10-K 1 d458386d10k.htm FORM 10-K FORM 10-K
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-K

 

 

(Mark One)

 

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2012

or

 

¨ 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)

 

(I.R.S. 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

 

 

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to section 12(g) of the Act:

 

Title of each class

Common Stock, $0.001 par value

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  x

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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K    ¨

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 definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” 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 Act).    Yes  ¨    No  x

As of June 30, 2012, the aggregate market value of the voting and non-voting common stock of the registrant held by non-affiliates (excluding shares held by directors, officers and others holding more than 10% of the outstanding shares of the class) was $25,121,650 based upon a closing sales price of $2.60.

As of March 8, 2013, the registrant had outstanding 59,021,389 shares of common stock.

DOCUMENTS INCORPORATED BY REFERENCE

Certain of the information required by Part III will be incorporated by reference into this Form 10-K from the Registrant’s Definitive Proxy Statement to be filed pursuant to Regulation 14A under the Securities Exchange Act of 1934 within 120 days after the end of the Registrant’s fiscal year covered by this Form 10-K.

 

 

 


Table of Contents

TABLE OF CONTENTS

 

Cautionary Notice Regarding Forward-Looking Statements

     1   

Glossary of Oil and Gas Terms

     1   

PART I

     3   

Item 1. and Item 2. Business and Properties

     3   

Item 1A. Risk Factors

     16   

Item 1B. Unresolved Staff Comments

     25   

Item 3. Legal Proceedings

     25   

Item 4. Mine Safety Disclosures

     25   

PART II

     26   

Item  5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

     26   

Item 6. Selected Financial Data

     28   

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     29   

Item 8. Financial Statements and Supplementary Data

     38   

Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure

     38   

Item 9A. Controls and Procedures

     38   

Item 9B. Other Information

     40   

PART III

     40   

PART IV

     70   

Item 15. Exhibits and Financial Statement Schedules

     70   

List of Subsidiaries

  

Consent of MaloneBailey, LLP, independent registered public accounting firm

  

Consent of DeGolyer and MacNaughton, independent petroleum engineers

  

Certification of CEO Pursuant to Section 302

  

Certification of CFO Pursuant to Section 302

  

Certification of CEO Pursuant to Section 906

  

Certification of CFO Pursuant to Section 906

  

Summary of Reserve Report

  


Table of Contents

Cautionary Notice Regarding Forward-Looking Statements

Dune Energy, Inc. (referred to herein with respect to terms such as “Dune”, “we,” “our,” “us” or the “Company”) desires to take advantage of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. This report contains a number of forward-looking statements that reflect management’s current views and expectations with respect to our business, strategies, future results and events and financial performance. All statements made in this report other than statements of historical fact, including statements that address operating performance, events or developments that management expects or anticipates will or may occur in the future, including statements related to revenues, cash flow, profitability, adequacy of funds from operations, statements expressing general optimism about future operating results and non-historical information, are forward-looking statements. In particular, the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “may,” “will,” variations of such words, and similar expressions identify forward-looking statements, but are not the exclusive means of identifying such statements and their absence does not mean that a statement is not forward-looking. These forward-looking statements are subject to certain risks and uncertainties, including those discussed under “Item 1A. Risk Factors” and elsewhere in this report. Our actual results, performance or achievements could differ materially from historical results as well as those expressed in or anticipated or implied by these forward-looking statements.

Readers should not place undue reliance on these forward-looking statements, which are based on management’s current expectations and projections about future events, are not guarantees of future performance, are subject to risks, uncertainties and assumptions (including, without limitation, those described herein) and are made only as of the date of this report. Our actual results, performance or achievements could differ materially from the results expressed in, or implied by, these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed below in “Item 1A. Risk Factors” as well as those discussed elsewhere in this report, and the risks discussed in our press releases and other communications to stockholders issued by us from time to time that attempt to advise interested parties of the risks and factors that may affect our business. Except as may be required under the federal securities laws, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Glossary of Oil and Gas Terms

The following are abbreviations and definitions of certain terms commonly used in the oil and gas industry and this report:

Bbl.    One stock tank barrel, or 42 U.S. gallons liquid volume, used in reference to oil or other liquid hydrocarbons.

Bcf.    One billion cubic feet of gas.

Bcfe.    One billion cubic feet of natural gas equivalent, using the ratio of one barrel of crude oil, condensate or natural gas liquids to 6 Mcf of natural gas.

Boe.    One barrel of oil equivalent, using the ratio of one barrel of crude oil, condensate or natural gas liquids to 6 Mcf of natural gas.

Btu.    British thermal unit. One British thermal unit is the amount of heat required to raise the temperature of one pound of water by one degree Fahrenheit.

Developed oil and gas reserves.    Developed oil and gas reserves are reserves of any category that can be expected to be recovered: (i) through existing wells with existing equipment and operating methods or in which the cost of the required equipment is relatively minor compared to the cost of a new well; and (ii) through installed extraction equipment and infrastructure operational at the time of the reserves estimate if the extraction is by means not involving a well.

 

1


Table of Contents

Development well.    A well drilled within the proved area of an oil or gas reservoir to the depth of a stratigraphic horizon known to be productive.

Differential.    An adjustment to the price of oil or gas from an established spot market price to reflect differences in the quality or location of oil or gas.

Exploratory well.    A well drilled to find a new field or to find a new reservoir in a field previously found to be productive of oil or gas in another reservoir. Generally, an exploratory well is any well that is not a development well, an extension well, a service well or a stratigraphic test well.

Extension well.    An extension well is a well drilled to extend the limits of a known reservoir.

Gas.    Natural gas.

MBbl.    One thousand barrels of crude oil or other liquid hydrocarbons.

Mcf.    One thousand cubic feet of gas.

Mcfe.    One thousand cubic feet of gas equivalent, using the ratio of one barrel of crude oil, condensate or natural gas liquids to 6 Mcf of natural gas.

Mmbbls.    One million barrels of crude oil or other liquid hydrocarbons.

Mmbtu.    One million Btus.

Mmcf.    One million cubic feet of gas.

MMcfe.    One million cubic feet of gas equivalent.

Oil.    Crude oil, condensate and natural gas liquids.

Operator.    The individual or company responsible for the exploration or production of an oil or gas well or lease.

 

2


Table of Contents

PART I

Items 1 and 2. Business and Properties.

Overview

Dune Energy, Inc., a Delaware corporation, is an independent energy company based in Houston, Texas. We were formed in 1998 and since May of 2004, we have been engaged in the exploration, development, acquisition and exploitation of crude oil and natural gas properties, with interests along the Louisiana/Texas Gulf Coast. Our properties cover over 82,000 gross acres across 19 producing oil and natural gas fields.

Our total proved reserves as of December 31, 2012 were 90.1 Bcfe, consisting of 50.6 Bcf of natural gas and 6.6 Mmbbls of oil. The PV-10 of our proved reserves at year end was $260.6 million based on the average of the oil and natural gas sales prices on the first day of each of the twelve months during 2012, which was $91.33 per bbl of oil and $2.76 per mcf of natural gas. During 2012, we added 18.1 Bcfe through extensions and discoveries and produced 5.3 Bcfe. In addition, we experienced a net downward revision of 2.1 Bcfe.

Financial Restructuring

On December 22, 2011, Dune completed a financial restructuring, including the consummation of the exchange of $297,012,000 in aggregate principal amount of its 10.5% Senior Secured Notes due 2012 for:

 

   

shares of its newly issued common stock and shares of a new series of preferred stock that have been converted into common stock, which in the aggregate constitute approximately 97.2% of Dune’s common stock on a post-restructuring basis; and

 

   

approximately $49.5 million aggregate principal amount of newly issued Floating Rate Senior Secured Notes due 2016, or the New Notes.

The notes exchanged in the exchange offer constituted 99% of Dune’s senior notes outstanding prior to closing of the Restructuring.

As a component of the Restructuring, and with the requisite consent of such preferred stockholders, all of Dune’s 10% Senior Redeemable Convertible Preferred Stock was converted into $4 million in cash and shares of common stock constituting approximately 1.5% of Dune’s common stock on a post-restructuring basis.

Completion of the restructuring resulted in Dune’s pre-restructuring common stockholders holding approximately 1.3% of Dune’s common stock on a post-restructuring basis.

After the restructuring, percentage ownership of Dune’s common stock will continue to be subject to dilution through issuance of equity compensation pursuant to Dune’s equity compensation arrangements.

As part of its overall financial restructuring, Dune has also entered into a new $200.0 million senior secured revolving credit facility pursuant to a credit agreement, dated as of December 22, 2011, by and among Dune, Bank of Montreal, CIT Capital Securities LLC and the lenders party thereto, or the New Credit Agreement, with an initial borrowing base limit of up to $63.0 million. At December 31, 2012, the borrowing base was set at $50 million and $28 million was borrowed under this facility.

In addition, as part of its restructuring, Dune implemented a 1-for-100 reverse stock split, which was effective on December 22, 2011. After the restructuring and the reverse stock split, there were approximately 38.6 million shares of Dune’s common stock outstanding.

Employees

As of December 31, 2012, we had 32 full-time employees. We are not a party to any collective bargaining agreements and have not experienced any strikes or work stoppages. We believe our relationships with our employees are good. From time to time, we utilize the services of independent contractors to perform various field and other services.

 

3


Table of Contents

Our Business Strategy

We intend to use our competitive strengths to increase reserves, production and cash flow in order to maximize value for our stockholders. The following are key elements of this strategy:

Grow Through Exploitation, Development and Exploration of Our Properties. Our primary focus will continue to be the development and exploration efforts in our Gulf Coast properties. We believe that our properties and acreage position will allow us to grow organically through low-risk drilling in the near term, as this property set continues to present attractive opportunities to expand our reserve base through workovers and recompletions, field extensions, delineating deeper formations within existing fields and higher risk/higher reward exploratory drilling. In addition, we will constantly review, rationalize and “high-grade” our properties in order to optimize our existing asset base.

Actively Manage the Risks and Rewards of Our Drilling Program. Our strategy is to increase our oil and natural gas reserves and production while keeping our finding and development costs and operating costs (on a per Mcfe basis) competitive with our industry peers. We expect to implement this strategy through drilling exploratory and development wells from our inventory of available prospects that we have evaluated for geologic and mechanical risk and future reserve or resource potential. Our drilling program will contain some higher risk/higher reserve potential opportunities as well as some lower risk/lower reserve potential opportunities in order to achieve a balanced program of reserve and production growth.

Maintain and Utilize State of the Art Technological Expertise. 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 employ technical advancements, including 3-D seismic data, pre-stack depth and reverse-time migration, to identify and exploit new opportunities in our asset base. We also employ the latest directional drilling, completion and stimulation technology in our wells to enhance recoverability and accelerate cash flows.

Pursue Opportunistic Acquisitions of Underdeveloped Properties. We continually review opportunities to acquire producing properties, leasehold acreage and drilling prospects that are in core operating areas and require a minimum of initial upfront capital. We are also seeking to acquire operational control of properties that we believe have a solid proved reserve base coupled with significant exploitation and exploration potential. We will evaluate acquisition opportunities that we believe will further enhance our operations and reserves in a cost-effective manner.

2013 Budget. For 2013, we have targeted an initial capital budget of approximately $65 million to $75 million (including dry-hole costs), primarily focused on our Garden Island Bay and Leeville field projects. The capital program will include several maintenance projects in addition to field exploitation within Garden Island Bay and Leeville. Approximately $30 million will be expended in the 1st half of 2013. Success on these programs will provide cash flow and availability under our credit facility to conduct a drilling program across several fields in the 4th quarter.

Offices

Our headquarters are located at Two Shell Plaza, 777 Walker Street, Suite 2300, Houston, Texas 77002. Our telephone number is (713) 229-6300.

Core Areas of Operation and Certain Key Properties

As of December 31, 2012, our proved oil and gas reserves were concentrated in 19 producing fields along the Texas and Louisiana Gulf Coast. The fields tend to have stacked multiple producing horizons with production typically between 4,000 and 13,000 feet. Some of the fields have numerous available wellbores capable of

 

4


Table of Contents

providing workover and recompletion opportunities. Additionally, new 3-D seismic data allows definition of numerous updip proved undeveloped, or PUD, locations throughout the fields. We expect the characteristics of these fields to allow us to record significant proved behind pipe and PUD reserves in each annual year-end and mid-year reserve report. At year-end 2012, our proved developed producing, or PDP, reserves of 20.6 Bcfe were 23% of our 90.1 Bcfe of total proved oil and natural gas reserves, our proved developed non-producing, or PDNP, reserves of 29.7 Bcfe were 33% of our total proved oil and natural gas reserves and our PUD reserves of 39.8 Bcfe were 44% of our total proved oil and natural gas reserves.

Three of our fields, Garden Island Bay, Leeville and Bateman Lake, have large acreage positions surrounding piercement salt domes. Approximately 59% of our total proved oil and gas reserves are located in these fields. We maintain an active workover and recompletion program in each of these fields and have drilled several development wells in the fields since we acquired them. These workovers, recompletions and development wells are designed to maintain or enhance the production rates in each of the fields. We intend to complete 4 to 6 workovers in these fields in 2013 along with 10 to 15 drilling opportunities both PUD and exploration locations. Most of these fields have had minimal drilling below 15,000 feet or below the salt layers, which provides significant exploratory upside for the Company. Three dimensional, or 3-D, seismic technology and directional drilling techniques provide the Company with several high reserve potential opportunities to drill in 2013 and beyond.

At Garden Island Bay, in 2012 Dune drilled and completed two PUD locations, the SL 214 #915 and SL 214 #917, which added 400 bbl/day to production and performed successful workovers on the SL214 #457 and SL214 #543 which provided additional 100 bbl/day to oil production and natural gas for the field’s gas uplift system, which also enhances oil recovery. In Garden Island Bay Field we control 17 prospects and approximately 40 separate well locations identified using a recently completed depth-migrated 3-D data set within the field. Dune maintains a 100% working interest in these prospects. We intend to drill two or three of these projects in 2013. Success on these projects could lead to further exploratory or development drilling later in 2013 within this field.

At the Leeville field, we have formed a joint venture to drill new wells in which Dune can elect to participate, typically at a 40% working interest. The initial well drilled in the field under this joint venture was completed in November 2011 and is producing at approximately 4 Mmcf / day on a gross basis. During the fourth quarter of 2012, four additional wells were drilled and three of these are expected to be completed in early 2013. Also in early 2013, the drilling of two additional wells was initiated as well as a deep exploatory well. Dune has a 40% interest in the shallower wells and a 20% interest in the deep exploratory test well. Drilling and completion activities continue into 2013. Depending on the success of these completions we may drill additional wells in 2013.

At our Bateman Lake field, we continue evaluating investments in drilling opportunities. However, the reserves attributed to this field are 90% natural gas and as a result of low gas prices in 2012, we conducted no new drilling in this field in 2012. With gas price recovery we anticipate a more active program in 2013.

The Chocolate Bayou, Comite, North Broussard and Live Oak fields comprise our next four largest properties and consist of 31% of our total proved reserves. These assets are typically characterized as having fewer wellbores than the salt dome fields but present numerous opportunities for new fault blocks containing unproved reserves that have been identified with new 3-D seismic data. As of December 31, 2012, approximately 52% of our PUDs requiring new wellbores are contained in these fields.

The remaining 12 fields contain approximately 10% of our total proved oil and gas reserves and are characterized by occasional new drilling wells and workovers, but typically do not have the upside opportunities demonstrated in the other fields.

 

5


Table of Contents

Natural Gas and Oil Reserves.

Due to the inherent uncertainties and the limited nature of reservoir data, proved reserves are subject to change as additional information becomes available. The estimates of reserves, future cash flows and present value are based on various assumptions, including those prescribed by the U.S. Securities and Exchange Commission, or the SEC, and are inherently imprecise. Although we believe these estimates are reasonable, actual future production, cash flows, taxes, development expenditures, operating expenses and quantities of recoverable oil and natural gas reserves may vary substantially from these estimates. Also, the use of a 10% discount factor for reporting purposes may not necessarily represent the most appropriate discount factor, given actual interest rates and risks to which our business or the oil and natural gas industry in general are subject.

These calculations were prepared using standard geological and engineering methods generally accepted by the petroleum industry and in accordance with SEC financial accounting and reporting standards. The estimated present value of proved reserves does not include indirect expenses such as general and administrative expenses, debt service, future income tax expense or depletion, depreciation and amortization.

In accordance with applicable financial accounting and reporting standards of the SEC, the estimates of our proved reserves and the present value of proved reserves set forth herein are made using the average of oil and natural gas sales prices on the first day of each of the twelve months during 2012. Estimated quantities of proved reserves and their present value are affected by changes in oil and natural gas prices. The arithmetic average reference prices utilized for the purpose of estimating our proved reserves and the present value of proved reserves as of December 31, 2012 were $91.33 per barrel of oil and $2.76 per Mmbtu of natural gas.

The reserve data and the present value as of December 31, 2012 were prepared by Dune’s Senior Vice-President of Operations. He is the technical person primarily responsible for overseeing the preparation of reserve estimates. He attended Texas A&M University for his undergraduate studies in Petroleum Engineering and has over 31 years of industry experience with positions of increasing responsibility in engineering and reservoir evaluations. Dune also has Degolyer and MacNaughton, a nationally recognized petroleum engineering firm, prepare a complete analysis of our reserves at mid-year. Such a report was completed as of June 30, 2012. This report is provided to our banks for calculation of our borrowing base under our revolver along with the year-end report prepared by our internal reservoir engineering staff

In this regard, management has established, and is responsible for, internal controls designed to provide reasonable assurance that our reserve estimation is compared and reported in accordance with rules and regulations promulgated by the SEC as well as established industry practices used by independent engineering firms and our peers. These internal controls include, but are not limited to, (i) documented process workflow timeline, (ii) verification of economic data inputs to information supplied by our internal operations accounting, regional production and operations, land, and marketing groups, and (iii) senior management review of internal reserve estimations prior to publication.

During 2012 we drilled two PUD locations at Garden Island Bay field. Both were successful and resulting in reducing PUD reserves in Garden Island Bay to 1.3 Bcfe from 5.4 Bcfe at year-end 2011. In our Leeville field we increased PUD reserves from 2.5 Bcfe year-end 2011 to 17.1 Bcfe at year-end 2012 based on extensive 3-D mapping incorporating all existing well data. Leeville now accounts for approximately 43% of our current PUD volumes and 51% of the current PV-10 value. We commenced a drilling program on these new PUD locations late in 2012 and it is continuing into 2013. The remaining PUD locations on our books at year end 2011 remained booked at year-end 2012 and the majority are anticipated to be evaluated as part of the 2013 drilling program. Even with very limited capital the Company has maintained a program of evaluating all PUD locations in a timely manner.

 

6


Table of Contents

The following table sets forth our estimated net total oil and natural gas reserves and the PV-10 value of such reserves as of December 31, 2012.

Summary of Oil and Natural Gas Reserves as of Fiscal-Year End Based on Average Fiscal-Year Prices

 

     Oil      Natural
Gas
     Total      Undiscounted
Future Net
Revenue
     Present
Value of
Reserves
Discounted
at 10% (1)
 
     Mbbl      Mmcf      Mmcfe      $ (thousands)      $ (thousands)  

Proved:

              

Developed Producing

     1,483         11,698         20,600         71,069         52,145   

Developed Nonproducing

     2,425         15,118         29,668         158,899         75,769   

Undeveloped

     2,677         23,791         39,851         196,209         132,687   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Proved

     6,585         50,607         90,119         426,177         260,601   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Probable:

              

Developed Producing

     —          —          —          —          —    

Developed Nonproducing

     112         372         1,046         9,442         5,143   

Undeveloped

     1,578         14,880         24,346         165,742         103,595   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Probable

     1,690         15,252         25,392         175,184         108,738   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Possible:

              

Undeveloped

     2         3,995         4,007         1,703         (256
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Possible

     2         3,995         4,007         1,703         (256
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Management believes that the presentation of PV-10 may be considered a non-GAAP financial measure as defined in Item 10(e) of Regulation S-K. Therefore, we have included a reconciliation of the measure to the most directly comparable GAAP financial measure (standardized measure of discounted future net cash flows in the table immediately below). Management believes that the presentation of PV-10 value provides useful information to investors because it is widely used by professional analysts and sophisticated investors in evaluating oil and natural gas companies. Because many factors that are unique to each individual company may impact the amount of future income taxes to be paid, the use of the pre-tax measure provides greater comparability when evaluating companies. It is relevant and useful to investors for evaluating the relative monetary significance of our natural gas and oil properties. Further, investors may utilize the measure as a basis for comparison of the relative size and value of our reserves to other companies. Management also uses this pre-tax measure when assessing the potential return on investment related to its oil and gas properties and in evaluating acquisition candidates. The PV-10 value is not a measure of financial or operating performance under accounting principles that are generally accepted in the United States, or GAAP, nor is it intended to represent the current market value of the estimated oil and natural gas reserves owned by us. PV-10 should not be considered in isolation or as a substitute for the standardized measure of discounted future net cash flows as defined under GAAP.

The table below provides a reconciliation of PV-10 to the standardized measure of discounted future net cash flows:

 

     As of
December 31,
2012
 
     $(thousands)  

PV-10

   $ 260,601   

Future income taxes, discounted at 10%

     —    
  

 

 

 

Standardized measure of discounted future net cash flows

   $ 260,601   
  

 

 

 

 

7


Table of Contents

Oil and Natural Gas Volumes, Prices and Operating Expense

The following tables set forth certain information regarding the production volumes, revenue, average prices received and average production costs associated with our sale of oil and natural gas from continuing operations for the three years ended December 31, 2012, 2011 and 2010.

 

     Year Ended December 31,  
         2012              2011          2010  

Net Production:

        

Oil (Mbbl)

     407         482         585   

Natural gas (Mmcf)

     2,819         2,928         3,793   
  

 

 

    

 

 

    

 

 

 

Natural gas equivalent (Mmcfe)

     5,261         5,820         7,303   
  

 

 

    

 

 

    

 

 

 

Oil and Natural Gas Sales (dollars in thousands):

        

Oil

   $ 42,954       $ 49,473       $ 45,408   

Natural gas

     9,014         13,419         18,781   
  

 

 

    

 

 

    

 

 

 

Total

   $ 51,968       $ 62,892       $ 64,189   
  

 

 

    

 

 

    

 

 

 

Average Sales Price:

        

Oil ($ per Bbl)

   $ 105.54       $ 102.64       $ 77.62   

Natural gas ($ per Mcf)

     3.20         4.58         4.95   
  

 

 

    

 

 

    

 

 

 

Natural gas equivalent ($ per Mcfe)

   $ 9.88       $ 10.81       $ 8.79   
  

 

 

    

 

 

    

 

 

 

Oil and Natural Gas Costs (dollars in thousands):

        

Lease operating expenses

   $ 18,904       $ 18,298       $ 18,822   

Production taxes

     4,479         4,923         2,767   

Other operating expenses

     2,578         2,863         4,024   
  

 

 

    

 

 

    

 

 

 

Total

   $ 25,961       $ 26,084       $ 25,613   
  

 

 

    

 

 

    

 

 

 

Average production cost per Mcfe

   $ 4.93       $ 4.48       $ 3.51   

Average production cost per Boe

   $ 29.60       $ 26.88       $ 21.06   

Exploration, Development and Acquisition Capital Expenditures

The following table sets forth certain information regarding the gross costs incurred in the purchase of proved and unproved properties and in development and exploration activities.

 

     Year Ended
December 31,
 
     2012      2011  
     (in thousands)  

Unproved property costs

   $ —        $ —    

Development costs

     27,333         19,302   

ARO costs

     3,591         744   
  

 

 

    

 

 

 

Total consolidated operations

     30,924         20,046   
  

 

 

    

 

 

 

Asset retirement obligations (non-cash)

   $ 1,701       $ —    
  

 

 

    

 

 

 

 

8


Table of Contents

Drilling Activity

The following table sets forth our drilling activity during the twelve-month periods ended December 31, 2012, 2011 and 2010 (excluding wells in progress at the end of such period). In the table, “gross” refers to the total number of wells in which we have a working interest and “net” refers to gross wells multiplied by our working interest therein.

 

     Year Ended December 31,  
     2012      2011      2010  
     Gross      Net      Gross      Net      Gross      Net  

Development wells

                 

Productive

     2.0         2.0         1.0         0.4         1.0         0.2   

Non-productive

     —          —          —          —          1.0         1.0   

Exploratory wells

                 

Productive

     1.0         0.4         1.0         0.5         1.0         0.5   

Non-productive

     —          —          1.0         0.2         2.0         0.2   

Productive Wells

The following table sets forth the number of productive oil and natural gas wells in which we owned an interest as of December 31, 2012. Productive wells are wells that are capable of producing natural gas or oil in economic quantities.

 

    

Company Operated

     Non-operated      Total  
     Gross      Net      Gross      Net      Gross      Net  

Oil

     30         27         16         8         46         35   

Natural gas

     22         17         186         16         208         33   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     52         44         202         24         254         68   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Acreage Data

The following table summarizes our gross and net developed and undeveloped oil and natural gas acreage under lease as of December 31, 2012.

 

     Developed acres      Undeveloped
acres
 
     Gross      Net      Gross      Net  

Gulf Coast Properties (1)

     73,135         43,862         1,327         375   

Other (2)

     640         259         6,581         2,666   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     73,775         44,121         7,908         3,041   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Includes undeveloped acreage at Hitchcock field, release of Alvin Gas Unit and Chocolate Bayou Wilson A lease acreage.
(2) Other includes some of the Delaware Deep acreage in Sweetwater County, Wyoming.

As is customary in the oil and natural gas industry, we can generally retain our interest in undeveloped acreage by carrying out drilling activity that establishes commercial production sufficient to maintain the leases or by paying delay rentals during the remaining primary term of leases. The oil and natural gas leases in which we have an interest are for varying primary terms and if production under a lease continues from our developed lease acreage beyond the primary term, we are entitled to hold the lease for as long as oil or natural gas is produced.

 

9


Table of Contents

Our oil and natural gas properties consist primarily of oil and natural gas wells and our interests in leasehold acreage, both developed and undeveloped.

Major Customers

The Company sold oil and natural gas production representing more than 10% of its oil and natural gas revenues as follows:

 

2012:

  

Sunoco Partners Marketing

     46

Texon Crude Oil LLC

     34

2011:

  

Texon LP

     49

Texon Crude Oil LLC

     23

Upstream Energy Services

     14

Because alternate purchasers of natural gas and oil are readily available, we believe that the loss of any of our purchasers would not have a material adverse effect on our financial results.

Competition

We encounter competition from other natural gas and oil companies in all areas of our operations, including the acquisition of exploratory prospects and proven properties. Many of our competitors are large, well-established companies that have been engaged in the natural gas and oil business for much longer than we have and possess substantially larger operating staffs and greater capital resources than we do. Our ability to explore for oil and natural gas reserves and to acquire additional properties in the future will be dependent upon our ability to conduct our operations, to evaluate and select suitable properties and to consummate transactions in this highly competitive environment. We believe that our technological expertise, our exploration, land, drilling and production capabilities and the experience of our management generally enable us to compete effectively.

Marketing

Our production is marketed to third parties consistent with industry practices. Typically, oil is sold at the wellhead at field-posted prices plus an oil-quality differential and natural gas is sold under contract at a negotiated price based upon factors normally considered in the industry, such as distance from the well to the pipeline, well pressure, estimated reserves, quality of natural gas and prevailing supply and demand conditions.

Our marketing objective is to receive the highest possible wellhead price for our product. We are aided by the presence of multiple outlets near our production in Texas and Louisiana. We take an active role in determining the available pipeline alternatives for each property based on historical pricing, capacity, pressure, market relationships, seasonal variances and long-term viability.

Regulation of the Oil and Natural Gas Industry

Regulation of the Oil and Natural Gas Industry

The oil and natural gas industry is subject to extensive regulation by federal, state and local authorities. Legislation affecting the oil and natural gas industry is frequently amended or reinterpreted, and may increase the regulatory burden on our industry and our company. In addition, numerous federal and state agencies are authorized by statute to issue rules, regulations and policies that are binding on the oil and natural gas industry and its individual participants. Some of these rules and regulations authorize the imposition of substantial penalties for failures to comply. The regulatory burden on the oil and natural gas industry increases the cost of doing business and, consequently, our profitability. However, this regulatory burden generally does not affect us any differently or to a greater or lesser extent than it affects other companies in the oil and natural gas industry with similar types, quantities and locations of oil and natural gas production.

 

10


Table of Contents

Regulation of Sales and Transportation of Oil

Sales of crude oil, condensate and natural gas liquids are not currently regulated and are made at negotiated prices. Nevertheless, the United States Congress, or Congress, could reenact price controls in the future.

Our sales of crude oil are affected by the availability, terms and cost of transportation. The transportation of oil by common carrier pipelines is subject to rate regulation. The Federal Energy Regulatory Commission, or the FERC, regulates interstate oil pipeline transportation rates under the Interstate Commerce Act. Interstate oil pipeline rates must be just and reasonable and may not be unduly discriminatory or confer undue preference upon any shipper. Rates generally are cost-based, although rates may be market-based or may be the result of settlement, if agreed to by all shippers. Some oil pipeline rates may be increased pursuant to an indexing methodology, whereby the pipeline may increase its rates up to a prescribed ceiling that changes annually based on the change from year to year in the Producer Price Index for Finished Goods. Intrastate oil pipeline transportation rates are subject to regulation by state regulatory commissions. The basis for intrastate oil pipeline regulation, and the degree of regulatory oversight and scrutiny given to intrastate oil pipeline rates, varies from state to state. Insofar as effective interstate and intrastate rates are equally applicable to all comparable shippers, we believe that the regulation of oil transportation rates will not affect our operations in any way that is of material difference from those of our competitors.

Further, interstate and intrastate common carrier oil pipelines must provide service on a non-discriminatory basis. Common carriers must offer service to all similarly situated shippers requesting service on the same terms and under the same rates. Accordingly, we believe that access to oil pipeline transportation services generally will be available to us to the same extent as to our competitors.

Regulation of Sales, Transportation and Gathering of Natural Gas

In the past, the federal government has regulated the prices at which natural gas could be sold. While sales by producers of natural gas can currently be made at uncontrolled market prices, Congress could reenact price controls in the future. Historically, the transportation and sale for resale of natural gas in interstate commerce have been regulated pursuant to the Natural Gas Act of 1938, or the NGA, the Natural Gas Policy Act of 1978 and regulations enacted under those statutes by the FERC. The FERC regulates interstate natural gas transportation rates and service conditions, which affects the marketing of natural gas that we produce, as well as the revenues we receive for sales of our natural gas. Since 1985, the FERC has endeavored to make natural gas transportation more accessible to natural gas buyers and sellers. In general, the interstate pipelines’ traditional roles as wholesalers of natural gas have been eliminated and replaced by a structure under which pipelines provide transportation and storage service on an open-access basis to others who buy and sell natural gas. Although the FERC’s orders generally do not directly regulate natural gas producers, they are intended to foster increased competition within all phases of the natural gas industry. Failure to comply with the FERC’s regulations, policies and orders may result in substantial penalties. Under the Energy Policy Act of 2005, the FERC has civil authority under the NGA to impose penalties for violations of up to $1 million per day per violation.

We cannot accurately predict whether the FERC’s actions will achieve the goal of increasing competition in markets in which our natural gas is sold. Additional proposals and proceedings that might affect the natural gas industry are pending before the FERC and the courts. The natural gas industry historically has been very heavily regulated. Therefore, we cannot provide any assurance that the pro-competitive regulatory approach established by the FERC will continue. However, we do not believe that any action taken will affect us in a way that materially differs from the way it affects other natural gas producers.

Intrastate natural gas transportation is subject to regulation by state regulatory agencies. The degree of regulatory oversight and scrutiny given to intrastate natural gas pipeline rates and services varies from state to state. Insofar as such regulation within a particular state will generally affect all intrastate natural gas shippers

 

11


Table of Contents

within the state on a comparable basis, we believe that intrastate natural gas transportation in the states in which we operate will not affect our operations in any way that is of material difference from those of our competitors. Like the regulation of interstate transportation rates, the regulation of intrastate transportation rates affects the marketing of natural gas that we produce, as well as the revenues we receive for sales of our natural gas.

Gathering, which is distinct from transportation, is regulated by state regulatory authorities and is not subject to regulation by the FERC. Under certain circumstances, the FERC will reclassify jurisdictional transportation facilities as non-jurisdictional gathering facilities. This reclassification tends to increase our costs of getting natural gas to point-of-sale locations.

Regulation of Production

The production of oil and natural gas is subject to and affected by regulation under a wide range of local, state and federal statutes, rules, orders and regulations. Federal, state and local statutes and regulations require permits for drilling of wells, drilling bonds and reports concerning operations. Each of the states in which we own and operate properties have regulations governing conservation matters, including provisions for the unitization or pooling of oil and natural gas properties, the establishment of maximum allowable rates of production from oil and natural gas wells, the regulation of well spacing and the plugging and abandonment of wells. The effect of these regulations may be to limit the amount of oil and natural gas that we can produce from our wells and to limit the number of wells or the locations at which we can drill, although we can apply for exceptions to such regulations or to have reductions in well spacing. Moreover, each state generally imposes a production or severance tax with respect to the production and sale of oil, natural gas and natural gas liquids within its jurisdiction.

Our competitors in the oil and natural gas industry are subject to the same regulatory requirements and restrictions that affect our operations.

Environmental Matters and Other Regulation

General

Our operations are subject to stringent and complex federal, state and local laws and regulations governing environmental protection as well as the discharge of materials into the environment. These laws and regulations may, among other things:

 

   

require the acquisition of various permits before drilling commences;

 

   

restrict the types, quantities and concentration of various substances that can be released into the environment in connection with oil and natural gas drilling and production activities;

 

   

limit or prohibit drilling activities on certain lands lying within wilderness, wetlands and other protected areas; and

 

   

require remedial measures to mitigate pollution from former and ongoing operations, such as requirements to close pits and plug abandoned wells.

These laws and regulations may also restrict the rate of oil and natural gas production below the rate that would otherwise be possible. The regulatory burden on the oil and gas industry increases the cost of doing business in the industry and consequently affects profitability. Additionally, the United States Congress and federal and state agencies frequently revise environmental laws and regulations, and any changes that result in more stringent and costly waste handling, disposal and cleanup requirements for the oil and gas industry could have a significant impact on our operating costs.

 

12


Table of Contents

The following is a summary of some of the existing laws, rules and regulations to which our business operations are subject.

Waste Handling

The Resource Conservation and Recovery Act, or RCRA, and comparable state statutes, regulate the generation, transportation, treatment, storage, disposal and cleanup of hazardous and non-hazardous wastes. Under the auspices of the federal Environmental Protection Agency, or the EPA, the individual states administer some or all of the provisions of RCRA, sometimes in conjunction with their own, more stringent requirements. Drilling fluids, produced waters and most of the other wastes associated with the exploration, development and production of crude oil or natural gas are currently exempted from regulation under RCRA or state hazardous waste provisions, though our operations may produce waste that does not fall within this exemption. However, these oil and gas production wastes may be regulated as solid waste under state law or RCRA. It is possible that certain oil and natural gas exploration and production wastes now classified as non-hazardous could be classified as hazardous wastes in the future. Any such change could result in an increase in our costs to manage and dispose of wastes, which could have a material adverse effect on our results of operations and financial position.

Comprehensive Environmental Response, Compensation, and Liability Act

The Comprehensive Environmental Response, Compensation, and Liability Act, or CERCLA, also known as the Superfund Law, imposes joint and several liability, without regard to fault or legality of conduct, on classes of persons who are considered to be responsible for the release of a hazardous substance into the environment. These persons include the current or former owner or operator of the site where the release occurred and anyone who disposed or arranged for the disposal of a hazardous substance released at the site. Under CERCLA, such persons may be subject to joint and several liability for the costs of cleaning up the hazardous substances that have been released into the environment, for damages to natural resources and for the costs of certain health studies. In addition, it is not uncommon for neighboring landowners and other third parties to file claims for personal injury and property damage allegedly caused by the hazardous substances released into the environment.

In the course of our operations, we generate wastes that may fall within CERCLA’s definition of hazardous substances. Further, we currently own, lease or operate properties that have been used for oil and natural gas exploration and production for many years. Hazardous substances or petroleum may have been released on, at or under the properties owned, leased or operated by us, or on, at or under other locations, including off-site locations, where such hazardous substances or other wastes have been taken for disposal. In addition, some of our properties have been operated by third parties or by previous owners or operators whose handling, treatment and disposal of hazardous substances, petroleum, or other materials or wastes were not under our control. These properties and the substances or materials disposed or released on, at or under them may be subject to CERCLA, RCRA or analogous or other state laws. Under such laws, we could be required to remove previously disposed substances and wastes or released petroleum, remediate contaminated property or perform remedial plugging or pit closure operations to prevent future contamination.

In connection with the acquisition of Goldking, the Company inherited an environmental contingency, which after conducting its due diligence and subsequent testing, the Company believes is the responsibility of a third party. However, federal and state regulators have determined Dune is the responsible party for cleanup 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 $1,800,000 has been incurred by the Company minus insurance proceeds of $1,000,000. The Company still believes 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. Plans for testing and analysis of various containment products and remediation procedures by third party consultants are being reviewed and will be presented to the federal and state authorities for consideration in 2013. The possible cost of an acceptable containment product, assuming potential remediation programs are viable and acceptable to all involved parties, may be as much as $2,500,000 to $3,000,000 over a several year time-frame. At this time, it is

 

13


Table of Contents

not known if the Company’s insurance will continue to cover the cleanup costs or if the Company can be successful in proving another party should be primarily responsible for the cost of remediation.

Water Discharges

The Federal Water Pollution Control Act, or the Clean Water Act, and analogous state laws impose restrictions and strict controls with respect to the discharge of pollutants, including spills and leaks of oil and other substances into waters of the United States or state waters. Under these laws, the discharge of pollutants into regulated waters is prohibited except in accordance with the terms of a permit issued by the EPA or an analogous state agency. Federal and state regulatory agencies can impose administrative, civil and criminal penalties for non-compliance with discharge permits or other requirements of the Clean Water Act and analogous state laws and regulations.

The Oil Pollution Act of 1990, or OPA, which amends and augments the Clean Water Act, establishes strict liability for owners and operators of facilities that are the site of a release of oil into waters of the United States. In addition, OPA and regulations promulgated pursuant to OPA impose a variety of regulations on responsible parties related to the prevention of oil spills and liability for damages resulting from such spills. OPA also requires certain oil and natural gas operators to develop, implement and maintain facility response plans, conduct annual spill training for certain employees and provide varying degrees of financial assurance.

Air Emissions

The Federal Clean Air Act and comparable state laws regulate emissions of various air pollutants through air emissions permitting programs and the imposition of other requirements. In addition, the EPA has developed and continues to develop stringent regulations governing emissions of toxic air pollutants at specified sources. Federal and state regulatory agencies can impose administrative, civil and criminal penalties for non-compliance with air permits or other requirements of the Federal Clean Air Act and associated state laws and regulations. Oil and gas operations may in certain circumstances and locations be subject to permits and restrictions under these statutes for emissions of air pollutants, including volatile organic compounds, nitrous oxides and hydrogen sulfide.

Climate Change

In response to findings that emissions of carbon dioxide, methane and other greenhouse gases, or GHGs, present an endangerment to public health and the environment because emissions of such gases are contributing to warming of the earth’s atmosphere and other climatic changes, the EPA had adopted regulations under existing provisions of the Federal Clean Air Act that would require a reduction in emissions of GHGs from motor vehicles and also could trigger permit review for GHG emissions from certain stationary sources. The EPA has asserted that the motor vehicle GHG emission standards triggered Federal Clean Air Act construction and operating permit requirements for stationary sources, commencing when the motor vehicle standards took effect on January 2, 2011. The EPA published its final rule to address the permitting of GHG emissions from stationary sources under the prevention of significant deterioration, or PSD, and Title V permitting programs. This rule “tailors” these permitting programs to apply to certain stationary sources of GHG emissions in a multi-step process, with the largest sources first subject to permitting. It is widely expected that facilities required to obtain PSD permits for their GHG emissions also will be required to reduce those emissions according to “best available control technology” standards for GHGs that have yet to be developed. With regards to the monitoring and reporting of GHGs, on November 30, 2010, the EPA published a final rule expanding its existing GHG emissions reporting rule published in October 2009 to include onshore oil and natural gas production activities, which may include certain of our operations. In addition, both houses of Congress have actively considered legislation to reduce emissions of GHGs, and almost one-half of the states have already taken legal measures to reduce emissions of GHGs, primarily through the planned development of GHG emission inventories and/or regional GHG cap and trade programs. The adoption and implementation of any legislation or regulations imposing reporting obligations with respect to, or limiting emissions of GHGs from, our equipment and

 

14


Table of Contents

operations could require us to incur costs to reduce emissions of GHGs associated with our operations or could adversely affect demand for the oil and natural gas we produce. Finally, it should be noted that some scientists have concluded that increasing concentrations of GHGs in the Earth’s atmosphere may produce climate changes that have significant physical effects, such as increased frequency and severity of storms, floods and other climatic event; if any such effects were to occur, they could have an adverse effect on our exploration and production operations.

National Environmental Policy Act

Oil and natural gas exploration and production activities on federal lands are subject to the National Environmental Policy Act, or NEPA. NEPA requires federal agencies, including the Department of the Interior, to evaluate major agency actions that have the potential to significantly impact the environment. In the course of such evaluations, an agency will prepare an environmental assessment that assesses the potential direct, indirect and cumulative impacts of a proposed project and, if necessary, will prepare a more detailed environmental impact statement that may be made available for public review and comment. All of our current exploration and production activities, as well as proposed exploration and development plans, on federal lands require governmental permits that are subject to the requirements of NEPA. This process has the potential to delay the development of oil and natural gas projects.

Endangered Species, Wetlands and Damages to Natural Resources

Various state and federal statutes prohibit certain actions that adversely affect endangered or threatened species and their habitat, migratory birds, wetlands and natural resources. These statutes include the Endangered Species Act, the Migratory Bird Treaty Act, the Clean Water Act and CERCLA. Where takings of or harm to species or damages to wetlands, habitat or natural resources occur or may occur, government entities or at times private parties may act to prevent oil and gas exploration or production or seek damages to species, habitat or natural resources resulting from filling or construction or releases of oil, wastes, hazardous substances or other regulated materials.

OSHA and Other Laws and Regulations

We are subject to the requirements of the federal Occupational Safety and Health Act, or OSHA, and comparable state statutes. The OSHA hazard communication standard, the Emergency Planning and Community Right to Know Act and similar state statutes require that we organize or disclose information about hazardous materials stored, used or produced in our operations.

Private Lawsuits

In addition to claims arising under state and federal statutes, where a release or spill of hazardous substances, oil and gas or oil and gas wastes has occurred, private parties or landowners may bring lawsuits against oil and gas companies under state law. The plaintiffs may seek property damages, personal injury damages, remediation costs or injunctions to require remediation or restoration of contaminated property, soil, groundwater or surface water. In some cases, oil and gas operations are located near populated areas and emissions or accidental releases could affect the surrounding properties and population.

 

15


Table of Contents
Item 1A. Risk Factors.

You should carefully consider each of the risks described below, together with all of the other information contained in this report, before deciding to invest in our securities. If any of the following risks develop into actual events, our business, financial condition or results of operations could be materially adversely affected and you may lose all or part of your investment.

We have had operating losses and limited revenues to date.

We have operated at a loss each year since inception. Net losses applicable to common stockholders for the fiscal years ended December 31, 2011 and 2012 were $80.6 million and $7.9million, respectively. Our revenues for the fiscal years ended December 31, 2011 and 2012 were $62.9 million and $52.1 million, respectively. We may not be able to generate significant revenues in the future. In addition, we expect to incur substantial operating expenses in connection with our natural gas and oil exploration and development activities. As a result, we may continue to experience negative cash flow for at least the foreseeable future and cannot predict if or when we might become profitable.

Our New Credit Agreement imposes significant operating and financial restrictions on us that may prevent us from pursuing certain business opportunities and restrict our ability to operate our business.

Our New Credit Agreement contains covenants that restrict our ability and the ability of certain of our subsidiaries to take various actions, such as:

 

   

have a leverage ratio of greater than 4.0 to 1.0;

 

   

have a current ratio of less than 1.0 to 1.0;

 

   

incur additional debt;

 

   

make distributions or other restricted payments;

 

   

make investments;

 

   

change its business;

 

   

enter into leases;

 

   

use the proceeds of loans other than as permitted by the New Credit Agreement;

 

   

sell receivables;

 

   

merge or consolidate or sell, transfer, ease or otherwise dispose of its assets;

 

   

sell properties and terminate hedges in excess of 5% of the borrowing base then in effect;

 

   

enter into transactions with affiliates of the Company;

 

   

organize subsidiaries;

 

   

agree to limit its ability to grant liens or pay dividends;

 

   

incur gas imbalances or make prepayments;

 

   

enter into hedge agreements in excess of agreed limits;

 

   

modify its organizational documents; and

 

   

engage in certain types of hydrocarbon marketing activities.

The New Credit Agreement also contains other customary covenants that, subject to certain exceptions, include, among other things: maintenance of existence; maintenance of insurance; compliance with laws; delivery of certain information; maintenance of properties; keeping of books and records; preservation of organizational existence; and further assurances requirements.

 

16


Table of Contents

The restrictions contained in the New Credit Agreement could:

 

   

limit our ability to plan for or react to market conditions or meet capital needs or otherwise restrict our activities or business plans; and

 

   

adversely affect our ability to finance our operations, strategic acquisitions, investments or alliances or other capital needs or to engage in other business activities that would be in our interest.

We have substantial capital requirements that, if not met, may hinder our operations.

We have and expect to continue to have substantial capital needs as a result of our active exploration, development and acquisition programs. We expect that additional external financing will be required in the future to fund our growth. We may not be able to obtain additional financing, and financing under our new credit facility pursuant to the New Credit Agreement may not be available in the future. Without additional capital resources, we may be forced to limit or defer our planned natural gas and oil exploration and development program and this will adversely affect the recoverability and ultimate value of our natural gas and oil properties, which will in turn negatively affect our business, financial condition and results of operations.

Recent economic conditions in the credit markets may adversely affect our financial condition.

The disruption experienced in U.S. and global credit markets since the latter half of 2008 has resulted in instability in demand for oil and natural gas, resulting in volatile energy prices, and has affected the availability and cost of capital. In addition, capital and credit markets have experienced unprecedented volatility and disruption and continue to be unpredictable. Given the current levels of market volatility and disruption, the availability of funds from those markets has diminished substantially. Prolonged negative changes in domestic and global economic conditions or disruptions of the financial or credit markets may have a material adverse effect on our results from operations, financial condition and liquidity. At this time, it is unclear whether and to what extent the actions taken by the U.S. government will mitigate the effects of the financial market turmoil. The impact of the current difficult conditions on our ability to obtain, and the cost and terms of, any financing in the future is equally unclear. Any inability to obtain adequate financing under our new credit facility or to fund on acceptable terms could deter or prevent us from meeting our future capital needs to finance our development program, adversely affect the satisfaction or replacement of our debt obligations and result in a deterioration of our financial condition.

Natural gas and oil prices are highly volatile, and lower prices will negatively affect our financial results.

Our revenue, profitability, cash flow, oil and natural gas reserves value, future growth and ability to borrow funds or obtain additional capital, as well as the carrying value of our properties, are substantially dependent on prevailing prices of natural gas and oil. Historically, the markets for natural gas and oil have been volatile, and those markets are likely to continue to be volatile in the future. It is impossible to predict future natural gas and oil price movements with certainty. Prices for natural gas and oil are subject to wide fluctuations in response to relatively minor changes in the supply of and demand for natural gas and oil, market uncertainty and a variety of additional factors beyond our control. These factors include, but are not limited to:

 

   

the level of consumer product demand;

 

   

the domestic and foreign supply of oil and natural gas;

 

   

overall economic conditions;

 

   

weather conditions;

 

   

domestic and foreign governmental regulations and taxes;

 

   

the price and availability of alternative fuels;

 

17


Table of Contents
   

political conditions in or affecting oil and natural gas producing regions;

 

   

the level and price of foreign imports of oil and liquefied natural gas; and

 

   

the ability of the members of the Organization of Petroleum Exporting Countries and other state-controlled oil companies to agree upon and maintain oil price and production controls.

Declines in natural gas and oil prices may materially adversely affect our financial condition, liquidity and ability to finance planned capital expenditures and results of operations and may reduce the amount of oil and natural gas that we can produce economically.

Drilling for natural gas and oil is a speculative activity and involves numerous risks and substantial and uncertain costs that could adversely affect us.

Our success will be largely dependent upon the success of our drilling program. Our prospects are in various stages of evaluation, ranging from prospects that are ready to drill to prospects that will require substantial additional seismic data processing and interpretation and other types of technical evaluation. There is no way to predict in advance of drilling and testing whether any particular prospect will yield oil or natural gas in sufficient quantities to recover drilling or completion costs or to be economically viable. The use of seismic data and other technologies and the study of producing fields in the same area will not enable us to know conclusively prior to drilling whether oil or natural gas will be present or, if present, whether oil or natural gas will be present in commercial quantities. We cannot assure you that the analogies we draw from available data from other wells, more fully explored prospects or producing fields will be applicable to our drilling prospects. Drilling for natural gas and oil involves numerous risks, including the risk that no commercially productive natural gas or oil reservoirs will be discovered. The cost of drilling, completing and operating wells is substantial and uncertain, and drilling operations may be curtailed, delayed or canceled as a result of a variety of factors beyond our control, including:

 

   

unexpected or adverse drilling conditions;

 

   

elevated pressure or irregularities in geologic formations;

 

   

equipment failures or accidents;

 

   

adverse weather conditions;

 

   

compliance with governmental requirements; and

 

   

shortages or delays in the availability of drilling rigs, crews and equipment.

Even if drilled, our completed wells may not produce reserves of natural gas or oil that are economically viable or that meet our earlier estimates of economically recoverable reserves. A productive well may become uneconomic if water or other deleterious substances are encountered, which impair or prevent the production of oil or natural gas from the well. Our overall drilling success rate or our drilling success rate for activity within a particular project area may decline. Unsuccessful drilling activities could result in a significant decline in our production and revenues and materially harm our operations and financial condition by reducing our available cash and resources. Because of the risks and uncertainties of our business, our future performance in exploration and drilling may not be comparable to our historical performance.

We depend on successful exploration, development and acquisitions to maintain reserves and revenue in the future.

In general, the volume of production from natural gas and oil properties declines as reserves are depleted, with the rate of decline depending on reservoir characteristics. Except to the extent that we conduct successful exploration and development activities or acquire properties containing proved reserves, or both, our proved reserves will decline as reserves are produced. Our future natural gas and oil production is, therefore, highly

 

18


Table of Contents

dependent on our level of success in finding or acquiring additional reserves. Additionally, the business of exploring for, developing or acquiring reserves is capital intensive. Recovery in our reserves, particularly undeveloped reserves, will require significant additional capital expenditures and successful drilling operations. To the extent cash flow from operations is reduced and external sources of capital become limited or unavailable, our ability to make the necessary capital investment to maintain or expand our asset base of natural gas and oil reserves would be impaired. In addition, we are dependent on finding partners for our exploratory activity and to the extent that others in the industry do not have the financial resources or choose not to participate in our exploration activities, we will be adversely affected.

Our estimated reserves are based on many assumptions that may prove inaccurate. Any material inaccuracies in these reserve estimates or underlying assumptions will materially affect the quantities and present value of our reserves.

No one can measure underground accumulations of oil and natural gas in an exact way. Oil and natural gas reserve engineering requires subjective estimates of underground accumulations of oil and natural gas and assumptions concerning future oil and natural gas prices, production levels and operating and development costs. As a result, estimated quantities of proved reserves and projections of future production rates and the timing of development expenditures may prove to be inaccurate. Any material inaccuracies in these reserve estimates or underlying assumptions will materially affect the quantities and present value of our reserves, which could adversely affect our business, results of operations and financial condition.

Further, the present value of future net cash flows from our proved reserves may not be the current market value of our estimated natural gas and oil reserves. In accordance with SEC requirements, we base the estimated discounted future net cash flows from our proved reserves on the 12-month average oil and gas index prices, calculated as the unweighted arithmetic average for the first-day-of-the-month price for each month and costs in effect on the date of the estimate, holding the prices and costs constant throughout the life of the properties. Actual future prices and costs may differ materially from those used in the net present value estimate, and future net present value estimates using then current prices and costs may be significantly less than the current estimate. In addition, the 10% discount factor we use when calculating discounted future net cash flows for reporting requirements in compliance with FASB ASC 932 may not be the most appropriate discount factor based on interest rates in effect from time to time and risks associated with us or the natural gas and oil industry in general.

A substantial percentage of our proved reserves consist of undeveloped reserves.

As of the end of our 2012 fiscal year, approximately 44% of our proved reserves were classified as proved undeveloped reserves. These reserves may not ultimately be developed or produced. As a result, we may not find commercially viable quantities of oil and natural gas, which in turn may have a material adverse effect on our results of operations.

Seismic studies do not guarantee that hydrocarbons are present or, if present, will produce in economic quantities.

We rely on seismic studies to assist us with assessing prospective drilling opportunities on our properties, as well as on properties that we may acquire. Such seismic studies are merely an interpretive tool and do not necessarily guarantee that hydrocarbons are present or, if present, will produce in economic quantities.

We may experience difficulty in achieving and managing future growth.

Future growth may place strains on our resources and cause us to rely more on project partners and independent contractors, possibly negatively affecting our financial condition and results of operations. Our ability to grow will depend on a number of factors, including, but not limited to:

 

   

our ability to obtain leases or options on properties for which we have 3-D seismic data;

 

   

our ability to acquire additional 3-D seismic data;

 

19


Table of Contents
   

our ability to identify and acquire new exploratory prospects;

 

   

our ability to develop existing prospects;

 

   

our ability to continue to retain and attract skilled personnel;

 

   

our ability to maintain or enter into new relationships with project partners and independent contractors;

 

   

the results of our drilling program;

 

   

hydrocarbon prices; and

 

   

our access to capital.

We may not be successful in upgrading our technical, operations and administrative resources or in increasing our ability to internally provide certain of the services currently provided by outside sources, and we may not be able to maintain or enter into new relationships with project partners and independent contractors. Our inability to achieve or manage growth may adversely affect our financial condition and results of operations.

Our business may suffer if we lose key personnel.

We depend to a large extent on the services of certain key management personnel, including James A. Watt, our President and Chief Executive Officer, Frank T. Smith, Jr., our Senior Vice President and Chief Financial Officer, and our other executive officers and key employees. The loss of Mr. Watt, Mr. Smith or other key management personnel could have a material adverse effect on our business, financial condition and results of operations. These individuals have extensive experience and expertise in evaluating and analyzing producing oil and natural gas properties and drilling prospects, maximizing production from oil and natural gas properties, marketing oil and natural gas production and developing and executing financing and hedging strategies. We do not maintain key-man life insurance with respect to any of our employees. Our success will be dependent on our ability to continue to employ and retain skilled technical personnel.

We face strong competition from other natural gas and oil companies.

We encounter competition from other natural gas and oil companies in all areas of our operations, including the acquisition of exploratory prospects and proved properties. Our competitors include major integrated natural gas and oil companies and numerous independent natural gas and oil companies, individuals and drilling and income programs. Many of our competitors are large, well-established companies that have been engaged in the natural gas and oil business much longer than we have and possess substantially larger operating staffs and greater capital resources than we do. These companies may be able to pay more for exploratory projects and productive natural gas and oil properties and may be able to define, evaluate, bid for and purchase a greater number of properties and prospects than our financial or human resources permit. In addition, these companies may be able to expend greater resources on the existing and changing technologies that we believe are and will be increasingly important to attaining success in the industry. We may not be able to conduct our operations, evaluate and select suitable properties and consummate transactions successfully in this highly competitive environment.

We may not be able to keep pace with technological developments in our industry.

The natural gas and oil industry is characterized by rapid and significant technological advancements and introductions of new products and services using new technologies. As others use or develop new technologies, we may be placed at a competitive disadvantage or competitive pressures may force us to implement those new technologies at substantial costs. In addition, other natural gas and oil companies may have greater financial, technical and personnel resources that allow them to enjoy technological advantages and may in the future allow them to implement new technologies before we can. We may not be able to respond to these competitive

 

20


Table of Contents

pressures and implement new technologies on a timely basis or at an acceptable cost. If one or more of the technologies we use now or in the future were to become obsolete or if we are unable to use the most advanced commercially available technology, our business, financial condition and results of operations could be materially adversely affected.

Governmental regulation and liability for environmental matters may adversely affect our business, financial condition and results of operations.

Natural gas and oil operations are subject to various federal, state and local government regulations that may change from time to time. Matters subject to regulation include discharge permits for drilling operations, plug and abandonment bonds, reports concerning operations, the spacing of wells, unitization and pooling of properties and taxation. From time to time, regulatory agencies have imposed price controls and limitations on production by restricting the rate of flow of natural gas and oil wells below actual production capacity in order to conserve supplies of natural gas and oil. Other federal, state and local laws and regulations relating primarily to the protection of human health and the environment apply to the development, production, handling, storage, transportation and disposal of natural gas and oil, by-products thereof and other substances and materials produced or used in connection with natural gas and oil operations. In addition, we may be liable for environmental damages caused by previous owners of property we purchase or lease. Some environmental laws provide for joint and several strict liability for remediation of releases of hazardous substances, rendering a person liable for environmental damage without regard to negligence or fault on the part of such person. In addition, we may be subject to claims alleging personal injury or property damage as a result of alleged exposure to hazardous substances such as oil and natural gas related products. As a result, we may incur substantial liabilities to third parties or governmental entities and may be required to incur substantial remediation costs. We also are subject to changing and extensive tax laws, the effects of which cannot be predicted. Compliance with existing, new or modified laws and regulations could have a material adverse effect on our business, financial condition and results of operations.

Certain federal income tax deductions currently available with respect to oil and natural gas drilling and development may be eliminated as a result of future legislation.

President Obama’s Fiscal Year 2013 Budget includes proposals that would, if enacted into law, make significant changes to United States tax laws, including the elimination of certain key U.S. federal income tax incentives currently available to oil and natural gas exploration and production companies. These changes include, but are not limited to, (i) the repeal of the percentage depletion allowance for oil and natural gas properties, (ii) the elimination of current deductions for intangible drilling and development costs, (iii) the elimination of the deduction for certain domestic production activities and (iv) increasing the amortization period for certain geological and geophysical expenditures. It is unclear whether these or similar changes will be enacted and, if enacted, how soon any such changes could become effective. The passage of any legislation as a result of these proposals or any other similar changes in U.S. federal income tax laws could eliminate or postpone certain tax deductions that are currently available with respect to oil and natural gas exploration and development, and any such change could increase our tax liability and negatively impact our financial results.

We may not have enough insurance to cover all of the risks we face and operators of prospects in which we participate may not maintain or may fail to obtain adequate insurance.

In accordance with customary industry practices, we maintain insurance coverage against some, but not all, potential losses in order to protect against the risks we face. We do not carry business interruption insurance. We may elect not to carry insurance if our management believes that the cost of available insurance is excessive relative to the risks presented. In addition, we cannot insure fully against pollution and environmental risks. The occurrence of an event not fully covered by insurance could have a material adverse effect on our financial condition and results of operations. The impact of hurricanes in the areas where we operate has resulted in escalating insurance costs and less favorable coverage terms.

 

21


Table of Contents

Oil and natural gas operations are subject to particular hazards incident to the drilling and production of oil and natural gas, such as blowouts, cratering, explosions, uncontrollable flows of oil, natural gas or well fluids, fires and pollution and other environmental risks. These hazards can cause personal injury and loss of life, severe damage to and destruction of property and equipment, pollution or environmental damage and suspension of operation. We do not operate all of the properties in which we have an interest. In the projects in which we own a non-operating interest directly, the operator for the prospect maintains insurance of various types to cover our operations with policy limits and retention liability customary in the industry. We believe the coverage and types of insurance are adequate. The occurrence of a significant adverse event that is not fully covered by insurance could result in the loss of our total investment in a particular prospect, which could have a material adverse effect on our financial condition and results of operations.

The financial condition of our operators could negatively impact our ability to collect revenues from operations.

We operate the majority of the properties in which we have working interests. In the event that an operator of our remaining properties experiences financial difficulties, this may negatively impact our ability to receive payments for our share of net production to which we are entitled under our contractual arrangements with such operator. While we seek to minimize such risk by structuring our contractual arrangements to provide for production payments to be made directly to us by first purchasers of the hydrocarbons, there can be no assurances that we can do so in all situations covering our non-operated properties.

We may hedge the price risks associated with our production. Our hedge transactions may result in our making cash payments or prevent us from benefiting to the fullest extent possible from increases in prices for natural gas and oil.

Because natural gas and oil prices are unstable, we may enter into price-risk-management transactions such as swaps, collars, futures and options to reduce our exposure to price declines associated with a portion of our natural gas and oil production and thereby achieve a more predictable cash flow. The use of these arrangements will limit our ability to benefit from increases in the prices of natural gas and oil. In addition, our hedging arrangements may apply only to a portion of our production, thereby providing only partial protection against declines in natural gas and oil prices. These arrangements could expose us to the risk of financial loss in certain circumstances, including instances in which production is less than expected, our customers fail to purchase contracted quantities of natural gas and oil or a sudden, unexpected event materially adversely impacts natural gas or oil prices.

If oil and natural gas prices decrease, we may be required to take write-downs of the carrying values of our oil and natural gas properties.

Certain accounting rules may require us to write down the carrying value of our properties when oil and natural gas prices decrease or when we have substantial downward adjustments of our estimated proved reserves, increases in our estimates of development costs or deterioration in our exploration results. Once incurred, a write-down of our oil and natural gas properties is not reversible at a later date. Any write-down would constitute a non-cash charge to earnings and could have a material adverse effect on our results of operations for the periods in which such charges are taken.

Our producing properties are located in regions that make us vulnerable to risks associated with operating in one major contiguous geographic area, including, but not limited to, the risk of damage or business interruptions from hurricanes.

Our properties are located onshore and in state waters along the Texas and Louisiana Gulf Coast region of the United States. As a result of this geographic concentration, we are disproportionately affected by any delays or interruptions in production or transportation in these areas caused by governmental regulation, transportation

 

22


Table of Contents

capacity constraints, natural disasters, regional price fluctuations or other factors. This is particularly true of our inland water drilling and offshore operations, which are susceptible to hurricanes and other tropical weather disturbances. Such disturbances have in the past and will in the future have any or all of the following adverse effects on our business:

 

   

interruptions to our operations as we suspend production in advance of an approaching storm;

 

   

damage to our facilities and equipment, including damage that disrupts or delays our production;

 

   

disruption to the transportation systems we rely upon to deliver our products to our customers; and

 

   

damage to or disruption of our customers’ facilities that prevents us from taking delivery of our products.

Our identified drilling locations are scheduled out over several years, making them susceptible to uncertainties that could materially alter the occurrence or timing of their drilling.

Our management has specifically identified and scheduled drilling locations as an estimation of our future multi-year drilling activities on our existing acreage. These scheduled drilling locations represent a significant component of our growth strategy. Our ability to drill and develop these locations depends on a number of uncertainties, including oil and natural gas prices, the availability of capital, costs, drilling results, regulatory approvals and other factors. Because of these uncertainties, we do not know if the potential drilling locations we have identified will ever be drilled or if we will be able to produce oil or natural gas from these or any other potential drilling locations. As such, our actual drilling activities may materially differ from those presently identified, which could adversely affect our business.

Market conditions or operational impediments may hinder our access to oil and natural gas markets or delay our production.

Market conditions or the unavailability of satisfactory oil and natural gas transportation arrangements may hinder our access to oil and natural gas markets or delay our production. The availability of a ready market for our oil and natural gas production depends on a number of factors, including the demand for and supply of oil and natural gas and the proximity of our reserves to pipelines and terminal facilities. Our ability to market our production depends in substantial part on the availability and capacity of transport vessels, gathering systems, pipelines and processing facilities owned and operated by third parties under interruptible or short-term transportation agreements. Under the interruptible transportation agreements, the transportation of our natural gas may be interrupted due to capacity constraints on the applicable system, for maintenance or repair of the system or for other reasons as dictated by the particular agreements. Our failure to obtain such services on acceptable terms could materially harm our business. We may be required to shut in wells due to lack of a market or the inadequacy or unavailability of natural gas pipeline or gathering system capacity. If that were to occur, we would be unable to realize revenue from those wells unless and until we made arrangements for delivery of their production to market.

Terrorist attacks aimed at our energy operations could adversely affect our business.

The continued threat of terrorism and the impact of military and other government action have led and may lead to further increased volatility in prices for oil and natural gas and could affect these commodity markets or the financial markets used by us. In addition, the U.S. government has issued warnings that energy assets may be a future target of terrorist organizations. These developments have subjected our oil and natural gas operations to increased risks. Any future terrorist attack on our facilities, those of our customers, the infrastructure we depend on for transportation of our products, and, in some cases, those of other energy companies, could have a material adverse effect on our business.

 

23


Table of Contents

The market price of our common stock may be volatile.

The trading price of our common stock and the price at which we may sell common stock in the future could be subject to large fluctuations in response to a variety of events or conditions, including, but not limited to, any of the following:

 

   

limited trading volume in our common stock;

 

   

quarterly variations in operating results;

 

   

our involvement in litigation;

 

   

general financial market conditions;

 

   

the prices of natural gas and oil;

 

   

announcements by us and our competitors;

 

   

our liquidity;

 

   

our ability to raise additional funds; and

 

   

changes in government regulations.

We do not intend to pay dividends on our common stock and our ability to pay dividends on our common stock is restricted.

We have not historically paid a dividend on our common stock, cash or otherwise, and do not intend to do so in the foreseeable future. We are currently restricted from paying dividends on our common stock by the indenture governing our New Notes and by our New Credit Agreement. Any future dividends also may be restricted by our then-existing debt agreements.

Provisions of Delaware law and our charter and bylaws may delay or prevent transactions that would benefit stockholders.

Our certificate of incorporation and bylaws and the Delaware General Corporation Law, or the DGCL, contain provisions that may have the effect of delaying, deferring or preventing a change of control of the Company. These provisions, among other things, authorize the Company’s board of directors to set the terms of preferred stock.

Because of these provisions, persons considering unsolicited tender offers or other unilateral takeover proposals may be more likely to negotiate with our board of directors rather than pursue non-negotiated takeover attempts. As a result, these provisions may make it more difficult for our stockholders to benefit from transactions that are opposed by our board of directors.

Substantial sales of our common stock could adversely affect our stock price.

Sales of a substantial number of shares of our common stock, or the perception that such sales could occur, could adversely affect the market price of our common stock by introducing a large number of sellers to the market. Such sales could cause the market price of our common stock to decline. We cannot predict whether future sales of our common stock, or the availability of our common stock for sale, will adversely affect the market price for our common stock or our ability to raise capital by offering equity securities.

We may issue shares of preferred stock that could adversely affect holders of shares of our common stock.

Our board of directors is authorized to issue additional classes or series of shares of preferred stock without any action on the part of the holders of shares of our common stock, subject to the limitations of our certificate of

 

24


Table of Contents

incorporation and the DGCL. Our board of directors also has the power, without approval of the holders of shares of our common stock and subject to the terms of our certificate of incorporation and the DGCL, to set the terms of any such classes or series of shares of preferred stock that may be issued, including voting rights, dividend rights, conversion features, preferences over shares of our common stock with respect to dividends or if we liquidate, dissolution or winding-up of our business and other terms. If we issue shares of preferred stock in the future that have a preference over shares of our common stock with respect to the payment of dividends or upon our liquidation, dissolution or winding up, or if we issue shares of preferred stock with voting rights that dilute the voting power of shares of our common stock, the rights of holders of shares of our common stock or the trading price of shares of our common stock could be adversely affected.

 

Item 1B. Unresolved Staff Comments.

Not applicable.

 

Item 3. Legal Proceedings.

From time to time, we are party to certain legal actions and claims arising in the ordinary course of business. While the outcome of these events cannot be predicted with certainty, our management does not expect these matters to have a materially adverse effect on our financial position or results of operations.

 

Item 4. Mine Safety Disclosures.

Not applicable.

 

25


Table of Contents

PART II

 

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Market for Our Common Stock

Since July 16, 2010, our common stock has been traded on the OTC Bulletin Board. The following table sets forth, for the periods indicated, the high and low bid information of our common stock on the OTC Bulletin Board for the period from January 1, 2011 through December 31, 2012. Prices set forth below for periods prior to December 31, 2011 have been adjusted for the 1-for-100 reverse split that was effective on December 22, 2011.

 

2012:

   High      Low  

Quarter ended December 31, 2012

   $ 1.99       $ 1.00   

Quarter ended September 30, 2012

   $ 2.60       $ 1.51   

Quarter ended June 30, 2012

   $ 3.43       $ 2.51   

Quarter ended March 31, 2012

   $ 4.25       $ 2.35   

2011:

   High      Low  

Quarter ended December 31, 2011

   $ 10.00       $ 2.00   

Quarter ended September 30, 2011

   $ 71.00       $ 9.00   

Quarter ended June 30, 2011

   $ 135.00       $ 40.50   

Quarter ended March 31, 2011

   $ 131.00       $ 39.50   

The last sales price of our common stock on the OTC Bulletin Board on December 30, 2012 was $1.55 per share. As of February 28, 2013, the closing sales price of a share of our common stock was $2.00 and there were approximately 324 stockholders of record.

We have not paid any cash dividends to date, and have no intention of paying any cash dividends on our common stock in the foreseeable future. The declaration and payment of dividends is subject to the discretion of our board of directors and to certain limitations imposed under the DGCL and other restrictions under our existing or future debt instruments. The timing, amount and form of dividends, if any, will depend on, among other things, our results of operations, financial condition, cash requirements and other factors deemed relevant by our board of directors. The indenture governing our New Notes and our New Credit Agreement contain significant restrictions on our ability to pay dividends on our common stock.

There were 821 common shares repurchased in 2012, all repurchased in the fourth quarter of 2012. All shares repurchased were associated with the payment of taxes by employees upon the vesting of stock awarded pursuant to the Dune Energy, Inc. 2007 Stock Incentive Plan, as amended on December 1, 2009.

1,716,433 shares of restricted stock were awarded to employees, officers or non-employee directors during fiscal year 2012.

 

26


Table of Contents

Securities Authorized for Issuance Under Equity Compensation Plans

The following table provides information as of December 31, 2012 about our equity compensation plans and arrangements.

Equity Compensation Plan Information—December 31, 2012(*)

 

Plan category

   (a)
Number of securities
to be issued upon
exercise of
outstanding options,
warrants and rights
    (b)
Weighted-average
exercise price of
outstanding options,
warrants and rights
     (c)
Number of  securities remaining
available for future issuance under
equity compensation plans
(excluding securities reflected in
column (a))
 

Equity compensation plans approved by security holders

     —        $ —          11,550 (1) 

Equity compensation plans not approved by security holders

     1,116 (2)(3)    $ 675.00         —    
  

 

 

   

 

 

    

 

 

 

Total

     1,116      $ 675.00         11,550   
  

 

 

   

 

 

    

 

 

 

 

(*) The number of shares and any exercise prices with respect to awards and equity issuances made prior to December 1, 2009 have been adjusted to give effect to the 1-for-5 reverse stock split adopted, effective as of December 2, 2009, and the 1-for-100 reverse stock split effective December 22, 2011.
(1) Includes 3,400 shares available under the 2005 Plan and 8,150 shares available under the 2007 Plan. The following shares may return to the 2007 Plan or the 2005 Plan, as the case may be, and be available for issuance in connection with a future award: (i) shares covered by an award that expires or otherwise terminates without having been exercised in full; (ii) shares that are forfeited or repurchased by us prior to becoming fully vested; (iii) shares covered by an award that is settled in cash; (iv) shares withheld to cover payment of an exercise price or cover applicable tax withholding obligations; (v) shares tendered to cover payment of an exercise price; and (vi) shares that are cancelled pursuant to an exchange or repricing program.
(2) Consists of warrants and options granted to our employees, officers, directors and consultants, to the extent vested and exercisable (within the meaning of Rule 13d-3(d)(1) promulgated by the SEC under the Securities Exchange Act of 1934, as amended) as of December 31, 2011.
(3) Excludes 4,078 shares of restricted stock awarded in fiscal year 2009 to non-employee directors having elected to receive shares in lieu of cash for a portion of their annual retainer and fees.

Set forth below is a description of the individual compensation arrangements or equity compensation plans that were not required to be approved by our security holders, pursuant to which the 1,116 shares of our common stock included in the chart above were issuable as of December 31, 2012:

 

   

Warrant issued September 26, 2006 to a consultant in consideration of services performed on our behalf, which warrant expires September 25, 2015 and is currently exercisable to purchase up to 1,000 shares of our common stock at an exercise price of $675.00 per share;

 

   

Warrants issued April 17, 2007 to our former lender in accordance with anti-dilutive protection contained in the September 26, 2006 warrant agreement with our former lender, resulting in the issuance of additional warrants expiring on September 25, 2015 and exercisable to purchase up to 116 shares of our common stock at an exercise price of $675.00 per share.

Recent Sales of Unregistered Securities

On December 20, 2012, the Company entered into an agreement with each of its major shareholders to sell 18,749,997 new shares of common stock at $1.60 per share for total proceeds of $30 million to be used to fund working capital for the Company’s planned 2013 drilling program. Subject to certain conditions or upon the occurrence of certain events, Dune may issue and the major shareholders may purchase up to an additional 12.5 million shares of common stock in two equal tranches, also at $1.60 per share.

 

27


Table of Contents

Each of the Company’s major shareholders, who collectively held approximately 93% of the outstanding shares of the Company prior to the agreement, participated in the sale on a pro-rata basis as to their interest prior to the issuance of the new common stock. Under the terms of the agreement the Company may issue up to 31,250,000 shares at $1.60 per share prior to December 31, 2013. The initial issuance on December 22, 2012 was for a cash consideration of $30 million and, depending on Dune’s satisfaction of certain performance conditions relating to its drilling program, it may make up to two additional cash draws of $10 million each at the $1.60 per share price. Total consideration to the Company, assuming all conditions of the program are achieved and additional draws made, would be $50 million.

In the financing, each of the investors received a “Preemptive Right” to purchase such investor’s pro rata percentage of new stock or new debt financings (excluding certain reserve based revolver financings) undertaken by Dune, on substantially the same terms as offered to any outside investor. At the expiration of the term of the agreement or upon a change of control of Dune, the investors can elect to draw down the remaining shares in the program by paying to the Company $1.60 per share for any shares remaining under the initial 31,250,000 shares allocated for issuance pursuant to the agreement.

In connection with the financing, Dune received the right, but not the obligation, to offer Dune’s non-participating shareholders the option to make a one-time proportional purchase of the Company’s common stock at a purchase price of $1.60 per share.

The shares of common stock were issued in reliance on an exemption from registration under Section 4(2) of the Securities Act. The proceeds from the sale of common stock will be used to fund working capital and repay indebtedness.

 

Purchaser

   Number of Shares
Purchased
 

Simplon Partners, L.P.

     196,965   

Simplon International Limited

     482,226   

Highbridge International, LLC

     1,034,705   

West Face Long Term Opportunities Global Master L.P.

     2,980,550   

BlueMountain Distressed Master Fund L.P.

     822,314   

BlueMountain Long/Short Credit Master Fund L.P.

     930,563   

AAI BlueMountain Fund PLC

     66,606   

Blue Mountain Credit Alternatives Master Fund L.P.

     953,573   

BlueMountain Timberline Ltd.

     841,390   

BlueMountain Kicking Horse Fund L.P.

     2,378   

BlueMountain Strategic Credit Master Fund L.P.

     126,985   

BlueMountain Credit Opportunities Master Fund I L.P.

     383,245   

Zell Credit Opportunities Side Fund, L.P.

     1,268,542   

Whitebox Multi-Strategy Partners, LP

     442,487   

Pandora Select Partners, LP

     187,750   

Whitebox Credit Arbitrage Partners, LP

     462,738   

TPG Opportunity Fund I, L.P.

     1,866,320   

TPG Opportunity Fund III, L.P.

     799,852   

Mardi Gras Ltd.

     689,986   

High Ridge Ltd.

     3,976,068   

Strategic Value Special Situation Fund, L.P.

     234,754   

 

Item 6. Selected Financial Data.

The Company qualifies as a smaller reporting company and is not required to provide information pursuant to this item.

 

28


Table of Contents
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion will assist you in understanding our financial position, liquidity and results of operations. The information below should be read in conjunction with the consolidated financial statements and the related notes to the consolidated financial statements. 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 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.

Critical Estimates and Accounting Policies

We prepare our consolidated financial statements in this report using accounting principles that are generally accepted in the United States, or GAAP. GAAP represents a comprehensive set of accounting and disclosure rules and requirements. We must make judgments, estimates and, in certain circumstances, choices between acceptable GAAP alternatives as we apply these rules and requirements. The most critical estimate we make is the engineering estimate of proved oil and gas reserves. This estimate affects the application of the successful efforts method of accounting, the calculation of depreciation, depletion and amortization of oil and gas properties and the estimate of the impairment of our oil and gas properties. It also affects the estimated lives used to determine asset retirement obligations. In addition, the estimates of proved oil and gas reserves are the basis for the related standardized measure of discounted future net cash flows.

Estimated proved oil and gas reserves

The evaluation of our oil and gas reserves is critical to management of our operations and ultimately our economic success. Decisions such as whether development of a property should proceed and what technical methods are available for development are based on an evaluation of reserves. These oil and gas reserve quantities are also used as the basis of calculating the unit-of-production rates for depreciation, evaluating impairment and estimating the life of our producing oil and gas properties in our asset retirement obligations. Our total reserves are classified as proved, probable and possible. Proved reserves are classified as either proved developed or proved undeveloped. Proved developed reserves are those reserves that can be expected to be recovered through existing wells with existing equipment and operating methods. Proved undeveloped reserves include reserves expected to be recovered from new wells from undrilled proven reservoirs or from existing wells where a significant major expenditure is required for completion and production. Probable reserves are those additional reserves that are less certain to be recovered than proved reserves and when probabilistic methods are used, there should be at least a 50% probability that the actual quantities recovered will equal or exceed the proved plus probable estimates. Possible reserves are those additional reserves that are less certain to be recovered than probable reserves and when probabilistic methods are used, there should be at least a 10% probability that the total quantities ultimately recovered will equal or exceed proved plus probable plus possible reserve estimates.

Reserve engineers prepare the estimates of our oil and gas reserves presented in this report based on guidelines promulgated under GAAP and in accordance with the rules and regulations of the U.S. Securities and Exchange Commission, or the SEC. The evaluation of our reserves by the reserve engineers involves their rigorous examination of our technical evaluation and extrapolations of well information such as flow rates and reservoir pressure declines as well as other technical information and measurements. Reservoir engineers interpret these data to determine the nature of the reservoir and ultimately the quantity of total oil and gas reserves attributable to a specific property. Our total reserves in this report include only quantities that we expect to recover commercially using current prices, costs, existing regulatory practices and technology. While we are reasonably certain that the total reserves will be produced, the timing and ultimate recovery can be affected by a

 

29


Table of Contents

number of factors including completion of development projects, reservoir performance, regulatory approvals and changes in projections of long-term oil and gas prices. Revisions can include upward or downward changes in the previously estimated volumes or proved reserves for existing fields due to evaluation of (i) already available geologic, reservoir or production data or (ii) new geologic or reservoir data obtained from wells. Revisions can also include changes associated with significant changes in development strategy, oil and gas prices or production equipment/facility capacity.

Standardized measure of discounted future net cash flows

The standardized measure of discounted future net cash flows relies on these estimates of oil and gas reserves using commodity prices and costs at year-end. Oil and condensate prices were calculated for each property using differentials to an average for the year of the first-of-the-month ConocoPhillips WTI price of $91.33 per barrel and were held constant for the lives of the property. The weighted average price over the lives of the properties was $108.23 per barrel. Gas prices were calculated for each property using differentials to an average for the year of the first-of-the-month Henry Hub Louisiana Onshore price of $2.76 per Mmbtu and were held constant for the lives of the properties. The weighted average price over the lives of the properties was $2.93 per Mcf. The standardized measure is based on the average of the first-of-the-month pricing for 2012. While we believe that future operating costs can be reasonably estimated, future prices are difficult to estimate since the market prices are influenced by events beyond our control. Future global economic and political events will most likely result in significant fluctuations in future oil prices.

Successful efforts method of accounting

Oil and gas exploration and production companies choose one of two acceptable accounting methods, successful efforts or full cost. The most significant difference between the two methods relates to the accounting treatment of drilling costs for unsuccessful exploration wells, or dry holes, and exploration costs. Under the successful efforts method, exploration costs and dry hole costs (the primary uncertainty affecting this method) are recognized as expenses when incurred and the costs of successful exploration wells are capitalized as oil and gas properties. Entities that follow the full cost method capitalize all drilling and exploration costs including dry hole costs into one pool of total oil and gas property costs. We employ the successful efforts method of accounting.

It is typical for companies that drill exploration wells to incur dry hole costs. Our primary activities have focused on mainly development wells and our exploratory drilling activities are limited. However, we anticipate we will selectively expand our exploration drilling in the future. It is impossible to accurately predict specific dry holes. Because we cannot predict the timing and magnitude of dry holes, quarterly and annual net income can vary dramatically.

The calculation of depreciation, depletion and amortization of capitalized costs under the successful efforts method of accounting differs from the full cost method in that the successful efforts method requires us to calculate depreciation, depletion and amortization expense on individual fields rather than one pool of costs. In addition, under the successful efforts method, we assess our fields individually for impairment compared to one pool of costs under the full cost method.

Depreciation, Depletion and Amortization of Oil and Gas Properties

The unit-of-production method of depreciation, depletion and amortization of oil and gas properties under the successful efforts method of accounting is applied pursuant to the simple multiplication of units produced by the costs per unit on a field by field basis. Leasehold cost per unit is calculated by dividing the total cost by the estimated total proved oil and gas reserves associated with that field. Well cost per unit is calculated by dividing the total cost by the estimated total proved developed oil and gas reserves associated with that field. The volumes

 

30


Table of Contents

or units produced and asset costs are known and while the proved reserves have a high probability of recoverability, they are based on estimates that are subject to some variability. The factors that create this variability are included in the discussion of estimated proved oil and gas reserves above.

Impairment of Oil and Gas Properties

We test for impairment of our properties based on estimates of proved reserves. Proved oil and gas properties are reviewed for impairment whenever events or circumstances indicate that the carrying amount may not be recoverable. We estimate the future undiscounted cash flows of the affected properties to judge the recoverability of the carrying amounts. Initially this analysis is based on proved reserves. However, when we believe that a property contains oil and gas reserves that do not meet the defined parameters of proved reserves, an appropriately risk-adjusted amount of these reserves may be included in the impairment evaluation. These reserves are subject to much greater risk of ultimate recovery. An asset would be impaired if the undiscounted cash flows were less than its carrying value. Impairments are measured by the amount by which the carrying value exceeds its fair value.

Impairment analysis is performed on an ongoing basis. In addition to using estimates of oil and gas reserve volumes in conducting impairment analysis, it is also necessary to estimate future oil and gas prices. The impairment evaluation triggers include a significant long-term decrease in current and projected prices or reserve volumes, an accumulation of project costs significantly in excess of the amount originally expected and historical and current negative operating losses. Although we evaluate future oil and gas prices as part of the impairment analysis, we do not view short-term decreases in prices, even if significant, as impairment triggering events.

Exploratory Drilling Costs

The costs of drilling an exploratory well are capitalized as uncompleted wells pending the determination of whether the well has found proved reserves. If proved reserves are not found, these capitalized costs are charged to expense. On the other hand, the determination that proved reserves have been found results in continued capitalization of the well and its reclassification as a well containing proved reserves.

Asset Retirement Obligation

The Company follows FASB ASC 410—Asset Retirement and Environmental Obligations which requires entities to record the fair value of a liability for legal obligations associated with the retirement obligations of tangible long-lived assets in the period in which it is incurred. The fair value of asset retirement obligation liabilities has been calculated using an expected present value technique. Fair value, to the extent possible, should include a market risk premium for unforeseeable circumstances. A five percent market risk premium was included in the Company’s asset retirement obligation fair value estimate. When the liability is initially recorded, the entity increases the carrying amount of the related long-lived asset. Over time, accretion of the liability is recognized each period and the capitalized cost is amortized over the useful life of the related asset. Upon retirement of the liability, an entity either settles the obligation for its recorded amount or incurs a gain or loss upon settlement. This standard requires the Company to record a liability for the fair value of the dismantlement and plugging and abandonment costs, excluding salvage values.

Derivatives

Derivative financial instruments, utilized to manage or reduce commodity price risk related to Dune’s production, are accounted for under the provisions of FASB ASC 815—Derivatives and Hedging. Under this statement, derivatives are carried on the balance sheet at fair value. If the derivative is designated as a fair value hedge, the changes in the fair value of the derivative and of the hedged item attributable to the hedged risk are recognized in earnings. If the derivative is designated as a cash flow hedge, the effective portions of changes in the fair value of the derivatives are recorded in other comprehensive income or loss and are recognized in the

 

31


Table of Contents

statement of operations when the hedged item affects earnings. If the derivative is not designated as a hedge, changes in the fair value are recognized in other expense. Ineffective portions of changes in the fair value of cash flow hedges are also recognized in loss on derivative liabilities.

In accordance with the requirements of the financial restructuring, the Company entered into hedge agreements in January 2012. The gain or loss on these derivatives is recognized currently in earnings and treated as fair value hedges.

Stock-based compensation

The Company follows the provisions of FASB ASC 718 – Stock Compensation. The statement requires all stock-based payments to employees and non-employee directors, including grants of stock options, to be recognized in the financial statements based on their fair values on the date of the grant.

Business Strategy

Dune is an independent energy company engaged in the exploration, development, acquisition and exploitation of natural gas and crude oil properties, with interests along the Louisiana/Texas Gulf Coast. On May 15, 2007, we closed the Stock Purchase and Sale Agreement to acquire all of the capital stock of Goldking Energy Holdings, L.P., or Goldking. Goldking was an independent energy company focused on the exploration, exploitation and development of natural gas and crude properties located onshore and in state waters along the Gulf Coast. The acquisition of Goldking substantially increased our proved reserves, provided significant drilling upside and increased our geographic and geological well diversification. Additionally, the acquisition of Goldking provided us with exploration opportunities within our core geographic area.

Our properties now cover over 82,000 gross acres across 19 producing oil and natural gas fields onshore and in state waters along the Texas and Louisiana Gulf Coast.

Grow Through Exploitation, Development, and Exploration of Our Properties. Our primary focus will continue to be the development and exploration efforts in our Gulf Coast properties. We believe that our properties and acreage position will allow us to grow organically through low-risk drilling in the near term, as this property set continues to present attractive opportunities to expand our reserve base through workovers and recompletions, field extensions, delineating deeper formations within existing fields and higher risk/higher reward exploratory drilling. In addition, we will constantly review, rationalize and “high-grade” our properties in order to optimize our existing asset base.

Actively Manage the Risks and Rewards of Our Drilling Program. Our strategy is to increase our oil and natural gas reserves and production while keeping our finding and development costs and operating costs (on a per Mcfe basis) competitive with our industry peers. We expect to implement this strategy through drilling exploratory and development wells from our inventory of available prospects that we have evaluated for geologic and mechanical risk and future reserve or resource potential. Our drilling program will contain some higher risk/higher reserve potential opportunities as well as some lower risk/lower reserve potential opportunities in order to achieve a balanced program of reserve and production growth. Success of this strategy is contingent on various risk factors, as discussed elsewhere in this report.

Maintain and Utilize State of the Art Technological Expertise. 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 will employ technical advancements, including 3-D seismic data, pre-stack depth and reverse-time migration, to identify and exploit new opportunities in our asset base. We also employ the latest directional drilling, completion and stimulation technology in our wells to enhance recoverability and accelerate cash flows associated with these wells.

 

32


Table of Contents

Pursue Opportunistic Acquisitions of Underdeveloped Properties. We continually review opportunities to acquire producing properties, leasehold acreage and drilling prospects that are in core operating areas and require a minimum of initial upfront capital. We are also seeking to acquire operational control of properties that we believe have a solid proved reserves base coupled with significant exploitation and exploration potential. We will evaluate acquisition opportunities that we believe will further enhance our operations and reserves in a cost effective manner.

In 2012 we invested $27.3 million in oil and gas properties. We produced 5.3 Bcfe during the year. Extensions and discoveries were 18.1 Bcfe and revisions of previous estimates were 2.1 Bcfe negative.

 

Capital costs (in thousands):

   Year
Ended
2012
    Year
Ended
2011
 

Acquisitions—unproved

   $ —       $ —    

Development

     27,333        19,302   
  

 

 

   

 

 

 

Total CAPEX before ARO

     27,333        19,302   

ARO costs

     3,591        744   
  

 

 

   

 

 

 

Total CAPEX including ARO

   $ 30,924      $ 20,046   
  

 

 

   

 

 

 

Asset retirement obligation (non-cash)

   $ 1,701      $ —    
  

 

 

   

 

 

 

Proved Reserves (Mmcfe):

    

Beginning

     79,448        82,703   

Production

     (5,261     (5,820

Discoveries and extensions

     18,073        3,019   

Revisions

     (2,141     (454
  

 

 

   

 

 

 

Ending reserves

     90,119        79,448   
  

 

 

   

 

 

 

Reserve additions before revisions (Mmcfe)

     18,073        3,019   

Reserve additions after revisions (Mmcfe)

     15,932        2,565   

The implementation of our strategy requires that we continually incur significant capital expenditures in order to replace current production and find and develop new oil and gas reserves. In order to finance our capital and exploration program, we depend on cash flow from operations, bank debt and equity offerings as discussed below in “Liquidity and Capital Resources.”

Liquidity and Capital Resources

During fiscal year 2012 compared to fiscal year 2011, net cash flow provided by operating activities improved by $7.6 million to $8.9 million. This improvement was primarily attributable to the absence of the $18.1 million impairment taken in 2011 as a result of that year’s capital Restructuring. In addition, Dune enjoyed 2.7% higher average oil prices for 2012 of $105.54/Bbl compared to $102.64/Bbl for 2011. However, this was offset in part by a 30.1% decline in the average price received for natural gas from $4.58/Mcf in 2011 to $3.20/Mcf for 2012.

Our current assets were $35.4 million on December 31, 2012. Cash on hand comprised approximately $22.8 million of this amount. This compared to cash of $20.4 million at December 31, 2011, which represented an 11.8% increase. Accounts payable rose 3.4% slightly up from $6.8 million at December 31, 2011 to $7.0 million at December 31, 2012, as a result of increasing drilling and workover activity.

The consolidated financial statements reflect a modest increase in the drilling program compared to the previous year, as well as ongoing drilling and facilities upgrade program. As mentioned previously, these investments were equal to $27.3 million (there were no dry-hole costs) in 2012 versus $19.3 million in 2011

 

33


Table of Contents

(excluding dry-hole costs). Our capital program is designed to maintain production from recompletions and workovers within our fields and fully develop both existing PUD locations and evaluate potential field extension wells through joint venture programs. This strategy involved industry partners in these efforts so as to reduce our upfront cash requirements and dollars expended.

On December 20, 2012, the Company entered into an agreement with each of its major shareholders to sell 18,749,997 new shares of common stock at $1.60 per share for total proceeds of $30 Million to be used to fund working capital for the Company’s planned 2013 drilling program. Including this issuance of common stock, there are currently approximately 59 million shares outstanding. Subject to certain conditions or upon the occurrence of certain events, Dune may issue and the major shareholders may purchase up to an additional 12.5 million shares of common stock in two equal tranches, also at $1.60 per share.

Each of the Company’s major shareholders, who collectively hold approximately 93% of the outstanding shares of the Company prior to the agreement, participated in the sale on a pro rata basis as to their interest prior to the issuance of the new common stock. Under the terms of the agreement the Company may issue up to 31,250,000 shares at $1.60 per share prior to December 31, 2013. The initial issuance on December 21, 2012 was for a cash consideration of $30 million and, depending on Dune’s satisfaction of certain performance conditions relating to its drilling program, it may make up to two additional cash draws of $10 million each at the $1.60 per share price. Total consideration to the Company, assuming all conditions of the program are achieved and additional draws made would be $50 million.

In the financing, each of the investors received a “Preemptive Right” to purchase such investor’s pro rata percentage of new stock or new debt financings (excluding certain reserve based revolver financings) undertaken by Dune, on substantially the same terms as offered to any outside investor. At the expiration of the term of the agreement or upon a change of control of Dune, the investors can elect to draw down the remaining shares in the program by paying to the Company $1.60 per share for any shares remaining under the initial 31,250,000 shares allocated for issuance pursuant to the agreement.

In connection with the financing, Dune received the right, but not the obligation, to offer Dune’s non-participating shareholders the option to make a one-time proportional purchase of the Company’s Common Stock at a purchase price of $1.60 per share. The Company was also obligated to file a Shelf Registration Statement within 30 days of the closing of this agreement. The full agreement and the Registration Rights Agreement have been filed as exhibits to an 8-K, for the Company dated December 26, 2012.

Our primary sources of liquidity are cash provided by operating activities, debt financing, sales of non-core properties and access to capital markets. We believe the strength of our current cash position and remaining availability under our borrowing arrangements put us in a favorable position to meet our financial obligations and ongoing capital programs in the current commodity price environment.

The exact amount of capital spending for 2013 will depend upon individual well performance results, cash flow and, where applicable, partner negotiations on the timing of drilling operations. However, we have targeted an initial capital budget of approximately $65 million to $75 million (including dry-hole costs), primarily focused on our Garden Island Bay and Leeville field projects. The capital program will include several maintenance projects in addition to field exploitation within Garden Island Bay and Leeville.

 

34


Table of Contents

The following table summarizes our contractual obligations and commercial commitments as of December 31, 2012:

 

     Payments Due By Period  
     Total      1 year      2 - 3
years
     4 - 5
years
 
     (in thousands)  

Contractual obligations:

           

Debt and interest

   $ 119,592       $ 9,391       $ 46,734       $ 63,467   

Office lease

     2,365         495         990         880   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 121,957       $ 9,886       $ 47,724       $ 64,347   
  

 

 

    

 

 

    

 

 

    

 

 

 

Results of Operations

Comparison of 2012 and 2011

Year-over-year production decreased by 9.6% from 5,820 Mmcfe in 2011 to 5,261 Mmcfe in 2012. This decrease was caused by normal reservoir declines and a very limited capital reinvestment program.

The following table reflects the increase (decrease) in oil and gas sales revenue between fiscal years 2010, 2011 and 2012 due to changes in prices and production volumes:

 

     2012     % Increase
(Decrease)
    2011     % Increase
(Decrease)
    2010  

Oil production volume (Mbbls)

     407        -16     482        -18     585   

Oil sales revenue ($000)

   $ 42,954        -13   $ 49,473        9   $ 45,408   

Price per Bbl

   $ 105.54        3   $ 102.64        32   $ 77.62   

Increase (decrease) in oil sales revenue due to:

          

Change in production volume

   $ (7,698     $ (7,995    

Change in prices

     1,179          12,060       
  

 

 

     

 

 

     

Total increase (decrease) in oil sales revenue

   $ (6,519     $ 4,065       
  

 

 

     

 

 

     

Gas production volume (Mmcf)

     2,819        -4     2,928        -23     3,793   

Gas sales revenue ($000)

   $ 9,014        -33   $ 13,419        -29   $ 18,781   

Price per Mcf

   $ 3.20        -30   $ 4.58        -7   $ 4.95   

Increase (decrease) in gas sales revenue due to:

          

Change in production volume

   $ (499     $ (4,282    

Change in prices

     (3,906       (1,080    
  

 

 

     

 

 

     

Total increase (decrease) in gas sales revenue

   $ (4,405     $ (5,362    
  

 

 

     

 

 

     

Total production volume (Mmcfe)

     5,261        -10     5,820        -20     7,303   

Total revenue ($000)

   $ 51,968        -17   $ 62,892        -2   $ 64,189   

Price per Mcfe

   $ 9.88        -9   $ 10.81        23   $ 8.79   

Increase (decrease) in revenue due to:

          

Change in production volume

   $ (6,043     $ (13,036    

Change in prices

     (4,881       11,739       
  

 

 

     

 

 

     

Total increase (decrease) in total revenue

   $ (10,924     $ (1,297    
  

 

 

     

 

 

     

Revenues

Revenues for the year ended December 31, 2012 totaled $52.0 million as compared to $62.9 million for the year ended December 31, 2011, representing a $10.9 million decrease. Production volumes for 2012 were

 

35


Table of Contents

407 Mbbls of oil and 2.8 Bcf of natural gas, or 5.3 Bcfe. This compares to 482 Mbbls of oil and 2.9 Bcf of natural gas, or 5.8 Bcfe, for 2011, representing a 10% reduction in production volumes. In 2012, the average sales price of oil was $105.54 per barrel and the average sales price of natural gas was $3.20 per Mcf as compared to $102.64 per barrel of oil and $4.58 per Mcf of natural gas in 2011. These results indicate that the decrease in revenue was attributable to the decrease in production volumes of 10% and by the decrease in commodity prices from $10.81 per Mcfe to $9.88 per Mcfe in 2012, representing a 9% decrease.

Operating expenses

Lease operating expense and production taxes

The following table presents the major components of Dune’s lease operating expense for the last two years in total (in thousands) and on a per Mcfe basis:

 

     Years Ending December 31,  
     2012      2011  
     Total      Per
Mcfe
     Total      Per
Mcfe
 

Direct operating expense

   $ 18,904       $ 3.59       $ 18,298       $ 3.14   

Production taxes

     4,480         0.85         4,924         0.85   

Ad valorem taxes

     1,025         0.19         656         0.11   

Transportation

     1,300         0.25         1,232         0.21   

Workovers

     252         0.05         974         0.17   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 25,961       $ 4.93       $ 26,084       $ 4.48   
  

 

 

    

 

 

    

 

 

    

 

 

 

Lease operating expense and production taxes for the year ended December 31, 2012 totaled $25.9 million versus $26.1 million for the year ended December 31, 2011. This translated to a 10% increase year-over-year on a sales volume basis from $4.48/Mcfe to $4.93/Mcfe as declining production had an adverse impact on field economies of scale.

Accretion of asset retirement obligation

Accretion expense for asset retirement obligations increased by $0.1 million for 2012 compared to 2011. This increase is the result of reevaluating abandonment cost at year end.

Depletion, depreciation and amortization (DD&A)

For the year ended December 31, 2012, the Company recorded DD&A expense of $14.1 million ($2.67/Mcfe) compared to $22.1 million ($3.80/Mcfe) for the year ended December 31, 2011, representing a decrease of $8.0 million ($1.13/Mcfe). This reduction reflects both the impact of the reallocation of costs on the depletable base resulting from the Restructuring and the increase in reserves associated with the year-end reserve report.

General and administrative expense (G&A expense)

G&A expense for the year ended December 31, 2012 increased $0.8 million (8%) from the year ended December 31, 2011 to $10.4 million. This increase is primarily attributable to increased stock-based compensation. Cash G&A expenses for 2012 fell by $0.4 million (4.7%) to $8.7 million from $9.1 million in 2011. This decrease is primarily attributable to reduced personnel expense.

 

36


Table of Contents

Impairment of oil and gas properties

Dune recorded an impairment of oil and gas properties of $18.1 million for the year ended December 31, 2011 compared to no impairment for the year ended December 31, 2012. The 2011 impairment was attributable to the Company’s decision not to drill proved undeveloped wells in the Toro Grande field of $13.5 million and $4.6 million split among four fields that did not perform as anticipated in 2011.

Exploration expense

In 2011, the Company, as a party to a joint venture, drilled an exploratory well. Although the Company continues to evaluate future options associated with the well, it determined that the costs incurred should be expensed. Consequently, $6.1 million was expensed during the year ended December 31, 2011.

Loss on settlement of asset retirement obligation liability

As a result of the Company’s plugging and abandonment commitment, Dune is required to conduct a plugging and abandon program in certain of its fields. In 2011, the program included 16 wells. In 2012, the program included 21 wells, however, an additional 16 wells were plugged and abandoned prior to year-end as part of the 2013 commitment. As these costs are scheduled to occur several years into the future, the Company recognized a loss of $0.5 million and $1.7 million in 2011 and 2012, representing the present value of these future costs.

Other income

Other income, which includes interest income, has been minimal as a result of using the Company’s cash balances to support working capital. However, in 2012, the Company favorably settled an outstanding liability giving rise to $0.8 million of other income for the year.

Interest expense

As a direct result of the Restructuring which occurred on December 22, 2011, interest expense for the year ended December 31, 2012 decreased to $9.8 million compared to $39.6 million for the year ended December 31, 2011. Additionally, it should be noted the $17.4 million of interest payable in 2011 was cancelled as part of the Restructuring.

Gain on derivative liabilities

In accordance with the requirements of the New Credit Agreement entered into with the Restructuring, the Company entered into hedge agreements in the first quarter of 2012. During the year ended December 31, 2012, the Company incurred a gain on derivatives of $2.5 million consisting of an unrealized gain on changes in mark-to-market valuations of $1.2 million and a realized gain on cash settlements of $1.3 million.

Net loss available to common stockholders

For the year ended December 31, 2012, net loss available to common stockholders decreased $72.8 million from the previous year. This decrease reflects the impact of a $29.8 million reduction in interest expense, a $20.2 million elimination of preferred stock dividends, an $18.1 million elimination of impairment of oil and gas properties, an $8.0 million reduction in DD&A and a $6.1 million elimination of exploration expense offset by a $10.7 decrease in revenues.

 

37


Table of Contents
Item 8. Financial Statements and Supplementary Data.

The response to this item is included in Item 15—Financial Statements and is incorporated into this Item 8 by reference.

 

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

None.

 

Item 9A. Controls and Procedures.

(a) Disclosure Controls and Procedures.

We maintain disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit to the Securities and Exchange Commission, or the SEC, under the Securities Exchange Act of 1934, as amended, or the Exchange Act, is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms, and that information is accumulated and communicated to our management, including our Chief Executive Officer, or CEO, and Chief Financial Officer, or CFO, as appropriate to allow timely decisions regarding required disclosure.

In accordance with Exchange Act Rules 13a-15 and 15d-15, we carried out an evaluation, under the supervision and with the participation of management, including our CEO and CFO, of the effectiveness of our disclosure controls and procedures as of December 31, 2012. As described below under Management’s Annual Report on Internal Control over Financial Reporting, our CEO and CFO have concluded that, as of December 31, 2012, our disclosure controls and procedures were effective 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 SEC’s rules and forms.

(b) Management’s Annual Report on Internal Control over Financial Reporting.

Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control over financial reporting is designed to provide reasonable assurance to the Company’s management and directors regarding the reliability of financial reporting and the preparation of published financial statements. The Company’s internal control over financial reporting includes those policies and procedures that:

 

  1. pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;

 

  2. provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and

 

  3. provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

Because of the inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or deterioration in the degree of compliance with the policies or procedures.

Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2012. In making this assessment, management used the criteria set forth by the Committee of

 

38


Table of Contents

Sponsoring Organizations of the Treadway Commission in Internal Control—Integrated Framework. Based on such assessment and those criteria, management believes that the Company maintained effective internal control over financial reporting as of December 31, 2012.

This report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting due to an exemption provided by the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act, enacted into law in July 2010. The Dodd-Frank Act provides smaller public companies and debt-only issuers with a permanent exemption from the requirement to obtain an external audit on the effectiveness of internal financial reporting controls provided in Section 404(b) of the Sarbanes-Oxley Act. Dune is a smaller reporting company and is eligible for this exemption under the Dodd-Frank Act.

(c) Changes in Internal Control Over Financial Reporting. There have not been any changes in the Company’s internal control over financial reporting during the fiscal fourth quarter ended December 31, 2012 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

39


Table of Contents
Item 9B. Other Information.

None.

PART III

Certain of the information required by Part III will be incorporated by reference into this Form 10-K from the Registrant’s Definitive Proxy Statement to be filed pursuant to Regulation 14A within 120 days after the end of the Registrant’s fiscal year covered by this Form 10-K.

 

Item 10. Directors, Executive Officers and Corporate Governance

Identification of Directors

James A. Watt, age 63, became a Director of our Company on April 16, 2007 and our President and Chief Executive Officer on April 17, 2007. Mr. Watt served as the Chief Executive Officer of Remington Oil and Gas Corporation from February 1998 and the Chairman of Remington from May 2003, until Helix Energy Solutions Group, Inc. (NYSE: HLX) acquired Remington in July 2006. From August 2006 through March 2007, Mr. Watt served as the Chairman and Chief Executive Officer of Maverick Oil & Gas, Inc. (OTC: MVOG.OB). Mr. Watt currently serves on the Board of Directors of Helix. Mr. Watt received a B.S. in Physics from Rensselaer Polytechnic Institute. As a result of these professional experiences, Mr. Watt possesses particular knowledge and experience in the operations of oil and gas companies that strengthen the board’s collective qualifications, skills, and experience.

Michael R. Keener, 53, became a Director of our Company in January 2012. He has been the principal/owner since January of 2011 of KP Energy, a private company focused on providing Mezzanine Debt, Private Equity and Direct Asset ownership to North American Exploration and Production companies. From October of 2009 until December of 2010, Mr. Keener served as Managing Director of Imperial Capital, LLC and from February 2003 until October 2009 he served as Principal and Managing Director of Petrobridge Investment, LLC. Mr. Keener received a B.S. in Business Administration—Accounting from Bloomsburg University and an MBA from Loyola University. Mr. Keener’s prior banking experiences for smaller exploration and production companies provide a high level of understanding of the Company’s challenges.

Dr. Alexander A. Kulpecz, Jr., age 59, became a Director of our Company in January 2012. He is currently managing EP Partner of Pulser Energy, LLP (London) an investment group focused on energy and CEO of Alexander Energy Limited (Houston). He has served in these positions since 2006, and 2008 respectively. From 1978 to 1998, Dr. Kulpecz had increasingly more responsible technical and management positions with the Royal Dutch Shell group concluding as Executive Director and Executive Vice President of Shell International Gas and Power. From 1998 to 2000 he was President of Azurix International. Dr. Kulpecz received a B.A. and MSC degree in Geology, an MBA from Henley (UK) and a PhD from Imperial College of Science and Medicine, University of London in subsurface petroleum engineering. Dr. Kulpecz’s extensive exploration and production background provide an excellent base to assist in the evaluations of the Company’s programs.

Robert A. Schmitz, age 72, became a Director of our Company in January 2012. He has served as Co-Founder of Quest Turnaround Advisors since 2000, an advisory firm serving debtors and creditors of distressed companies. Mr. Schmitz was the Chief Restructuring Officer of Fontainebleau Miami JV, LLC in 2010 and of WorldSpace Inc. from 2008 to present. From 2010-2012, Mr. Schmitz served as a member of the Board of Houghton Mifflin Harcourt Holdings, Inc. From 2003-2007 he served as non-executive chairman of the board of Premium TV, Ltd. From 2009-2011 he served on the Board of Sun Times Media Group which was sold to a private group of investors. Mr. Schmitz received a BA in Economics from the University of Michigan and a SM from the Sloan School of Management at the Massachusetts Institute of Technology. Mr. Schmitz will serve as

 

40


Table of Contents

Chairman of the Board. Mr. Schmitz experience advising companies through turnaround situations will benefit the Company as it moves forward from its restructuring.

Eric R. Stearns, age 55, became a Director of our Company in January 2012. He is currently President, CEO and a member of the Board of Directors of Puckett Land Company, a privately held Colorado energy company. He has served in this position from July 2011 to present. Mr. Stearns served from 1985-2009 in ever increasingly responsible technical and management positions with Petroleum Development Corporation concluding as Executive Vice President. Mr. Stearns received a B.S. in Geology from Virginia Polytechnic Institute and State University. Mr. Stearns extensive exploration and production background provide an excellent base to assist in the evaluations of the Company’s programs.

Certain Information Concerning Executive Officers

The below table sets forth certain information regarding our current executive officers:

 

Name

   Age    

Position

James A. Watt

     [63   President, Chief Executive Officer and Director

Frank T. Smith, Jr.

     [66   Senior Vice President, Chief Financial Officer and Secretary

Hal L. Bettis

     [67   Senior Vice President and Chief Operating Officer

Richard H. Mourglia

     [54   General Counsel and Senior Vice President–Land

James A. Watt became a Director of our Company on April 16, 2007 and our President and Chief Executive Officer on April 17, 2007. Mr. Watt served as the Chief Executive Officer of Remington Oil and Gas Corporation from February 1998 and the Chairman of Remington from May 2003, until Helix Energy Solutions Group, Inc. (NYSE: HLX) acquired Remington in July 2006. From August 2006 through March 2007, Mr. Watt served as the Chairman and Chief Executive Officer of Maverick Oil & Gas, Inc. (OTC: MVOG.OB). Mr. Watt currently serves on the Board of Directors of Helix. Mr. Watt received a B.S. in Physics from Rensselaer Polytechnic Institute.

Frank T. Smith, Jr. joined Dune Energy, Inc. as Senior Vice President and Chief Financial Officer on April 17, 2007 and was appointed as Secretary in January 2012. From 2004 through 2006, Mr. Smith served as Senior Vice President—Finance and Corporate Secretary of Remington Oil and Gas Corp., which was acquired by Helix Energy Solutions Group, Inc. (NYSE: HLX) in June 2006. From June 1997 through 2003, Mr. Smith served as Executive Vice President and Manager of energy lending at the Bank of Texas. From 1991 through 1997, Mr. Smith served as Director in the energy and utilities division of the First National Bank of Boston. Prior to 1991, Mr. Smith held positions of increasing responsibility in the energy banking departments of other major, publicly-traded United States financial institutions. Immediately prior to coming to our Company, he served as President and Chief Financial Officer of Sonoran Energy, Inc. Mr. Smith received an MBA in Corporate Finance & Banking from the University of Pennsylvania (Wharton School). He also holds M.Ed and B.S. degrees from the University of Delaware.

Hal L. Bettis became our Senior Vice President and Chief Operating Officer on May 21, 2007. From 2004 through 2007, Mr. Bettis served as Executive Vice-President of Operations of Goldking Energy Corporation, which was acquired by our Company in May 2007. From 2001 through 2004, he served as President and Chief Operating Officer of Dunhill Resources, Inc. and from 1999 through 2001 he served as President and Chief Operating Officer of Willis Energy, LLC, each an independent oil and natural gas exploration and production company. From 1994 through 1999, Mr. Bettis served as Chief Operating Officer of Taylor Energy Company, an independent exploration and production company operating entirely in the Gulf of Mexico. Mr. Bettis received a B.S. in Petroleum Engineering from Mississippi State University.

Richard H. Mourglia has served as General Counsel and Senior Vice President–Land of Dune, Energy, Inc. since August 2008. From 1990 until joining Dune, Mr. Mourglia was in private practice in major law firms where

 

41


Table of Contents

his practice involved a variety of oil and gas transactional matters. Mr. Mourglia began his career in 1980 as a petroleum landman, including heading his own petroleum land services company from 1984 to 1990. Mr. Mourglia received a BBA in Finance in 1980 from The University of Texas at Austin and a law degree in 1990 from South Texas College of Law.

Our executive officers are appointed by our Board of Directors and serve at its discretion, subject to the terms of applicable employment agreements. There are no family relationships among any of the directors or executive officers of our Company.

Code of Business Conduct and Ethics

We have adopted a written code of business conduct and ethics (“Code of Conduct and Ethics”) that applies to all our directors, officers and employees, including our Chairman, President and Chief Executive Officer, Chief Financial Officer and Senior Vice Presidents. A copy of our current Code of Conduct and Ethics can be found on our website at www.duneenergy.com. All documents which we have filed on the SEC’s EDGAR system are available for retrieval on their website at www.sec.gov, as well as available to the public from commercial document retrieval services. You may also obtain a copy of our Code of Conduct and Ethics at no cost, by writing or telephoning us at: Dune Energy, Inc., Two Shell Plaza, 777 Walker Street, Suite 2300, Houston, Texas 77002 (tel.: 713-229-6300). We undertake to make all disclosures that are required by applicable law concerning any subsequent amendments to, or waivers from, any provision of the Code of Conduct and Ethics.

Audit Committee

Our Audit Committee was established by our Board of Directors in accordance with Section 3(a)(58)(A) of the Securities Exchange Act of 1934 for the purpose of overseeing our accounting and financial reporting processes and the audits of our financial statements. The responsibilities of the Audit Committee are described in the committee’s charter, a copy of which is available at our website, www.duneenergy.com. The current members of the Audit Committee are Michael R. Keener and Robert A. Schmitz . Michael R. Keener is the audit committee financial expert and is independent, as determined by our Board of Directors, and the applicable rules under the Securities Exchange Act of 1934 .

 

Item 11. Executive Compensation

This Compensation Discussion and Analysis is intended to assist in understanding the Company’s compensation programs. It is intended to explain the philosophy underlying the Company’s compensation strategy and the fundamental elements of compensation paid to the Company’s President and Chief Executive Officer (“CEO”), Chief Financial Officer, and other individuals included in the Summary Compensation Table (“Named Executive Officers” or “executive officers”). The discussion is divided into the following sections:

 

I.

   Executive Summary

II.

   Compensation Philosophy, Objectives, and Key Considerations

III.

   Roles of Participants in the Decision-Making Process

IV.

   Items the Compensation Committee Considers When Making Compensation Decisions

V.

   Elements of the 2012 Compensation Program

VI.

   Employment Agreements and Severance Arrangements

VII.

   Other Important Compensation Policies Affecting the Named Executive Officers

I. Executive Summary

The primary purpose of the Company’s compensation strategy is to reward results and align all employees’ interests with those of our shareholders. Our policy is to provide a portion of the executive officers’

 

42


Table of Contents

compensation in cash, including an annual base salary along with an opportunity to receive an annual bonus. The other significant component of the executive officers’ compensation has historically been, and will continue to be, delivered in the form of long-term incentive equity awards, generally in the form of restricted stock. Consistent with our commitment to compensation tied to performance and increasing shareholder value, restricted stock has historically been granted to all employees, not just the executive officers, in an effort to keep the executive officers and other employees focused on shareholder growth.

During 2012, the Company continued to navigate through a challenging environment due to depressed natural gas prices and concerns regarding employee retention. These issues were similar to those faced in 2011, during which the Company completed its financial restructuring plan (the “restructuring”), which is briefly discussed below. These challenges and concerns underscore a critical and complementary driver in the Company’s overall approach to compensation, which is the need to retain employees, including the executive officers, through the long-term. The Board believes that keeping the current management team intact is essential to building shareholder value, and it has therefore chosen to link a significant portion of each executive officer’s total compensation to long-term equity awards that may vest over a period of three years.

Due to the uncertainty leading up to the financial restructuring in late 2011, the Company did not grant long-term incentive awards in 2011. Therefore, as discussed in more detail below (see Section V, “Elements of the 2012 Compensation Program – Long Term Equity Awards”), an off-cycle grant of restricted stock was made to employees, including the executive officers, in March 2012. In December 2012, the Company granted to employees long-term incentive awards for 2012, and it anticipates continuing such practice in the last fiscal quarter in 2013 and successive years, as performance dictates.

As discussed below, two other notable events occurred during 2012 with respect to compensation. First, the Company entered into amended employment agreements with Mr. James A. Watt, President and Chief Executive Officer, and Mr. Frank T. Smith, Jr., Senior Vice President and Chief Financial Officer. Prior to such amendment, the initial terms of the employment agreements of Messrs. Watt and Smith were set to expire on October 1, 2012. In order to motivate and retain Messrs. Watt and Smith for the foreseeable future, the amended employment agreements have an initial term through 2015 and 2014, respectively. Second, as discussed below and in the 2012 proxy statement, the Company revised the compensation structure for non-employee directors to be more market-competitive and to continue to attract highly qualified directors in the future.

During 2012, the Compensation Committee (and the rest of the Board of Directors) experienced a change in composition. Messrs. Richard Cohen, Alan Bell and William Greenwood, formerly members of the Compensation Committee, submitted their resignations from the Board of Directors effective January 17, 2012. The following day, Messrs. Eric Stearns, Stephen Kovacs and Dr. Alexander Kulpecz, Jr. were appointed to serve on the Company’s Board of Directors and as members of the Compensation Committee. Each member of the Compensation Committee qualifies as an independent, outside member of the Board of Directors in accordance with the requirements of current Securities and Exchange Commission (SEC) regulations.

Compensation Committee Interlocks and Insider Participation

During fiscal year 2012, none of our executive officers served on the Board of Directors of any entities whose directors or officers served on our Compensation Committee. No current or past officers or employees of the Company serve on our Compensation Committee.

II. Compensation Philosophy, Objectives and Key Considerations

The nature of our business, which consists primarily of acquiring, exploring, exploiting, and developing oil and natural gas properties, is complex and requires that we attract and retain highly qualified and capable leaders that are strong technically and operationally. Therefore, our overall compensation philosophy is twofold: (1) to attract, retain, and motivate the executive officers who are critical to developing and executing on our business

 

43


Table of Contents

plan; and (2) to administer our compensation programs in a performance-driven manner that delivers compensation that is competitive and reasonable when compared to the marketplace.

The Compensation Committee has the responsibility for continually monitoring the compensation paid to the Named Executive Officers. The Compensation Committee believes that the compensation of the Company’s Named Executive Officers should encourage creation of shareholder value and achievement of strategic corporate objectives. Specifically, the Compensation Committee is committed to ensuring that the total compensation package for the Named Executive Officers will serve to:

 

   

Attract, retain, and motivate highly qualified senior executives by providing base salaries that are competitive with our peer companies;

 

   

Enhance the Company’s near-term financial performance by subjecting annual bonuses to performance measures that relate to improving the Company’s profitability during the measurement period; and

 

   

Increase shareholder value by providing stock-based long-term incentives in an effort to align the interests of senior executives with those of our stockholders.

At all times, the Compensation Committee aims to maintain consistency in its approach and execution of our overall executive compensation philosophy. However, the Compensation Committee may at times consider other factors in making decisions affecting executive compensation.

III. Roles of Participants in the Decision-Making Process

The following table summarizes the responsibilities of the Compensation Committee and management in determining and approving the executive compensation programs of the Company.

 

Compensation Committee   

•   Reviews and makes recommendations to the Board of Directors regarding compensation of the Board of Directors and various committees thereof;

 

•   Determines program principles and philosophies to ensure the attraction and retention of qualified executive officers, the motivation of executive officers to achieve the Company’s business objectives, and the alignment of interests of key leadership with long-term shareholder growth;

 

•   Reviews state of executive compensation programs from time to time to ensure competitiveness in the marketplace;

 

•   Reviews recommendations made by the CEO regarding the compensation of the other executive officers;

 

•   Reviews and makes recommendations to the Board of Directors regarding annual bonus plan performance measures and goals;

 

•   Reviews and makes recommendations to the Board of Directors regarding each element of compensation for the Named Executive Officers, including base salary, short-term annual bonus targets and actual payouts, and long-term incentive equity award grants;

 

•   Reviews, adopts, and submits to the Board of Directors amendments to executive employment agreements, incentive plans and other equity-based plans; and

 

•   Has exclusive authority to retain or terminate the services of an independent compensation consultant.

Management   

•   CEO recommends base salary levels, annual bonus plan target levels, and long-term incentive equity awards for executive officers other than himself; and

 

•   CEO provides information on performance goals for Compensation Committee consideration in structuring the performance-based components of the Company’s compensation programs.

 

44


Table of Contents

IV. Items the Compensation Committee Considers When Making Compensation Decisions

Set forth below are several items that the Compensation Committee considers when making decisions that affect the compensation of the Named Executive Officers and other employees. As previously discussed, the Compensation Committee may find it necessary from time to time to consider items not specifically listed below.

Business Environment

We are an independent exploration and development company with operations focused along the Louisiana and Texas Gulf Coasts. We actively manage our drilling program to increase oil and gas reserves and production while seeking to keep finding and development costs and operating costs competitive. As we operate in a very cyclical industry, our executive team is crucial to the development and execution of our long-term strategy in order to build value for our shareholders through the volatile nature of our industry.

In light of the challenges faced over the last several years, including limited cash resources, the Company relied greatly on senior management in 2012 to provide leadership and direction to the Company. In late 2011, senior management led the effort to restructure the Company’s debt obligations, which resulted in the Company entering into an agreement with bond holders in which the Company eliminated certain outstanding notes and related cash interest expense in exchange for a combination of equity securities and new debt securities. In late 2012, senior management again led the effort at reaching an agreement with the Company’s major shareholders in which the Company raised $30 million through the sale of approximately 18.8 million new shares of common stock.

While the restructuring and the equity offering were major accomplishments that we believe are essential to the Company’s future success, the events leading up to these accomplishments created uncertainty at all levels within the organization. As a result, the Compensation Committee has and will continue to monitor the impact of industry and company-specific challenges that lead to employee retention concerns in the design and administration of our compensation programs.

Market Trends

From time to time, the Compensation Committee reviews trends in executive compensation, both among our direct competitors and within the broader energy industry. In addition, when the need arises, the Compensation Committee considers market levels of compensation paid to our competitors in making compensation decisions.

In 2012, the Compensation Committee engaged Towers Watson & Co. to provide competitive benchmark levels of executive compensation within the independent oil and gas exploration and production industry for the Chief Executive Officer and Chief Financial Officer. As discussed later, the Compensation Committee utilized the benchmark data to make informed adjustments to certain executive officers’ base salaries in June 2012 and to determine the 2012 long-term incentive awards granted in December 2012.

When examining market trends and competitive levels of executive compensation, the Company generally looks first and foremost to the Peer Group. The Company’s Peer Group for 2012, as reviewed and approved by the Compensation Committee, is shown below. Specifically, the Peer Group was utilized in 2012 for purposes of measuring relative total stockholder return for the performance-based long-term incentive awards granted to the executive officers.

 

   

ATP Oil and Gas Corporation;

 

   

Callon Petroleum Company;

 

   

Crimson Exploration, Inc.;

 

45


Table of Contents
   

Energy Partners, Ltd.;

 

   

Energy XXI, Ltd.;

 

   

Goodrich Petroleum Corporation;

 

   

PetroQuest Energy, Inc.;

 

   

Stone Energy Corporation; and

 

   

W&T Offshore, Inc.

The Compensation Committee believes that the companies contained in the Peer Group were appropriate for the purpose of measuring relative total stockholder return because they are the Company’s direct competitors, both operationally and in competing for our executive talent. For 2013, ATP Oil and Gas Corporation will be removed due to an announced bankruptcy filing, and will be replaced with Saratoga Resources, Inc.

Consideration of Risk

Our compensation programs are designed to provide the Named Executive Officers incentives to manage the Company for the long term, while avoiding excessive risk-taking in the short term. In addition, certain elements of the executive officers’ compensation have been and will continue to be paid out over multiple years (e.g., long-term incentive equity awards which generally vest over a three-year period). The Compensation Committee develops goals and objectives based on a mix of performance metrics to avoid excessive weight on any single criterion. Likewise, the compensation of our executive officers has historically been, and will continue to be, balanced among base salary, annual bonus, and long-term equity incentive awards (in particular, restricted stock awards, which the Compensation Committee views as an appropriate vehicle to deliver compensation to the executive officers). The Compensation Committee believes that the Company’s executive compensation practices in 2012 are appropriate to (i) encourage the executive officers to take appropriate levels of risk; and (ii) create sustained shareholder value over a long period of time. If and when the Compensation Committee modifies the overall compensation program in the future, it will at such times examine the new programs to determine if they encourage the executive officers to continue to take appropriate levels of risk.

Tax and Accounting Considerations

The Company considers the tax and accounting implications regarding the delivery of various forms of compensation. Section 162(m) of the Internal Revenue Code of 1986 (“Code”), as amended, generally disallows a tax deduction to public companies for compensation over $1,000,000 paid to a corporation’s Principal Executive Officer and the three other most highly compensated executive officers (excluding the Principal Financial Officer). In connection with the compensation of the Company’s executive officers, the Compensation Committee is aware of Code section 162(m) as it relates to deductibility of qualifying compensation paid to executive officers. The Compensation Committee attempts, where practical, to comply with the requirements of Code section 162(m) so that all compensation is deductible.

As required under current accounting guidance, the Company has adopted Financial Accounting Standards Board Accounting Standards Codification Topic 718 (“ASC Topic 718”) for all stock-based awards. ASC Topic 718 requires companies to measure the compensation expense for all share-based payment awards made to employees and directors, including stock options and restricted stock awards, based on the aggregate grant date “fair value” of these awards. The Company takes into account the accounting treatment of stock-based awards in determining the type and amount of awards to be granted to the executive officers and other employees. In 2012 and prior years, such accounting treatment has in part influenced the Compensation Committee to utilize restricted stock rather than stock options when granting long-term equity incentives to employees, including the executive officers.

 

46


Table of Contents

V. Elements of the 2012 Compensation Program

The following discussion provides insights into the various elements of our 2012 compensation program. On the whole, the 2012 compensation program was similar to the 2011 compensation program, although several meaningful changes were made, as bulleted below and discussed on the following pages.

 

   

Adjustments were made to the base salaries of the executive officers (other than Mr. Watt) to levels more competitive with market practices.

 

   

For fiscal year 2011, regular annual bonuses were not earned, but the Company did award retention bonuses to the executive officers upon the completion of the Company’s restructuring. For fiscal year 2012, the Company determined that performance was such that annual bonuses should be paid. In addition, the Compensation Committee approved the addition of health, safety and environmental measures to each executive officer’s individual goals.

 

   

After not granting long-term equity awards to any employees in 2011 due to the impending restructuring, the Board of Directors unanimously authorized the adoption of the 2012 Stock Incentive Plan (“2012 Plan”). Concurrently, the Compensation Committee developed a blueprint for granting long-term incentives over the next few years.

The Compensation Committee believes that the changes made, particularly with respect to long-term equity awards, will continue to guide the Company to an objective and performance-based compensation model.

The elements of compensation utilized in 2012 to retain and motivate the Named Executive Officers included:

 

   

Base Salary;

 

   

Annual Bonus;

 

   

Long-Term Equity Awards;

 

   

Retirement Benefits;

 

   

Health and Insurance Plans; and

 

   

Perquisites.

Below is a discussion of each element of compensation listed above, including the purpose of each element, why the Compensation Committee elects to pay each element, how each element was determined by the Compensation Committee, and how each element and the Compensation Committee’s decisions regarding the payment of each element relate to the Company’s goals. Details of compensation for our executive officers can be found in the tables below.

Base Salary

Base salary is the starting point in a compensation package that will attract and retain executives. Base salary provides a steady income as the foundation upon which performance incentives can build. The Compensation Committee believes that base salary should be competitive with the companies within the Peer Group and the broader oil and gas exploration and production industry.

It is the Compensation Committee’s goal to set base salary to reflect the role, responsibility and level of experience of each executive officer over time. Base salary, although not directly connected to performance, is essential to compete for talent, and the Company’s failure to pay a competitive base salary could affect our ability to recruit and retain qualified members of management. Base salary was determined by analyzing the base salaries of comparable executives in our Peer Group and considering the abilities, qualifications, accomplishments, and prior work experience of each executive officer.

 

47


Table of Contents

In addition, as previously discussed, during 2012 Towers Watson & Co. provided to the Compensation Committee competitive benchmark levels of executive compensation, including market competitive salaries for the Chief Executive Officer and Chief Financial Officer.

Based on the Company’s view of competitive salaries in light of all the data available, the Compensation Committee, effective June 16, 2012, increased the base salaries of Messrs. Smith, Bettis and Mourglia as shown in the following table. Mr. Watt’s base salary has remained unchanged since January 1, 2008.

 

Named Executive Officer

   2011 Base
Salary
     2012 Base
Salary
     % Increase  

James A. Watt

President and Chief Executive Officer

   $ 550,000       $ 550,000        

Frank T. Smith, Jr.

Senior Vice President, Chief Financial Officer & Secretary

     279,000         306,000         10

Hal L. Bettis

Executive Vice President & Chief Operating Officer

     279,000         306,000         10

Richard H. Mourglia

General Counsel and Senior Vice President–Land

     245,000         269,000         10

Annual Bonus

Annual bonuses are provided to the Named Executive Officers through the Company’s bonus program, which is designed to support the near-term initiatives of the business and to position the Company for the future by focusing on annual goals, both financial and operational.

The Named Executive Officers have the opportunity to receive an annual bonus that is tied to the main controllable operating criteria of the Company. In 2012 and prior years, these operating criteria were based on performance in three primary areas: (i) growth in reserves (producing and non-producing) year over year; (ii) increased annual production volumes; and (iii) limiting finding and development costs and/or LOE costs. The Company intentionally ties the annual bonus to these three elements to keep executive officers focused on the elements of the Company’s business that are critical to its success in the marketplace. The Company adopts pre-established objective targets in most areas of the annual bonus program, against which actual performance is later measured.

Additionally, individual goals are set for each executive officer. These individual performance goals can impact the actual annual bonus awarded. The Compensation Committee periodically reviews and updates individual goals for the executive officers based on the responsibilities of each of their positions. As previously discussed, the Compensation Committee approved the addition of health, safety and environmental measures to each executive officer’s individual goals for 2012.

The Compensation Committee sets target annual bonus opportunities so that total cash compensation (base salary plus annual target bonus) is competitive with executives within the Peer Group. The Company’s annual bonus is designed to pay for performance and is at risk. Annual bonus amounts could payout between zero and two hundred percent (200%) of each Named Executive Officer’s target percentage based on corporate and individual performance relative to target levels set by the Compensation Committee.

The executive officers’ target annual bonus opportunities for 2012 are set forth in the table below. The target bonus percentages remain unchanged from 2011, with the exception of Mr. Smith. In connection with

 

48


Table of Contents

entering into an amended employment agreement with Mr. Smith, his target bonus was increased from 60% to 70% of base salary.

 

      2012 Target Bonus  

Named Executive Officer

   Target
Bonus
(% of
Salary)
    Target
Bonus
 

James A. Watt

     100   $ 550,000   

Frank T. Smith, Jr.

     70     214,200   

Hal L. Bettis

     70     214,200   

Richard H. Mourglia

     60     161,400   

Based on the Company’s performance during fiscal year 2012 as compared to the reserve growth, production growth, and finding and development and LOE cost containment targets established by the Compensation Committee in early 2012, and based upon each executive officer’s achievements versus the individual goals previously established, the Compensation Committee determined that overall performance supported a bonus payout for 2012 at approximately one-half of each executive officer’s target bonus. Half of Mr. Watt’s annual bonus payment was made in the form of restricted shares that will vest ratably over three years. To account for the fact that this portion of Mr. Watt’s bonus is subject to future vesting conditions, the restricted stock portion of Mr. Watt’s 2012 bonus was increased by 25%. The table below shows the 2012 bonus earned by each executive officer:

 

Named Executive Officer

   2012 Actual
Bonus Earned
 

James A. Watt

   $ 274,500 (1) 

Frank T. Smith, Jr.

     106,900   

Hal L. Bettis

     106,900   

Richard H. Mourglia

     80,600   

Long-Term Equity Awards

As previously discussed, the Company did not grant long-term equity awards to any employee in 2011 due to the restructuring. On March 5, 2012, the Board of Directors unanimously authorized the adoption of the 2012 Plan to become effective immediately. The 2012 Plan was subsequently approved by shareholders on June 5, 2012 at the annual meeting of stockholders. The 2012 Plan is administered by the Compensation Committee, which under the plan may grant any one or a combination of incentive stock options, nonqualified stock options, restricted stock awards, stock appreciation rights and phantom stock awards, as well as purchased stock, bonus stock and other performance awards. Except for incentive stock options, which may only be granted to employees of the Company, awards under the 2012 Plan may be granted to employees and non-employee directors of the Company who are designated by the Compensation Committee. The aggregate number of shares of common stock that may be issued or transferred to grantees under the 2012 Plan may not exceed 3,250,000 shares.

At the time it authorized the adoption of the 2012 Plan, the Compensation Committee developed a blueprint for granting long-term equity awards in 2012 and 2013. The blueprint calls for a mix of time-based and performance-based restricted shares to be granted to the Company’s employees, including the Named Executive Officers, in three main installments:

 

   

Approximately three-sevenths of the total planned shares to be granted (the “3/7ths Grant”) were granted on March 5, 2012. The Compensation Committee viewed the 3/7ths Grant as compensation for 2011 since no long-term equity awards were granted in 2011.

 

1  Fifty percent of the annual bonus earned by Mr. Watt was granted in the form of restricted stock which will vest over a three-year period. To account for the vesting restrictions, the portion of the bonus delivered in restricted shares was increased by 25%.

 

49


Table of Contents
   

Approximately two-sevenths of the total planned shares to be granted (the “First 2/7ths Grant”) were granted on December 3, 2012. The Compensation Committee views the First 2/7ths Grant as the regular long-term equity award for 2012.

 

   

Approximately two-sevenths of the total planned shares to be granted (the “Last 2/7ths Grant”) are expected to be granted in late 2013 as the main long-term equity award for 2013.

Restricted stock has historically been granted to the executive officers to align their interests with those of shareholders and to incent them to increase the Company’s stock price over time. It is the Compensation Committee’s belief that executive officers should have a significant interest tied to long-term performance and increasing shareholder value. The Compensation Committee believes the best way to accomplish this is through stock ownership of the Company.

At the time of the 3/7ths Grant, which occurred on March 5, 2012, the Compensation Committee approved awards of 834,500 restricted shares to employees, including 327,700 restricted shares to the Named Executive Officers as set forth below.

 

      2012 Restricted Shares – 3/7ths Grant  

Named Executive Officer

   Performance-
Based
     Time-
Based
     Total  

James A. Watt

     133,200         —          133,200   

Frank T. Smith, Jr.

     33,800         33,800         67,600   

Hal L. Bettis

     33,800         33,800         67,600   

Richard H. Mourglia

     29,650         29,650         59,300   

The 3/7ths Grant reflects our increased focus on performance-based pay, which translates to a significant portion of our executive officers’ compensation being based on long-term incentives which are at risk based on the Company’s performance. All of Mr. Watt’s restricted shares and 50% of the other executive officers’ restricted shares are subject to performance vesting based on the Company’s total stockholder return relative to the Peer Group. The remaining 50% of Messrs. Smith’s, Bettis’ and Mourglia’s restricted shares are subject to time-based vesting over a three-year period.

The performance-based restricted shares within the 3/7ths Grant are divided into three annual performance periods. The annual performance periods and corresponding vesting dates are shown below.

 

Annual Performance Period

   Corresponding Vesting Date  

January 1 – December 31, 2012

     March 5, 2013   

January 1 – December 31, 2013

     March 5, 2014   

January 1 – December 31, 2014

     March 5, 2015   

Within each annual performance period, the performance-based restricted shares may vest based on the Company’s relative total stockholder return compared to the Peer Group as follows:

 

Total Stockholder Return Relative to

the 2012 Peer Group

   % of Performance-Based
Restricted Shares Vesting
 

³ 75th percentile

     100

³ 50th percentile but < 75th percentile

     75

³ 25th percentile but < 50th percentile

     50

< 25th percentile

    

At the time of the First 2/7ths Grant, which occurred on December 3, 2012, the Compensation Committee approved awards of 578,933 time-based restricted shares to employees, including 241,900 restricted shares to the

 

50


Table of Contents

Named Executive Officers as set forth below. Such time-based restricted shares vest ratably over three years from the date of grant.

 

Named Executive Officer

   Time – Based Restricted
Shares –First 2/7ths Grant
 

James A. Watt

     92,300   

Frank T. Smith, Jr.

     51,400   

Hal L. Bettis

     52,200   

Richard H. Mourglia

     46,000   

In addition to the 3/7ths Grant and the First 2/7ths Grant, the Company also made the following grants of time-based restricted shares, which vest ratably over three years, to the Named Executive Officers during 2012:

 

   

125,000 and 100,000 shares of restricted stock to Messrs. Watt and Smith, respectively, on October 1, 2012 in connection with entering into amended employment agreements with the Company and in recognition of their efforts. The fair value of these one-time, special grants was $243,750 for Mr. Watt and $195,000 for Mr. Smith.

 

   

82,700 shares of restricted stock to Mr. Watt on December 3, 2012 to aid in the Company’s efforts to provide meaningful, retention-based compensation to him and to bring his total compensation to a level that was more competitive with comparable market data. The fair value of this one-time, special grant was $132,320.

Retirement Benefits

The Company does not have a defined benefit pension plan. However, the Named Executive Officers are eligible to participate in the Dune Energy 401(k) Plan (“401(k) Plan”), which is a Company-wide, tax-qualified retirement plan. The intent of this plan is to provide all employees with a tax-advantaged savings opportunity for retirement. The Company sponsors this plan to help employees in all levels of the Company save and accumulate assets for use during their retirement. As required, eligible pay under this plan is capped at IRC annual limits. The Company makes annual matching contributions to the 401(k) Plan on behalf of all employees, including the Named Executive Officers.

Health and Insurance Plans

The Named Executive Officers are eligible to participate in Company-sponsored benefit plans on the same terms as those generally provided to all salaried employees. Basic health benefits, dental benefits, and similar programs are provided to make certain that access to healthcare and income protection is available to the Company’s employees and the employees’ family members. The cost of Company-sponsored benefit plans is negotiated by the Company with the providers of such benefits, and the executive officers contribute to the cost of their benefits.

Perquisites

The Company has not historically provided perquisites for its executive officers. Prior to 2011, the Company provided Mr. Bettis with a modest car allowance pursuant to an arrangement with a company previously acquired by Dune Energy. Effective May 1, 2011, Messrs. Smith, Bettis and Mourglia were each provided a car allowance of $1,500 per month. Effective July 2012, we ceased providing car allowances to all executive officers.

VI. Employment Agreements and Severance Agreements

In 2012, the Company entered into amended employment agreements with Messrs. Watt and Smith. Such amended employment agreements are largely similar to their prior employment agreements, which were effective October 1, 2009 with a term of three years.

 

51


Table of Contents

For employees that are not party to an employment agreement, the Employee Severance Plan (the “Severance Plan”) provides for severance and other benefits upon certain termination events. For more information regarding the Severance Plan, please refer to the section “Potential Payments Upon Termination or Change In Control.”

Set forth below are the general terms of the current employment agreements with Messrs. Watt and Smith. Each executive has the right to voluntarily terminate his employment at any time.

James Watt—President and Chief Executive Officer

The effective date of Mr. Watt’s current employment agreement, as amended, is October 1, 2012. The initial term begins on the effective date and ends on December 31, 2015. The Company or Mr. Watt may give written notice at least sixty (60) days prior to the end of the initial term of the intent to terminate or modify the employment agreement. If no such notice is given, the agreement will automatically renew and continue in effect for successive one-year periods.

Under the agreement, Mr. Watt serves as the President and Chief Executive Officer of the Company. Pursuant to the agreement, Mr. Watt receives an annual base salary of $550,000. During the term of the agreement, Mr. Watt is entitled to earn an annual performance bonus. The amount of the annual bonus is targeted at 100% of his annual base salary, based primarily upon the achievement of performance criteria previously discussed in the section “Elements of the 2012 Compensation Program – Annual Bonus.” The amount of the actual annual bonus can be less than or more than the target bonus, but in no event will it exceed 200% of the then applicable base salary.

According to the terms of the agreement, Mr. Watt also received a grant of 125,000 shares of restricted stock which vest in equal installments on each of the first three anniversaries of the effective date.

Mr. Watt is entitled to medical, disability insurance, life insurance and other similar benefits provided by the Company, subject to the terms and conditions of those programs.

In addition, Mr. Watt’s employment agreement contains termination trigger events that provide for the payment of severance and other benefits upon certain termination events. For more information regarding such provisions contained in Mr. Watt’s employment agreement, please refer to the section “Potential Payments Upon Termination or Change In Control.”

Frank Smith—Senior Vice President and Chief Financial Officer

The effective date of Mr. Smith’s current employment agreement, as amended, is October 1, 2012. The initial term begins on the effective date and ends on December 31, 2014. The Company or Mr. Smith may give written notice at least sixty (60) days prior to the end of the initial term of the intent to terminate or modify the employment agreement. If no such notice is given, the agreement will automatically renew and continue in effect for successive one-year periods.

Under the agreement, Mr. Smith serves as the Senior Vice President and Chief Financial Officer of the Company. Pursuant to the agreement, Mr. Smith receives an annual base salary of $306,000. During the term of the agreement, Mr. Smith is entitled to earn an annual performance bonus. The amount of the annual bonus is targeted at 70% of his annual base salary, based primarily upon the achievement of performance criteria previously discussed in the section “Elements of the 2012 Compensation Program – Annual Bonus.” The amount of the actual annual bonus can be less than or more than the target bonus, but in no event will it exceed 140% of the then applicable base salary.

According to the terms of the agreement, Mr. Smith also received a grant of 100,000 shares of restricted stock which vest in equal installments on each of the first three anniversaries of the effective date.

 

52


Table of Contents

Mr. Smith is entitled to medical, disability insurance, life insurance and other similar benefits provided by the Company, subject to the terms and conditions of those programs.

In addition, Mr. Smith’s employment agreement contains termination trigger events that provide for the payment of severance and other benefits upon certain termination events. For more information regarding such provisions contained in Mr. Smith’s employment agreement, please refer to the section “Potential Payments Upon Termination or Change In Control.”

VII. Other Important Compensation Policies Affecting the Named Executive Officers

Financial Restatement

Currently, the Compensation Committee does not have an official policy in place governing retroactive modifications to any cash or equity-based incentive compensation paid to the Named Executive Officers where the payment of such compensation was predicated upon the achievement of specified financial results that were subsequently the subject of a restatement. The Compensation Committee will, if the need arises, make a determination as to whether and to what extent compensation should be recaptured should there be a financial restatement. We intend to institute a claw back policy in the future, to the extent applicable, when the SEC promulgates rules as provided under the Dodd-Frank Act.

Stock Ownership Requirements

The Compensation Committee does not maintain a formal policy relating to stock ownership guidelines or requirements for its Named Executive Officers or its Board of Directors. The Compensation Committee does not believe it is necessary to impose such a policy on these groups. If circumstances change, the Compensation Committee will review whether such a policy is appropriate for its executive officers and the Board of Directors.

Trading in the Company’s Stock Derivatives

The Compensation Committee does not currently have a formal policy in place prohibiting executive officers of the Company from purchasing or selling options on the Company’s common stock, engaging in short sales with respect to the Company’s common stock, or trading in puts, calls, straddles, equity swaps or other derivative securities that are directly linked to the Company’s common stock. The Compensation Committee is not aware that any of the executive officers have entered into these types of arrangements. To the Company’s knowledge, there are no actively traded options in the Company’s common stock.

COMPENSATION COMMITTEE REPORT

The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis with management. Based upon such review, the related discussions and such other matters deemed relevant and appropriate to the Compensation Committee, the Compensation Committee has recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this Form 10-K to be delivered to shareholders.

 

Submitted by the Compensation Committee:
Eric E. Stearns
Dr. Alexander A. Kulpecz, Jr.

 

53


Table of Contents

SUMMARY COMPENSATION TABLE

The Summary Compensation Table below displays the total compensation awarded to, earned by or paid to the Named Executive Officers for the fiscal years ending December 31, 2012, December 31, 2011 and December 31, 2010. All amounts shown below are in dollars.

 

Name and Principal Position

(a)

  Year
(b)
    Salary
($)

(c)
    Bonus
($)

(d)
    Stock
Award(s)(1)
($)

(e)
    Option
Award(s)
($)

(f)
    Non-Equity
Incentive Plan
Compensation
($)

(g)
    Change in
Pension Value
and Non-
Qualified
Deferred
Compensation
Earnings ($)
(h)
    All Other
Compensation (2)
($)

(i)
    Total ($)
(j)
 

James A. Watt,

    2012        550,000        308,814  (3)(4)      884,278        —          —          —          17,000        1,760,092   

President and Chief

    2011        550,000        550,000  (5)      —          —          —          —          16,500        1,116,500   

Executive Officer

    2010        550,000        55,000        23,375        —          —          —          48,106        676,481   

Frank T . Smith, Jr.,

    2012        293,680  (7)      106,900  (3)      483,983        —          —          —          26,000        910,563   

Senior Vice President,

    2011        279,000        167,400  (5)      —          —          —          —          28,500        474,900   

Chief Financial

    2010        268,000        26,800        11,390        —          —          —          16,500        322,690   

Officer and Secretary

                 

Hal L. Bettis,

    2012        293,680  (7)      106,900  (3)      290,263        —          —          —          26,000        716,843   

Executive Vice

    2011        279,000        195,300  (5)      —          —          —          —          29,300        503,600   

President and Chief Operating Officer (6)

    2010        268,000        26,800        11,390        —          —          —          18,900        325,090   

Richard H. Mourglia,

    2012        258,049  (7)      80,600 (3)      254,959        —          —          —          24,960        618,568   

General Counsel and

    2011        245,000        147,000  (5)      —          —          —          —          27,420        419,420   

Senior Vice President-Land

    2010        235,000        23,500        9,996        —          —          —          —          268,496   

 

(1) The amounts in column (e) represent the fair value of the restricted stock awards granted in the years listed. The fair value of the time-based restricted stock awards is based on the fair market value on the date of grant, calculated as the closing trading value of the Company’s common stock on the date of grant. The fair value of the performance-based restricted stock awards is valued using the Monte Carlo simulation. None of the executive officers were granted restricted stock awards in 2011.
(2) Represents matching contributions allocated to the executive’s account under the 401(k) Plan, car allowances, and various other payments as detailed in the following All Other Compensation table.
(3) Represents bonus awards earned in 2012, but paid in 2013.
(4) Mr. Watt’s bonus payment under the 2012 Bonus Plan is $274,500, or 49.9% of his target, which was satisfied through an award of $137,250 cash and 103,978 shares of the Company’s common stock. Such stock will vest over a three (3) year period. To account for receiving shares subject to vesting conditions, the amount of shares granted was increased by 25%. To determine the number of shares granted, half of the total bonus amount ($137,250) was divided by $1.65 per share (the closing price on January 28, 2013) and multiplied by 1.25.
(5) Represents retention bonuses paid to the executive officers on December 27, 2011 following the successful completion of the Company’s restructuring.
(6) On January 31, 2013, Mr. Bettis’ title changed to Executive Vice President, Business Development and Environmental Affairs.
(7) On June 16, 2012, the base salary amounts for Messrs. Smith, Bettis, and Mourglia increased to $306,000, $306,000, and $269,000, respectively. The base salary amounts presented in the table represent the actual salary received by each Named Executive Officer in 2012.

 

54


Table of Contents

ALL OTHER COMPENSATION

The following table includes certain information with respect to the other compensation received by the Named Executive Officers for the fiscal years ending December 31, 2012, 2011 and 2010, respectively, which was shown at a summary level in column (i) of the Summary Compensation Table. All amounts shown below are in dollars.

 

            Company             Equity         
            Contributions      Car      Modification         
            to 401(k) Plan      Allowance (1)      Payment (2)         

Name and Principal Position

   Year      ($)      ($)      ($)      Total ($)  

James A. Watt,

     2012         17,000         —           —           17,000   

President and Chief

     2011         16,500         —           —           16,500   

Executive Officer

     2010         16,500         —           31,606         48,106   

Frank T . Smith, Jr.,

     2012         17,000         9,000         —           26,000   

Senior Vice President,

     2011         16,500         12,000         —           28,500   

Chief Financial Officer and Secretary

     2010         16,500         —           —           16,500   

Hal L. Bettis,

     2012         17,000         9,000         —           26,000   

Executive Vice President and

     2011         16,500         12,800         —           29,300   

Chief Operating Officer

     2010         16,500         2,400         —           18,900   

Richard H. Mourglia,

     2012         15,960         9,000         —           24,960   

General Counsel and

     2011         15,420         12,000         —           27,420   

Senior Vice President -Land

     2010         —           —           —           —     

 

(1) Represents monthly car allowance payments of $1,500 for Messrs. Smith, Bettis and Mourglia from May 2011 to June 2012. Prior to May 2011, Mr. Bettis was paid a monthly car allowance of $200.
(2) In 2010, the repurchase feature with respect to Mr. Watt’s April 17, 2007 restricted stock grant was removed. This modification resulted in a payment for taxes in the amount of approximately $31,606.

 

55


Table of Contents

GRANTS OF PLAN BASED AWARDS

The Grants of Plan Based Awards Table discloses the total number of equity and non-equity incentive based plan awards actually granted during the year. The Grants of Plan Based Awards Table should be read in conjunction with the Summary Compensation Table. The value of the equity award granted during 2012 is shown at the grant date fair value of the award.

 

          Estimated Future Payouts                                             
          Under Non-Equity Incentive     Estimated Future Payouts Under Equity                          
          Plan Awards     Incentive Plan Awards     All Other     All Other              

Name

(a)

  Grant
Date

(b)
    Threshold
($)

(c)
    Target
($)

(d)
    Maxi-
mum
($)

(e)
    Threshold
(#)

(f)
     Target
(#)

(g)
    Max-
imum
(#)

(h)
    Stock
Awards:
Number  of
Shares of
Stock or
Units (#)
(i)
    Option
Awards:
Number of
Securities
Underlying
Options (#)
(j)
    Exercise
of Base
Price of
Option
Awards
($/Sh)
(k)
    Grant Date
Fair Value
of Stock
and Option
Awards

(l)
 

James A. Watt

    3/5/2012        —          —          —          —           133,200 (1)      133,200        —          —          —          360,528  (2) 
    10/1/2012  (3)      —          —          —          —           —          —          125,000        —          —          243,750  (4) 
    12/3/2012        —          —          —          —           —          —          92,300        —          —          147,680  (5) 
    12/3/2012        —          —          —          —           —          —          82,700        —          —          132,320  (5) 

Frank T. Smith, Jr.

    3/5/2012        —          —          —          —           33,800 (1)      33,800        —          —          —          91,485  (2) 
    3/5/2012        —          —          —          —           —          —          33,800        —          —          115,258  (6) 
    10/1/2012  (3)      —          —          —          —           —          —          100,000        —          —          195,000  (4) 
    12/3/2012        —          —          —          —           —          —          51,400        —          —          82,240  (5) 

Hal L. Bettis

    3/5/2012        —          —          —          —           33,800 (1)      33,800        —          —          —          91,485  (2) 
    3/5/2012        —          —          —          —           —          —          33,800        —          —          115,258  (6) 
    12/3/2012        —          —          —          —           —          —          52,200        —          —          83,520  (5) 

Richard H. Mourglia

    3/5/2012        —          —          —          —           29,650 (1)      29,650        —          —          —          80,252  (2) 
    3/5/2012        —          —          —          —           —          —          29,650        —          —          101,107  (6) 
    12/3/2012        —          —          —          —           —          —          46,000        —          —          73,600  (5) 

 

(1)

The performance-vesting restricted stock vests based on the satisfaction of certain performance criteria over a three year performance period. For each performance period, 100% of the awards vest if the Company’s Total Stock Return Performance equals or exceeds the 75th percentile of its peer group; 75% of the awards vest if the Company’s Total Stock Return Performance equals or exceeds the 50th percentile but falls below the 75th percentile of the peer group, and 50% of the awards vest if the Company’s Total Stock Return Performance equals or exceeds the 25th percentile but falls below the 50th percentile of the peer group.

(2) Represents the fair value of the shares on the grant date as valued using the Monte Carlo simulation ($2.66 for Performance Period A; $2.70 for Performance Period B; and $2.76 for Performance Period C).
(3) The October 1, 2012 restricted stock grants were made in connection with the amended employment agreements.
(4) Represents the fair value of the shares granted at a per share fair value of $1.95 on the grant date.
(5) Represents the fair value of the shares granted at a per share fair value of $1.60 on the grant date.
(6) Represents the fair value of the shares granted at a per share fair value of $3.41 on the grant date.

 

56


Table of Contents

OUTSTANDING EQUITY AWARDS AT FISCAL YEAR END

The Outstanding Equity Awards at Fiscal Year End Table reflects each Named Executive Officer’s unexercised option award holdings and unvested restricted stock awards at December 31, 2012 on an individual award basis.

 

    Option Awards     Stock Awards(1)  

Name

(a)

  Number of
Securities
Underlying
Unexercised
Options (#)
Exercisable
(b)
    Number of
Securities
Underlying

Unexercised
Options (#)
Unexercisable
(c)
    Equity
Incentive
Plan
Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options (#)
(d)
    Option
Exercise
Price
($)

(e)
    Option
Expiration
Date

(f)
    Number of
Shares or
Units of Stock
That Have
Not Vested
(#)

(g)
    Market Value
of Shares or
Units of Stock
That Have
Not Vested
($)

(h)
    Equity
Incentive
Plan Awards:
Number of
Unearned
Shares, Units
or Other
Rights That
Have Not
Vested (#)

(i)
    Incentive
Plan
Awards:
Market or
Payout Value
of Unearned
Shares, Units
or Other
Rights That
Have Not
Vested ($)

(j)
 

James A. Watt

    —          —          —          —          —          300,459  (2)      465,711  (3)      111,000        172,050 (3) 

Frank T. Smith, Jr.

    —          —          —          —          —          185,424  (2)      287,407  (3)      28,167        43,659 (3) 

Hal L. Bettis

    —          —          —          —          —          86,224  (2)      133,647  (3)      28,167        43,659 (3) 

Richard H. Mourglia

    —          —          —          —          —          75,846  (2)      117,561  (3)      24,709        38,299 (3) 

 

(1) As noted below, a portion of the restricted stock vest based on the satisfaction of certain performance criteria.
(2) On December 22, 2011, the Company effected a 100-for-1 reverse stock split. The share amounts shown are on a post-reverse stock split basis. Details regarding the grant dates, number of unvested restricted shares, and general vesting criteria are shown below.
(3) The fair market value of Dune Energy stock on December 31, 2012 was $1.55 per share.

 

Name

   Grant Date      Unvested
Restricted
Shares
    Vesting Criteria (1)    Total
Unvested
Restricted
Shares
 

James A. Watt

     11/18/2010         459  (2)    Time-Based      411,459   
     3/5/2012         111,000      Performance-Based   
     10/1/2012         125,000      Time-Based   
     12/3/2012         92,300      Time-Based   
     12/3/2012         82,700      Time-Based   

Frank T. Smith, Jr.

     11/18/2010         224  (2)    Time-Based      213,591   
     3/5/2012         33,800      Time-Based   
     3/5/2012         28,167      Performance-Based   
     10/1/2012         100,000      Time-Based   
     12/3/2012         51,400      Time-Based   

Hal L. Bettis

     11/18/2010         224  (2)    Time-Based      114,391   
     3/5/2012         33,800      Time-Based   
     3/5/2012         28,167      Performance-Based   
     12/3/2012         52,200      Time-Based   

Richard H. Mourglia

     11/18/2010         196  (2)    Time-Based      100,555   
     3/5/2012         29,650      Time-Based   
     3/5/2012         24,709      Performance-Based   
     12/3/2012         46,000      Time-Based   

 

(1) All restricted stock awards vest ratably over three years, subject to satisfying performance goals, where applicable.
(2) Award adjusted for the December 22, 2011 100-for-1 reverse stock split.

 

57


Table of Contents

OPTION EXERCISES AND STOCK VESTED

The Option Exercises and Stock Vested Table reflects the stock options actually exercised by, and shares of stock that vested for, each of the Named Executive Officers during 2012.

 

     Option Awards (1)      Stock Awards  

Name

(a)

   Number of
Shares Acquired
On Exercise (#)
(b)
     Value
Realized on
Exercise ($)

(c)
     Number of
Shares Acquired
on Vesting (#)

(d)
    Value
Realized
on Vesting  ($)

(e)
 

James A. Watt

     —           —           1,017  (2)      1,813  (3) 

Frank T. Smith, Jr.

     —           —           670  (2)      1,206  (4) 

Hal L. Bettis

     —           —           325  (2)      537  (5) 

Richard H. Mourglia

     —           —           284  (2)      470  (6) 

 

(1) No stock options were exercised by the Named Executive Officers in 2012.
(2) The share amounts shown are on a post-reverse stock split basis.
(3) Represents the fair market value for 559 shares on September 30, 2012 at $1.85 per share and 458 shares on November 18, 2012 at $1.70 per share.
(4) Represents the fair market value for 447 shares on September 30, 2012 at $1.85 per share and 223 shares on November 18, 2012 at $1.70 per share.
(5) Represents the fair market value for 102 shares on December 31, 2012 at $1.55 per share and 223 shares on November 18, 2012 at $1.70 per share.
(6) Represents the fair market value for 88 shares on December 31, 2012 at $1.55 per share and 196 shares on November 18, 2012 at $1.70 per share.

PENSION BENEFITS

The Pension Benefits Table discloses information pertaining to pension benefits provided to the Named Executive Officers. The Company does not provide pension benefits to the Named Executive Officers. Therefore, the Pension Benefits table has been omitted from this disclosure.

NONQUALIFIED DEFERRED COMPENSATION

The Nonqualified Deferred Compensation Table discloses information pertaining to nonqualified deferred compensation benefits provided to the Named Executive Officers. The Company does not provide nonqualified deferred compensation benefits to the Named Executive Officers. Therefore, the Nonqualified Deferred Compensation table has been omitted from this disclosure.

POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE IN CONTROL

The following paragraphs discuss the incremental compensation that would be payable by the Company to each remaining Named Executive Officer in the event of the Named Executive Officer’s termination of employment with the Company under various scenarios including: 1) voluntary termination without Good Reason; 2) termination in the event of death or disability; 3) termination without cause or for Good Reason absent a change in control; and 4) termination without cause or for Good Reason in connection with a change in control. In accordance with applicable SEC rules, the following discussion assumes:

 

(i) That the termination event in question occurred on December 31, 2012; and

 

(ii) With respect to calculations based on the Company’s stock price, the stock was priced at $1.55, which was the closing price of one share of the Company’s common stock on December 31, 2012.

 

58


Table of Contents

Pursuant to applicable SEC rules, the analysis contained in this section does not consider or include payments made to a Named Executive Officer with respect to contracts, agreements, plans or arrangements to the extent they do not discriminate in scope, terms or operation, in favor of executive officers of the Company and that are available generally to all salaried employees, such as the Company’s 401(k) Plan. The actual amounts that would be paid upon a Named Executive Officer’s termination of employment can only be determined at the time of such executive officer’s termination from the Company. Due to the number of factors that affect the nature and amount of any compensation or benefits provided upon the termination events, any actual amounts paid or distributed may be higher or lower than reported below. Factors that could affect these amounts include the timing during the year of any such event and the Company’s stock price.

Payments to be made to Messrs. Watt and Smith as a result of the set forth termination events are based on such executive officer’s respective employment agreement. Messrs. Bettis and Mourglia are not parties to employment agreements and, therefore, the payments they would receive upon each of the termination events discussed below are generally provided by the Severance Plan.

In addition, as described below, the terms of the executive officers’ restricted stock awards granted pursuant to the 2007 and 2012 Stock Incentive Plans provide for accelerated vesting to varying degrees upon each of the termination events as discussed below.

Voluntary Termination

Pursuant to the terms of Messrs. Watt’s and Smith’s respective employment agreements, the Company is not obligated to pay any separation payments in the event that the executive voluntarily terminates employment with the Company. Similarly, the Severance Plan does not provide for a severance payment upon an executive officer’s voluntary termination.

In addition, all outstanding and unvested restricted stock awards are forfeited if the executive officers voluntarily terminate employment with the Company.

In the event of Messrs. Watt’s and Smith’s termination, unless such termination is without cause or due to a resignation for Good Reason, these executive officers will be subject to one (1) year non-competition and non-solicitation provisions as provided in their respective employment agreements.

Termination in the event of Death or Disability

Messrs. Watt’s and Smith’s respective employment agreements do not provide for severance payments in the event of the executives’ death or disability.

The Severance Plan provides that Messrs. Bettis and Mourglia would be entitled to a payout equal to their respective pro-rata target bonuses upon termination due to death or disability. As previously discussed, the target bonuses for Messrs. Bettis and Mourglia are as follows:

 

Named Executive Officer

   Base
Salary
     Target Bonus
(% of Salary)
    Target
Bonus
 

Hal L. Bettis

   $ 306,000         70   $ 214,200   

Richard H. Mourglia

     269,000         60     161,400   

Unvested restricted stock awards held by the executive officers that were granted November 18, 2010 would become immediately vested in the event the executive officer’s employment was terminated due to death or disability. Any other unvested restricted stock awards would be forfeited in accordance with the terms of the applicable award agreements.

 

59


Table of Contents

Termination without Cause or Termination for Good Reason Absent a Change In Control

Pursuant to the terms of Mr. Watt’s employment agreement, as amended on September 21, 2012, if the Company terminates his employment without cause or Mr. Watt terminates his employment for Good Reason (as defined below), he is entitled to a severance payment equal to 2.99 times the sum of his then applicable base salary and target bonus.

Pursuant to the terms of Mr. Smith’s employment agreement, as amended on September 21, 2012, in the event that the Company terminates Mr. Smith’s employment without cause or Mr. Smith terminates his employment for Good Reason (as defined below), he is entitled to severance pay equal to 1.0 times the sum of his then applicable base salary and target bonus.

The terms of the respective employment agreements provide that Messrs. Watt and Smith are also entitled to continued health care coverage for the Named Executive Officer and his spouse/dependents under the Company’s health insurance plan for a period of three (3) years following termination for Mr. Watt and two (2) years following termination for Mr. Smith.

In addition, the respective employment agreements of Messrs. Watt and Smith also provide for payment for any annual bonus earned in the year preceding termination, but not yet paid, and accrued and unused vacation days during the year of termination.

Good Reason means any of the following which remain uncured after thirty (30) days prior written notice is received by the Company from either Mr. Watt or Mr. Smith:

 

  (1) The failure of the Company to continue the executive officers’ current positions of the Company (or such other senior executive position as may be offered by the Company and which the executive may in his sole discretion accept);

 

  (2) Material diminution by the Company of the executive’s responsibilities, duties, or authority in comparison with the responsibilities, duties and authority held during the six (6) month period immediately preceding the diminution, or assignment to the executive of any duties inconsistent with his position as the senior executive officer of the Company (or such other senior executive position as may be offered by the Company and which the executive may in his sole discretion accept);

 

  (3) Failure by the Company to pay and provide the executive with compensation and benefits provided for in his employment agreement; or

 

  (4) The requirement that the executive relocates his residence outside the State of Texas.

The Severance Plan provides that Messrs. Bettis and Mourglia would be entitled to severance pay in the amount of one (1) times the sum of the executive’s then applicable base salary and target bonus should each executive’s employment be involuntarily terminated without cause. The Severance Plan does not provide for a severance payment in the event the executive terminates for good reason absent a change in control.

The table below summarizes the cash severance payments each executive officer would receive upon a termination without cause or, for Messrs. Watt and Smith, termination for good reason absent a change in control.

 

Named Executive Officer

   Base
Salary
     Target
Bonus
     Applicable
Multiple
     Cash Severance
Payment
 

James A. Watt

   $ 550,000       $ 550,000         2.99       $ 3,289,000   

Frank T. Smith, Jr.

     306,000         214,200         1.00         520,200   

Hal L. Bettis

     306,000         214,200         1.00         520,200   

Richard H. Mourglia

     269,000         161,400         1.00         430,400   

 

60


Table of Contents

None of the executive officers’ unvested restricted stock would receive accelerated vesting in the event the executive officer was terminated without cause or for Good Reason absent a change in control.

Termination without Cause or Termination for Good Reason with a Change In Control

Pursuant to the terms of Mr. Watt’s employment agreement, if the Company terminates his employment without cause or Mr. Watt terminates his employment for Good Reason in connection with a change in control, he is entitled to a severance payment equal to 2.99 times the sum of his then applicable base salary and target bonus.

In the event that the Company terminates Mr. Smith’s employment without cause or Mr. Smith terminates his employment for Good Reason in connection with a change in control, he is entitled to severance pay equal to 2.0 times the sum of his then applicable base salary and target bonus.

Pursuant to their respective employment agreements, Messrs. Watt’s and Smith’s severance payments are contingent upon the Named Executive Officer signing a full release of all claims within forty-five days after termination of employment. The Named Executive Officer’s severance payment is payable thirty days after the Company receives the Executive’s signed release. If the Named Executive Officer is a “specified employee” as defined in section 409A of the Code, the Named Executive Officer shall receive his severance payment on the first day of the seventh calendar month following termination.

The terms of the respective employment agreements provide that Messrs. Watt and Smith are also entitled to continued health care coverage for the Named Executive Officer and his spouse/dependents under the Company’s health insurance plan for a period of three (3) years following termination for Mr. Watt and two (2) years following termination for Mr. Smith.

In addition, the respective employment agreements of Messrs. Watt and Smith also provide for payment for any annual bonus earned in the year preceding termination, but not yet paid, and accrued and unused vacation days during the year of termination.

The Severance Plan provides that Messrs. Bettis and Mourglia will be entitled to severance in the amount of two (2) times the sum of the executive’s then applicable base salary and target bonus if each executive’s employment is involuntarily terminated without cause or if the executive resigns for Good Reason in connection with a change in control.

The table below summarizes the severance payments each executive officer would receive upon a termination without cause or termination for good reason in connection with a change in control.

 

Named Executive Officer

   Base
Salary
     Target
Bonus
     Applicable
Multiple
     Cash Severance
Payment
 

James A. Watt

   $ 550,000       $ 550,000         2.99       $ 3,289,000   

Frank T. Smith

     306,000         214,200         2.00         1,040,400   

Hal L. Bettis

     306,000         214,200         2.00         1,040,400   

Richard H. Mourglia

     269,000         161,400         2.00         860,800   

Pursuant to the terms of the employment agreements of Messrs. Watt and Smith and the terms of the restricted stock award agreements, all outstanding restricted shares, to the extent not previously vested, would become immediately vested upon the executive officers’ termination without cause or for Good Reason in connection with a change in control. All change in control benefits provided to the Executives are “double-trigger” benefits, provided only upon a change in control and termination of employment. No benefits would be payable upon a change in control that is not accompanied by termination of an Executive.

 

 

61


Table of Contents

Pursuant to their respective employment agreements, Messrs. Watt and Smith are entitled to receive tax gross-up payments in the event they are subject to Code section 280G excise taxes related to payments upon a change in control termination.

The Severance Plan does not provide for a tax gross-up upon termination in connection with a change in control in the event that the executive is subject to Code section 280G excise tax.

Potential Payments Upon Termination Or Change In Control on December 31, 2012

The table below indicates the amount of compensation payable by us to the executive officers, including cash severance and restricted stock awards, upon various termination events assumed to occur on December 31, 2012.

 

                    Termination     Termination in  
                    Absent a Change     Connection with a  
                    in Control (Without     Change in Control  
        Voluntary     Death or     Cause or For Good     (Without Cause or  

Executive

 

Compensation Element

  Resignation     Disability     Reason)     For Good Reason)  

Watt, James

  Cash Severance Payment   $ —        $ —        $ 3,289,000      $ 3,289,000   
  Restricted Stock Awards(1)     —          711        —          672,171   
  Continued Health Care Coverage     —          —          19,020        19,020   
  Excise Tax Gross-Up     n/a        n/a        n/a        1,567,905   
  Total   $ —        $ 711      $ 3,308,020      $ 5,548,096   

Smith, Frank

  Cash Severance Payment     —          —          520,200        1,040,400   
  Restricted Stock Awards(1)     —          347        —          339,797   
  Continued Health Care Coverage     —          —          12,680        12,680   
  Excise Tax Gross-Up     n/a        n/a        n/a        427,289   
  Total   $ —        $ 347      $ 532,880      $ 1,820,166   

Bettis, Hal

  Cash Severance Payment     —          214,200 (2)      520,200 (3)      1,040,400   
  Restricted Stock Awards(1)     —          347        —          186,037   
  Continued Health Care Coverage     —          —          —          —     
  Excise Tax Gross-Up     n/a        n/a        n/a        n/a   
  Total   $ —        $ 214,547      $ 520,200      $ 1,226,437   

Mourglia, Richard

  Cash Severance Payment     —          161,400 (2)      430,400 (3)      860,800   
  Restricted Stock Awards(1)     —          304        —          163,519   
  Continued Health Care Coverage     —          —          —          —     
  Excise Tax Gross-Up     n/a        n/a        n/a        n/a   
  Total   $ —        $ 161,704      $ 430,400      $ 1,024,319   

 

(1) Amounts include the value of unvested awards at December 31, 2012 that would vest based on the termination event. The fair market value of a share of stock on December 31, 2012 was $1.55 per share on a post-split basis.
(2) Messrs. Bettis and Mourglia are entitled to a payout equal to their respective pro-rata bonus upon termination due to death or disability.
(3) Absent a change in control, Messrs. Bettis and Mourglia are only entitled to a servance payment upon termination without cause.

 

62


Table of Contents

COMPENSATION OF DIRECTORS

2012 Director Compensation

Effective January 17, 2012, Steven Barrenchea, Richard Cohen, William Greenwood, Alan Bell and Steven Sisselman resigned from the Company’s Board of Directors. Effective the following day, Michael Keener, Steven Kovacs, Dr. Alexander Kulpecz, Jr., Emanuel Pearlman, Robert Schmitz, and Eric Stearns were appointed to serve as Directors of the Company.

The new Directors were appointed in connection with the Company’s restructuring, which was consummated on December 22, 2011. The Company’s Board of Directors for the majority of 2012 consisted of seven members, which included the six newly appointed Directors previously mentioned and Mr. Watt. Consistent with historical practice, Mr. Watt is not entitled to any additional compensation for serving as a Director. Upon their resignation, Messrs. Barrenchea, Cohen, Greenwood, Bell and Sisselman retained their previously granted restricted stock.

Pursuant to the Committee’s recommendation for director cash compensation, the Board approved the following director cash compensation structure effective January 1, 2012. Directors may receive such compensation in the form of the Company’s common stock.

 

   

Annual retainer of $50,000, payable in quarterly installments;

 

   

$50,000 for the Chairman of the Board, payable in quarterly installments;

 

   

$25,000 for the Chairman of the Audit Committee, payable in quarterly installments;

 

   

$15,000 for each of the Chairmen of the Nominations and Corporate Governance Committee, the Health, Safety & Environmental Committee and the Compensation Committee, each payable in quarterly installments;

 

   

$7,500 for each member of the Audit Committee, payable in quarterly installments;

 

   

$5,000 for each member of each of the Nominations and Corporate Governance Committee, the Health, Safety & Environmental Committee and the Compensation Committee, each payable in quarterly installments; and

 

   

$2,000 fee for each meeting of the Board attended by the director (including telephonic meetings), payable at the end of each quarter.

The director compensation guidelines for 2012 do not provide for committee meeting fees.

As previously discussed, on March 5, 2012, the Board unanimously authorized the adoption of the 2012 Stock Incentive Plan to become effective immediately. In conjunction with the adoption of the 2012 Plan, the Board approved the following grants to nonemployee directors of nonqualified stock options to purchase an aggregate of 600,000 shares of common stock at $3.41(exercise price) per share, as previously recommended by the Committee. The Committee chose to introduce stock options into the Director compensation program for 2012 to align the Directors with the Company’s stockholders and reward them for future stock price growth.

 

63


Table of Contents

The table below shows the number of stock options granted to each Director and the associated vesting schedule.

 

Name

   # Options      # Options
Vesting
Upon Grant
     # Options
Vesting on
March 5, 2013
     # Options
Vesting on
March 5, 2014
 

Michael R. Keener

     100,000         33,333         33,333         33,334   

Stephen P. Kovacs

     100,000         33,333         33,333         33,334   

Alexander A. Kulpecz, Jr.

     100,000         33,333         33,333         33,334   

Emanuel R. Pearlman

     100,000         33,333         33,333         33,334   

Robert A. Schmitz

     100,000         33,333         33,333         33,334   

Eric R. Stearns

     100,000         33,333         33,333         33,334   

For 2012, Directors could elect to receive Board fees in cash or in shares of Company stock. If an election to receive Company stock was made, such Director was entitled to the number of shares equal to 125% of the Board fees earned divided by the fair market value of the stock on the last day of the respective fiscal quarter. However, none of the Directors made such elections during 2012.

During 2012, Mr. Watt served as a Director, but was not entitled to any additional compensation for such service. Therefore, Mr. Watt is not included in the Director Compensation Table below.

The Director Compensation Table below displays the total compensation awarded to, earned by or paid to Directors for the fiscal year ending December 31, 2012. All amounts shown below are in dollars.

 

    Fees Earned or
Paid in Cash
    Stock
Awards
    Option
Awards(1)
    Non-Equity
Incentive Plan
Compensation
    Change in
Pension Value
and Nonqualified
Deferred
Compensation
Earnings
    All Other
Compensation
    Total  
Name   (b)     (c)     (d)     (e)     (f)     (g)     (h)  

(a)

  ($)     ($)     ($)     ($)     ($)     ($)     ($)  

Robert A. Schmitz

    137,500        —          246,000        —          —          —          383,500   

Michael R. Keener

    117,500        —          246,000        —          —          —          363,500   

Stephen P. Kovacs

    93,500        —          246,000        —          —          —          339,500   

Alexander A. Kulpecz, Jr.

    110,000        —          246,000        —          —          —          356,000   

Emanuel R. Pearlman

    100,000        —          246,000        —          —          —          346,000   

Eric R. Stearns

    98,000        —          246,000        —          —          —          344,000   

Steven Barrenechea

    10,455 (2)      —          —          —          —          —          10,455   

Alan D. Bell

    23,116 (2)      —          —          —          —          —          23,116   

Richard M. Cohen

    13,396 (2)      —          —          —          —          —          13,396   

William E. Greenwood

    12,955 (2)      —          —          —          —          —          12,955   

Steven M. Sisselman

    13,396 (2)      —          —          —          —          —          13,396   

 

(1) Represents grants of 100,000 shares awarded on March 5, 2012 with a fair value of $2.46.
(2) Board fees received prior to resigning on January 17, 2012.

 

64


Table of Contents

The table below summarizes the stock options held by each of the directors as of December 31, 2012.

 

     Option Awards     

 

 
Name    Number of
Securities
Underlying
Unexercised
Options (#)
Exercisable
     Number of
Securities
Underlying
Unexercised
Options (#)
Unexercisable
     Plan Awards:
Number of
Securities
Underlying
Unexercised
Unearned Options
(#)
     Option
Exercise
Price
($)
     Option
Expiration
Date
 

(a)

   (b)      (c)      (d)      (e)      (f)  

Robert A. Schmitz

     33,333         66,667         —           3.41         3/5/2017   

Michael R. Keener

     33,333         66,667         —           3.41         3/5/2017   

Stephen P . Kovacs

     33,333         66,667         —           3.41         3/5/2017   

Alexander A. Kulpecz, Jr.

     33,333         66,667         —           3.41         3/5/2017   

Emanuel R. Pearlman

     33,333         66,667         —           3.41         3/5/2017   

Eric R. Stearns

     33,333         66,667         —           3.41         3/5/2017   

Messrs. Kovacs and Pearlman resigned from the Board on January 8, 2013 and January 14, 2013, respectively.

 

Item 12 Security Ownership of Certain Beneficial Owners and Management Related Stockholder Matters

Securities Authorized for Issuance Under Equity Compensation Plans

See Part II, Item 5.

Security Ownership of Certain Beneficial Owners and Management

The following table sets forth certain information regarding the beneficial ownership of our common stock as of March 1, 2013 by (i) each of our current executive officers (the “Named Executive Officers”) and directors, (ii) each person who, to our knowledge, beneficially owns more than 5% of the outstanding shares of our common stock; and (iii) all of our current directors and the Named Executive Officers as a group:

 

Name of Beneficial Owner (1)

   Amount (2)     Percent of Class  

James A. Watt (President, Chief Executive Officer and Director)(3)

     549,880  (3)      1

Frank T. Smith, Jr. (Senior Vice President, Chief Financial Officer and Secretary)(4)

     221,175  (4)      *   

Hal L. Bettis (Senior Vice President and Chief Operating Officer)(5)

     120,588  (5)      *   

Richard H. Mourglia (General Counsel and Senior Vice President–Land)(6)

     105,850  (6)      *   

Michael R. Keener (Director)(7)

     33,333  (7)      *   

Dr. Alexander A. Kulpecz, Jr. (Director)(7)

     33,333  (7)      *   

Robert A. Schmitz (Director and Chairman of the Board)(7)

     33,333  (7)      *   

Eric R. Stearns (Director)(7)

     33,333  (7)      *   

West Face Long Term Opportunities Global Master L.P. (8)

     8,909,791  (8)      15.1

BlueMountain (9)

     12,337,048  (9)      20.9

Zell Credit Opportunities Side Fund, L.P. (10)

     3,792,068  (10)      6.4

Whitebox (11)

     3,141,562  (11)      5.3

TPG Funds(12)

     7,970,018  (12)      13.5

Strategic Value Special Situation Fund, L.P. (13)

     14,650,040  (13)      24.8

Highbridge International, LLC (14)

     3,093,056  (14)      5.2

All Officers & Directors as a Group (8 persons)

     1,130,825        1.5

 

* Indicates ownership of less than 1%

 

65


Table of Contents
(1) Unless otherwise indicated, the address of the beneficial holder is c/o Dune Energy, Inc., Two Shell Plaza, 777 Walker Street, Suite 2300, Houston, Texas 77002. The number of shares and any exercise prices with respect to awards and equity issuances made prior to December 1, 2009 have been adjusted to give effect to the 1-for-5 reverse stock split effective December 1, 2009, and the 1-for-100 reverse stock split effective December 22, 2011.
(2) Under Rule 13d-3 promulgated by the SEC, a person is deemed to be the beneficial owner of securities if one has the power to vote or direct the voting of such securities or has the power to dispose or direct the disposition of such securities. A person is also deemed to be the beneficial owner of securities that can be acquired by such person within 60 days. For purposes hereof, each beneficial owner’s percentage ownership is determined by assuming that options that are held by such person (but not held by any other person), and which are exercisable within 60 days from the Record Date, have been exercised. As of March 1, 2013, an aggregate of 59,125,367 shares of common stock were outstanding.
(3) Includes voting power with respect to 133,200 unvested shares of common stock awarded pursuant to the 2012 Plan all of which are subject to vesting in accordance with certain performance-based criteria set forth in the grant agreement with respect to the grant.
(4) Includes voting power with respect to 33,800 unvested shares of common stock awarded pursuant to the 2012 Plan all of which are subject to vesting in accordance with certain performance-based criteria set forth in the grant agreement with respect to the grant.
(5) Includes voting power with respect to 33,800 unvested shares of common stock awarded pursuant to the 2012 Plan all of which are subject to vesting in accordance with certain performance-based criteria set forth in the grant agreement with respect to the grant.
(6) Includes voting power with respect to 29,650 unvested shares of common stock awarded pursuant to the 2012 Plan all of which are subject to vesting in accordance with certain performance-based criteria set forth in the grant agreement with respect to the grant.
(7) In connection with the adoption of the 2012 Plan, on March 5, 2012, each independent director was granted 100,000 options, 33,333 of which immediately became exercisable, and 33,333 vest on March 5, 2013, and 33,333 vest on March 5, 2014.
(8) The address of West Face Long Term Opportunities Global Master L.P. is c/o West Face Capital Inc., 810-2 Bloor Street East, Box #85, Toronto, Ontario M4W 1A8. West Face Capital Inc. (“West Face Capital”), which is the Advisor to West Face Long Term Opportunities Global Master L.P. (“Global Master Fund”), exercises voting and dispositive power over the securities held by Global Master Fund. Voting and investment decisions of West Face Capital are made by its Co-Chief Investment Officers, Gregory Boland and Peter Fraser, each of whom disclaims beneficial ownership of any shares held by Global Master Fund.
(9)

The address of BlueMountain Distressed Master Fund L.P. is Ugland House, South Church Street, George Town, Grand Cayman, Cayman Islands. Ethan Auerbach, Andrew Feldstein and Derek Smith exercise voting and dispositive power over the securities held by BlueMountain Distressed Master Fund L.P. The address of BlueMountain Long/Short Credit Master Fund L.P. is Ugland House, South Church Street, George Town, Grand Cayman, Cayman Islands. Ethan Auerbach, Andrew Feldstein and Derek Smith exercise voting and dispositive power over the securities held by BlueMountain Long/Short Credit Master Fund L.P. The address of AAI BlueMountain Fund PLC is Beaux Lane House, Mercer Street Lower, Dublin, Ireland. Ethan Auerbach, Andrew Feldstein and Derek Smith exercise voting and dispositive power over the securities held by AAI BlueMountain Fund PLC. The address of Blue Mountain Credit Alternatives Master Fund L.P. is Ugland House, South Church Street, George Town, Grand Cayman, Cayman Islands. Ethan Auerbach, Andrew Feldstein and Derek Smith exercise voting and dispositive power over the securities held by Blue Mountain Credit Alternatives Master Fund L.P. The address of BlueMountain Timberline Ltd. is Ugland House, South Church Street, George Town, Grand Cayman, Cayman Islands. Ethan Auerbach, Andrew Feldstein and Derek Smith exercise voting and dispositive power over the securities held by BlueMountain Timberline Ltd. The address of BlueMountain Kicking Horse Fund L.P. is Ugland House, South Church Street, George Town, Grand Cayman, Cayman Islands. Ethan Auerbach, Andrew Feldstein and Derek Smith exercise voting and dispositive power over the securities held by BlueMountain Kicking Horse Fund L.P. The address of BlueMountain Strategic Credit Master Fund L.P. is Ugland House, South Church Street, George Town, Grand Cayman, Cayman Islands. Ethan Auerbach,

 

66


Table of Contents
  Andrew Feldstein and Derek Smith exercise voting and dispositive power over the securities held by BlueMountain Strategic Credit Master Fund L.P. The address of BlueMountain Credit Opportunities Master Fund I L.P. is Ugland House, South Church Street, George Town, Grand Cayman, Cayman Islands. Ethan Auerbach, Andrew Feldstein and Derek Smith exercise voting and dispositive power over the securities held by BlueMountain Credit Opportunities Master Fund I L.P.
(10) The address of Zell Credit Opportunities Side Fund, L.P. (“ZCOF”) is Two North Riverside Plaza, Suite 600, Chicago, IL, 60606. ZCOF is a Delaware limited partnership. Chai Trust Company, LLC, an Illinois limited liability company (“Chai”), is the general partner and investment manager of ZCOF. The following individuals are the Senior Managing Directors of Chai: Robert M. Levin, Donald J. Liebentritt, Jonathan D. Wasserman, JoAnn Zell, Kellie Zell and Matthew Zell.
(11) The address of Whitebox Multi-Strategy Partners, LP is 3033 Excelsior Blvd, STE 300 Minneapolis, MN 55416. Andrew Redleaf exercises voting and dispositive power over the securities held by Whitebox Multi-Strategy Partners, LP. The address of Pandora Select Partners, LP is 3033 Excelsior Blvd, STE 300 Minneapolis, MN 55416. Andrew Redleaf exercises voting and dispositive power over the securities held by Pandora Select Partners, LP. The address of Whitebox Credit Arbitrage Partners, LP is 3033 Excelsior Blvd, STE 300 Minneapolis, MN 55416. Andrew Redleaf exercises voting and dispositive power over the securities held by Whitebox Credit Arbitrage Partners, LP.
(12) The address of TPG Opportunity Fund I, L.P. (“Opportunity I”) is 301 Commerce Street, Suite 3300, Fort Worth, TX, 76102. Opportunity I’s general partner is TPG Opportunities Advisors, Inc., a Delaware corporation (“Opportunities Advisors”). David Bonderman and James G. Coulter are officers, directors and sole shareholders of Opportunities Advisors and therefore may be deemed to beneficially own the shares held by Opportunity I. Messrs. Bonderman and Coulter disclaim beneficial ownership of the shares held by Opportunity I except to the extent of their pecuniary interest therein. The address of Opportunities Advisors and Messrs. Bonderman and Coulter is c/o TPG Global, LLC, 301 Commerce Street, Suite 3300, Fort Worth, TX 76102. The address of TPG Opportunity Fund III, L.P. (“Opportunity III”) is 301 Commerce Street, Suite 3300, Fort Worth, TX, 76102. Opportunity III’s general partner is Opportunities Advisors. David Bonderman and James G. Coulter are officers, directors and sole shareholders of Opportunities Advisors and therefore may be deemed to beneficially own the shares held by Opportunity III. Messrs. Bonderman and Coulter disclaim beneficial ownership of the shares held by Opportunity III except to the extent of their pecuniary interest therein. The address of Opportunities Advisors and Messrs. Bonderman and Coulter is c/o TPG Global, LLC, 301 Commerce Street, Suite 3300, Fort Worth, TX 76102.
(13) The address of Mardi Gras Ltd. is c/o Strategic Value Partners, LLC, 100 West Putnam Avenue, Greenwich, CT 06830. Victor Khosla, the Chief Investment Officer of Strategic Value Partners, LLC, indirectly exercises voting and dispositive power over the securities held by Mardi Gras Ltd. Mr. Khosla disclaims beneficial ownership of such securities except to the extent of his pecuniary interest therein. The address of High Ridge Ltd. is c/o Strategic Value Partners, LLC, 100 West Putnam Avenue, Greenwich, CT 06830. Victor Khosla, the Chief Investment Officer of Strategic Value Partners, LLC, indirectly exercises voting and dispositive power over the securities held by High Ridge Ltd. Mr. Khosla disclaims beneficial ownership of such securities except to the extent of his pecuniary interest therein. The address of Strategic Value Special Situations Fund L.P. is c/o Strategic Value Partners, LLC, 100 West Putnam Avenue, Greenwich, CT 06830. Victor Khosla, the Chief Investment Officer of Strategic Value Partners, LLC, indirectly exercises voting and dispositive power over the securities held by Strategic Value Special Situations Fund L.P. Mr. Khosla disclaims beneficial ownership of such securities except to the extent of his pecuniary interest therein.
(14) The address of Highbridge International, LLC is ATTN: Chris Casale 40 West 57th Street, 32nd Floor New York, NY, 10019. Highbridge Capital Management, LLC is the trading manager of Highbridge International, LLC and has voting and dispositive power over the securities held by Highbridge International, LLC. Glenn Dubin is the Chief Executive Officer of Highbridge Capital Management, LLC. Each of Highbridge Capital Management LLC and Glenn Dubin disclaims beneficial ownership of the securities held by Highbridge International LLC

 

67


Table of Contents
Item 13. Certain Relationships and Related Transactions, and Director Independence

Transactions with Related Persons

On December 20, 2012, the Company entered into an agreement with each of its major shareholders to sell 18,749,997 new shares of common stock at $1.60 per share for total proceeds of $30 Million to be used to fund working capital for the Company’s planned 2013 drilling program. Subject to certain conditions or upon the occurrence of certain events, Dune may issue and the major shareholders may purchase up to an additional 12.5 million shares of common stock in two equal tranches, also at $1.60 per share.

Each of the Company’s major shareholders, who collectively hold approximately 93% of the outstanding shares of the Company prior to the agreement, participated in the sale on a pro rata basis as to their interest prior to the issuance of the new common stock. Under the terms of the agreement the Company may issue up to 31,250,000 shares at $1.60 per share prior to December 31, 2013. Total consideration to the Company, assuming all conditions of the program are achieved and additional draws made would be $50 million.

In the financing, each of the investors received a “Preemptive Right” to purchase such investor’s pro rata percentage of new stock or new debt financings (excluding certain reserve based revolver financings) undertaken by Dune, on substantially the same terms as offered to any outside investor. At the expiration of the term of the agreement or upon a change of control of Dune, the investors can elect to draw down the remaining shares in the program by paying to the Company $1.60 per share for any shares remaining under the initial 31,250,000 shares allocated for issuance pursuant to the agreement. The total number of shares purchased by each purchaser at the initial closing held on December 21, 2012 is listed in the chart below. Some of the purchasers are “related persons” by virtue of their ownership of the Company’s stock.

 

Purchaser

   Number of Shares Purchased  

Simplon Partners, L.P.

     196,965   

Simplon International Limited

     482,226   

Highbridge International, LLC

     1,034,705   

West Face Long Term Opportunities Global Master L.P.

     2,980,550   

BlueMountain Distressed Master Fund L.P.

     822,314   

BlueMountain Long/Short Credit Master Fund L.P.

     930,563   

AAI BlueMountain Fund PLC

     66,606   

Blue Mountain Credit Alternatives Master Fund L.P.

     953,573   

BlueMountain Timberline Ltd.

     841,390   

BlueMountain Kicking Horse Fund L.P.

     2,378   

BlueMountain Strategic Credit Master Fund L.P.

     126,985   

BlueMountain Credit Opportunities Master Fund I L.P.

     383,245   

Zell Credit Opportunities Side Fund, L.P.

     1,268,542   

Whitebox Multi-Strategy Partners, LP

     442,487   

Pandora Select Partners, LP

     187,750   

Whitebox Credit Arbitrage Partners, LP

     462,738   

TPG Opportunity Fund I, L.P.

     1,866,320   

TPG Opportunity Fund III, L.P.

     799,852   

Mardi Gras Ltd.

     689,986   

High Ridge Ltd.

     3,976,068   

Strategic Value Special Situation Fund, L.P.

     234,754   

 

68


Table of Contents

Board of Directors Independence

The Board of Directors’ Nominations and Corporate Governance Committee (the “Nominations Committee”) has affirmatively determined that each of Messrs. Keener, Kulpecz, Schmitz and Stearns, constituting a majority of the members of the Board of Directors, qualify as “independent” by our Board of Directors, and the applicable rules under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The definition of “independent” is also set forth the Company’s Corporate Governance Guidelines, which are posted on the Company’s website at www.duneenergy.com. In making this determination, the Nominations Committee has concluded that none of these members has a relationship which, in the opinion of the Nominations Committee, is material and would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. Our only non-independent, management director is Mr. Watt, our current President and Chief Executive Officer. Our Nominations Committee reviews and analyzes this independence determination annually.

 

Item 14. Principal Accountant Fees and Services

The information required by this Item 14 will be incorporated by reference into this Form 10-K from the Registrant’s Definitive Proxy Statement to be filed pursuant to Regulation 14A within 120 days after the end of the Registrant’s fiscal year covered by this Form 10-K.

 

69


Table of Contents

PART IV

 

Item 15. Exhibits, Financial Statement Schedules.

(a)(1) Financial Statements

The response to this item is submitted in a separate section of this report.

(a)(3) Exhibits

 

Exhibit No.

  

Description

3.1    Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Registrant’s Form 10-KSB (File No. 001-32497) for the year ended December 31, 2002).
3.1.1    Certificate of Amendment of Amended and Restated Certificate of Incorporation, dated May 7, 2003 (incorporated by reference to Exhibit 3.1.1 to the Registrant’s Form 10-K (File No. 001-32497) for the year ended December 31, 2010).
3.1.2    Certificate of Amendment of Certificate of Incorporation, dated May 5, 2004 (incorporated by reference to Exhibit 3.1 to the Registrant’s Form 10-Q (File No. 001-32497) for the period ended March 31, 2007).
3.1.3    Certificate of Amendment of Certificate of Incorporation, dated June 12, 2007 (incorporated by reference to Exhibit 3.1.3 to the Registrant’s Form 10-K (File No. 001-32497) for the year ended December 31, 2010).
3.1.4    Certificate of Amendment of Certificate of Incorporation, dated December 14, 2007 (incorporated by reference to Exhibit 3.1.4 to the Registrant’s Form 10-K (File No. 001-32497) for the year ended December 31, 2010).
3.1.5    Certificate of Amendment of Amended and Restated Certificate of Incorporation, dated December 1, 2009 (incorporated by reference to Exhibit 3.1.2 to the Registrant’s Current Report on Form 8-K (File No. 001-32497) filed on December 1, 2009).
3.1.6    Certificate of Amendment of Amended and Restated Certificate of Incorporation, dated December 22, 2011 (incorporated by reference to Exhibit 3.2 to the Registrant’s Form 8-K (File No. 001-32497) filed on December 27, 2011).
3.2    Amended and Restated By-Laws (incorporated by reference to Exhibit 3.1 to the Registrant’s Report on Form 8-K (File No. 001-32497) filed on July 12, 2010).
4.1    Registration Rights Agreement, dated January 10, 2012, between Dune Energy, Inc. and TPG Opportunity Fund I, L.P., TPG Opportunity Fund III, L.P., West Face Long Term Opportunities Global Master L.P., Strategic Value Master Fund, Ltd., Strategic Value Special Situations Master Fund, L.P., BlueMountain Credit Alternatives Master Fund, LP, BlueMountain Distressed Master Fund, LP, BlueMountain Long/Short Credit Master Fund, LP, BlueMountain Strategic Master Fund, LP and BlueMountain Timberline, Ltd., (incorporated by reference to Exhibit 4.1 to the Registrant’s Form 8-K (File No. 001-32497) filed on January 10, 2012).
4.2    Indenture, dated December 22, 2011, by and among Dune Energy, Inc., the guarantors named therein and U.S. Bank National Association (incorporated by reference to Exhibit 4.2 to the Registrant’s Current Report on Form 8-K (File No. 001-32497) filed on December 27, 2011).
4.3    Collateral Agreement, dated December 22, 2011, by and among Dune Energy, Inc., the grantors named therein and U.S. Bank National Association (incorporated by reference to Exhibit 4.3 to the Registrant’s Current Report on Form 8-K (File No. 001-32497) filed on December 27, 2011).
4.4    Second Lien Mortgage, Deed of Trust, Assignment of as Extracted Collateral, Security Agreement, Fixture Filing and Financing Statement, dated as of December 22, 2011, from Dune Properties, Inc. to U.S. Bank National Association as trustee (incorporated by reference to Exhibit 4.4 to the Registrant’s Current Report on Form 8-K (File No. 001-32497) filed on December 27, 2011).

 

70


Table of Contents

Exhibit No.

  

Description

4.5    Indenture, dated May 15, 2007, among the Company, each of Dune Operating Company and Vaquero Partners LLC, as guarantors, and The Bank of New York, as trustee and collateral agent (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K (File No. 001-32497) filed on May 21, 2007).
4.6    First Supplemental Indenture, dated December 30, 2008, by and among Dune Energy, Inc, the guarantors signatory thereto and The Bank of New York Mellon (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K (File No. 001-32497) filed on December 30, 2008).
4.7    Second Supplemental Indenture, dated as of December 21, 2011, by and among Dune Energy, Inc., the guarantors signatory thereto and The Bank of New York Mellon (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K (File No. 001-32497) filed on December 27, 2011).
4.8    Registration Rights Agreement, dated December 20, 2012 by and among Dune Energy, Inc. and Simplon Partners, L.P., Simplon International Limited, Highbridge International, LLC, West Face Long Term Opportunities Global Master L.P., BlueMountain Distressed Master Fund L.P., BlueMountain Long/Short Credit Master Fund L.P., AAI BlueMountain Fund PLC, Blue Mountain Credit Alternatives Master Fund L.P., BlueMountain Timerberline Ltd., BlueMountain Kicking Horse Fund L.P., BlueMountain Strategic Credit Master Fund L.P., BlueMountain Credit Opportunities Master Fund I L.P., Zell Credit Opportunities Side Fund LP, Whitebox Multi-Strategy Partners, LP, Pandora Select Partners, LP, Whitebox Credit Arbitrage Partners, LP, TPG Opportunity Fund I, L.P., TPG Opportunity Fund III, L.P., High Ridge Ltd., Strategic Value Special Situation Fund, L.P., Mardi Gras Ltd. (incorporated by reference to Exhibit 4.1 to the Registrant’s Form 8-K (File No. 000-27897) filed on December 24, 2012).
10.1    Employment Agreement, effective October 1, 2012, between Dune Energy, Inc. and James A. Watt (incorporated by reference to Exhibit 10.1 to the Registrant’s Form 8-K (File No. 000-27897) filed on September 25, 2012).
10.2    Employment Agreement, effective October 1, 2012, between Dune Energy, Inc. and Frank T. Smith, Jr. (incorporated by reference to Exhibit 10.2 to the Registrant’s Form 8-K (File No. 000-27897) filed on September 25, 2012).
10.3    2005 Non-Employee Director Incentive Plan (incorporated by reference to Exhibit A to the Registrant’s Definitive Proxy Statement on Schedule 14A (File No. 001-32497) filed on May 30, 2006).
10.4    Dune Energy, Inc. 2007 Stock Incentive Plan (incorporated by reference to Exhibit B to the Registrant’s Preliminary Information Statement on Schedule 14C (File No. 001-32497) filed on November 9, 2007).
10.5    Form of Grant Agreement under Dune Energy, Inc. 2007 Stock Incentive Plan (incorporated by reference to Exhibit 10.7 to the Registrant’s Form 10-K (File No. 001-32497) for the year ended December 31, 2010).
10.6    Amended and Restated Credit Agreement, dated as of December 22, 2011, among Dune Energy, Inc., Bank of Montreal, CIT Capital Securities LLC and the lenders party thereto (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (File No. 001-32497) filed on December 27, 2011), as amended in the First Amendment to the Amended and Restated Credit Agreement dated September 25, 2012 (incorporated by reference to Exhibit 10.1 to the Registrant’s Form 8-K (File No. 000-27897) filed on September 27, 2012) (collectively, the “New Credit Agreement”).
10.7    Amended and Restated Guarantee and Collateral Agreement, dated as of December 22, 2011, by and among Dune Energy, Inc., the grantors named therein and Bank of Montreal (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K (File No. 001-32497) filed on December 27, 2011).

 

71


Table of Contents

Exhibit No.

  

Description

10.8    Amended and Restated Mortgage, Deed of Trust, Assignment of as Extracted Collateral, Security Agreement, Fixture Filing and Financing Statement, dated as of December 22, 2011, from Dune Properties, Inc. to Bank of Montreal as administrative agent. (incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K (File No. 001-32497) filed on December 27, 2011).
10.9    Master Assignment of Note and Liens, dated as of December 22, 2011, by and among Dune Energy, Inc., Dune Properties, Inc., Dune Operating Company, Wells Fargo Capital Finance, Inc., Wayzata Opportunities Fund II, L.P., Bank of Montreal and other lender parties thereto (incorporated by reference to Exhibit 10.4 to the Registrant’s Current Report on Form 8-K (File No. 001-32497) filed on December 27, 2011).
10.10    Intercreditor Agreement, dated as of December 22, 2011, by and among Dune Energy, Inc., its subsidiaries, Bank of Montreal and U.S. Bank National Association (incorporated by reference to Exhibit 10.5 to the Registrant’s Current Report on Form 8-K (File No. 001-32497) filed on December 27, 2011).
10.11    1992 ISDA Master Agreement, together with Schedule, dated May 15, 2007 among Wells Fargo Foothill, Inc., Dune Energy, Inc. and certain subsidiaries of Dune Energy, Inc. (incorporated by reference to Exhibit 10.6 to the Registrant’s Current Report on Form 8-K (File No. 001-32497) filed on May 21, 2007).
10.12    Purchase and Sale Agreement, dated as of May 28, 2010, between Dune Properties, Inc., as Seller, and Texas Petroleum Investment Company, as Buyer (incorporated by reference to Exhibit 99.1 to the Registrant’s Current Report on Form 8-K (File No. 001-32497) filed on June 30, 2010).
10.13    Common Stock Purchase Agreements, dated December 20, 2012 between Dune Energy, Inc. and each of Simplon Partners, L.P., Simplon International Limited, Highbridge International, LLC, West Face Long Term Opportunities Global Master L.P., BlueMountain Distressed Master Fund L.P., BlueMountain Long/Short Credit Master Fund L.P., AAI BlueMountain Fund PLC, Blue Mountain Credit Alternatives Master Fund L.P., BlueMountain Timerberline Ltd., BlueMountain Kicking Horse Fund L.P., BlueMountain Strategic Credit Master Fund L.P., BlueMountain Credit Opportunities Master Fund I L.P., Zell Credit Opportunities Side Fund LP, Whitebox Multi-Strategy Partners, LP, Pandora Select Partners, LP, Whitebox Credit Arbitrage Partners, LP, TPG Opportunity Fund I, L.P., TPG Opportunity Fund III, L.P., High Ridge Ltd., Strategic Value Special Situation Fund, L.P., Mardi Gras Ltd. (incorporated by reference to Exhibit 10.1 to the Registrant’s Form 8-K (File No. 000-27897) filed on December 24, 2012).
21.1*    List of subsidiaries.
23.1*    Consent of MaloneBailey, LLP.
23.2*    Consent of DeGolyer and MacNaughton, independent petroleum engineers.
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.
99.1    Letter Report of DeGolyer and MacNaughton, independent petroleum engineers (incorporated by reference to Exhibit 99.1 to the Registrant’s Registration Statement on Form S-1 filed on January 18, 2013).
101.INS    XBRL Instance Document.
101.SCH    XBRL Taxonomy Extension Schema Document.

 

72


Table of Contents