeking support for the prepackaged plan.

Dune does not anticipate any business interruption in its operations during the restructuring process, regardless of whether the restructuring is completed out of court or in court. Under the proposed plan, Dune expects to continue its operations in the normal course. All vendors and suppliers will continue to be paid in full under normal terms in the ordinary course of business. The proposed plan contemplates a refinancing of Dune’s

 

13


senior secured term loan and provides that all of Dune’s creditor classes (other than the notes), including general unsecured creditors, will be “unimpaired”—i.e., will be paid in full for all valid, outstanding claims upon consummation of the plan to the extent they have not been paid previously; however there can be no assurance that the treatment of creditors outlined above will not change significantly. Implementation of the transactions contemplated by the support agreements is dependent on a number of factors and approvals.

Pursuant to their support agreement, the supporting noteholders have agreed to, among other things, (1) support and use commercially reasonable efforts to complete the capital restructuring plan, including by tendering their notes into the exchange offer and voting in favor of the prepackaged plan; and (2) not exercise remedies or direct the trustee to exercise remedies under the indenture governing the notes for any default or event of default that has occurred or may occur thereunder. However, the support agreement may be terminated upon the occurrence or failure to occur of certain events generally related to progress towards consummation of the restructuring.

Results of Operations

Year-over-year production decreased from 5,584 Mmcfe for the first nine months of 2010 to 4,462 Mmcfe for the same nine month period of 2011. This decrease was caused by normal reservoir declines which were not offset by increased production due to the limited amount of capital reinvestment made during 2011.

The following table reflects the increase (decrease) in oil and gas sales revenue due to the changes in prices and volumes:

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2011     %
Change
    2010      2011     %
Change
    2010  

Oil production volume (Mbbls)

     120        -19     148         373        -16     447   

Oil sales revenue ($000)

   $ 11,871        7   $ 11,087       $ 37,777        12   $ 33,843   

Price per bbl

   $ 98.93        31   $ 74.92       $ 101.27        34   $ 75.71   

Increase (decrease) in oil sales revenue due to:

             

Change in production volume

   $ (2,098        $ (5,603    

Change in prices

     2,882             9,537       
  

 

 

        

 

 

     

Total increase in oil sales revenue

   $ 784           $ 3,934       
  

 

 

        

 

 

     

Gas production volume (Mmcf)

     678        -27     926         2,222        -23     2,904   

Gas sales revenue ($000)

   $ 3,236        -28   $ 4,513       $ 10,639        -28   $ 14,679   

Price per Mcf

   $ 4.77        -2   $ 4.87       $ 4.79        -5   $ 5.05   

Increase (decrease) in gas sales revenue due to:

             

Change in production volume

   $ (1,204        $ (3,444    

Change in prices

     (73          (596    
  

 

 

        

 

 

     

Total decrease in gas sales revenue

   $ (1,277        $ (4,040    
  

 

 

        

 

 

     

Total production volume (Mmcfe)

     1,397        -23     1,816         4,462        -20     5,584   

Total revenue ($000)

   $ 15,106        -3   $ 15,600       $ 48,416        -1   $ 48,522   

Price per Mcfe

   $ 10.81        26   $ 8.59       $ 10.85        25   $ 8.69   

Increase (decrease) in total revenue due to:

             

Change in production volume

   $ (3,599        $ (9,750    

Change in prices

     3,105             9,644       
  

 

 

        

 

 

     

Total decrease in total revenue

   $ (494        $ (106    
  

 

 

        

 

 

     

 

14


We recorded a net loss available to common shareholders for the three months ended September 30, 2011 of ($15.6 million) or ($0.32) basic and diluted loss per share compared to net loss available to common shareholders of ($15.6 million) or ($0.39) basic and diluted loss per share for the same quarter of 2010. For the nine months ended September 30, 2011, we recorded a net loss available to common shareholders of ($47.7 million) or ($0.99) basic and diluted loss per share compared to a net loss available to common shareholders of ($67.3 million) or ($1.67) basic and diluted loss per share for the same period of 2010.

Revenues

Revenues from continuing operations for the quarter ended September 30, 2011 totaled $15.1 million compared to $15.6 million for the quarter ended September 30, 2010 representing a $0.5 million decrease. Production volumes for 2011 were 120 Mbbls of oil and 0.7 Bcf of natural gas or 1.4 Bcfe. This compares to 148 Mbbls of oil and 0.9 Bcf of natural gas or 1.8 Bcfe. In 2011, the average sales price per barrel of oil was $98.93 and $4.77 per Mcf of natural gas as compared to $74.92 per barrel and $4.87 per Mcf, respectively for 2010. These results indicate that the slight decrease in revenue is primarily attributable to the reduction in production volumes of 0.4 Bcfe or 23% which were offset by increases in commodity prices of $2.22 per Mcfe or 26%.

Revenues from continuing operations for the nine months ended September 30, 2011 totaled $48.4 million compared to $48.5 million for the nine months ended September 30, 2010 representing a $0.1 million decrease. Production volumes for 2011 were 373 Mbbls of oil and 2.2 Bcf of natural gas or 4.5 Bcfe. This compares to 447 Mbbls of oil and 2.9 Bcf of natural gas or 5.6 Bcfe. In 2011, the average sales price per barrel of oil was $101.27 and $4.79 per Mcf of natural gas as compared to $75.71 per barrel and $5.05 per Mcf, respectively for 2010. These results indicate that the slight decrease in revenue was primarily attributable to the reduction in production volumes of 1.1 Bcfe or 20% which were offset by increases in commodity prices of $2.16 per Mcfe or 25%.

Operating expenses

Lease operating expense

The following table presents the major components of Dune’s lease operating expense (in thousands) for the three and nine months ended September 30, 2011 and 2010 on a Mcfe basis:

 

     Three months ended September 30,     Nine months ended September 30,  
     2011      2010     2011      2010  
     Total      Per Mcfe      Total     Per Mcfe     Total      Per Mcfe      Total      Per Mcfe  

Direct operating expense

   $ 4,249       $ 3.04       $ 4,231      $ 2.33      $ 13,921       $ 3.12       $ 14,202       $ 2.54   

Workovers

     139       $ 0.10         692      $ 0.38        800       $ 0.18         1,202       $ 0.22   

Ad valorem taxes

     243       $ 0.17         304      $ 0.17        723       $ 0.16         891       $ 0.16   

Production taxes

     1,183       $ 0.85         (258   $ (0.14     3,767       $ 0.84         2,013       $ 0.36   

Transportation

     330       $ 0.24         290      $ 0.16        887       $ 0.20         1,171       $ 0.21   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 
   $ 6,144       $ 4.40       $ 5,259      $ 2.90      $ 20,098       $ 4.50       $ 19,479       $ 3.49   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Lease operating expense from continuing operations for the quarter ended September 30, 2011 totaled $6.1 million versus $5.3 million for the same period of 2010. This translated into an increase of $1.50/Mcfe on a volume basis. The overall increase in lease operating expense between periods reflects the impact of the 2010 recoupment of production taxes resulting from drilling incentives that were not available in 2011.

Lease operating expense from continuing operations for the nine months ended September 30, 2011 totaled $20.1 million versus $19.5 million for the same period of 2010. This translated into an increase of $1.01/Mcfe on a volume basis. This overall increase in lease operating expense between periods reflects the impact of the 2010 recoupment of production taxes resulting from drilling incentives that were not available in 2011.

 

15


Exploration expense

In the first nine months of 2011, the Company, as party to a joint venture, drilled an exploratory well. Although the Company will continue to evaluate future options associated with the well, it has determined that the costs incurred should be expensed. Consequently, $0.9 million was expensed in the third quarter of 2011 and $6.0 million in the first nine months of 2011.

Accretion of asset retirement obligation

Accretion expense for asset retirement obligations decreased by $0.1 million for the quarter ended September 30, 2011 compared to the same period in 2010. Similarly, accretion expense for the nine month period ended September 30, 2011 reflected a $0.4 million decrease from the comparable period of 2010. This decrease is the result of reevaluating abandonment costs at year end.

Depletion, depreciation and amortization (DD&A)

For the quarter ended September 30, 2011, the Company recorded DD&A expense of $5.5 million ($3.95/Mcfe) compared to $7.5 million ($4.15/Mcfe) for the quarter ended September 30, 2010 representing a decrease of $2.0 million ($0.20/Mcfe). Additionally, for the nine months ended September 30, 2011, the Company recorded DD&A expense of $17.0 million ($3.82/Mcfe) compared to $21.9 million ($3.93/Mcfe) for the nine months ended September 30, 2010 representing a decrease of $4.9 million ($0.11/Mcfe). This decrease reflects the impact of a 20% reduction in production volumes that directly impacts the DD&A calculation.

General and administrative expense (G&A expense)

G&A expense for the quarter ended September 30, 2011 remained constant at $2.4 million compared to the comparable quarter of 2010. Similarly, cash G&A of $2.3 million did not fluctuate significantly from the comparable quarter of 2010. These results reflect the Company’s ongoing efforts to control costs.

For the nine months ended September 30, 2011 and 2010, G&A expense decreased $2.2 million (25%) to $6.5 million. Cash G&A expense for the first nine months of the year declined $1.2 million (16%) to $6.1 million. Again, this decrease reflects the Company’s efforts to control costs.

On a unit of production basis, G&A increased from $1.31/Mcfe for the quarter ended September 30, 2010 to $1.69/Mcfe for the same period of 2011. For the nine month period ended September 30, 2010, G&A fell from $1.56/Mcfe to $1.46/Mcfe for the same period of 2011.

Impairment of oil and gas properties

Dune recorded an impairment of oil and gas properties of $16.1 million during the nine months ended September 30, 2010. This amount consisted of expired leasehold costs of $5.3 million and drilling costs of $10.8 million on a well which was not completed.

Other income (expense)

Interest income

Interest income for the quarter ended September 30, 2011 was slightly higher than the comparable 2010 quarter. Interest income for the nine months ended September 30, 2011 was $0.04 million more than the comparable 2010 period. This was the result of higher cash balances held in escrow associated with the Credit Agreement.

 

16


Interest expense

As a result of the higher interest rate applicable to the Credit Agreement, interest expense for the quarter ended September 30, 2011 was $10.1 million compared to $9.1 million in the comparable quarter ended 2010. Additionally, interest expense for the nine months ended September 30, 2011 amounted to $30.2 million compared to $27.2 million in the comparable period of 2010.

Gain on derivative liabilities

For the quarter ended September 30, 2010, the Company incurred a gain on derivatives of $0.06 million composed of an unrealized loss of ($0.1) million due to the change in the mark-to-market valuation and a realized gain of $0.16 million for cash settlements.

For the nine months ended June 30, 2010, the Company incurred a gain on derivatives of $1.8 million composed of an unrealized gain of $1.7 million due to the change in mark-to-market valuation and a realized gain of $0.1 million for cash settlements.

In connection with entering into the Credit Agreement in December 2010, all hedging requirements were eliminated and all hedge balances were settled.

Net loss available to common shareholders

For the quarter ended September 30, 2011, net loss available to common shareholders decreased $0.04 million from the comparable quarter of 2010. This slight decrease reflects the impact of several different factors with no one item having a significant change between the quarters.

For the nine months ended September 30, 2011, net loss available to common shareholders decreased $19.6 million from the comparable 2010 period. This decrease is primarily the result of the ($16.1) million impairment of oil and gas properties incurred in 2010.

 

Item 4. Controls and Procedures.

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure based closely on the definition of “disclosure controls and procedures” in Rule 13a-15(e). In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

At the end of the period covered by this quarterly report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based upon the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2011, our disclosure controls and procedures are effective.

During the quarter ended September 30, 2011, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

17


PART II

OTHER INFORMATION

 

Item 6. Exhibits

(a) Exhibits

 

Exhibit Nos.

  

Description

  3.1    Amended and restated Certificate of Incorporation of IP Factory, Inc. (1)
  3.1.1    Certificate of Amendment of Amended and Restated Certificate of Incorporation, dated May 7, 2003 (2)
  3.1.2    Certificate of Amendment of Certificate of Incorporation, dated May 5, 2004 (3)
  3.1.3    Certificate of Amendment of Certificate of Incorporation, dated June 12, 2007 (4)
  3.1.4    Certificate of Amendment of Certificate of Incorporation, dated December 14, 2007 (5)
  3.1.5    Certificate of Amendment of Amended and Restated Certificate of Incorporation, dated December 1, 2009 (6)
  3.2    Amended and Restated By-Laws of Dune Energy, Inc. (7)
31.1*    Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*    Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*    Certification pursuant to 18 U.S.C. 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by Chief Executive Officer.
32.2*    Certification pursuant to 18 U.S.C. 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by Chief Financial Officer.
101.INS§    XBRL Instance Document
101.SCH§    XBRL Taxonomy Extension Schema Document
101.CAL§    XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF§    XBRL Taxonomy Extension Definition Linkbase Document
101.LAB§    XBRL Taxonomy Extension Label Linkbase Document
101.PRE§    XBRL Taxonomy Extension Presentation Linkbase Document

 

* Filed herewith
(1) Incorporated by reference to Exhibit No. 3.1 to Form 10-KSB filed by Dune Energy, Inc. (Commission File No. 000-27897) on November 14, 2003.
(2) Incorporated by reference to Exhibit No. 3.1.1 to Form 10-K filed by Dune Energy, Inc. (Commission File No. 001-32497) on March 3, 2011.
(3) Incorporation by reference to Exhibit No. 3.1 to Form 10-Q filed by Dune Energy, Inc. (Commission File No. 001-32497) for the quarterly period ended March 31, 2007.
(4) Incorporated by reference to Exhibit No. 3.1.3 to Form 10-K filed by Dune Energy, Inc. (Commission File No. 001-32497) on March 3, 2011.
(5) Incorporated by reference to Exhibit No. 3.1.4 to Form 10-K filed by Dune Energy, Inc. (Commission File No. 001-32497) on March 3, 2011.
(6) Incorporated by reference to Exhibit No. 3.1.2 to Form 8-K filed by Dune Energy, Inc. (Commission File No. 001-32497) on December 1, 2009.
(7) Incorporated by reference to Exhibit No. 3.1 to Form 8-K filed by Dune Energy, Inc. (Commission File No. 001-32497) on July 12, 2010.

 

18


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

    DUNE ENERGY, INC.
Date: October 31, 2011   By:  

/s/    JAMES A. WATT        

  Name:   James A. Watt
  Title:   President and Chief Executive Officer
Date: October 31, 2011   By:  

/s/    FRANK T. SMITH, JR.        

    Name:   Frank T. Smith, Jr.
    Title:   Chief Financial Officer

 

19


INDEX TO EXHIBITS

 

Exhibit Nos.

  

Description

  3.1    Amended and restated Certificate of Incorporation of IP Factory, Inc. (1)
  3.1.1    Certificate of Amendment of Amended and Restated Certificate of Incorporation, dated May 7, 2003 (2)
  3.1.2    Certificate of Amendment of Certificate of Incorporation, dated May 5, 2004 (3)
  3.1.3    Certificate of Amendment of Certificate of Incorporation, dated June 12, 2007 (4)
  3.1.4    Certificate of Amendment of Certificate of Incorporation, dated December 14, 2007 (5)
  3.1.5    Certificate of Amendment of Amended and Restated Certificate of Incorporation, dated December 1, 2009 (6)
  3.2    Amended and Restated By-Laws of Dune Energy, Inc. (7)
31.1*    Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*    Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*    Certification pursuant to 18 U.S.C. 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by Chief Executive Officer.
32.2*    Certification pursuant to 18 U.S.C. 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by Chief Financial Officer.
101.INS§    XBRL Instance Document
101.SCH§    XBRL Taxonomy Extension Schema Document
101.CAL§    XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF§    XBRL Taxonomy Extension Definition Linkbase Document
101.LAB§    XBRL Taxonomy Extension Label Linkbase Document
101.PRE§    XBRL Taxonomy Extension Presentation Linkbase Document

 

* Filed herewith
(1) Incorporated by reference to Exhibit No. 3.1 to Form 10-KSB filed by Dune Energy, Inc. (Commission File No. 000-27897) on November 14, 2003.
(2) Incorporated by reference to Exhibit No. 3.1.1 to Form 10-K filed by Dune Energy, Inc. (Commission File No. 001-32497) on March 3, 2011.
(3) Incorporation by reference to Exhibit No. 3.1 to Form 10-Q filed by Dune Energy, Inc. (Commission File No. 001-32497) for the quarterly period ended March 31, 2007.
(4) Incorporated by reference to Exhibit No. 3.1.3 to Form 10-K filed by Dune Energy, Inc. (Commission File No. 001-32497) on March 3, 2011.
(5) Incorporated by reference to Exhibit No. 3.1.4 to Form 10-K filed by Dune Energy, Inc. (Commission File No. 001-32497) on March 3, 2011.
(6) Incorporated by reference to Exhibit No. 3.1.2 to Form 8-K filed by Dune Energy, Inc. (Commission File No. 001-32497) on December 1, 2009.
(7) Incorporated by reference to Exhibit No. 3.1 to Form 8-K filed by Dune Energy, Inc. (Commission File No. 001-32497) on July 12, 2010.

 

20