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

 
FORM 10-Q
 

 
 
Check One
 
 
x
Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended March 31, 2016
     
   
or
     
 
o
Transition report under Section 13 or 15(d) of the Securities Exchange Act of 1934
 
Commission File Number 0-12500
 
ISRAMCO, INC
(Exact Name of registrant as Specified in its Charter)
 
Delaware
 
13-3145265
(State or other Jurisdiction of Incorporation or Organization)
 
I.R.S. Employer Number
 
2425 West Loop South, Suite 810, HOUSTON, TX 77027
 (Address of Principal Executive Offices)
 
713-621-5946
(Registrant’s Telephone Number, Including Area Code)
 
Indicate by check whether the registrant: (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer o Accelerated filer x Non-accelerated filer o (Do not check if a smaller reporting company)     Smaller reporting company o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes o No x
 
As of May 10, 2016, Isramco, Inc, had 2,717,691 outstanding shares of common stock, par value $0.01 per share.
 
 
TABLE OF CONTENTS

   
Page
PART I. FINANCIAL INFORMATION
 
     
Item 1.
4
 
4
 
5
 
 6
 
7
 
8
Item 2.
17
Item 3.  
24
Item 4.
24
     
PART II. OTHER INFORMATION
 
     
Item 1.
25
Item 1A.
26
Item 2.
26
Item 3.
26
Item 4
26
Item 5.
26
Item 6.
26
 
27
 
 
Forward Looking Statements
 
CERTAIN STATEMENTS MADE IN THIS QUARTERLY REPORT ON FORM 10-Q ARE “FORWARD-LOOKING STATEMENTS” WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. FORWARD-LOOKING STATEMENTS CAN BE IDENTIFIED BY TERMINOLOGY SUCH AS “MAY”, “WILL”, “SHOULD”, “EXPECTS”, “INTENDS”, “ANTICIPATES”, “BELIEVES”, “ESTIMATES”, “PREDICTS”, OR “CONTINUE” OR THE NEGATIVE OF THESE TERMS OR OTHER COMPARABLE TERMINOLOGY AND INCLUDE, WITHOUT LIMITATION, STATEMENTS BELOW REGARDING EXPLORATION AND DRILLING PLANS, FUTURE GENERAL AND ADMINISTRATIVE EXPENSES, FUTURE GROWTH, FUTURE EXPLORATION, FUTURE GEOPHYSICAL AND GEOLOGICAL DATA, GENERATION OF ADDITIONAL PROPERTIES, RESERVES, NEW PROSPECTS AND DRILLING LOCATIONS, FUTURE CAPITAL EXPENDITURES, SUFFICIENCY OF WORKING CAPITAL, ABILITY TO RAISE ADDITIONAL CAPITAL, PROJECTED CASH FLOWS FROM OPERATIONS, OUTCOME OF ANY LEGAL PROCEEDINGS, DRILLING PLANS, THE NUMBER, TIMING OR RESULTS OF ANY WELLS, INTERPRETATION AND RESULTS OF SEISMIC SURVEYS OR SEISMIC DATA, FUTURE PRODUCTION OR RESERVES, LEASE OPTIONS OR RIGHTS, PARTICIPATION OF OPERATING PARTNERS, CONTINUED RECEIPT OF ROYALTIES, AND ANY OTHER STATEMENTS REGARDING FUTURE OPERATIONS, FINANCIAL RESULTS, OPPORTUNITIES, GROWTH, BUSINESS PLANS AND STRATEGY. BECAUSE FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTIES, THERE ARE IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE EXPRESSED OR IMPLIED BY THESE FORWARD-LOOKING STATEMENTS. ALTHOUGH THE COMPANY BELIEVES THAT EXPECTATIONS REFLECTED IN THE FORWARD-LOOKING STATEMENTS ARE REASONABLE, IT CANNOT GUARANTEE FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS. MOREOVER, NEITHER THE COMPANY NOR ANY OTHER PERSON ASSUMES RESPONSIBILITY FOR THE ACCURACY AND COMPLETENESS OF THESE FORWARD-LOOKING STATEMENTS. THE COMPANY IS UNDER NO DUTY TO UPDATE ANY FORWARD-LOOKING STATEMENTS AFTER THE DATE OF THIS REPORT TO CONFORM SUCH STATEMENTS TO ACTUAL RESULTS.
 
 
 
 
PART I - Financial Information
 
ITEM 1. Financial Statements
 
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
 (Unaudited)
 
   
As of
March 31, 2016
   
As of
December 31, 2015
 
ASSETS
 
Current Assets:
           
Cash and cash equivalents
 
$
22,952
   
$
22,078
 
Accounts receivable, net of allowances for doubtful accounts of $1,825 and $1,743
   
10,015
     
12,460
 
Restricted and designated cash
   
186
     
185
 
Inventories
   
770
     
871
 
Prepaid expenses and other
   
2,268
     
2,679
 
Total Current Assets
   
36,191
     
38,273
 
                 
Property and Equipment, at cost – successful efforts method:
               
Oil and Gas properties
   
243,915
     
243,855
 
Advanced payment for equipment
   
440
     
440
 
Other
   
56,654
     
56,490
 
Total Property and Equipment
   
301,009
     
300,785
 
Accumulated depreciation, depletion, amortization and impairment
   
(237,256
)
   
(235,194
)
Net Property and Equipment
   
63,753
     
65,591
 
                 
Deferred tax assets and other
   
36,832
     
35,496
 
Deferred financing Costs
   
389
     
419
 
Restricted cash – long term
   
7,628
     
7,080
 
Investments
   
98
     
98
 
Total assets
 
$
144,891
   
$
146,957
 
                 
LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)
 
Current liabilities:
               
Accounts payable and accrued expenses
 
$
11,862
   
$
13,122
 
Bank overdraft
   
68
     
350
 
Short term debt and current maturities of long-term debt, net of discount of $818 and $820
   
9,675
     
9,602
 
Payables and accrued interest due to related party
   
63
     
63
 
Accrued Interest
   
947
     
950
 
Derivative liability
   
1,107
     
1,171
 
Total current liabilities
   
23,722
     
25,258
 
                 
Long term debt, net of discount of $3,547 and $3,748
   
102,053
     
104,252
 
                 
Other Long-term Liabilities:
               
Asset retirement obligations
   
20,104
     
19,884
 
Derivative liability
   
1,811
     
431
 
Total liabilities
   
147,690
     
149,825
 
                 
Commitments and contingencies
               
                 
Shareholders’ equity (deficit):
               
Common stock $0.01 par value; authorized 7,500,000 shares; issued 2,746,958 shares; outstanding 2,717,691 shares
   
27
     
27
 
Additional paid-in capital
   
23,853
     
23,853
 
Accumulated deficit
   
(22,894
)
   
(23,405
)
Treasury stock, 29,267 shares at cost
   
(164
)
   
(164
)
Total Isramco, Inc. shareholders’ equity (deficit)
   
822
     
311
 
Non controlling interest
   
(3,621
)
   
(3,179
)
Total deficit
   
(2,799
)
   
(2,868
)
Total liabilities and shareholders’ equity (deficit)
 
$
144,891
   
$
146,957
 
 
See notes to the unaudited condensed consolidated financial statements.  
 
 
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share amounts)
(Unaudited)
 
   
Three Months Ended March 31
 
   
2016
   
2015
 
             
Revenues
           
Oil and gas sales
 
$
9,090
   
$
10,525
 
Production services
   
3,298
     
5,815
 
Office services
   
151
     
158
 
Other
   
154
     
140
 
Total revenues
   
12,693
     
16,638
 
                 
Operating expenses
               
Lease operating expense, transportation and taxes
   
2,359
     
4,175
 
Depreciation, depletion and amortization
   
1,479
     
2,255
 
Impairments
   
583
     
-
 
Accretion expense
   
220
     
208
 
Production services
   
3,783
     
4,804
 
Loss (gain) from plug and abandonment
   
(30
)
   
2
 
General and administrative
   
1,086
     
1,097
 
Total operating expenses
   
9,480
     
12,541
 
Operating income
   
3,213
     
4,097
 
                 
Other expenses
               
Interest expense, net
   
1,180
     
-
 
Interest expense – related party, net
   
-
     
1,488
 
Loss from derivative contracts, net
   
1,671
     
-
 
Capital loss
   
17
     
10
 
Total other expenses
   
2,868
     
1,498
 
                 
Income before income taxes
   
345
     
2,599
 
Income tax expense
   
276
     
974
 
                 
Net income
 
$
69
   
$
1,625
 
Net loss attributable to non-controlling interests
   
(442
)
   
(181
)
Net income attributable to Isramco
 
$
511
   
$
1,806
 
                 
Earnings per share – basic:
 
$
0.19
   
$
0.66
 
                 
Earnings per share – diluted:
 
$
0.19
   
$
0.66
 
                 
Weighted average number of shares outstanding basic:
   
2,717,691
     
2,717,691
 
Weighted average number of shares outstanding diluted:
   
2,717,691
     
2,717,691
 

See notes to the unaudited condensed consolidated financial statements.
 
 
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
 
   
Three Months Ended March 31
 
   
2016
   
2015
 
Net income
 
$
69
   
$
1,625
 
Comprehensive income
   
69
     
1,625
 
Comprehensive loss attributable to non-controlling interests
   
(442
)
   
(181
)
Comprehensive Income attributable to Isramco
 
$
511
   
$
1,806
 
 
See notes to the unaudited condensed consolidated financial statements.

 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
   
Three months Ended
March 31,
 
   
2016
   
2015
 
             
Cash Flows From Operating Activities:
           
Net income
 
$
69
   
$
1,625
 
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation, depletion, amortization and impairment
   
2,062
     
2,255
 
Bad debt expense
   
82
     
56
 
Accretion expense
   
220
     
208
 
Changes in deferred taxes
   
(1,336
)
   
(650
)
Net unrealized loss on derivative contracts
   
1,316
     
-
 
Loss on sale of equipment and other
   
17
     
10
 
Amortization of debt cost
   
233
     
-
 
Changes in components of working capital and other assets and liabilities
               
Accounts receivable
   
2,363
     
4,047
 
Prepaid expenses, other receivables and other current assets
   
411
     
975
 
Due to related party
   
-
     
1,371
 
Inventories
   
101
     
(373
)
Accounts payable and accrued expenses
   
(1,265
)
   
(3,891
)
Net cash provided by operating activities
   
4,273
     
5,633
 
                 
Cash flows from investing activities:
               
Addition to property and equipment, net
   
(240
)
   
(2,466
)
Restricted cash and deposit, net
   
(548
)
   
-
 
Net cash used in investing activities
   
(788
)
   
(2,466
)
                 
Cash flows from financing activities:
               
Repayments on loans – related parties, net
   
-
     
(855
)
Repayment of long term debt
   
(1,800
)
   
-
 
Borrowings (repayments) of bank overdraft, net
   
(282
)
   
193
 
Payments of deferred financing costs
   
-
     
(125
)
Repayments of short - term debt, net
   
(529
)
   
(480
)
Net cash used in financing activities
   
(2,611
)
   
(1,267
)
                 
Net increase in cash and cash equivalents
   
874
     
1,900
 
Cash and cash equivalents at beginning of period
   
22,078
     
2,027
 
Cash and cash equivalents at end of period
 
$
22,952
   
$
3,927
 
 
See notes to the unaudited condensed consolidated financial statements.
 
 
Notes to Condensed Consolidated Financial Statements
(Unaudited)
 
Note 1 - Financial Statement Presentation
 
Isramco, Inc. and its subsidiaries and affiliated companies (together referred to as “We”, “Our”, “Isramco” or the “Company") is predominately an independent oil and natural gas company engaged in the exploration, development and production of oil and natural gas properties located onshore in the United States and ownership of various royalty interests in oil and gas concessions located offshore Israel. The Company also operates a production services company that provides well maintenance and workover services, well completion, and recompletion services.
 
The accompanying unaudited financial statements and notes of Isramco have been prepared pursuant to the rules and regulations of the United States Securities and Exchange Commission (the “Commission”). Pursuant to such rules and regulations, certain disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted. The accompanying financial statements and notes should be read in conjunction with the accompanying financial statements and notes included in Isramco’s Annual Report on Form 10-K for the year ended December 31, 2015.
 
Certain reclassifications have been made to the prior periods to conform to the current period presentation.
 
The accompanying unaudited interim financial statements furnished in this report reflect all adjustments that are, in the opinion of management, necessary to fairly present Isramco’s results of operations and cash flows for the three-month periods ended March 31, 2016 and 2015 and Isramco’s financial position as of March 31, 2016.

Use of Estimates

In preparing financial statements in accordance with accounting principles generally accepted in the United States, management makes informed judgments and estimates that affect the reported amounts of assets, liabilities, revenues, and expenses. Management evaluates its estimates and related assumptions regularly, including those related to the value of properties and equipment; proved reserves; intangible assets; asset retirement obligations; litigation reserves; environmental liabilities; liabilities, and costs; income taxes; and fair values. Changes in facts and circumstances or additional information may result in revised estimates, and actual results may differ from these estimates.
 
Consolidated interim period results are not necessarily indicative of results of operations or cash flows for the full year and accordingly, certain information normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States has been condensed or omitted. The Company has evaluated events or transactions through the date of issuance of these condensed consolidated financial statements. 

Concentrations of Credit Risk

Financial instruments, which potentially expose Isramco to concentrations of credit risk, consist primarily of interest rate swaps, cash equivalents, trade and joint interest accounts receivable. Isramco's customer base includes several of the major United States oil and gas operating and production companies as well as major power companies in Israel. Although Isramco is directly affected by the well-being of the oil and gas production industry, management does not believe a significant credit risk existed as of March 31, 2016. Isramco continues to monitor and review credit exposure of its marketing counter-parties.
 
Isramco entered into certain swap and cap agreements with Deutsche Bank AG London Branch to hedge the risk of interest rate volatility loan balances. See Note 3 for details.
 
Our production services segment customers include major oil and natural gas production companies and independent oil and natural gas production companies. We perform ongoing credit evaluations of our customers and usually do not require material collateral. We maintain reserves for potential credit losses when necessary. Our results of operations and financial position should be considered in light of the fluctuations in demand experienced by oilfield service companies as changes in oil and gas producers’ expenditures and budgets occur. These fluctuations can impact our results of operations and financial position as supply and demand factors directly affect utilization and hours which are the primary determinants of our net cash provided by operating activities.
 
Isramco maintains deposits in banks, which may exceed the amount of federal deposit insurance available. Management periodically assesses the financial condition of the institutions and believes that any possible deposit loss is minimal.
 
 
Risk Management Activities
 
The Company follows Accounting Standards Codification (ASC) 815, Derivatives and Hedging. From time to time, the Company may hedge a portion of its forecasted oil and natural gas production or may hedge interest rates on variable interest rate loans. Derivative contracts entered into by the Company have consisted of transactions in which the Company hedges the variability of cash flow related to a forecasted transaction. The Company has elected not to designate any of its positions for hedge accounting. Accordingly, the Company records the net change in the mark-to-market valuation of these positions, as well as payments and receipts on settled contracts, in “Net loss (gain) on derivative contracts” in the consolidated statements of operations. Currently, the Company has no derivative contracts in place to hedge against fluctuations in oil and natural gas prices.
  
Fair Value

Fair value accounting applies to reported balances that are required or permitted to be measured at fair value under existing accounting pronouncements. Fair value measurements are determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, these accounting requirements establish a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).

Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that we have the ability to access.

Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs might include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability (other than quoted prices), such as interest rates, foreign exchange rates, and yield curves that are observable at commonly quoted intervals.

Level 3 inputs are unobservable inputs for the asset or liability, and are typically based on an entity’s own assumptions, as there is little, if any, related market activity.

In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability. We utilize the fair value hierarchy in our accounting for interest rate swaps (Level 2).

Consolidation
 
The condensed consolidated financial statements include the accounts of Isramco and its subsidiaries. Inter-company balances and transactions have been eliminated in consolidation.
 
Impairment

We review our property and equipment in accordance with Accounting Standards Codification (ASC) 360, Property, Plant, and Equipment (ASC 360). ASC 360 requires us to evaluate property and equipment as an event occurs or circumstances change that would more likely than not reduce the fair value of the property and equipment below the carrying amount. If the carrying amount of property and equipment is not recoverable from its undiscounted cash flows, then we would recognize an impairment loss for the difference between the carrying amount and the current fair value. Further, we evaluate the remaining useful lives of property and equipment at each reporting period to determine whether events and circumstances warrant a revision to the remaining depreciation periods. During the three months ended March 31, 2016, the Company recognized impairment on the oil and gas properties in the amount of $583,000.
 
 
Asset Retirement Obligation
 
ASC 410, Asset Retirement and Environmental Obligations (ASC 410) requires that the fair value of an asset retirement cost, and corresponding liability, should be recorded as part of the cost of the related long-lived asset and subsequently allocated to expense using a systematic and rational method. The Company records asset retirement obligations to reflect the Company’s legal obligations related to future plugging and abandonment of its oil and natural gas wells and gas gathering systems. The Company estimates the expected cash flow associated with the obligation and discounts the amounts using a credit-adjusted, risk-free interest rate. At least annually, the Company reassesses the obligation to determine whether a change in the estimated obligation is necessary. The Company evaluates whether there are indicators that suggest the estimated cash flows underlying the obligation have materially changed. Should those indicators suggest the estimated obligation may have materially changed on an interim basis (quarterly), the Company will accordingly update its assessment.
 
Commitments and Contingencies

As is common within the oil and natural gas industry, we have entered into various commitments and operating agreements related to the exploration and development of and production from proved oil and natural gas properties. It is our belief that such commitments will be met without a material adverse effect on our financial position, results of operations or cash flows.
 
Aggregate maturities of contractual obligations at March 31, 2016 are due in future years as follows (in thousands):
 
Principal Payments on Long-term debt:
 
2016
    7,200  
2017
    9,600  
2018
    18,900  
2019
    21,900  
2020
    17,100  
2021
    14,700  
2022
    14,400  
2023
    11,400  
Total
  $ 115,200  
 
Note 2 - Supplemental Cash Flow Information
 
The Israeli taxing authority withheld taxes of $1,612,000 and $1,624,000 during the three months ended March 31, 2016 and 2015 respectively.
 
Cash payments for interest were $950,000 and $175,000 for the periods ended March 31, 2016 and 2015 respectively.
 
The condensed consolidated statement of cash flows for the period ended March 31, 2016 excludes the following non-cash transactions:
 
●   
Increase in property and equipment of $1,000 due to additional asset retirement obligation.
 
The condensed consolidated statement of cash flows for the period ended March 31, 2015 excludes the following non-cash transactions:
 
●   
Deferred financing costs of $150,000 were included in accounts payable.
●   
Property and equipment of $44,000 included in accounts payable.
●   
An increase in property and equipment of $27,000 due to additional asset retirement obligation.
●   
A related-party accrued interest payment of $31,000 withholding tax was included in accounts payable.
 
 
Note 3 - Financial Instruments and Fair Value

Pursuant to ASC 820, Fair Value Measurements and Disclosures (ASC 820) the Company's determination of fair value incorporates not only the credit standing of the counterparties involved in transactions with the Company resulting in receivables on the Company's consolidated balance sheets, but also the impact of the Company's non-performance risk on its own liabilities. ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The Company believes that it utilizes market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable. The Company classifies fair value balances based on the observability of those inputs.

On June 16, 2015, Tamar Royalties LLC, a wholly owned subsidiary of the Company, engaged in an interest rate swap agreement (“IRS Agreement”) with the Deutsche Bank AG London Branch (“DBAG”). An interest rate swap is an agreement between two parties (known as counterparties) where one stream of future interest payments is exchanged for another based on a specified notional principal amount. Interest rate swaps often exchange fixed interest payments for floating interest payments that are linked to interest rates.
 
As previously disclosed on the Company’s Form 8-K filed May 22, 2015, Tamar Royalties LLC entered into a $120,000,000 credit facility with Deutsche Bank, which facility is discussed further in Note 4 “Long-Term Debt and Interest Expense”. Under the terms of this facility, Tamar Royalties LLC, is required to hedge at least seventy-five percent (75%) of the outstanding balance under this Facility against fluctuations in LIBOR, with at least thirty seven and one-half percent (37.5%) of the outstanding balance being hedged through swaps. The notional value of these hedges corresponds to the amortization schedule covering the facility and previously disclosed in the aforementioned Form 8-K. Accordingly, on June 16, 2015, Tamar Royalties LLC and DBAG entered into the IRS agreement whereby the company hedged $119,250,000 of the $120,000,000 initial borrowing as follows:
 
(a)    Tamar Royalties LLC hedged 37.5% of the perpetual outstanding balance under the facility, being an initial notional amount of $45,000,000, with a fixed rate swap whereby the Company will pay DBAG a fixed interest rate of 4.63%, and DBAG will pay the Company a monthly floating interest rate of USD-LIBOR-BBA plus a spread of 2.75%.
 
(b)   Tamar Royalties hedged the remaining 62.5% of the perpetual outstanding balance less $750,000, being an initial notional amount of $74,250,000, against fluctuations in LIBOR by capping the fluctuations in LIBOR at 1.50%. Pursuant to the IRS agreement, the Company will pay DBAG a fixed interest rate of 0.91%, and the Bank will pay the Company the greater of (i) USD-LIBOR-BBA minus a cap strike of 1.5% and (ii) zero.
 
As a result of these financial instruments, the Company recorded a net loss from derivative contracts in the amount of $1,671,000 consisting of $1,316,000 of unrealized loss and $355,000 in cash settlements for the three months ended March 31, 2016.
 
Financial Instruments as of March 31, 2016 and December 31, 2015 consisted of the following (in thousands): 
 
       
March 31, 2016
   
December 31, 2015
 
Financial Instrument
 
Fair Value Input Level
 
Carrying
   
Fair
   
Carrying
   
Fair
 
       
Value
   
Value
   
Value
   
Value
 
                             
ST Liabilities:
                           
Interest rate swaps
 
Level 2
 
$
(1,107
)
 
$
(1,107
)
 
$
(1,171
)
 
$
(1,171
)
                                     
LT Liabilities:
                                   
Interest rate swaps
 
Level 2
   
(1,811
)
   
(1,811
)
   
(431
)
   
(431
)
                                     
       
$
(2,918
)
 
$
(2,918
)
 
$
(1,602
)
 
$
(1,602
)
 
Level 2 Financial Instruments
 
Our interest rate swaps are measured at fair value using Level 2 inputs. The fair of our interest rate swaps is based on the net present value of expected future cash flows related to both variable and fixed-rate legs of the swap agreement. This measurement is computed using the forward London Interbank Offered Rate (“LIBOR”) yield curve, a market-based observable input. 
 
 
Note 4 - Long-Term Debt and Interest Expense
 
Long-term debt as of March 31, 2016 and December 31, 2015 consisted of the following (in thousands):

 
  
As of 
March 31, 2016
   
As of
December 31, 2015
 
Bank loan
  
   
  
     
  
Principal amount
 
$
115,200
   
117,000
 
Less: unamortized discount and debt costs
   
(4,365
)
   
(4,568
)
Total long-term debt
   
110,835
     
112,432
 
Less: current maturities and current discount amortization
  
 
(8,782
)
   
(8,180
)
                 
Long-term debt, net of current maturities
 
$
102,053
  
 
$
104,252
  
 
Bank Loan and Credit Facility

The Deutsche Bank Facility

On May 18, 2015, Tamar Royalties LLC (“Tamar Royalties”), a newly formed, wholly-owned, special purpose subsidiary of the Company, entered into a term loan credit agreement (the “DB Facility”) with Deutsche Bank Trust Company Americas (“Deutsche Bank”), as facility agent for the lenders and as collateral agent for the secured parties, and with the lenders party thereto. The DB Facility provides for borrowings in the amount of $120,000,000 on a committed basis and is secured by, among other things, an overriding royalty interest in the Tamar Field, a natural gas field in the Mediterranean Sea, equal to 1.5375%, but is subject to increase to 2.7375% upon the Tamar project payout (the “Royalty Interest”). In connection with the DB Facility, and pursuant to a royalties sale and contribution agreement, the Company contributed the Royalty Interest to Tamar Royalties in exchange for all of the ownership units of Tamar Royalties. Pursuant to the terms of its governing documents, Tamar Royalties will be managed by N.M.A. Energy Resources Ltd, a related party of the Company, and an independent manager, Donald J. Puglisi.
 
Pursuant to the terms of the DB Facility, Tamar Royalties borrowed $120,000,000 in its initial borrowing under this facility. The initial borrowing under the DB Facility bears annual interest based on the LIBOR for a three-month interest period plus a spread of 2.75%. The $120,000,000 initial borrowing under the DB Facility will be repaid over eight (8) years commencing July 1, 2015, in accordance with an amortization profile based on projected cash flows from the Royalty Interest. Tamar Royalties’ obligations under the Facility are secured by a first ranking pledge of the shares of Tamar Royalties, first ranking pledge of all rights under the agreements creating the Royalty Interest, and a first priority security interest over the accounts created under the DB Facility.
 
So long as any amounts remain outstanding to the Lenders under the DB Facility, Tamar Royalties must, from and after the end of the Availability Period (as defined in the DB Facility), have a Historical Debt Service Coverage Ratio (as defined in the DB Facility) of not less than 1.00:1.00, a Loan Life Coverage Ratio (as defined in the DB Facility) of at least 1.1:1.00, and maintain a Required Reserve Amount (as defined in the DB Facility). The initial Required Reserve Amount was $4,680,000. In addition, Tamar Royalties is required under the DB facility to hedge against fluctuations in LIBOR as reflected in Note 3 “Financial Instruments and Fair Value”.

On January 1, 2016 the Company made a payment in the amount of $2,750,000 consisting of $1,800,000 and $950,000 in principal and in interest respectively.
 
The Company incurred debt costs in obtaining the DB facility in the amount of $2,011,000 and $2,959,000 in fees that were retained by the lenders. These costs totaling $4,970,000 are recorded as a reduction of the principal loan balance and are being amortized over the life of the loan using the effective interest method. Amortization of these costs for the three months ended March 31, 2016 totaled $203,000.

As of March 31, 2016, Tamar Royalties was in compliance with the financial covenants required under the DB Facility.
 
 
The Société Générale Facility
 
On June 30, 2015, Isramco Onshore LLC (“Isramco Onshore”), a newly formed, wholly-owned, subsidiary of Isramco, Inc. (the “Company”), entered into a secured Credit Agreement (the “SG Facility”) with The Société Générale, as Administrative Agent and Issuing Lender, SG Americas Securities LLC, as Sole Bookrunner, Lead Arranger and Documentation Agent, and the lenders party thereto from time to time, as Lenders. The SG Facility provides for a commitment by The Société Générale of $150,000,000, subject to an initial borrowing base of $40,000,000. The term of the SG Facility is four (4) years and the SG Facility is secured by certain onshore United States oil and gas properties. Pricing under the SG Facility is as follows: (i) for EuroDollar Rate (as defined in the SG Facility) loans range from the EuroDollar rate plus 1.75% to the EuroDollar rate plus 2.75% depending on borrowing base utilization; and (ii) for Reference Rate (as defined in the SG Facility) loans ranges from the Reference Rate plus 0.75% to the Reference Rate Spread plus 1.75% based on borrowing base utilization; (iii) a quarterly commitment fee (as defined in the SG Facility) ranging from an annual rate of 0.38% to 0.5% of the undrawn borrowing base.
 
The SG Facility provides that Isramco Onshore hedge at least seventy-five percent (75%) of its crude oil production before borrowing under the SG Facility. As of March 31, 2016 and as of the date of issuance Isramco Onshore has not entered into such hedge agreements nor has it made a draw under the SG Facility. The Company has incurred $478,000 of financing costs in relation to this credit facility which have been capitalized as a long-term asset and is being amortized over the term on the agreement on a straight-line basis. Amortization of these costs for the three months ended March 31, 2016 totaled $30,000.
 
Isramco Onshore has various financial and operating covenants required by the SG Facility, including, among other things, the requirement that, during the term of the SG Facility, Isramco Onshore must have a Minimum Current Ratio (as defined in the SG Facility) of not less than 1.00:1.00, a Maximum Leverage Ratio (as defined in the SG Facility) of not less than 4.00:1.00 and a Minimum Interest Coverage Ratio (as defined in the SG Facility) of at least 2.50:1.00. In addition, the SG Facility provides for customary events of default, including, but not limited to, payment defaults, breach of representations or covenants, bankruptcy events and change of control.
 
As of March 31, 2016, no amounts were drawn under the SG Facility and Isramco Onshore was in compliance with the financial covenants required under the SG Facility.
 
Short-Term Debt
 
As of March 31, 2016 and December 31, 2015 outstanding debt from short-term insurance financing agreements totaled $893,000 and $1,422,000 respectively. During the three months ended March 31, 2016, the Company made cash payments totaling $529,000. The Company also decreased its bank overdraft by $282,000.

Interest Expense

The following table summarizes the amounts included in interest expense for the three months ended March 31, 2016, and 2015:
 
 
  
Three Months Ended March 31,
 
   
2016
   
2015
 
   
(In thousands)
 
Current debt, long-term debt and other - banks
  
$
1,180
   
$
-
 
Long-term debt – related parties
   
-
     
1,488
 
 
  
             
 
  
$
1,180
   
$
1,488
 
 
  
 
Note 5 - Tamar Field Proceeds
 
We own an overriding royalty interest of 1.5375% in the Tamar Field, which will increase to 2.7375% after payout (collectively the “Tamar Royalty”).  An overriding royalty interest is an ownership interest in the oil and gas leasehold estate equating to a certain percentage of production or production revenues, calculated free of the costs of production and development of the underlying lease(s), but subject to its proportionate share of certain post production costs.  An overriding royalty interest is a non-possessory interest in the oil and gas leasehold estate and, accordingly, we have no control over the operations, drilling, expenses, timing, production, sales, or any other aspect of development or production of the Tamar Field. For additional information, please see the disclosure related to the Tamar Royalty set forth in the ITEM 1. BUSINESS section included in our Annual Report on Form 10-K for the year ended December 31, 2015, which disclosure is hereby incorporated herein by reference thereto.
 
In 2009, two natural gas discoveries, known as "Tamar" and "Dalit", were made within the area covered by the Michal and Matan Licenses, respectively. In December 2009, the Israeli Petroleum Commissioner granted Noble Energy, Inc. (“Noble”) and its partners, Isramco Negev 2-LP, Delek Drilling, Avner Oil & Gas, and Dor Gas (the “Tamar Consortium”), two leases (the “Leases”). The Leases are scheduled to expire in December 2038 and cover the Tamar and Dalit gas fields (collectively the “Tamar Field”). The Tamar Field is approximately 95 kilometers off the coast of the Israel, in the Israel exclusive economic zone of the Eastern Mediterranean, with a water depth of approximately 1,700 meters. On March 31, 2013 the Tamar Field commenced its initial production of the natural gas.
 
Since Isramco’s interest in the Tamar Field is an overriding royalty interest, there are no amounts capitalized with respect to Tamar Field.
 
During the three months ended March 31, 2016, Tamar Field net sales attributable to Isramco amounted to 1,186,421 Mcf of natural gas and 1,597 Bbl of condensate with prices of $5.39 per Mcf and $26.59 per Bbl of condensate. Total revenues net of marketing and transportations expenses were $6,446,000. The Israeli Tax Authority withheld $1,612,000 of this revenue which is recognized as a future tax credit, an asset on the Company’s condensed consolidated balance sheets.
 
During the three months ended March 31, 2015, Tamar Field net sales attributable to Isramco amounted to 1,069,514 Mcf of natural gas and 1,430 Bbl of condensate with prices of $5.67 per Mcf and $55.34 per Bbl of condensate. Total revenues net of marketing and transportations expenses were $6,128,000. The Israeli Tax Authority withheld $1,624,000 of this revenue which is recognized as a future tax credit, an asset on the Company’s condensed consolidated balance sheets.
 
 
 
Note 6 - Segment Information
 
Isramco’s primary business segments are vertically integrated within the oil and gas industry. These segments are separately managed due to distinct operational differences, unique technology, distribution and marketing requirements. The Company’s two reporting segments are oil and gas exploration and production and production services. The oil and gas exploration and production segment explores for and produces natural gas, crude oil, condensate, and natural gas liquids (“NGLs”). The production services segment is engaged in rig-based and workover services, well completion and recompletion services, plugging and abandonment of wells and other ancillary oilfield services.
 
Oil and Gas Exploration and Production Segment
 
Our Oil and Gas segment is engaged in the exploration, development and production of oil and natural gas properties located onshore in the United States and ownership of various royalty interests in oil and gas concessions located offshore Israel. We own varying working interests in oil and gas wells in Louisiana, Texas, New Mexico, Oklahoma, Wyoming, Utah and Colorado and currently serve as operator of approximately 515 producing wells located mainly in Texas in New Mexico.
 
Production Services Segment
 
The Company began production services operations in October 2011. Our production servicing rig and truck fleet provides a range of production services, including the completion of newly-drilled wells, maintenance and workover of existing wells, fluid transportation, related oilfield services and plugging and abandonment of wells at the end of their useful lives to a diverse group of oil and gas exploration and production companies.

●  
Completion Service. Newly drilled wells require completion services to prepare the well for production. Production servicing rigs are frequently used to complete newly drilled wells to minimize the use of higher cost drilling rigs in the completion process. The completion process may involve selectively perforating the well casing in the productive zones to allow oil or gas to flow into the well bore, stimulating and testing these zones, and installing the production string and other downhole equipment. The completion process typically ranges from a few days to several weeks, depending on the nature and type of the completion, and generally requires additional auxiliary equipment in addition to a production services rigs. The demand for completion services is directly related to drilling activity levels, which are sensitive to fluctuations in oil and gas prices.
 
●  
Well-servicing/Maintenance Services. We provide maintenance services on the mechanical apparatus used to pump or lift oil from producing wells. These services include, among other activities, repairing and replacing pumps, sucker rods and tubing. We provide the rigs, equipment and crews for these tasks, which are performed on both oil and natural gas wells, but which are more commonly required on oil wells. Maintenance services typically take less than 48 hours to complete. Rigs generally are provided to customers on a call-out basis.
 
●  
Workover Services. Producing oil and natural gas wells occasionally require major repairs or modifications, called “workovers.” Workovers may be required to remedy failures, modify well depth and formation penetration to capture hydrocarbons from alternative formations, clean out and recomplete a well when production has declined, repair leaks or convert a depleted well to an injection well for secondary or enhanced recovery projects. Workovers normally are carried out with pumps and tanks for drilling fluids, blowout preventers, and other specialized equipment for servicing rigs. A workover may last anywhere from a few days to several weeks.

●  
Fluid Services.  We own and operate 12 fluid service trucks equipped with an average fluid hauling capacity of up to 130 barrels a piece. Each fluid service truck is equipped to pump fluids from or into wells, pits, tanks and other storage facilities. The majority of our fluid service trucks are also used to transport water to fill frac tanks on well locations, to transport produced salt water to disposal wells, and to transport drilling and completion fluids to and from well locations.

●  
Plugging Services. Production servicing rigs are also used in the process of permanently closing oil and gas wells no longer capable of producing in economic quantities. Many well operators bid this work on a “turnkey” basis, requiring the service company to perform the entire job, including the sale or disposal of equipment salvaged from the well as part of the compensation received, and complying with state regulatory requirements. Plugging and abandonment work can provide favorable operating margins and is less sensitive to oil and gas pricing than drilling and workover activity since well operators must plug a well in accordance with state regulations when it is no longer productive. We perform plugging and abandonment work throughout our core areas of operation in conjunction with equipment provided by us or by other service companies.
 

We typically bill clients for our production servicing on an hourly basis for the period that the rig is actively working. As of March 31, 2016, our fleet of production servicing rigs totaled 33 rigs, which we operate through 5 locations in Texas and New Mexico.
 
thousands
 
Oil and Gas
Exploration
 & Production
   
Production Services
   
Eliminations
   
Total
 
Three Months Ended March 31, 2016:
                       
Sales revenues
                               
United States
 
$
2,644
   
$
3,298
   
$
-
   
$
5,942
 
Israel
   
6,446
     
 -
     
 -
     
6,446
 
Intersegment revenues
   
-
     
-
     
-
     
-
 
Office services and other
   
335
     
-
     
(30
)
   
305
 
                                 
Total revenues and other
   
9,425
     
3,298
     
(30
)
   
12,693
 
                                 
Impairment expense
   
583
     
-
     
-
     
583
 
Operating costs and expenses
   
4,250
     
4,677
     
(30
)
   
8,897
 
Interest expenses, net
   
348
     
832
     
-
     
1,180
 
Loss on derivative contracts
   
1,671
     
-
     
-
     
1,671
 
Capital loss
   
17
     
-
     
-
     
17
 
                                 
Total expenses and other
   
6,869
     
5,509
     
(30
)
   
12,348
 
                                 
Income (loss) before income taxes
 
$
2,556
   
$
(2,211
)
 
$
-
   
$
345
 
Net Income (loss)
   
1,661
     
(1,592
)
   
-
     
69
 
Net loss attributable to noncontrolling interests
   
-
     
(442
)
   
-
     
(442
)
Net income (loss) attributable to Isramco
   
1,661
     
(1,150
)
   
-
     
511
 
Total Assets
 
$
103,768
   
$
41,123
   
$
 -
   
$
144,891
 
Expenditures for Long-lived Assets
 
$
113
   
$
170
   
$
 -
   
$
283
 
 
thousands
 
Oil and Gas
Exploration
 & Production
   
Production Services
   
Eliminations
   
Total
 
Three Months Ended March 31, 2015:
                       
Sales revenues
                               
United States
 
$
4,397
   
$
5,815
   
$
-
   
$
10,212
 
Israel
   
6,128
     
 -
     
 -
     
6,128
 
Intersegment revenues
   
-
     
-
     
-
     
-
 
Office services and other
   
328
     
-
     
(30
)
   
298
 
                                 
Total revenues and other
   
10,853
     
5,815
     
(30
)
   
16,638
 
                                 
Operating costs and expenses
   
6,662
     
5,909
     
(30
)
   
12,541
 
Interest expenses, net
   
694
     
794
     
-
     
1,488
 
Capital (gain) loss
   
(7
)
   
17
     
-
     
10
 
                                 
Total expenses and other
   
7,349
     
6,720
     
(30
)
   
14,039
 
                                 
Income before income taxes
 
$
3,504
   
$
(905
)
 
$
-
   
$
2,599
 
Net Income (loss)
   
2,277
     
(652
)
   
-
     
1,625
 
Net loss attributable to noncontrolling interests
   
-
     
(181
)
   
-
     
(181
)
Net income (loss) attributable to Isramco
   
2,277
     
(471
)
   
-
     
1,806
 
Total Assets
 
$
100,046
   
$
57,209
   
$
 -
   
$
157,255
 
Expenditures for Long-lived Assets
 
$
1,610
   
$
960
   
$
 -
   
$
2,570
 
 
 
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
THE FOLLOWING COMMENTARY SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES CONTAINED ELSEWHERE IN THIS REPORT ON FORM 10-Q. THE DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THESE STATEMENTS RELATE TO FUTURE EVENTS OR OUR FUTURE FINANCIAL PERFORMANCE. IN SOME CASES, YOU CAN IDENTIFY THESE FORWARD-LOOKING STATEMENTS BY TERMINOLOGY SUCH AS “MAY,” “WILL,” “SHOULD,” “EXPECT,” “PLAN,” “ANTICIPATE,” “BELIEVE,” “ESTIMATE,” “PREDICT,” “POTENTIAL,” “INTEND,” OR “CONTINUE,” AND SIMILAR EXPRESSIONS. THESE STATEMENTS ARE ONLY PREDICTIONS. OUR ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF A VARIETY OF FACTORS, INCLUDING, BUT NOT LIMITED TO, THOSE SET FORTH UNDER “RISK FACTORS” AND ELSEWHERE IN THIS REPORT ON FORM 10-Q. ISRAMCO INC. DISCLAIMS ANY OBLIGATION TO UPDATE SUCH FORWARD LOOKING STATEMENTS.
 
Overview
 
Isramco is predominately an independent oil and natural gas company engaged in the exploration, development and production of oil and natural gas properties located onshore in the United States and ownership of various royalty interests in oil and gas concessions located offshore Israel. The Company also operates a production services company that provides well maintenance, workover services, well completion and recompletion services. Our properties are primarily located in Texas, New Mexico and Oklahoma. We also act as the operator of a certain number of these properties. Historically, we have grown through acquisitions, with a focus on properties within our core operating areas that we believe have significant development and exploration opportunities and where we can apply our technical experience and economies of scale to increase production and proved reserves, while lowering lease operating costs.
 
We own an overriding royalty interest of 1.5375% in the Tamar Field, which will increase to 2.7375% after payout (collectively the “Tamar Royalty”).  An overriding royalty interest is an ownership interest in the oil and gas leasehold estate equating to a certain percentage of production or production revenues, calculated free of the costs of production and development of the underlying lease(s), but subject to its proportionate share of certain post production costs.  An overriding royalty interest is a non-possessory interest in the oil and gas leasehold estate and, accordingly, we have no control over the operations, drilling, expenses, timing, production, sales, or any other aspect of development or production of the Tamar Field. For additional information, please see the disclosure related to the Tamar Royalty set forth in the ITEM 1. BUSINESS section included in our Annual Report on Form 10-K for the year ended December 31, 2015, which is incorporated by reference herein.
 
As noted above in Note 4 to the Company’s condensed consolidated financial statements, in 2009 two natural gas discoveries known as "Tamar" and "Dalit" were made within the area covered by the Michal and Matan Licenses respectively and are known as the Tamar Field. In December 2009 the Israeli Petroleum Commissioner granted Noble Energy, Inc. (“Noble”) and its partners, Isramco Negev 2-LP, Delek Drilling, Avner Oil & Gas, and Dor Gas (the “Tamar Consortium”), two leases (the “Leases”). The Leases are scheduled to expire in December 2038. The Tamar Field is approximately 95 kilometers off the coast of the Israel in the Israel exclusive economic zone of the Eastern Mediterranean with a water depth of approximately 1,700 meters. On March 31, 2013, the Tamar Field began its initial production of the natural gas.
 
During the three months ended March 31, 2016, Tamar Field net sales attributable to Isramco amounted to 1,186,421 Mcf of natural gas and 1,597 Bbl of condensate with prices of $5.39 per Mcf and $26.59 per Bbl of condensate. Total revenues net of marketing and transportations expenses were $6,446,000. Israeli Tax Authorities withheld $1,612,000 of this revenue which is recognized as a future tax credit, an asset on the Company’s condensed consolidated balance sheets.
 
Our financial results depend upon many factors, but are largely driven by the volume of our oil and natural gas production and the prices received for that production. Our production volumes will decline as reserves are depleted unless we expend capital in successful development and exploration activities or acquire additional properties with existing production. The amount we realize for our production depends predominantly upon commodity prices, which are affected by changes in market demand and supply, as impacted by overall economic activity, weather, pipeline capacity constraints, inventory storage levels, basis differentials and other factors, and secondarily upon our commodity price hedging activities. Accordingly, finding and developing oil and natural gas reserves at economical costs is critical to our long-term success. Our future drilling plans are subject to change based upon various factors, some of which are beyond our control, including drilling results, oil and natural gas prices, the availability and cost of capital, drilling and production costs, availability of drilling services and equipment, gathering system and pipeline transportation constraints and regulatory approvals. To the extent these factors lead to reductions in our drilling plans and associated capital budgets in future periods, our financial position, cash flows and operating results could be adversely impacted. 
 
 
Concentrations of Credit Risk

Our production services segment customers include major oil and natural gas production companies and independent oil and natural gas production companies. We perform ongoing credit evaluations of our customers and usually do not require material collateral. We maintain reserves for potential credit losses when necessary. Our results of operations and financial position should be considered in light of the fluctuations in demand experienced by oilfield service companies as changes in oil and gas producers’ expenditures and budgets occur. These fluctuations can impact our results of operations and financial position as supply and demand factors directly affect utilization and hours which are the primary determinants of our net cash provided by operating activities.
 
Isramco maintains deposits in banks, which may exceed the amount of federal deposit insurance available. Management periodically assesses the financial condition of the institutions and believes that any possible deposit loss is minimal.
 
Liquidity and Capital Resources
  
Our primary source of cash during the three months ended March 31, 2016 was cash flow from operating activities. We continuously monitor our liquidity and evaluate our development plans in light of a variety of factors, including, but not limited to, our cash flows, capital resources and drilling success.
 
Our future capital resources and liquidity may depend, in part, on our success in developing the leasehold interests that we have acquired. Cash is required to fund capital expenditures necessary to offset inherent declines in production and proven reserves, which is typical in the capital-intensive oil and gas industry. Future success in growing reserves and production will be highly dependent on the capital resources available and our success in finding and acquiring additional reserves. Our production services subsidiary also requires capital resources to acquire and maintain equipment and continue growth. We expect to fund our future capital requirements through internally generated cash flows, borrowings under loans from related parties, and a future credit facility. Long-term cash flows are subject to a number of variables, including the level of production, prices, amount of work orders received, and our commodity price hedging activities, as well as various economic conditions that have historically affected the oil and natural gas industry.

On May 18, 2015, the Company entered into a term loan credit agreement with Deutsche Bank Trust Company Americas (“Deutsche Bank”) in the amount of $120,000,000 secured by the Company’s interest in the Tamar field. Interest on the borrowing is variable. The Company entered into interest rate swap agreements in relation to this borrowing. The terms of the agreement and swaps are disclosed in Notes 3 and 4.
 
On June 30, 2015, the Company obtained a credit facility with The Societe Generale. The facility provides for a commitment by Societe Generale of $150,000,000, subject to an initial borrowing base of $40,000,000. The tenor of the SG Facility is four (4) years and it is secured by certain onshore United States oil and gas properties. Interest on borrowing is variable as disclosed in Note 4.
  
During the three months ended March 31, 2016, our cash increased by $0.9 million. Specifically, the net cash provided by operating activities of $4.3 million were offset by an investment of $0.8 million in production services equipment and oil and gas properties and restricted cash deposits, $1.8 million in repayments of long term debt, $0.5 million in repayments of short-term debt and $0.3 million in repayments of bank overdraft.
 
Debt:

   
As of 
March 31,
 
As of
December 31,
 
In thousands   
2016
   
2015
 
Long – term debt net of discount and bank fees
 
$
102,053
   
$
104,252
 
                 
Current maturities of long-term debt, short-term debt, current portion of discount and debt cost and bank overdraft
   
9,743
     
9,952
 
Total debt
 
$
111,796
   
$
114,204
 
                 
Stockholders’ equity
 
$
(2,799
)
 
$
(2,868
)
                 
Debt to capital ratio
   
100
%
   
100
%
 
As of March 31, 2016, our total debt was $111,796,000, compared to total debt of $114,204,000 at December 31, 2015.
 
 
Contractual Obligations

Aggregate maturities of contractual obligations at March 31, 2016 are due in future years as follows (in thousands):
 
Principal Payments on Long-term debt:
 
2016
 
7,200
 
2017
 
9,600
 
2018
 
18,900
 
2019
 
21,900
 
2020
 
17,100
 
2021
 
14,700
 
2022
 
14,400
 
2023
 
11,400
 
Total
 
$
115,200
 
 
Cash Flow
 
Our primary source of cash during the three months ended March 31, 2016 was cash flow from operating activities. In the first quarter of 2016, cash received from operations was primarily used for investments in production services equipment, oil and gas properties, increase of restricted cash deposit and repayment of short term and long term loans. In the first quarter of 2015, cash received from operations was primarily used for investments in production services equipment and oil and gas properties and repayment of loans.
 
Operating cash flow fluctuations were substantially driven by changes in commodity prices and changes in our production volumes. Working capital was substantially influenced by these variables. Fluctuation in commodity prices and our overall cash flow may result in an increase or decrease in our future capital expenditures. Prices for oil and natural gas have historically been subject to seasonal fluctuations characterized by peak demand and higher prices in the winter heating season; however, the impact of other risks and uncertainties have influenced prices throughout recent years. See Results of Operations below for a review of the impact of prices and volumes on sales. 
 
   
Three months Ended March 31,
 
   
2016
   
2015
 
   
(In thousands)
 
Cash flows provided by operating activities
 
$
4,273
   
$
5,633
 
Cash flows used in investing activities
   
(788
   
(2,466
Cash flows used in financing activities
   
(2,611
   
(1,267
Net increase in cash
 
$
874
   
$
1,900
 
 
 
Operating Activities.  During the three months ended March 31, 2016, compared to the same period in 2015, net cash flow provided by operating activities decreased by $1,360,000 to $4,273,000. The decrease was primarily attributable to lower commodity prices received for our United States Oil, Natural Gas, and NGL sales and a decrease in revenues from our production services segment.
 
Investing Activities.  Net cash flows used in investing activities for the three months ended March 31, 2016 and 2015 were $788,000 and $2,466,000, respectively. During the first three months of 2016, the Company invested $788,000, consisting of $70,000 for oil and gas properties, $170,000 in production services equipment and $548,000 increase in restricted cash. During the first three months of 2015, the Company invested $2,466,000, consisting of $1,555,000 for oil and gas properties and $911,000 in production services equipment.
 
Financing Activities.  Net cash flows used in financing activities were $2,611,000 and $1,267,000 for the three months ended March 31, 2016 and 2015, respectively. During the first three months of 2016 the Company made payments on long term debt of $1,800,000, made payments on short term debt and bank overdraft in the amount of $811,000. During the first three months of 2015 the Company made payments on related party debt of $855,000, made payments on short term debt in the amount of $480,000, paid deferred financing costs of $125,000, and increased its bank overdraft by $193,000. 
 
 
Results of Operations

Three Months Ended March 31, 2016 Compared to Three Months Ended March 31, 2015
 
Selected Data
   
Three Months Ended March 31,
 
   
2016
   
2015
 
   
(In thousands except per share
and BOE amounts)
 
Financial Results
           
Oil and Gas sales
               
United States
 
$
2,644
   
$
4,397
 
Israel
   
6,446
     
6,128
 
Production Services
   
3,298
     
5,815
 
Other
   
305
     
298
 
Total revenues and other
   
12,693
     
16,638
 
                 
Cost and expenses
   
9,480
     
12,541
 
Other expenses
   
2,868
     
1,498
 
Income tax expense
   
276
     
974
 
Net income attributable to common shareholders
   
69
     
1,625
 
Net income (loss) attributable to non-controlling interests
   
(442
)
   
(181
)
Net income attributable to Isramco
   
511
     
1,806
 
Earnings per common share – basic
 
$
0.19
   
$
0.66
 
Earnings per common share – diluted
 
$
0.19
   
$
0.66
 
                 
Weighted average number of shares outstanding- basic
   
2,717,691
     
2,717,691
 
Weighted average number of shares outstanding- diluted
   
2,717,691
     
2,717,691
 
                 
Operating Results
               
Adjusted EBITDAX (1)
 
$
5,123
   
$
6,550
 
Sales volumes United States (MBOE)
   
138
     
153
 
Sales volumes Israel (MBOE)
   
199
     
180
 
                 
Average cost per BOE United States: (2)
               
Production (excluding transportation and taxes)
 
$
13.58
   
$
23.03
 
General and administrative (oil and gas production segment)
 
$
6.88
   
$
6.21
 
Depletion
 
$
5.47
   
$
8.67
 
 
(1)  
See Adjusted EBITDAX for a description of Adjusted EBITDAX, which is not a Generally Accepted Accounting Principles (GAAP) measure, and a reconciliation of Adjusted EBITDAX to income from operations before income taxes, which is presented in accordance with GAAP.
 
(2)  
There are no costs associated with revenues from Israeli operations since the Company owns overriding royalty which is free of operating expenses.
 
 
Financial Results

Net income in the first quarter of 2016 was $511,000 or $0.19 per share. This compares to net income in the first quarter of 2015 of $1,806,000 or $0.66 per share.
 
This decrease was primarily due to the decrease in oil, natural gas and NGLs prices, and a resulting decrease in both the revenues from production service activities, and oil and gas operations in United States.

Revenues, Volumes and Average Prices Oil and Gas Segment - Israel

During the three months ended March 31, 2016 the Tamar Field net sales applicable to Isramco amounted to 1,186,421 Mcf of natural gas and 1,597 Bbl of condensate with prices of $5.39 per Mcf and $26.59 per Bbl of condensate. Total revenues net of marketing and transportations expenses were $6,446,000. 
 
During the three months ended March 31, 2015 the Tamar Field net sales applicable to Isramco amounted to 1,069,514 Mcf of natural gas and 1,430 Bbl of condensate with prices of $5.67 per Mcf and $55.34 per Bbl of condensate. Total revenues net of marketing and transportations expenses were $6,128,000. 
 
Revenues, Volumes and Average Prices Oil and Gas Segment – United States
 
Sales Revenues
 
   
Three Months Ended March 31,
 
In thousands except percentages
 
2016
   
2015
   
D vs. 2015
 
Gas sales
 
$
670
   
$
999
     
(33
)%
Oil sales
   
1,729
     
3,019
     
(43
)
Natural gas liquid sales
   
245
     
379
     
(35
)
Total
 
$
2,644
   
$
4,397
     
(40
)%
 
The Company’s sales revenues from U.S. based oil and gas operations for the first quarter of 2016 decreased by 40% when compared to same period in 2015 due to lower prices received for oil, natural gas, and NGLs, and lower volumes produced of crude oil, natural gas, and NGLs. 
 
Volumes and Average Prices
 
   
Three Months Ended March 31,
 
   
2016
   
2015
   
D vs. 2015
 
Natural Gas
                 
Sales volumes Mmcf
   
351.5
     
390.6
     
(10
)%
Average Price per Mcf
 
$
1.91
   
$
2.56
     
(25
)
Total gas sales revenues (thousands)
 
$
670
   
$
999
     
(33
)%
                         
Crude Oil
                       
Sales volumes MBbl
   
58.4
     
65.8
     
(11
)%
Average Price per Bbl
 
$
29.58
   
$
45.86
     
(36
Total oil sales revenues (thousands)
 
$
1,729
   
$
3,019
     
(43
)%
                         
Natural gas liquids
                       
Sales volumes MBbl
   
20.7
     
22.2
     
(7
)%
Average Price per Bbl
 
$
11.84
   
$
17.11
     
(31
)
Total natural gas liquids sales revenues (thousands)
 
$
245
   
$
379
     
(35
)%

In the United States the Company’s natural gas sales volumes decreased by 10%, crude oil sales volumes decreased by 11%, and natural gas liquids sales volumes decreased by 7% for the first quarter of 2016 compared to the same period of 2015.
 
The Company’s average natural gas price received for the first quarter of 2016 decreased by 25%, or $0.65 per Mcf, when compared to the same period of 2015. The Company’s average crude oil price for the first quarter of 2016 decreased by 36%, or $16.28 per Bbl, when compared to the same period of 2015. Our average natural gas liquids price for the first quarter of 2016 decreased by 31%, or $5.27 per Bbl, when compared to the same period of 2015.
 
 
Analysis of Oil and Gas Operations Sales Revenues
 
The following table provides a summary of the effects of changes in volumes and prices on Isramco’s United States sales revenues for the three months ended March 31, 2016 compared to the same period of 2015.

In thousands
 
Natural Gas
   
Oil
   
Natural gas liquids
 
2015 sales revenues
 
$
999
   
$
3,019
   
$
379
 
Changes associated with sales volumes
   
(100
)
   
(338
   
(25
)
Changes in prices
   
(229
)
   
(952
   
(109
)
2016 sales revenues
 
$
670
   
$
1,729
   
$
245
 

Operating Expenses (excluding production services segment)
 
   
Three Months Ended March 31,
In thousands except percentages
 
2016
   
2015
   
D vs. 2015
Lease operating expense, transportation and taxes
 
$
2,359
   
$
4,175
     
(43
)%
Depreciation, depletion and amortization of oil and gas properties
   
753
     
1,327
     
(43
)
Impairment of oil and gas properties
   
583
     
-
     
100
 
Accretion expense
   
220
     
208
     
6
 
Loss (gain) from plugging and abandonment of wells
   
(30
)
   
2
     
NM
 
General and administrative
   
948
     
950
     
NM
 
   
$
4,833
   
$
6,662
     
(27
)%
 
During three months ended March 31, 2016, our operating expenses decreased by 27% when compared to the same period of 2015 due to the following factors:
 
·
Lease operating expense, transportation cost and taxes decreased by 43%, or $1,816,000, in 2016 when compared to 2015 due to fewer workovers, more favorable pricing with vendors, decreased severance taxes and marketing expenses as a result of decline in oil and natural gas prices and decrease in payroll expenses associated with field personnel.  On a per unit basis, lease operating expenses (excluding transportation and taxes) decreased by $9.45 per MBOE to $13.58 per MBOE in 2016 from $23.03 per MBOE in 2015.
 
·
Depreciation, Depletion & Amortization (“DD&A”) of the cost of proved oil and gas properties is calculated using the unit-of-production method. Our DD&A rate and expense are the composite of numerous individual field calculations. There are several factors that can impact our composite DD&A rate and expense including, but not limited to, field production profiles, drilling or acquisition of new wells, disposition of existing wells, and reserve revisions (upward or downward) primarily related to well performance and commodity prices, and impairments. Changes in these factors may cause our composite DD&A rate and expense to fluctuate from period to period.  DD&A decreased by 43%, or $574,000 in 2016 when compared to 2015 primarily due to a 2015 impairment of $33,138,000 on the depletable base used to calculate DD&A and decrease in production. On a per unit basis, depletion expense decreased by $3.20 per MBOE to $5.47 per MBOE in 2016 from $8.67 per MBOE in 2015.
 
·
Impairment of oil and gas properties in the amount of $583,000 occurred in the first quarter of 2016 as a result of significant drops in commodity futures prices. No such triggering event occurred in the same period of 2015.
 
Production Services Segment
 
   
Three Months Ended March 31,
 
In thousands except percentages
 
2016
   
2015
   
D vs. 2015
 
Production Services (1)
 
$
3,298
   
$
5,815
     
(43
)%
Operating expenses
   
3,783
     
4,804
     
(21
)
Depreciation
   
726
     
928
     
(22
)
General and administrative
   
168
     
177
     
(5
)
Operating Income
 
$
(1,379
)
 
$
(94
)
   
(1,367
)%
 
(1)  
Production Services revenue includes intersegment revenues.
 
 
·
Our sales revenues from production services operations for the first quarter of 2016 decreased by 43% or $2,517,000 when compared to same period in 2015 due to a decrease in the prices that we charge our customers and the number of rigs deployed as a result in lower demand for our services caused by declined oil and gas prices. 
 
·
Operating expenses from production services operations for the first quarter of 2016 decreased by 21% or $1,021,000 when compared to the same period in 2015.
 
·
Production service equipment depreciation – the amounts represent depreciation of production services rigs and auxiliary equipment for our production services subsidiary. The depreciation expenses for the first quarter of 2016 totaled $726,000, a decrease of $202,000 compared to the same period in 2015. This decrease in depreciation is primarily a result of a $10,566,000 2015 impairment which reduced the depreciable base.
 
·
General and administrative expenses from production services operations for the first quarter of 2016 totaled $168,000, a decrease of $9,000 compared to the same period in 2015.
 
Other expenses

   
Three Months Ended March 31,
In thousands except percentages
 
2016
   
2015
   
D vs. 2015
 
Interest expense, net
 
$
1,180
   
$
1,488
     
(21
)%
Loss on interest rate swap
   
1,671
     
-
     
100
 
Capital loss
   
17
     
10
     
70
 
   
$
2,868
   
$
1,498
     
91
%
 
Interest expense.  Isramco’s interest expense decreased by 21%, or $308,000, for the three months ended March 31, 2016 compared to the same period of 2015.  This decrease was primarily due to a lower interest rates during the first quarter of 2016 compared to 2015.

Unrealized loss on interest rate swap. Isramco entered into an interest rate swap agreement with Deutsche Bank at the end of the second quarter of 2015. For the first quarter of 2016 we recorded a loss as a result of changes in fair value of the derivative in the amount of $1,316,000 and a cash settlement of $355,000. Isramco had no similar transaction for the same period of the previous year.
 
Adjusted EBITDAX.  
 
To assess the operating results of Isramco, management analyzes income from operations before income taxes, interest expense, exploration expense, unrealized gain (loss) on derivative contracts and DD&A expense and impairments (“Adjusted EBITDAX”). Adjusted EBITDAX is not a GAAP measure. Isramco’s definition of Adjusted EBITDAX excludes exploration expense because exploration expense is not an indicator of operating efficiency for a given reporting period, but rather is monitored by management as a part of the costs incurred in exploration and development activities. Similarly, Isramco excludes DD&A expense and impairments from Adjusted EBITDAX as a measure of segment operating performance because capital expenditures are evaluated at the time capital costs are incurred. The Company’s definition of Adjusted EBITDAX also excludes interest expense to allow for assessment of segment operating results without regard to Isramco’s financing methods or capital structure. Adjusted EBITDAX is a widely accepted financial indicator of a company’s ability to incur and service debt, fund capital expenditures and make payments on its long term loans. Management believes that the presentation of Adjusted EBITDAX provides information useful in assessing the Company’s financial condition and results of operations.
 
However, Adjusted EBITDAX, as defined by Isramco, may not be comparable to similarly titled measures used by other companies. Therefore, Isramco’s consolidated Adjusted EBITDAX should be considered in conjunction with income (loss) from operations and other performance measures prepared in accordance with GAAP, such as operating income or cash flow from operating activities. Adjusted EBITDAX has important limitations as an analytical tool because it excludes certain items that affect income from continuing operations and net cash provided by operating activities. Adjusted EBITDAX should not be considered in isolation or as a substitute for an analysis of Isramco’s results as reported under GAAP. Below is a reconciliation of consolidated Adjusted EBITDAX to income (loss) from operations before income taxes.
 
   
Three Months Ended March 31,
 
In thousands except percentages
 
2016
   
2015
 
Income from operations before income taxes
 
$
345
   
$
2,599
 
Depreciation, depletion and amortization expense
   
1,479
     
2,255
 
Impairment of oil and gas properties
   
583
     
-
 
Interest expense
   
1,180
     
1,488
 
Unrealized loss on interest rate swap
   
1,316
     
-
 
Accretion expense
   
220
     
208
 
Consolidated Adjusted EBITDAX
 
$
5,123
   
$
6,550
 
 
 
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
 
Derivative Instruments and Hedging Activity
 
We are exposed to various risks, including risks associated with energy commodity price. If oil and natural gas prices decline significantly, our ability to finance our capital budget and operations could be adversely impacted. We expect energy prices to remain volatile and unpredictable, therefore we have adopted a risk management policy which allows for the use of derivative instruments to provide partial protection against declines in oil and natural gas prices by reducing the risk of price volatility and the affect it could have on our operations. The type of derivative instrument that we typically utilize is swaps. The total volumes which we hedge through the use of our derivative instruments vary from period to period.  Currently, we have no open positions or contracts in place.
 
When such contracts are in place, we are exposed to market risk on our open derivative contracts of non-performance by our counterparties. However, we usually do not expect such non-performance because our contracts are usually with major financial institutions with investment grade credit ratings.
 
We are also exposed to interest rate risk on our variable interest rate debt. If interest rates increase, our interest expense would increase and our available cash flow would decrease. We continue to monitor our risk exposure as we incur future indebtedness at variable interest rates and will look to continue our risk management policy as situations present themselves. Periodically, we look to utilize interest rate swaps to reduce the exposure to market rate fluctuations by converting variable interest rates to fixed interest rates.
 
We account for our derivative activities under the provisions of ASC 815, Derivatives and Hedging (ASC 815). ASC 815 establishes accounting and reporting that every derivative instrument be recorded on the balance sheet as either an asset or liability measured at fair value. See Item 1. Consolidated Financial Statements.
 
ITEM 4. Controls and Procedures
 
Evaluation of Disclosure Controls and Procedures.
 
In accordance with Exchange Act Rule 13a-15 and 15d-15, we carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of March 31, 2016 to provide reasonable assurance that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Our disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer as appropriate, to allow timely decisions regarding required disclosure.
 
There were no changes in the Company’s internal control over financial reporting that occurred during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. 
 
 
PART II - Other Information
 
ITEM 1. Legal Proceedings
 
On or about September 21, 2011, the Company’s former Vice President and General Counsel, Dennis Holifield resigned. Mr. Holifield had been hired in March 2011. On or about October 12, 2011, Mr. Holifield submitted a “Summary Report” to the SEC (the “Summary Report”), in which made numerous factual allegations regarding Haim Tsuff, the Company‘s Chief Executive Officer, Chairman, and President; Edy Francis, the Company’s Chief Financial Officer; Amir Sanker, the Company’s Asset Manager; and other Company personnel. In the Summary Report, Mr. Holifield characterized the alleged conduct as illegal or criminal. On November 3, 2011, the Company’s Board of Directors constituted a committee of independent directors consisting of Max Pridgeon and Asaf Yarkoni, referred to as the Special Investigative Committee of the Board of Directors (“SIC”) which was directed to investigate all of the Holifield allegations and report back to the full board and make any recommendations, if any, for corrective action. On January 7, 2013, SIC made their final report to the Board of Directors of the conclusions and results of the fourteen-month investigation into the allegations made by Mr. Holifield. The SIC determined that Mr. Holifield’s allegations were not supported by any available documentary evidence or by any statements made by former or current Isramco, Inc., directors, management, or employees interviewed by the SIC or its counsel. The SIC also determined that the Company had not engaged in wrongdoing of any sort including any unlawful or unethical business practices, any lapses in financial controls, or any governance issues that require redress or reform.
 
On September 10, 2013, the Company filed suit against Mr. Holifield in Cause No. 201352927 of the 270th Judicial District Court of Harris County, Texas, to collect damages estimated in the amount of $1,000,000.00 owing to the Company by virtue of Mr. Holifield’s actions, which are alleged in the suit to include, but are not limited to, negligence, negligence per se, gross negligence, and breach of fiduciary duty owed to the Company. In response, in December 2013, Mr. Holifield filed a pro se answer which included counterclaims and a summary judgment motion. In his counterclaims. Mr. Holifield seeks to recover from the Company the following damages, inter alia: (i) over $2,000,000 for loss of income and failure to secure gainful employment arising from his constructive discharge or termination by the Company; (ii) over $2,000,000 for loss of earnings due to his alleged inability to obtain gainful employment by virtue of the damage caused to his professional reputation by alleged willful and deliberate acts of Haim Tsuff, Edy Francis, and Amir Sanker, (iii) over $2,000,000 due to the intentional infliction of emotional distress to Mr. Holifield; (iv) an amount estimated at $5,000,000 arising from Mr. Holifield’s claim that the Company violated the Racketeer Influenced Corrupt Organizations Act, by engaging in racketeering and conspiracy; (v) over $5,000,000 arising from the Company’s alleged fraudulent misrepresentation regarding Isramco’s purpose in hiring Mr. Holifield and (vi) other relief. The Company believes Mr. Holifield’s counter claims have no merit. The Company intends to vigorously (i) pursue its case against Mr. Holifield and (ii) defend against Mr. Holifield’s counterclaims.
 
 
ITEM 1A. Risk Factors
 
           None
 
ITEM 2. Change in Securities & Use of Proceeds
 
           None
 
ITEM 3. Default Upon Senior Securities
 
           None
 
ITEM 4. Removed and Reserved
 
           None
 
ITEM 5. Other Information
 
           None
 
ITEM 6. Exhibits
 
Exhibits
 
31.1
31.2
31.3
32.1
32.2
32.3
101.INS
XBRL Instance Document
101.SCH
XBRL Taxonomy Extension Schema
101.CAL
XBRL Taxonomy Extension Calculation Linkbase
101.DEF
XBRL Taxonomy Extension Definition Linkbase
101.LAB
XBRL Taxonomy Extension Label Linkbase
101.PRE
XBRL Taxonomy Extension Presentation Linkbase
 
 
 
 
 
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. 
 
 
ISRAMCO, INC
 
       
Date: May 10, 2016
By:
/s/ HAIM TSUFF             
 
   
HAIM TSUFF
 
   
CHIEF EXECUTIVE OFFICER
 
   
(PRINCIPAL EXECUTIVE OFFICER)
 
       
Date: May 10, 2016
By:
/s/ EDY FRANCIS      
 
   
EDY FRANCIS
 
   
CHIEF FINANCIAL OFFICER
 
   
(PRINCIPAL FINANCIAL OFFICER)
 
       
Date: May 10, 2016
By:
/s/ ZEEV KOLTOVSKOY      
 
   
ZEEV KOLTOVSKOY      
 
   
CHIEF ACCOUNTING OFFICER
 
   
(PRINCIPAL ACCOUNTING OFFICER)
 
 
 
 
27