TXCO Resources Reports Record First-Quarter Earnings, Updates Current Operations

TXCO Resources Inc. (Nasdaq:TXCO) today reported financial results for the quarter ended March 31, 2008, and provided an operations update. Highlights include record first-quarter: Net income, revenues and assets. Oil and gas volumes. Drilling activity. First-Quarter Results Net income attributable to common stock was $3.3 million, equal to $0.09 per share, compared with a net loss of $1.9 million, or $0.06 per share, for first-quarter 2007. Total revenues rose to $32.3 million from $11.2 million in the earlier period. Assets increased to $384.1 million from $354.6 million at year-end 2007. Ebitda – earnings before income taxes, interest, depreciation, depletion, amortization, impairment and abandonment expense – was a first-quarter record $19.2 million, up from $4.4 million in the 2007 quarter. Ebitdax – Ebitda plus exploration expense – also was a quarterly record, $19.8 million, compared with $4.8 million a year earlier. Net cash used by operating activities was $9.9 million, compared with net cash provided from operations of $1.0 million in the year-earlier period. Before certain changes in operating assets and liabilities, net cash provided by operating activities for the three months was $15.5 million, compared with $9.7 million for the 2007 quarter. The changes include increases or decreases in current receivables, payables and prepaid expenses from the prior year-end balances. All per-share amounts are on a diluted basis. See the accompanying table for a reconciliation of non-GAAP financial measures. Both crude oil and natural gas volumes rose sharply compared with the 2007 quarter. Oil sales averaged 2,717 bopd, up 61 percent from 1,683 bopd in first-quarter 2007, while gas averaged 7.3 mmcfd, up 192 percent from 2.5 mmcfd a year earlier. The Company’s sales mix was 69 percent oil and 31 percent gas. TXCO Estimated Quarterly Oil and Gas Sales Volumes*   1Q 2008*   1Q 2007   % Change   4Q 2007   % Change Natural gas/mmcf 664,828   220,868   +201.0%   607,289   +9.5% Oil/Bbls 247,248   151,460   +63.2%   294,809   -16.1%                     Natural Gas Equivalent/mmcfe 2,148   1,130   +90.0%   2,376   -9.6% Barrels Oil Equivalent/boe 358,053   188,271   +90.0%   396,024   -9.6% *1st Quarter 2008 unaudited. mmcf=million cubic feet, mmcfe=million cubic feet equivalent, Bbls=barrels, BOE=barrels of oil equivalent Operations Update TXCO has a record CAPEX program of more than $125 million planned for this year with more than 100 wells budgeted. Currently, TXCO has a record 11 rigs operating, including seven on its core Maverick Basin acreage, one in the East Texas Fort Trinidad Field, two in Oklahoma and one offshore Louisiana. In the Maverick Basin, two rigs target the Glen Rose Porosity, three the Pearsall shale gas resource play and two target other formations. On its Pearsall play, TXCO has drilled the first well horizontally and successfully fractured two of five intervals in the Cage 26-2 (50 percent working interest). The well averaged a little more than 1.1 mmcfd for the first 30 days of production after the fracturing treatment and also is still producing 100 bwpd of fracturing fluid. Management is encouraged with the results in this first attempt at fracturing a horizontal Pearsall well. A second Pearsall well, the Comanche 34-1 (38% WI) has been drilled horizontally and casing has been run in the lateral. The rig is currently moving to another well, the Meyers 2-683 (50% WI), and should spud shortly. The Briscoe Chupadera Ranch 1 (25% WI), a horizontal re-completion started in late April, and TXCO’s third horizontal Pearsall well, is the first on Anadarko Petroleum Corp. acreage in the Maverick Basin, under an agreement announced by the firms in early April. Glen Rose Porosity oil sales for the first quarter were 152,532 barrels, or 1,676 bopd, a 24 percent increase from first-quarter 2007. Porosity sales seasonally declined from the fourth quarter, as in past years, due to an annual hunting season drilling moratorium on certain Maverick Basin leases that halts field activity from November into January. For April, production averaged approximately 2,100 bopd as normal drilling operations resumed during the first quarter, offset by a temporary production curtailment of certain non-operated wells due to a discharge permit renewal delay. Schlumberger presented its comprehensive reservoir optimization study in early May and the study is now under review by TXCO’s technical staff with Schlumberger. On TXCO’s San Miguel oil sands pilot projects, installation is nearing completion on a second, 25 mmBtu steam generator for the Company’s steam-assisted gravity drainage (SAGD) pilot project (50% WI). SAGD steam injection is expected to begin later in May. On the second, fracture-assisted steamflood technology (FAST) pilot (50% WI), drilling is nearly finished on a second horizontal production well. Two, 50 mmBtu steam generators are now scheduled for delivery in June and steam injection is expected to start in the third quarter. In the East Texas Fort Trinidad Field, TXCO is completing its second Glen Rose well, the Forrest 3H (100% WI). Its first Glen Rose shoal project, the Forrest 2H (100% WI), went on production during the first quarter and in April averaged approximately 535 mmcfd and 35 bcpd as it recovered water lost into the reservoir while drilling. The Company is moving in a second rig to expedite drilling in the field. Management Perspective "We had an excellent first quarter,” said CEO James E. Sigmon. "Our increased sales volumes, coupled with record oil and gas prices, created strong financial results during what is usually our weakest quarter each year. "Meanwhile, our drilling activity currently is at a record pace,” he added. "We’re cautiously optimistic with the results of our initial Pearsall wells as we move ahead in the initial development of this exciting play. Coupled with our continued development of the Glen Rose Porosity play and other targets, I look forward to further growth in shareholder value as TXCO’s production, reserves and profitability climb in what I expect to be a record year.” Conference Call and Annual Meeting TXCO has scheduled a conference call for 10 a.m. CDT (11 a.m. EDT) Tuesday, May 6, to discuss first-quarter financial results and current operations. The call will be broadcast live via the Company Web site at http://www.txco.com/concall.html or by telephone at 877-387-9209 in the U.S. and Canada and 706-643-3820 for international callers. Passcode is 44595462. A replay will be available through Thursday, May 8, at 800-642-1687 (U.S./Canada) and 706-645-9291 (international), same passcode, and for 30 days at http://www.txco.com/concall.html. The 2008 annual meeting has been set for 10 a.m. CDT Friday, May 30, at the San Antonio Petroleum Club. All TXCO stockholders are invited to attend. About TXCO Resources TXCO Resources, formerly The Exploration Company, is an independent oil and gas enterprise with interests in the Maverick Basin, the Gulf Coast region and the Marfa Basin of Texas, and the Midcontinent region of western Oklahoma. It has a consistent record of long-term growth in its proved oil and gas reserves, leasehold acreage position, production and cash flow through its established exploration and development programs. TXCO’s business strategy is to build shareholder value by acquiring undeveloped mineral interests and internally developing a multi-year drilling inventory through the use of advanced technologies, such as 3-D seismic and horizontal drilling. It accounts for its oil and gas operations under the successful efforts method of accounting and trades its common stock on Nasdaq’s Global Select Market under the symbol "TXCO.” Forward-Looking Statements Statements in this press release that are not historical, including statements regarding TXCO’s or management’s intentions, hopes, beliefs, expectations, representations, projections, estimations, plans or predictions of the future, are forward-looking statements and are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements include those relating to budget and drilling plans, capital expenditures, production levels, the timing, number and cost of wells to be drilled, new projects and expected response, and establishment of reserves. It is important to note that actual results may differ materially from the results predicted in any such forward-looking statements. Investors are cautioned that all forward-looking statements involve risks and uncertainty, including without limitation, the costs of exploring and developing new oil and natural gas reserves, the price for which such reserves can be sold, environmental concerns affecting the drilling of oil and natural gas wells, as well as general market conditions, competition and pricing. TXCO undertakes no obligation to revise or update any forward-looking statements, or to make any other forward-looking statements, whether as a result of new information, future events or otherwise. More information about potential factors that could affect the Company’s operating and financial results is included in TXCO’s annual report on Form 10-K for the year ended December 31, 2007. This and all previously filed documents are on file at the Securities and Exchange Commission and can be viewed on TXCO’s Web site at www.txco.com. Copies are available without charge, upon request from the Company. (Financial Information and Selected Operational Tables Follow) TXCO RESOURCES INC. Condensed Consolidated Balance Sheets (Unaudited)     ($ in thousands)   March 31,2008   December 31,2007 Assets   Current Assets Cash and equivalents $1,469 $9,831 Accounts receivable, net 22,291 17,952 Accounts receivable, subscribed stock 13,909 - Federal income tax receivable 4,974 4,974 Prepaid expenses and other 2,720 2,989 Total Current Assets 45,363 35,746   Property and Equipment, net - successful efforts method of accounting for oil and gas properties 333,760 314,941   Other Assets Deferred financing fees 3,564 2,613 Other assets 1,458 1,307 Total Other Assets 5,022 3,920   Total Assets $384,145 $354,607 TXCO RESOURCES INC. Condensed Consolidated Balance Sheets (Unaudited)   ($ in thousands) March 31,2008   December 31,2007 Liabilities and Stockholders' Equity       Current Liabilities Accounts payable, trade $12,347 $11,345 Other payables and accrued liabilities 18,510 39,916 Undistributed revenue 2,716 2,401 Notes payable 263 399 Derivative settlements payable 634 475 Preferred dividends payable 1,381 397 Accrued derivative obligation - short-term 7,336 4,725 Total Current Liabilities 43,187 59,658   Long-Term Liabilities Long-term debt 110,700 100,000 Deferred income taxes 10,328 12,007 Accrued derivative obligation - long-term 5,970 3,993 Asset retirement obligation 4,119 4,233 Total Long-Term Liabilities 131,117 120,233   Stockholders' Equity Preferred stock: authorized 10,000,000 shares;Series A & B, -0- shares issued and outstandingSeries C, -0- and 55,000 shares issued and outstandingSeries D, 55,000 and -0- shares issued and outstandingSeries E, 20,000 and -0- shares issued and outstanding 1 1 Common stock, par value $.01 per share; authorized 100,000,000 shares; issued 35,078,090 and 34,269,038 shares, outstanding 34,938,224 and 34,150,619 shares 350 343 Additional paid-in capital 198,223 177,030 Retained earnings 6,830 3,561 Accumulated other comprehensive loss, net of tax (8,782 ) (5,754 ) Preferred stock subscribed (payment received April 7, 2008) 13,909 - Less treasury stock, at cost, 139,866 and 118,419 shares (690 ) (465 ) Total Stockholders' Equity 209,841 174,716   Total Liabilities and Stockholders' Equity $384,145 $354,607 TXCO RESOURCES INC. Condensed Consolidated Statements Of Operations (Unaudited)   Three Months Ended Three MonthsEnded (in thousands, except earnings per share data)   March 31, 2008   March 31, 2007   Revenues   Oil and gas sales $28,648 $8,725 Gas gathering operations 3,225 2,494 Other operating income 453 1 Total Revenues 32,326 11,220   Costs and Expenses Lease operations 4,232 2,660 Drilling operations 432 - Production taxes 1,484 494 Exploration expenses 644 375 Impairment and abandonments 255 686 Gas gathering operations 3,387 2,881 Depreciation, depletion and amortization 11,275 4,916 General and administrative 4,031 1,804 Total Costs and Expenses 25,740 13,816   Income (Loss) from Operations 6,586 (2,596 )   Other Income (Expense) Interest expense (2,235 ) (277 ) Interest income 72 26 Loan fee amortization (290 ) (10 ) Total Other Income (Expense) (2,453 ) (261 )   Income (loss) before income taxes 4,133 (2,857 ) Income tax (benefit) expense -- current - (5,266 ) deferred (119 ) 4,301   Net Income (Loss) 4,252 (1,892 ) Preferred dividends 984 - Net Income (Loss) Available to Common Stockholders $3,268 $(1,892 )   Earnings (Loss) Per Share Basic $0.10 $(0.06 ) Diluted $0.09 $(0.06 ) TXCO RESOURCES INC. Condensed Consolidated Statements Of Cash Flows (Unaudited)   Three Months Ended Three MonthsEnded (in thousands, except earnings per share data)   March 31, 2008   March 31, 2007   Operating Activities   Net income (loss) $4,252 $(1,892 ) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation, depletion and amortization 11,565 4,926 Impairment, abandonments and dry hole costs 255 965 Deferred tax benefit/expense (119 ) 4,301 Excess tax benefits from stock-based compensation (1,453 ) - Non-cash compensation expense 1,041 226 Non-cash change in components of OCI - 1,143 Changes in operating assets and liabilities: Receivables (4,340 ) (594 ) Prepaid expenses and other (1,122 ) (4,410 ) Accounts payable and accrued expenses (19,929 ) 1,615 Current income taxes receivable/payable (1 ) (5,280 ) Net cash (used) provided by operating activities (9,851 ) 1,000   Investing Activities Development and purchases of oil and gas properties (26,404 ) (20,950 ) Purchase of other equipment (174 ) (825 ) Net cash used by investing activities (26,578 ) (21,775 )   Financing Activities Proceeds from bank credit facility 10,700 20,500 Issuance of preferred stock, net of expenses 19,139 - Purchase of lower call option (6,175 ) - Proceeds from sale of upper call option 4,842 - Cost of shares retired upon option exercises (2,414 ) - Excess tax benefits from stock-based compensation 1,453 - Proceeds from exercise of stock options 850 - Proceeds from issuance of common stock, net of expenses 33 284 Purchase of treasury shares (225 ) (219 ) Proceeds from installment and other obligations - 119 Payments on installment and other obligations (136 ) (123 ) Net cash provided by financing activities 28,067 20,561   Change in Cash and Equivalents (8,362 ) (214 )   Cash and equivalents at beginning of period 9,831 3,882   Cash and Equivalents at End of Period $1,469 $3,668 TXCO RESOURCES INC.SELECTED OPERATING DATA     Three Months Ended ($'s in thousands, except average prices)   Mar. 31, 2008   Mar. 31, 2007   Net cash (used) provided in operating activities $ (9,851) $ 1,000   Ebitdax 1 19,801 4,750   Ebitda 1 19,156 4,375   Debt to asset ratio 28.9% 13.9%   Sales   Oil: Sales, in mBbl 247 151 Average realized sales price per barrel, excluding hedging impact $ 97.33 $ 54.98   Natural Gas: Sales, in mmcf 665 221 Average realized sales price per mcf, excluding hedging impact $ 9.07 $ 7.26   Equivalent Basis: Sales in mBOE 358 188 Average realized sales price per BOE, excluding hedging impact $ 84.25 $ 52.74   Sales in mmcfe 2,148 1,130 Average realized sales price per mcfe, excluding hedging impact $ 14.04 $ 8.79   Other Operating Data Total lifting costs $ 5,716 $ 3,116 Total lifting costs per BOE $ 15.96 $ 16.55 Total lifting costs per mcfe $ 2.66 $ 2.76   Sales volume - oil properties - mBbl 237 149 Oil prop. lifting costs-oil (Incl Prod & Sev Tax) $ 4,223 $ 2,516 Oil prop. lifting costs per barrel $ 17.80 $ 16.90   Glen Rose Porosity sales volume - mBbl 153 123 Glen Rose Porosity lifting costs per barrel $ 10.02 $ 12.57   Sales volume - gas properties - mmcf 619 209 Gas prop. lifting costs-gas (Incl Prod & Sev Tax) $ 981 $ 544 Gas prop. lifting costs per mcf $ 1.60 $ 2.61   Total depletion cost per BOE $ 31.26 $ 25.78 Total depletion cost per mcfe $ 5.21 $ 4.30     1 Please see the last page of this press release for a reconciliation of these non-GAAP financial measures. TXCO RESOURCES INC. EBITDA and EBITDAX RECONCILIATION TO NET INCOME AND NET CASH PROVIDED, PERIODS INDICATED     ($ Thousands) 1Q08 1Q07 Net cash provided by operating activities per CF Stmt (9,851) 1,000   Change in operating assets and liabilities (25,391) (8,669)   Operating CF before change in operating assets & liabilities 15,541 9,670   Deferred income taxes 119 (4,301) Cash portion of net interest expense 2,163 251 Excess benefit from stock-based compensation 1,453 - Derivative settlements loss - 1,143 Income tax (119) (965) Exploration costs 644 375 Dry hole costs - (280) Change in components of other comprehensive income - (1,143)     Ebitdax 19,801 4,750   Less: Exploration costs 644 375   Ebitda 19,156 4,375   Less: Loss (Gain) on sale of assets - - Income tax expense (119) (965) Impairment & abandonments 255 686 Derivative Loss (Gain) - 1,143 Interest, net 2,163 251 Non cash compensation 1,041 226 DD&A 11,565 4,926   Net Income (Loss) 4,252 (1,892) EBITDAX is earnings before income taxes, interest, depreciation, depletion, amortization, impairment, abandonment and exploration expense. EBITDA equals EBITDAX less exploration expense. We believe EBITDA and EBITDAX provide a more complete analysis of TXCO’s operating performance and debt servicing ability relative to other companies, and of our ability to fund capital expenditure and working capital requirements. These measures are widely used by investors and rating agencies. EBITDA, with certain negotiated adjustments, is referenced in TXCO’s financial covenants and required in reporting under our credit facility. EBITDA and EBITDAX are not measures of financial performance under GAAP. Accordingly, they should not be considered as substitutes for net income, income from operations, or cash flow provided by operating activities prepared in accordance with GAAP. Columns / rows may not foot / cross-foot due to rounding.