10-K 1 form-10k.htm ADAMS RESOURCES FORM 10-K 12-31-2013 form-10k.htm
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, 2013
OR
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
Commission File Number 1-7908
ADAMS RESOURCES & ENERGY, INC.
(Exact name of registrant as specified in its charter)
Delaware
74-1753147
17 South Briar Hollow Lane  Suite 100
77027
   
Houston, Texas
 
(State of Incorporation)
(I.R.S. Employer Identification No.)
(Address of Principal executive offices)
(Zip Code)

Registrant’s telephone number, including area code:  (713) 881-3600
Securities registered pursuant to Section 12(b) of the Act:

Title of each class
Name of each exchange on which registered
Common Stock, $.10 Par Value
NYSE MKT

Indicate by check mark whether the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  YES ___NO      X__

Indicate by check mark whether the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange 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 the filing requirements for the past 90 days.     YES   X    NO ___

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant 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 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.       X

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or a smaller reporting company.  See definition of ‟large accelerated filer”, ‟accelerated filer” and ‟smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ____                                                                Accelerated filer     X   

Non-accelerated filer ____                                                      Smaller reporting company _____

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Act).
YES ___NO      X   

The aggregate market value of the voting and non-voting common equity held by non-affiliates as of the close of business on June 28, 2013 was $144,823,864 based on the closing price of $68.89 per one share of common stock as reported on the NYSE MKT for such date.  A total of 4,217,596 shares of Common Stock were outstanding at March 1, 2014.

DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Annual Meeting of Stockholders to be held May 14, 2014 are incorporated by reference into Part III of this report.

 
 

 

PART I

Forward-Looking Statements –Safe Harbor Provisions

This annual report on Form 10-K for the year ended December 31, 2013 contains certain forward-looking statements covered by the safe harbors provided under Federal securities law and regulations.  To the extent such statements are not recitations of historical fact, forward-looking statements involve risks and uncertainties.  In particular, statements under the captions (a) Production and Reserve Information, (b) Regulatory Status and Potential Environmental Liability, (c) Management’s Discussion and Analysis of Financial Condition and Results of Operations, (d) Critical Accounting Policies and Use of Estimates, (e) Quantitative and Qualitative Disclosures about Market Risk, (f) Income Taxes, (g) Concentration of Credit Risk, (h) Price Risk Management Activities, and (i) Commitments and Contingencies, among others, contain forward-looking statements.  Where the Company expresses an expectation or belief regarding future results or events, such expression is made in good faith and believed to have a reasonable basis in fact.  However, there can be no assurance that such expectation or belief will actually result or be achieved.

With the uncertainties of forward looking statements in mind, the reader should consider the risks discussed elsewhere in this report and other documents filed by the Company with the Securities and Exchange Commission (the ‟SEC”) from time to time and the important factors described under ‟Item 1A. Risk Factors” that could cause actual results to differ materially from those expressed in any forward-looking statement made by or on behalf of the Company.

Items 1 and 2.  BUSINESS AND PROPERTIES

Business Activities

Adams Resources & Energy, Inc. (‟ARE”), a Delaware corporation organized in 1973, and its subsidiaries (collectively, the ‟Company”), are engaged in the business of crude oil marketing, tank truck transportation of liquid chemicals, and oil and gas exploration and production.    The Company’s headquarters are located in 23,450 square feet of office space located at 17 South Briar Hollow Lane Suite 100, Houston, Texas 77027 and the telephone number of that address is (713) 881-3600.  The revenues, operating results and identifiable assets of each industry segment for the three years ended December 31, 2013 are set forth in Note (8) to the Consolidated Financial Statements included elsewhere herein.

Marketing Segment Subsidiaries

Gulfmark Energy, Inc. (‟Gulfmark”), a subsidiary of ARE, purchases crude oil and arranges sales and deliveries to refiners and other customers. Activity is concentrated primarily onshore in Texas and Louisiana with additional operations in Michigan and North Dakota. Gulfmark operates 187 tractor-trailer rigs and maintains over 55 pipeline inventory locations or injection stations.  Gulfmark has the ability to barge oil from four oil storage facilities along the intercoastal waterway of Texas and Louisiana and maintains 356,000 barrels of storage capacity at the dock facilities in order to access waterborne markets for its products. During 2013, Gulfmark purchased approximately 106,000 barrels per day of crude oil at the wellhead or lease level. Gulfmark delivers physical supplies to refiner customers or enters into exchange transactions with third parties when the cost of the exchange is less than the alternate cost incurred in transporting or storing the crude oil.  During 2013, Gulfmark had sales to four customers that comprised 18.5 percent, 17.7 percent, 15.8 percent and 10.4 percent, respectively, of total Company wide revenues.  Management believes that a loss of any of these customers would not have a material adverse effect on the Company’s operations.  See also Note (3) of Notes to Consolidated Financial Statements.

 
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Operating results for the marketing segment are sensitive to a number of factors.  Such factors include commodity location, grades of product, individual customer demand for grades or location of product, localized market price structures, availability of transportation facilities, actual delivery volumes that vary from expected quantities, and the timing and costs to deliver the commodity to the customer.

Transportation Segment Subsidiary

Service Transport Company (‟STC”), a subsidiary of ARE, transports liquid chemicals on a ‟for hire” basis throughout the continental United States and Canada. Transportation service is provided to over 400 customers under multiple load contracts in addition to loads covered under STC’s standard price list.  Pursuant to regulatory requirements, STC holds a Hazardous Materials Certificate of Registration issued by the United States Department of Transportation (‟DOT”).   STC operates 299 truck tractors of which 13 are independent owner-operator units and owns 480 tank trailers.  In addition, STC operates truck terminals in Houston, Corpus Christi, and Nederland, Texas as well as Baton Rouge (St. Gabriel), Louisiana and Mobile (Saraland), Alabama. Transportation operations are headquartered at a terminal facility situated on 22 Company-owned acres in Houston, Texas.  This property includes maintenance facilities, an office building, tank wash rack facilities and a water treatment system.  The St. Gabriel, Louisiana terminal is situated on 11.5 Company-owned acres and includes an office building, maintenance bays and tank cleaning facilities.

STC is compliant with International Organization for Standardization (‟ISO”) 9001:2000 Standard.  The scope of this Quality System Certificate covers the carriage of bulk liquids throughout STC’s area of operations as well as the tank trailer cleaning facilities and equipment maintenance.  STC’s quality management process is one of its major assets.  The practice of using statistical process control covering safety, on-time performance and customer satisfaction aids continuous improvement in all areas of quality service.  In addition to its ISO 9001:2000 practices, the American Chemistry Council recognizes STC as a Responsible CareÓ Partner. Responsible Care Partners serve the chemical industry and implement and monitor the seven Codes of Management Practices.  The seven codes address compliance and continuing improvement in (1) Community Awareness and Emergency Response, (2) Pollution Prevention, (3) Process Safety, (4) Distribution, (5) Employee Health and Safety, (6) Product Stewardship, and (7) Security.

Oil and Gas Segment Subsidiary

Adams Resources Exploration Corporation (‟AREC”), a subsidiary of ARE, is actively engaged in the exploration and development of domestic oil and natural gas properties primarily in Texas and the south central region of the United States. AREC’s offices are maintained in Houston and the Company holds an interest in 527 wells of which 36 are Company operated.

Producing Wells--The following table sets forth the Company’s gross and net productive wells as of December 31, 2013. Gross wells are the total number of wells in which the Company has an interest, while net wells are the sum of the fractional interests owned.

   
Oil Wells
   
Gas Wells
   
Total Wells
 
   
Gross
   
Net
   
Gross
   
Net
   
Gross
   
Net
 
Texas
    209       6.80       179       14.06       388       20.86  
Other
    94       4.10       45       4.82       139       8.92  
      303       10.90       224       18.88       527       29.78  


 
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Acreage--The following table sets forth the Company’s gross and net developed and undeveloped acreage as of December 31, 2013.  Gross acreage represents the Company’s direct ownership and net acreage represents the sum of the fractional interests owned.  The Company’s developed acreage is held by current production while undeveloped acreage is held by oil and gas leases with various remaining terms, production from non-owned shallow wells, or other contractual provisions delaying termination of leasehold rights.   The Company’s ownership in undeveloped acreage is substantially all in the form of a non-operated minority interest.  As such, the Company relies on the third party operator to manage the lease holdings.

   
Developed Acreage
   
Undeveloped Acreage
 
   
Gross
   
Net
   
Gross
   
Net
 
Texas
    162,432       11,543       173,737       16,076  
Kansas
    889       45       16,283       814  
Other
    5,943       872       7,451       1,644  
      169,264       12,460       197,471       18,534  

Drilling Activity--The following table sets forth the Company’s drilling activity for each of the three years ended December 31, 2013.  All drilling activity was onshore in Texas, Louisiana, Arkansas and Kansas.

   
2013
   
2012
   
2011
 
   
Gross
   
Net
   
Gross
   
Net
   
Gross
   
Net
 
Exploratory wells drilled
                                   
- Productive
    -       -       -       -       -       -  
- Dry
    3       .38       -       -       8       .87  
                                                 
Development wells drilled
                                               
- Productive
    77       1.40       109       2.40       75       2.10  
- Dry
    -       -       -       -       3       .18  
      80       1.78       109       2.40       86       3.15  

Production and Reserve Information--The Company’s estimated net quantities of proved oil and natural gas reserves and the standardized measure of discounted future net cash flows, calculated at a 10% discount rate, for the three years ended December 31, 2013, are presented in the table below (in thousands):

   
December 31,
 
   
2013
   
2012
   
2011
 
Crude oil (thousands of barrels)
    368       307       292  
Natural gas (thousands of mcf)
    6,286       8,837       9,661  
Standardized measure of discounted future
                       
net cash flows from oil and natural gas  reserves
  $ 17,836     $ 16,355     $ 20,931  

The estimated value of oil and natural gas reserves and future net revenues from oil and natural gas reserves was made by the Company’s independent petroleum engineers.  The reserve value estimates provided at each of December 31, 2013, 2012 and 2011 are based on market prices of $94.99, $93.85 and $95.85 per barrel for crude oil and $4.69, $3.51 and $4.69 per mcf for natural gas, respectively.  Such prices were based on the unweighted arithmetic average of the prices in effect on the first day of the month for each month of the respective twelve month periods as required by SEC regulations.  The price reported in reserve disclosures for natural gas for 2013 and 2012 includes the value of associated natural gas liquids.

 
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Reserve estimates are based on many subjective factors.  The accuracy of these estimates depends on the quantity and quality of geological data, production performance data, reservoir engineering data, the pricing assumptions utilized as well as the skill and judgment of petroleum engineers in interpreting such data.  The process of estimating reserves requires frequent revision as additional information is made available through drilling, testing, reservoir studies and acquiring historical pressure and production data.  In addition, the discounted present value of estimated future net revenues should not be construed as the fair market value of oil and natural gas producing properties.  Such reserve valuations do not necessarily portray a realistic assessment of current value or future performance of such properties. These calculations are based on estimates as to the timing of oil and natural gas production, and there is no assurance that the actual timing of production will conform to or approximate such calculations.  Also, certain assumptions have been made with respect to pricing. The estimates assume prices will remain constant from the date of the engineer’s assessment, except for changes reflected under natural gas sales contracts.  There can be no assurance that actual future prices will not vary as industry conditions, governmental regulation and other factors impact the market price for oil and natural gas.

The Company’s net oil and natural gas production for the three years ended December 31, 2013 was as follows:

Years Ended
 
Crude Oil
   
Natural
 
December 31,
 
(barrels)
   
Gas (mcf)
 
2013
    102,300       1,608,000  
2012
    98,100       2,608,000  
2011
    61,500       1,895,000  

Certain financial information relating to the Company’s oil and natural gas division revenues and earnings is summarized as follows:
 
 
   
Years Ended December 31,
 
   
2013
   
2012
   
2011
 
Average oil and condensate
                 
sales price per barrel
  $ 79.15     $ 84.39     $ 93.23  
Average natural gas
                       
sales price per mcf
  $ 3.75     $ 2.94     $ 4.39  
Average production cost, per equivalent
                       
barrel, charged to expense
  $ 15.54     $ 13.14     $ 16.79  

The Company had no reports to federal authorities or agencies of estimated oil and gas reserves. The Company is not obligated to provide any fixed and determinable quantities of oil or gas in the future under existing contracts or agreements associated with its oil and gas exploration and production segment.

Environmental Compliance and Regulation

The Company is subject to an extensive variety of evolving United States federal, state and local laws, rules and regulations governing the storage, transportation, manufacture, use, discharge, release and disposal of product and contaminants into the environment, or otherwise relating to the protection of the environment. Presented below is a non-exclusive listing of the environmental laws that potentially impact the Company’s activities.

 
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-  
The Solid Waste Disposal Act, as amended by the Resource Conservation and Recovery Act of 1976, as amended.
-  
Comprehensive Environmental Response, Compensation and Liability Act of 1980 (‟CERCLA” or ‟Superfund”), as amended.
-  
The Clean Water Act of 1972, as amended.
-  
Federal Oil Pollution Act of 1990, as amended.
-  
The Clean Air Act of 1970, as amended.
-  
The Toxic Substances Control Act of 1976, as amended.
-  
The Emergency Planning and Community Right-to-Know Act.
-  
The Occupational Safety and Health Act of 1970, as amended.
-  
Texas Clean Air Act.
-  
Texas Solid Waste Disposal Act.
-  
Texas Water Code.
-  
Texas Oil Spill Prevention and Response Act of 1991, as amended.

Railroad Commission of Texas (‟RRC”)--The RRC regulates, among other things, the drilling and operation of oil and natural gas wells, the operation of oil and gas pipelines, the disposal of oil and natural gas production wastes, and certain storage of unrefined oil and gas.  RRC regulations govern the generation, management and disposal of waste from such oil and natural gas operations and provide for the clean up of contamination from oil and natural gas operations.

Louisiana Office of Conservation--This agency has primary statutory responsibility for regulation and conservation of oil, gas, and other natural resources in the State of Louisiana.  Their objectives are to (i) regulate the exploration and production of oil, natural gas and other hydrocarbons, (ii) control and allocate energy supplies and distribution thereof, and (iii) protect public safety and the environment from oilfield waste, including the regulation of underground injection and disposal practices.
 
 
State and Local Government Regulation--Many states are authorized by the United States Environmental Protection Agency (‟EPA”) to enforce regulations promulgated under various federal statutes.  In addition, there are numerous other state and local authorities that regulate the environment, some of which impose more stringent environmental standards than federal laws and regulations.  The penalties for violations of state law vary, but typically include injunctive relief and recovery of damages for injury to air, water or property as well as fines for non-compliance.

Oil and Gas Operations--The Company’s oil and gas drilling and production activities are subject to laws and regulations relating to environmental quality and pollution control.  One aspect of the Company’s oil and gas operation is the disposal of used drilling fluids, saltwater, and crude oil sediments.  In addition, low-level naturally occurring radiation may, at times, occur with the production of crude oil and natural gas.  The Company’s policy is to comply with environmental regulations and industry standards. Environmental compliance has become more stringent and the Company, from time to time, may be required to remediate past practices. Management believes that such required remediation in the future, if any, will not have a material adverse impact on the Company’s financial position or results of operations.

All states in which the Company owns producing oil and gas properties have statutory provisions regulating the production and sale of crude oil and natural gas.  Regulations typically require permits for the drilling of wells and regulate the spacing of wells, the prevention of waste, protection of correlative rights, the rate of production, prevention and clean-up of pollution, and other matters.

 
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Trucking Activities --The Company’s marketing and transportation businesses operate truck fleets pursuant to authority of the DOT and various state authorities.  Trucking operations must be conducted in accordance with various laws relating to pollution and environmental control as well as safety requirements prescribed by states and the DOT. Matters such as weight and dimension of equipment are also subject to federal and state regulations.  These regulations also require mandatory drug testing of drivers and require certain tests for alcohol levels in drivers and other safety personnel.  The trucking industry is subject to possible regulatory and legislative changes such as increasingly stringent environmental requirements or limits on vehicle weight and size.  Regulatory change may affect the economics of the industry by requiring changes in operating practices or by changing the demand for private and common or contract carrier services or the cost of providing truckload services.  In addition, the Company’s tank wash facilities are subject to increasingly stringent local, state and federal environmental regulations.

The Company has implemented security procedures for drivers and terminal facilities. Satellite tracking transponders installed in the power units are used to communicate emergencies to the Company and to maintain constant information as to the unit’s location.  If necessary, the Company’s terminal personnel will notify local law enforcement agencies.  In addition, the Company is able to advise a customer of the status and location of their loads.  Remote cameras and better lighting coverage in the staging and parking areas have augmented terminal security.

Regulatory Status and Potential Environmental Liability--The operations and facilities of the Company are subject to numerous federal, state, and local environmental laws and regulations including those described above, as well as associated permitting and licensing requirements.  The Company regards compliance with applicable environmental regulations as a critical component of its overall operation, and devotes significant attention to providing quality service and products to its customers, protecting the health and safety of its employees, and protecting the Company’s facilities from damage. Management believes the Company has obtained or applied for all permits and approvals required under existing environmental laws and regulations to operate its current business.  Management has reported that the Company is not subject to any pending or threatened environmental litigation or enforcement actions which could materially and adversely affect the Company’s business.  The Company has, where appropriate, implemented operating procedures at each of its facilities designed to assure compliance with environmental laws and regulation. However, given the nature of the Company’s business, the Company is subject to environmental risks and the possibility remains that the Company’s ownership of its facilities and its operations and activities could result in civil or criminal enforcement and public as well as private actions against the Company, which may necessitate or generate mandatory clean up activities, revocation of required permits or licenses, denial of application for future permits, and/or significant fines, penalties or damages, any and all of which could have a material adverse effect on the Company.  See “Item 1A. Risk Factors – Environmental liabilities and environmental regulations may have an adverse effect on the Company.”  At December 31, 2013, the Company is unaware of any unresolved environmental issues for which additional accounting accruals are necessary.

Employees

At December 31, 2013, the Company employed 821 persons, 14 of whom were employed in the exploration and production of oil and gas, 365 in the marketing of crude oil, 424 in transportation operations, and 18 in administrative capacities.  None of the Company’s employees are represented by a union.  Management believes its employee relations are satisfactory.

Federal and State Taxation

The Company is subject to the provisions of the Internal Revenue Code of 1986, as amended (the ‟Code”). In accordance with the Code, the Company computes its income tax provision based on a 35 percent tax rate.  The Company’s operations are, in large part, conducted within the State of Texas.  Texas operations are subject to a one-half percent state tax on its revenues net of cost of goods sold as defined by the state.  Oil and gas activities are also subject to state and local income, severance, property and other taxes. Management believes the Company is currently in compliance with all federal and state tax regulations.

 
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Available Information

The Company is required to file periodic reports as well as other information with the SEC within established deadlines.  Any document filed with the SEC may be viewed or copied at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549.  Additional information regarding the Public Reference Room can be obtained by calling the SEC at (800) SEC-0330.  The Company’s SEC filings are also available to the public through the SEC’s web site located at http://www.sec.gov.

The Company maintains a corporate website at http://www.adamsresources.com, on which investors may access free of charge the annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports as soon as is reasonably practicable after filing or furnishing such material with the SEC.  Additionally, the Company has adopted and posted on its website a Code of Business Ethics designed to reflect requirements of the Sarbanes-Oxley Act of 2002, NYSE MKT Exchange rules and other applicable laws, rules and regulations. The Code of Business Ethics applies to all of the Company’s directors, officers and employees.  Any amendment to the Code of Business Ethics will be posted promptly on the Company’s website.  The information contained on or accessible from the Company’s website does not constitute a part of this report and is not incorporated by reference herein.  The Company will provide a printed copy of any of these aforementioned documents free of charge upon request by calling ARE at (713)881-3600 or by writing to:
 
Adams Resources & Energy, Inc.
ATTN:  Richard B. Abshire
17 South Briar Hollow Lane, Suite 100
Houston, Texas 77027

Item 1A. RISK FACTORS

Economic developments could damage operations and materially reduce profitability and cash flows.

Potential disruptions in the credit markets and concerns about global economic growth could have a significant adverse impact on global financial markets and commodity prices.  Such factors could contribute to a decline in the Company’s stock price and corresponding market capitalization.  Should commodity prices experience a period of rapid decline, future earnings will be reduced.  Since the Company has no bank debt obligations nor covenants tied to its stock price, potential declines in the Company’s stock price do not affect the Company’s liquidity or overall financial condition.  Should the capital and credit markets experience volatility and the availability of funds become limited, the Company’s customers and suppliers may incur increased costs associated with issuing commercial paper and/or other debt instruments and this, in turn, could adversely affect the Company’s ability to secure supply and make profitable sales.

General economic conditions could reduce demand for chemical based trucking services.

Customer demand for the Company’s products and services is substantially dependent upon the general economic conditions for the United States which are cyclical in nature.  In particular, demand for liquid chemical truck transportation services is dependent on activity within the petrochemical sector of the U.S. economy.  Chemical sector demand typically varies with the housing and auto markets as well as the relative strength of the U.S. dollar to foreign currencies.  A relatively strong U.S. dollar exchange rate may be adverse to the Company’s transportation operation since it tends to suppress export demand for petrochemicals.  Conversely, a weak U.S. dollar exchange rate tends to stimulate export demand for petrochemicals.

 
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The Company’s business is dependent on the ability to obtain trade and other credit.

The Company’s future development and growth depends, in part, on its ability to successfully obtain credit from suppliers and other parties.  Trade credit arrangements are relied upon as a significant source of liquidity for capital requirements not satisfied by operating cash flow.  Should global financial markets and economic conditions disrupt and reduce stability in general, and the solvency of creditors specifically, the availability of funding from credit markets would be reduced as many lenders and institutional investors would enact tighter lending standards, refuse to refinance existing debt on terms similar to current debt or, in some cases, cease to provide funding to borrowers.  These issues coupled with weak economic conditions would make it more difficult for the Company and its suppliers and customers to obtain funding.  If the Company is unable to obtain trade or other forms of credit on reasonable and competitive terms, the ability to continue its marketing and exploration businesses, pursue improvements, and continue future growth will be limited.  There is no assurance that the Company will be able to maintain future credit arrangements on commercially reasonable terms.

The financial soundness of customers could affect the Company’s business and operating results

Constraints in the financial markets and other macro-economic challenges that might affect the economy of the United States and other parts of the world could cause the Company’s customers to experience cash flow concerns.  As a result, if customers’ operating and financial performance deteriorates, or if they are unable to make scheduled payments or obtain credit, customers would not be able to pay, or may delay payment of, accounts receivable owed to the Company.  Any inability of current and/or potential customers to pay for services may adversely affect the Company’s financial condition and results of operations.

Counterparty credit default could have an adverse effect on the Company.

The Company’s revenues are generated under contracts with various counterparties and results of operations could be adversely affected by non-performance under the various contracts.  A counterparty’s default or non-performance could be caused by factors beyond the Company’s control.  A default could occur as a result of circumstances relating directly to the counterparty, or due to circumstances caused by other market participants having a direct or indirect relationship with such counterparty.  The Company seeks to mitigate the risk of default by evaluating the financial strength of potential counterparties; however, despite mitigation efforts, contractual defaults may occur from time to time.

Escalating diesel fuel prices could have an adverse effect on the Company

As an integral part of the Company’s marketing and transportation businesses, the Company operates  approximately 500 truck-tractors and diesel fuel costs are a significant component of operating expense.  Such costs generally fluctuate with increasing and decreasing world crude oil prices. While the Company attempts to recoup rising diesel fuel costs through the pricing of its services, to the extent such costs escalate, operating earnings will generally be adversely affected.

Fluctuations in oil and gas prices could have an adverse effect on the Company.

The Company’s future financial condition, revenues, results of operations and future rate of growth are materially affected by oil and natural gas prices that historically have been volatile and are likely to continue to be volatile in the future.  Moreover, oil and natural gas prices depend on factors outside the control of the Company.  These factors include:

 
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·  
supply and demand for oil and gas and expectations regarding supply and demand;
·  
political conditions in other oil-producing countries, including the possibility of insurgency or war in such areas;
·  
economic conditions in the United States and worldwide;
·  
governmental regulations and taxation;
·  
impact of energy conservation efforts;
·  
the price and availability of alternative fuel sources;
·  
weather conditions;
·  
availability of local, interstate and intrastate transportation systems; and
·  
market uncertainty.

Revenues are generated under contracts that must be renegotiated periodically.

Substantially all of the Company’s revenues are generated under contracts which expire periodically or which must be frequently renegotiated, extended or replaced.  Whether these contracts are renegotiated, extended or replaced is often subject to factors beyond the Company’s control. Such factors include sudden fluctuations in oil and gas prices, counterparty ability to pay for or accept the contracted volumes and, most importantly, an extremely competitive marketplace for the services offered by the Company.  There is no assurance that the costs and pricing of the Company’s services can remain competitive in the marketplace or that the Company will be successful in renegotiating its contracts.

Anticipated or scheduled volumes will differ from actual or delivered volumes.

The Company’s crude oil marketing operation purchases initial production of crude oil at the wellhead under contracts requiring the Company to accept the actual volume produced.  The resale of such production is generally under contracts requiring a fixed volume to be delivered.  The Company estimates its anticipated supply and matches such supply estimate for both volume and pricing formulas with committed sales volumes.   Since actual wellhead volumes produced will never equal anticipated supply, the Company’s marketing margins may be adversely impacted.  In many instances, any losses resulting from the difference between actual supply volumes compared to committed sales volumes must be absorbed by the Company.

Environmental liabilities and environmental regulations may have an adverse effect on the Company.

The Company’s business is subject to environmental hazards such as spills, leaks or any discharges of petroleum products and hazardous substances.  These environmental hazards could expose the Company to material liabilities for property damage, personal injuries, and/or environmental harms, including the costs of investigating and rectifying contaminated properties.

Environmental laws and regulations govern many aspects of the Company’s business, such as drilling and exploration, production, transportation and waste management.  Compliance with environmental laws and regulations can require significant costs or may require a decrease in production.  Moreover, noncompliance with these laws and regulations could subject the Company to significant administrative, civil, and/or criminal fines and/or penalties.

Operations could result in liabilities that may not be fully covered by insurance.

Transportation of hazardous materials and the exploration and production of crude oil and natural gas involves certain operating hazards such as well blowouts, automobile accidents, explosions, fires and pollution.  Any of these operating hazards could cause serious injuries, fatalities or property damage, which could expose the Company to liability.  The payment of any of these liabilities could reduce, or even eliminate, the funds available for exploration, development, and acquisition, or could result in a loss of the Company’s properties and may even threaten survival of the enterprise.

 
9

 


Consistent with the industry standard, the Company’s insurance policies provide limited coverage for losses or liabilities relating to pollution, with broader coverage provided for sudden and accidental occurrences.  Insurance might be inadequate to cover all liabilities.  Moreover, from time to time, obtaining insurance for the Company’s line of business can become difficult and costly.  Typically, when insurance cost escalates, the Company may reduce its level of coverage and more risk may be retained to offset cost increases.  If substantial liability is incurred and damages are not covered by insurance or exceed policy limits, the Company’s operation and financial condition could be materially adversely affected.

Changes in tax laws or regulations could adversely affect the Company.

The Internal Revenue Service, the United States Treasury Department, Congress and the states frequently review federal or state income tax legislation.  The Company cannot predict whether, when, or to what extent new federal or state tax laws, regulations, interpretations or rulings will be adopted.  Any such legislative action may prospectively or retroactively modify tax treatment and, therefore, may adversely affect taxation of the Company.

The Company’s business is subject to changing government regulations.

Federal, state or local government agencies may impose environmental, labor or other regulations that increase costs and/or terminate or suspend operations. The Company’s business is subject to federal, state and local laws and regulations.  These regulations relate to, among other things, the exploration, development, production and transportation of oil and natural gas.  Existing laws and regulations could be changed, and any changes could increase costs of compliance and costs of operations.

Several proposals are before state legislators and the U.S. Congress that, if implemented, would either prohibit the practice of hydraulic fracturing or subject the process to regulation under state regulation or the Safe Drinking Water Act.   The Company routinely participates in wells where fracturing techniques are utilized to expand the available space for natural gas and oil to migrate toward the well-bore.  This is typically done at substantial depths in very tight formations.  Although it is not possible at this time to predict the final outcome of the legislation regarding hydraulic fracturing, any new state or federal restrictions could result in increased compliance costs or additional operating restrictions.

Estimating reserves, production and future net cash flow is difficult.

Estimating oil and natural gas reserves is a complex process requiring significant interpretations of technical data and assumptions relating to economic factors such as future commodity prices, production costs, severance and excise taxes, capital expenditures and remedial costs, and the assumed effect of governmental regulation.  As a result, actual results may differ from the Company’s estimates. Also, the use of a 10 percent discount factor for reporting purposes, as prescribed by the SEC, may not necessarily represent the most appropriate discount factor, given actual interest rates and risks to which the Company’s business is subject. Any significant variations from the Company’s valuations could cause the estimated quantities and net present value of the Company’s reserves to differ materially.

The reserve data included in this report is only an estimate. The reader should not assume that the present values referred to in this report represent the current market value of the Company’s estimated oil and natural gas reserves. The timing of the production and the expenses from development and production of oil and natural gas properties will affect both the timing of actual future net cash flows from the Company’s proved reserves and their present value.

 
10

 


The Company’s exploration operations are dependent on the ability to replace reserves.

Future success depends in part on the Company’s ability to find, develop and acquire additional oil and natural gas reserves.  Absent ongoing successful acquisition or exploration activities, reserves and revenues will decline as a result of current reserves being depleted by production.  The successful acquisition, development or exploration of oil and natural gas properties is dependent upon an assessment of recoverable reserves, future oil and natural gas prices and operating costs, potential environmental and other liabilities, and other factors. These factors are necessarily inexact. As a result, the Company may not recover the purchase price and/or the development costs of a property from the sale of production from the property, or may not recognize an acceptable return from properties acquired. In addition, exploration and development operations may not result in any increases in reserves. Exploration or development may be delayed or cancelled as a result of inadequate capital, compliance with governmental regulations, price controls or mechanical difficulties.  In the future, the cost to find or acquire additional reserves may become prohibitive.

Oil and gas segment revenues are dependent on the ability to successfully complete drilling activity.

Drilling and exploration are one of the main methods of replacing reserves.  However, drilling and exploration operations may not result in any increases in reserves for various reasons.  Drilling and exploration may be curtailed, delayed or cancelled as a result of:

·  
lack of acceptable prospective acreage;
·  
inadequate capital resources;
·  
weather;
·  
title problems;
·  
compliance with governmental regulations; and
·  
mechanical difficulties.

Moreover, the costs of drilling and exploration may greatly exceed initial estimates.  In such a case, the Company would be required to make additional expenditures to develop its drilling projects.  Such additional and unanticipated expenditures could adversely affect the Company’s financial condition and results of operations.

Security issues exist relating to drivers, equipment and terminal facilities.

The Company transports liquid combustible materials including petrochemicals, and such materials may be a target for terrorist attacks.  While the Company employs a variety of security measures to mitigate risks, no assurance can be given that such events will not occur.

Current and future litigation could have an adverse effect on the Company.

The Company is currently involved in certain administrative and civil legal proceedings as part of the ordinary course of its business.  Moreover, as incidental to operations, the Company sometimes becomes involved in various lawsuits and/or disputes.  Lawsuits and other legal proceedings can involve substantial costs, including the costs associated with investigation, litigation and possible settlement, judgment, penalty or fine.  Although insurance is maintained to mitigate these costs, there can be no assurance that costs associated with lawsuits or other legal proceedings will not exceed the limits of insurance policies.  The Company’s results of operations could be adversely affected if a judgment, penalty or fine is not fully covered by insurance.

 
11

 


The Company is subject to risks associated with climate change.
 
Potential climate change and efforts to regulate ‟greenhouse gas” (‟GHG’s”) emissions have the potential to adversely affect the Company’s business including negatively impacting the costs it incurs in providing its products and services, including costs to operate and maintain its facilities, install new emission controls on its facilities, acquire allowances to authorize its GHG emissions, pay any taxes related to GHG emissions, administer and manage a GHG emissions program, pay higher insurance premiums or accept greater risk of loss in areas affected by adverse weather and coastal regions in the event of rising sea levels.  In addition, the demand for and consumption of its products and services (due to change in both costs and weather patterns), and the economic health of the regions in which the Company operates, could have a material adverse effect on the Company’s business, financial condition, results of operations and cash flows.
 
The Company is subject to risks related to cybersecurity.

The Company is subject to cybersecurity risks and may incur increasing costs in connection with its efforts to enhance and ensure security and in response to actual or attempted cybersecurity attacks.

Substantial aspects of the Company’s business depend on the secure operation of its computer systems and websites. Security breaches could expose the Company to a risk of loss, misuse, or interruption of sensitive and critical information and functions, including its own proprietary information and that of its customers, suppliers and employees.  Such breaches could result in operational impacts, reputational harm, competitive disadvantage, litigation, regulatory enforcement actions, and liability. While the Company devotes substantial resources to maintaining adequate levels of cybersecurity, there can be no assurance that it will be able to prevent all of the rapidly evolving types of cyber attacks. Actual or anticipated attacks and risks may cause the Company to incur increasing costs for technology, personnel and services to enhance security or to respond to occurrences.

If the Company’s security measures are circumvented, proprietary information may be misappropriated, its operations may be disrupted, and its computers or those of its customers or other third parties may be damaged. Compromises of the Company’s security may result in an interruption of operations, violation of applicable privacy and other laws, significant legal and financial exposure, damage to its reputation, and a loss of confidence in its security measures.


Item 1B. UNRESOLVED STAFF COMMENTS

None.

Item 3.  LEGAL PROCEEDINGS

During 2013 and continuing in 2014, AREC has been noticed as a defendant in a number of Louisiana based suits involving alleged environmental contamination from prior drilling operations.  Such suits typically allege improper disposal of oilfield wastes in earthen pits with one suit alleging subsidence contributing of the formation of a sink hole.  The Company is currently named as a defendant in four such suits.  The suits are styled LePetit Chateau Deluxe v. Adams Resources Exploration Corporation dated March 2004, Gustave J. LaBarre, Jr., et. al. v. Adams Resources Exploration Corporation et al dated October 2012, Edward Conner, et al v. Adams Resources Exploration Corporation dated October 2013 and Henning Management, LLC v. Adams Resources Exploration Corporation dated November 2013.  Each suit involves multiple industry defendants with substantially larger proportional interest in the properties.  The plaintiffs in each of these matters are seeking unspecified compensatory and punitive damages.    While management does not believe that a material adverse effect will result from the claims, significant attorney fees will be incurred to defend this item.  As of December 31, 2013, the Company has accrued $200,000 of future legal costs for these matters.

 
12

 


From time to time as incident to its operations, the Company may become involved in various lawsuits and/or disputes.  Primarily as an operator of an extensive trucking fleet, the Company is a party to motor vehicle accidents, worker compensation claims and other items of general liability as would be typical for the industry. Management of the Company is presently unaware of any claims against the Company that are either outside the scope of insurance coverage, or that may exceed the level of insurance coverage, and could potentially represent a material adverse effect on the Company’s financial position or results of operations.

Item 4.  MINE SAFETY DISCLOSURES

Not Applicable.


 
13

 


PART II

Item 5.
MARKET FOR THE REGISTRANT’S COMMON STOCK, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES

The Company’s common stock is traded on the NYSE MKT under the ticker symbol ‟AE”.  The following table sets forth the high and low sales prices of the common stock as reported by the NYSE MKT for each calendar quarter since January 1, 2012.

   
American Stock Exchange
 
   
High
   
Low
 
2013
           
First Quarter
  $ 55.82     $ 33.75  
Second Quarter
    70.80       43.00  
Third Quarter
    71.77       54.86  
Fourth Quarter
    70.01       47.46  
                 
2012
               
First Quarter
  $ 75.13     $ 29.20  
Second Quarter
    74.73       27.85  
Third Quarter
    47.33       30.00  
Fourth Quarter
    36.20       28.10  

At February 14, 2014 there were approximately 217 shareholders of record of the Company’s common stock and the closing stock price was $67.10 per share.  The Company has no securities authorized for issuance under equity compensation plans.  The Company made no repurchases of its stock during 2013 and 2012.

On December 17, 2012, the Company paid an annual cash dividend of $.62 per common share to its common stockholders.  On each of June 17, 2013, September 17, 2013 and December 16, 2013 the Company paid quarterly cash dividend of $.22 per common share to common its stockholders.  Such dividends totaled $2,614,954 and $3,027,841 for 2012 and 2013, respectively.

 
 

 
14

 

Performance Graph

The performance graph shown below was prepared under the applicable rules of the SEC based on data supplied by Research Data Group.  The purpose of the graph is to show comparative total stockholder returns for the Company versus other investment options for a specified period of time.  The graph was prepared based upon the following assumptions:

1.  
$100.00 was invested on December 31, 2008 in the Company’s common stock, the S&P 500 Index, and the S&P 500 Integrated Oil and Gas Index.

2.  
Dividends are reinvested on the ex-dividend dates.

Note:  The stock price performance shown on the graph below is not necessarily indicative of future price performance.

Adams Resources Performance Graph 2013



 
12/08
12/09
12/10
12/11
12/12
12/13
             
Adams Resources & Energy, Inc.
100.00
132.70
149.73
183.26
224.99
444.24
S&P 500
100.00
126.46
145.51
148.59
172.37
228.19
S&P Integrated Oil & Gas
100.00
98.71
117.31
134.64
137.61
167.24

 
15

 

Item 6.  SELECTED FINANCIAL DATA

SELECTED FINANCIAL DATA

   
Years Ended December 31,
 
   
2013
   
2012
   
2011
   
2010
   
2009
 
   
(In thousands, except per share data)
 
Revenues:
     
Marketing
  $ 3,863,057     $ 3,292,948     $ 2,961,176     $ 2,005,301     $ 1,770,600  
Transportation
    68,783       67,183       63,501       56,867       44,895  
Oil and natural gas
    14,129       15,954       14,060       11,021       8,650  
    $ 3,945,969     $ 3,376,085     $ 3,038,737     $ 2,073,189     $ 1,824,145  
Operating earnings (loss):
                                       
Marketing
  $ 40,369     $ 46,145     $ 49,237     $ 13,530     $ 15,404  
Transportation
    5,180       10,253       8,521       6,623       2,128  
Oil and gas operations
    (2,113 )     (5,835 )     (16,797 )     (1,801 )     (3,791 )
Oil and gas property sale
    -       2,203       2,923       -       -  
General and administrative
    (9,060 )     (8,810 )     (8,678 )     (7,858 )     (8,260 )
      34,376       43,956       35,206       10,494       5,481  
Other income (expense):
                                       
Interest income
    198       190       237       191       125  
Interest expense
    (24 )     (10 )     (8 )     (36 )     (25 )
Earnings (loss) from continuing operations
                                       
before income taxes
    34,550       44,136       35,435       10,649       5,581  
                                         
Income tax (provision) benefit
    (12,429 )     (16,664 )     (12,717 )     (3,352 )     (2,030 )
                                         
Earnings (loss) from continuing
                                       
operations
    22,121       27,472       22,718       7,297       3,551  
Earnings (loss) from discontinued
                                       
operations, net of taxes
    (511 )     319       213       1,334       598  
                                         
Net earnings (loss)
  $ 21,610     $ 27,791     $ 22,931     $ 8,631     $ 4,149  
                                         
Earnings (Loss) Per Share
                                       
From continuing operations
    5.24       6.51       5.39       1.73       .84  
From discontinued operations
    (.12 )     .08       (.05 )     .32       .14  
                                         
Basic and diluted earnings (loss) per share
  $ 5.12     $ 6.59     $ 5.34     $ 2.05     $ .98  
                                         
Dividends per common share
  $ .66     $ .62     $ .57     $ .54     $ .50  
                                         
Financial Position
                                       
Cash
  $ 60,733     $ 47,239     $ 37,066     $ 29,032     $ 16,806  
Net working capital
    79,561       58,474       48,871       39,978       38,372  
Total assets
    448,082       419,501       378,840       301,305       249,401  
Long-term debt
    -       -       -       -       -  
Shareholders’ equity
    154,685       135,858       110,682       90,155       83,801  
Dividends on common shares
    2,783       2,615       2,404       2,277       2,109  
________________________________
Notes:
-  
In 2012 and 2011, certain oil and natural gas producing properties were sold for $3.6 million and $6.6 million producing net gains of $2.2 million and $2.9 million, respectively.
-  
The 2013, 2012 and 2011 oil and gas operating losses include property impairments totaling $2.6 million, $4.7 million and $14.8 million, respectively, recorded following unfavorable drilling results in 2013 and declining natural gas prices in 2012 and 2011.

 
16

 

Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Results of Operations

- Crude Oil

Crude oil marketing revenues, operating earnings, depreciation and certain costs are as follows (in thousands):

   
2013
   
2012
   
2011
 
                   
Revenues
  $ 3,863,057     $ 3,292,948     $ 2,961,176  
                         
Operating earnings
  $ 40,369     $ 46,145     $ 49,237  
                         
Depreciation
  $ 7,682     $ 5,945     $ 3,724  
                         
Driver commissions
  $ 19,478     $ 15,151     $ 12,284  
                         
Insurance
  $ 7,659     $ 5,241     $ 4,262  
                         
Fuel
  $ 13,808     $ 11,617     $ 9,982  

Supplemental volume and price information:

   
2013
   
2012
   
2011
 
Field Level Purchases per day (1)
                 
Crude Oil – barrels
    106,000       89,200       81,600  
                         
Average Purchase Price
                       
Crude Oil – per barrel
  $ 99.57     $ 99.66     $ 96.77  


 
(1) Reflects the volume purchased from third parties at the field level of operations.

 
 
Crude oil revenues increased in 2013 relative to 2012 and in 2012 relative to 2011 consistent with increased field level purchase volumes as shown in the table above.  Volume increases resulted from new production established by the Company’s customer base in the Eagle Ford shale trend of South Texas beginning in 2011, coupled with a new area of operation established in the Bakken field of North Dakota during 2013.

-  
Crude Oil – Field Level Operating Earnings (Non GAAP Measure)

Two significant factors affecting comparative crude oil segment operating earnings are inventory valuations and forward commodity contract (derivatives or mark-to-market) valuations.  As a purchaser and shipper of crude oil, the Company holds inventory in storage tanks and third-party pipelines.  Inventory sales turnover occurs approximately every three days, but the quantity held in stock at the end of a given period is reasonably consistent.  As a result, during periods of increasing crude oil prices, the Company recognizes inventory liquidation gains while during periods of falling prices, the Company recognizes inventory liquidation and valuation losses.  Over time, these gains and losses tend to offset and have limited impact on cash flow.  While crude oil prices fluctuated during 2013 and 2012, the net impact yielded inventory valuation losses totaling $3,824,000 and $1,596,000, respectively as compared to inventory liquidation gains totaling $3,021,000 for 2011.    As of December 31, 2013, the Company held 306,633 barrels of crude oil inventory at a composite average price of $90.06 per barrel.

 
17

 

Crude oil marketing operating earnings are also affected by the valuations of the Company’s forward month commodity contracts (derivative instruments) as of the various report dates.  Such non-cash valuations are calculated and recorded at each period end based on the underlying data existing as of such date.  The Company generally enters into these derivative contracts as part of a pricing strategy based on crude oil purchases at the wellhead (field level).  Only those contracts qualifying as derivative instruments are accorded fair value treatment while the companion contracts to purchase crude oil at the wellhead (field level) are not accorded fair value treatment.  The valuation of derivative instruments at period end requires the recognition of ‟mark-to-market” gains and losses.  The impact on crude oil segment operating earnings of inventory liquidations and derivative valuations is summarized as follows (in thousands):
 
 
   
2013
   
2012
   
2011
 
                   
As reported segment operating earnings
  $ 40,369     $ 46,145     $ 49,237  
Add (less) -
                       
Inventory liquidation (gains) losses
    3,824       1,596       (3,021 )
Derivative valuation (gains) losses
    193       2,001       149  
                         
Field level operating earnings(1)
  $ 44,386     $ 49,742     $ 46,365  

____________________________________
(1)  
Such designation is unique to the Company and is not comparable to any similar measures developed by industry participants.

Field level operating earnings and field level purchase volumes (see earlier table) depict the Company’s day-to-day operation of acquiring crude oil at the wellhead, transporting the material, and delivering it to market at the sales point.  Comparative crude oil field level operating earnings decreased in 2013 relative to 2012 but increased in 2012 relative to 2011 with the noted volume additions and fluctuating unit margins for the comparative periods.  Unit margins initially began to widen during the third quarter of 2011 when South Texas sourced production started selling at a discount to world crude oil prices due to its relative abundance in relation to the infrastructure available to deliver such oil to market.  The initial burst in unit margins was most prevalent during the third quarter of 2011 with favorable unit margins continuing into 2012, and then diminishing in 2013 as competition and additional industry infrastructure development progressed in the region.  In addition, competitive pressure increased driver commission rates in 2013 and 2012 and a combination of higher mileage and deteriorating accident frequency increased insurance costs in 2013.  The Company anticipates continued volume growth from South Texas and North Dakota sourced production as these regions continue to develop, although competition should narrow margins.

Historically, prices received for crude oil have been volatile and unpredictable with price volatility expected to continue.  See discussion under Item 1A Risk Factors.

 
18

 


 
-
Transportation

The transportation segment revenues and operating earnings were as follows (in thousands):

   
2013
   
2012
   
2011
 
   
Amount
   
Change(1)
   
Amount
   
Change(1)
   
Amount
   
Change(1)
 
                                     
Revenues
  $ 68,783       2 %   $ 67,183       6 %   $ 63,501       12 %
                                                 
Operating earnings
  $ 5,180       (49 )%   $ 10,253       20 %   $ 8,521       29 %
                                                 
Depreciation
  $ 7,099       20 %   $ 5,921       51 %   $ 3,912       (9 )%
                                                 
Driver commissions
  $ 13,152       3 %   $ 12,773       3 %   $ 12,369       6 %
                                                 
Insurance
  $ 5,937       20 %   $ 4,933       2 %   $ 4,814       6 %
                                                 
Fuel
  $ 14,813       2 %   $ 14,516       -     $ 14,519       35 %
                                                 
Maintenance Expense
  $ 6,479       21 %   $ 5,335       (8 )%   $ 5,828       4 %
______________
(1)
Represents the percentage increase (decrease) from the prior year.

Revenues for the transportation segment were consistent and strong for the comparative periods due to consistent customer demand.  Operating earnings for 2012 and 2011 benefitted from gains totaling $2.6 million and $1.2 million, respectively, from the sale of used equipment following the purchase of new truck replacements.  Such sales did not recur in 2013 within the transportation segment.  Operating earnings for 2013 were adversely impacted by increased depreciation, insurance and maintenance costs.  As shown above, maintenance expense increased in 2013, in part due to increased environmental compliance costs.

The Company’s customers predominately consist of the domestic petrochemical industry and contributing to customer demand is low natural gas prices (a basic feedstock cost for the petrochemical industry) and high export demand for petrochemicals.  With demand strength, industry capacity has been strained allowing rate increases and an opportunity for increased profitability.  However, an industry wide shortage of qualified drivers has affected the Company by suppressing current year revenues and results of operations.  As transportation revenues increase or decrease, operating earnings will typically increase or decrease at an accelerated rate.  This trend exists because the fixed cost components of the Company’s operation do not vary with changing revenues.  As currently configured, operating earnings project at break-even levels when annual revenues average approximately $54 million.  Above that level, operating earnings will grow and below that level, losses result.

Transportation segment depreciation increased for 2013 and 2012 as older fully depreciated tractor units were replaced with new model year vehicles.  During 2013, the Company purchased 35 new trailers with 17 serving as replacements.  During 2012, the Company replaced 125 truck-tractors and one trailer.  During 2011 the Company replaced 115 older model truck-tractor units and added 10 new units to the fleet.  In addition, 25 trailers were added to the fleet during 2011.

 
19

 


 
-
Oil and Gas

Oil and gas segment revenues and operating earnings are primarily a function of crude oil and natural gas production volumes and prices.  Comparative amounts for revenues, operating earnings and depreciation and depletion were as follows (in thousands):
   
2013
   
2012
   
2011
 
   
Amount
   
Change(1)
   
Amount
   
Change(1)
   
Amount
   
Change(1)
 
Revenues
  $ 14,129       (11 )%   $ 15,954       13 %   $ 14,060       28 %
                                                 
Operating earnings (loss)(2)
    (2,113 )     42 %     (3,632 )     (74 )%     (13,874 )     689 %
                                                 
Depreciation and depletion
    7,494       (15 )%     8,848       7 %     8,249       77 %
                                                 
Producing property impairments
    1,373       (71 )%     4,699       (34 )%     7,105       651 %
______________
(1)  
Represents the percentage increase (decrease) from the prior year.
(2)  
Includes gains from property sales of $2.2 million and $2.9 million in 2012 and 2011, respectively.

As shown in the table below, improving crude oil production volumes served to boost oil and gas segment revenues, with a partial offset occurring during 2013 as natural gas volumes declined.  Such volume changes resulting from the interplay of recent drilling efforts and normal production declines as low prices curtailed natural gas drilling.  Operating losses resulted in 2013, 2012 and 2011 following producing property impairments as well as increased prospect impairment expense as shown in the second table below.  Property impairments resulted in 2013 following adverse drilling results while 2012 and 2011 impairments followed declines in the then current and forward price for natural gas.

Comparative volumes and prices were as follows:

   
2013
     
2012
     
2011
   
                         
Production Volumes
                       
- Crude oil
    102,300  
Bbls
    98,100  
Bbls
    61,500  
Bbls
- Natural gas
    1,608,000  
Mcf
    2,608,000  
Mcf
    1,895,000  
Mcf
                               
Average Price
                             
- Crude oil(1)
  $ 79.15  
Bbls
  $ 84.39  
Bbls
  $ 93.23  
Bbls
- Natural gas
  $ 3.75  
Mcf
  $ 2.94  
Mcf
  $ 4.39  
Mcf
___________________________

(1)  
 Crude oil prices and volumes include the sale of associated natural gas liquids production.

Comparative exploration and prospect impairment costs were as follows (in thousands):

   
2013
   
2012
   
2011
 
Dry hole expense
  $ 233     $ 43     $ 1,212  
Prospect impairment
    1,257       856       7,644  
Seismic and geological
    129       252       310  
                         
Total
  $ 1,619     $ 1,151     $ 9,166  


 
20

 


During 2013, the Company participated in the drilling of 80 wells with three dry holes. Additionally, the Company had 34 wells in process on December 31, 2013 with ultimate evaluation anticipated during 2014.  Converting natural gas volumes to equate with crude oil volumes at a ratio of six to one, production volumes and proved reserve changes summarize as follows, on an equivalent barrel (Eq. Bbls) basis:

   
2013
   
2012
   
2011
 
   
(Eq. Bbls.)
   
(Eq. Bbls.)
   
(Eq. Bbls.)
 
                   
Proved reserves – beginning of year
    1,779,000       1,907,000       1,566,000  
Estimated reserve additions
    267,000       537,000       1,209,000  
Production volumes
    (370,000 )     (533,000 )     (377,000 )
Producing properties sold
    (5,000 )     (71,000 )     (385,000 )
Revisions of previous estimates
    (255,000 )     (61,000 )     (106,000 )
                         
Proved reserves - end of year
    1,416,000       1,779,000       1,907,000  

For 2013 and for the three year period ended December 31, 2013, estimated reserve additions represented 157 percent and 72 percent, respectively, of production volumes.  Such reserve additions resulted from active drilling efforts during the periods presented.

Given the present low natural gas price environment, exploration and development activity during 2014 will be substantially reduced.  The Company’s current drilling and exploration efforts are primarily focused as follows:

West Texas Project

In 2008 the Company acquired an approximate 7.5% working interest in 49,015 gross acres located in Irion and Crockett Counties, Texas for the purpose of developing the Wolfcamp Shale.  A total of 190 wells have been drilled through December 31, 2013 with 177 wells on production and 13 wells being completed.  Drilling is expected to continue in 2014 with 31 wells scheduled for drilling.  Production from the Wolfcamp area is oil-rich with large amounts of gas and natural gas liquids.

South Texas Project

This investment’s goal is to extend the productive area of the Eagle Ford trend north in Fayette and Lavaca Counties, Texas.  Two wells have been drilled on this acreage indicating the project is on the gas-condensate window, but substantial Eagle Ford production has yet to be established.  Evaluation of this project continues and the Company holds a five percent working interest in this project which includes approximately 46,800 acres currently under lease.

Kansas

The Company presently holds a 6.8% interest in 30,000 acres in Pratt County, Kansas with the objective of further developing the Mississippi Lime trend.  One successful well has been completed on this acreage with a second well currently in process.  If warranted by results, approximately 10 additional horizontal well sites can be developed on this acreage.

In addition to current active drilling efforts, the Company maintains a fractional interest in approximately 142,163 acres in the East Texas – Haynesville trend.  The Haynesville program is a natural gas development play with the Company’s interest currently held by production and to date, the Company has participated in 93 wells on this acreage.  Further development of this property is contingent on increased natural gas prices.

 
21

 


 
 -
Oil and gas property sales

In 2012, the Company sold, to third parties, its interest in two separate oil and gas producing properties.  One of the properties was located on-shore Texas with the second property located in Federal waters offshore Louisiana.  Proceeds from these two sales totaled $3,049,000 and the Company recorded a $1,728,000 pre-tax gain.  Since both properties had depleted substantially from their initial productive period, the sales were consummated before the properties lost further value.  Additionally in 2012, the Company sold to a third party fifty percent of its interest in certain Kansas oil and gas properties with the sale consummated to spur further development on the properties.  Total proceeds were $578,000 and the Company recorded a $475,000 pre-tax gain on sale.  The Company continues to participate in the development of these Kansas properties.

In 2011, the Company completed the sale of its interest in certain producing oil and gas properties located in the on-shore Gulf Coast region of Texas.  Proceeds from the sale totaled $6.2 million and the pre-tax gain from this transaction totaled $2,708,000.  Sales negotiations were conducted by the third party operator of the properties and the Company elected to participate in the sale due to attractive pricing.  Also during 2011, the Company sold a portion of its interest in certain non-producing oil and gas properties located in West Texas.  Total proceeds from the sale were $329,000 and the Company recorded a $125,000 gain from this transaction.    Further in 2011, the Company sold an interest in certain non-producing properties for $90,000 in proceeds and gain.

-  
General and administrative expense, interest income and income tax

General and administrative expenses were generally consistent during the periods presented with elevated costs in 2013, 2012 and 2011 due to employee bonuses, consistent with increased corporate earnings.  The provision for income taxes is based on Federal and State tax rates and variations are consistent with taxable income in the respective accounting periods.

 
-
Discontinued operations

Effective October 31, 2013 and due to inadequate earnings, the Company completed an orderly wind-down and closure of its natural gas marketing segment.  The Company incurred employee severance and other shut-down costs totaling $416,000 as a result of this event.  All obligations were satisfied and no further matters are anticipated.  During the first quarter of 2012, the Company sold contracts, inventory and certain equipment associated with its former refined products marketing segment and discontinued that operation.  The pre-tax gain from this sale, net of first quarter 2012 operating expenses and wind-down cost totaled $808,000.  See also Note 9 – Discontinued Operations to Unaudited Condensed Consolidated Financial Statements.
 
 
 
-
Outlook

Crude oil marketing operations anticipate steady volume growth but competition continues to narrow unit margins by as much as one-third and an operating earnings decline is anticipated for 2014.  Demand for transportation services remains strong but driver shortages and persistently high operating cost has dampened profitability within this segment.  For the oil and gas segment, growth in production volumes should lead to continued earnings improvement especially if 2014 price increases in natural gas prices are sustained.

The Company has the following major objectives for 2014:

-  
Manage declining marketing margins to maintain operating earnings at the $30 million level exclusive of inventory valuation gains or losses.

-  
Maintain transportation operating earnings at the $5 million level.

-  
Grow oil and gas operating earnings to the $2 million level.

 
22

 



Liquidity and Capital Resources

The Company’s liquidity primarily derives from net cash provided from operating activities, which was $43,976,000, $54,494,000 and $55,815,000 for each of 2013, 2012 and 2011, respectively.  As of December 31, 2013 and 2012, the Company had no bank debt or other forms of debenture obligations.  Cash and cash equivalents totaled $60,733,000 as of December 31, 2013, and such balances are maintained in order to meet the timing of day-to-day cash needs.  Working capital, the excess of current assets over current liabilities, totaled $79,561,000 as of December 31, 2013.  The Company relies on its ability to obtain open-line trade credit from its suppliers especially with respect to its crude oil marketing operation.  In this regard, the Company generally maintains substantial cash balances and avoids debt obligations.

Capital expenditures during 2013 included $14,508,000 for marketing and transportation equipment additions, primarily consisting of truck-tractors, and $13,094,000 in property additions associated with oil and gas exploration and production activities.  For 2014, the Company anticipates expending an additional approximately $10 million on oil and gas development and exploration projects.  In addition, approximately $3 million will be expended during 2014 primarily for the purchase of 30 trailers for the transportation segment and approximately $15 million will be expended by the crude oil marketing operation for the purchase of 42 truck-tractors, 51 trailers and the construction of a barge loading facility.  The truck-tractors will serve to replace older units and to increase the marketing fleet by 32 units.  Funding for these 2014 projects will be from operating cash flow and available working capital.  Within certain constraints, the proposed projects can be delayed or cancelled should funding become unavailable.

At various times during each month, the Company makes cash prepayments and/or early payments in advance of the normal due date to certain suppliers of crude oil within the marketing operations.  Crude oil supply prepayments totaled $13,705,000 as of December 31, 2013 and such amounts will be recouped and advanced from month to month as the suppliers deliver product to the Company.  In addition, in order to secure crude oil supply, the Company may also ‟early pay” its suppliers in advance of the normal payment due date of the twentieth of the month following the month of production.  Such ‟early payments” serve to reduce accounts payable as of the balance sheet date.  The Company also requires certain counterparties to make similar early payments or to post cash collateral with the Company in order to support their purchases from the Company.  Early payments received from customers serve to reduce accounts receivable as of the balance sheet date.  Such cash collateral held by the Company totaled $6,938,000 as of December 31, 2013.  The Company also maintains a stand-by letter of credit facility with Wells Fargo Bank to provide for the issuance of up to $60 million in stand-by letters of credit to suppliers of crude oil (see Note (1) to Consolidated Financial Statements).  The issuance of stand-by letters of credit enables the Company to avoid posting cash collateral when procuring crude oil supply.  As of December 31, 2013, letters of credit outstanding totaled $14.6 million.  The issued stand-by letters of credit are cancelled as the underlying purchase obligations are satisfied by cash payment when due.  Management believes current cash balances, together with expected cash generated from future operations, and the ease of financing truck and trailer additions through leasing arrangements (should the need arise) will be sufficient to meet short-term and long-term liquidity needs.
 
 
The Company utilizes cash from operations to make discretionary investments in its marketing, transportation and exploration businesses, which comprise substantially all of the Company’s investing cash outflows for each of the periods in this filing.  The Company does not look to proceeds from property sales to fund its cash flow needs.  Except for an approximate $9.5 million commitment for storage tank terminal arrangements and office lease space, the Company’s future commitments and planned investments can be readily curtailed if operating cash flows contract.

Historically, the Company paid an annual dividend in the fourth quarter of each year, and the Company paid a $.62 per common share dividend or $2,615,000 to shareholders of record as of December 3, 2012.  On June 17, 2013, the Company initiated a quarterly dividend of $.22 per common share or $928,000.  A quarterly dividend of $.22 per common share or $928,000 was also paid during both the third and fourth quarters of 2013.  The most significant item affecting future increases or decreases in liquidity is earnings from operations and such earnings are dependent on the success of future operations (see Item 1A. Risk Factors in this annual report on Form 10-K).

 
23

 


Off-balance Sheet Arrangements

The Company maintains certain operating lease arrangements with independent truck owner-operators for use of their equipment and driver services on a month-to-month basis.  In addition, the Company has entered into certain lease and terminal access contracts in order to provide tank storage and dock access for its crude oil marketing business.  Such contracts require certain minimum monthly payments for the term of the contracts.   All operating lease commitments qualify for off-balance sheet treatment.  Rental expense for the years ended December 31, 2013, 2012, and 2011 was $8,281,000, $8,110,000 and $7,621,000, respectively.  As of December 31, 2013, rental commitments under long-term non-cancelable operating leases and terminal arrangements for the next five years are payable as follows:  2014 - $3,138,000; 2015 - $1,931,000; 2016 - $1,910,000; 2017 - $1,690,000; 2018 – $804,000 and $40,000 thereafter.

Contractual Cash Obligations

The Company has no capital lease obligations.  The Company has entered into certain operating lease arrangements and terminal access agreements for tankage, truck-tractors, trailers and office space.    A summary of the lease payment periods for contractual cash obligations is as follows (in thousands):

2014
   
2015
   
2016
   
2017
   
2018
   
Thereafter
   
Total
 
                                       
$ 3,138     $ 1,931     $ 1,910     $ 1,690     $ 804     $ 40     $ 9,513  

In addition to its lease obligations, the Company is also committed to purchase certain quantities of crude oil in connection with its marketing activities.  Such commodity purchase obligations are the basis for commodity sales, which generate the cash flow necessary to meet such purchase obligations.  Approximate commodity purchase obligations as of December 31, 2013 are as follows (in thousands):

January
   
Remaining
                         
2014
   
2014
   
2015
   
2016
   
Thereafter
   
Total
 
$ 421,408     $ 25     $ -     $ -     $ -     $ 421,433  

Insurance

From time to time, the marketplace for all forms of insurance enters into periods of severe cost increases. In the past, during such cyclical periods, the Company has seen costs escalate to the point where desired levels of insurance were either unavailable or unaffordable.  The Company’s primary insurance needs are workers’ compensation, automobile and umbrella coverage for its trucking fleet and medical insurance for employees.  During each of 2013, 2012 and 2011, insurance costs totaled $14.9 million, $11.5 million and $10.1 million, respectively with 2013 costs elevated due to adverse claims experience.  Insurance cost may experience rate increases during 2014 subject to market conditions and claims experience.  Since the Company is generally unable to pass on such cost increases, any increase will need to be absorbed by existing operations.

Competition

In all phases of its operations, the Company encounters strong competition from a number of entities. Many of these entities possess financial resources substantially in excess of those of the Company. The Company faces competition principally in establishing trade credit, pricing of available materials and quality of service as well as for the acquisition of mineral properties. The Company’s marketing division competes with major oil companies and other large industrial concerns that own or control significant refining and marketing facilities.  These major oil companies may offer their products to others on more favorable terms than those available to the Company.  From time to time in recent years, there have been supply imbalances for crude oil and natural gas in the marketplace.  This in turn has led to significant fluctuations in prices for crude oil and natural gas. As a result, there is a high degree of uncertainty regarding both the future market price for crude oil and natural gas and the available margin spread between wholesale acquisition costs and sales realization.

 
24

 

Critical Accounting Policies and Use of Estimates

Fair Value Accounting

The Company enters into certain forward commodity contracts that are required to be recorded at fair value and such contracts are recorded as either an asset or liability measured at its fair value.  Changes in fair value are recognized immediately in earnings unless the derivatives qualify for, and the Company elects, cash flow hedge accounting.  The Company had no contracts designated for hedge accounting during 2013, 2012 and 2011.

The Company utilizes a market approach to valuing its commodity contracts.  On a contract by contract, forward month by forward month basis, the Company obtains observable market data for valuing its contracts that typically have durations of less than 18 months.  As of December 31, 2013, all of the Company’s market value measurements were based on either quoted prices in active markets (Level 1 inputs) or from inputs based on observable market data (Level 2 inputs). See discussion under ‟Fair Value Measurements” in Note 1 to the Consolidated Financial Statements.

The Company’s fair value contracts give rise to market risk, which represents the potential loss that may result from a change in the market value of a particular commitment.  The Company monitors and manages its exposure to market risk to ensure compliance with the Company’s risk management policies.  Such policies are regularly assessed to ensure their appropriateness given management’s objectives, strategies and current market conditions.

Trade Accounts

Accounts receivable and accounts payable typically represent the most significant assets and liabilities of the Company.  Particularly within the Company’s energy marketing, oil and gas exploration, and production operations, there is a high degree of interdependence with and reliance upon third parties (including transaction counterparties) to provide adequate information for the proper recording of accounts receivable or payable. Substantially all such third parties are larger firms providing the Company with the source documents for recording trade activity.  It is commonplace for these entities to retroactively adjust or correct such documents. This typically requires the Company to absorb, benefit from, or pass along such corrections to another third party.

Due to the volume of and complexity of transactions and the high degree of interdependence with third parties, this is a difficult area to control and manage.  The Company manages this process by participating in a monthly settlement process with each of its counterparties.  Ongoing account balances are monitored monthly and the Company attempts to gain the cooperation of such counterparties to reconcile outstanding balances.  The Company also places great emphasis on collecting cash balances due and paying only bonafide and properly supported claims.  In addition, the Company maintains and monitors its bad debt allowance.  Nevertheless a degree of risk remains due to the custom and practices of the industry.

Oil and Gas Reserve Estimate

The value of the capitalized cost of oil and natural gas exploration and production related assets are dependent on underlying oil and natural gas reserve estimates.  Reserve estimates are based on many subjective factors.  The accuracy of these estimates depends on the quantity and quality of geological data, production performance data, reservoir engineering data, the pricing assumptions utilized as well as the skill and judgment of petroleum engineers in interpreting such data.  The process of estimating reserves requires frequent revision (usually on an annual basis) as additional information becomes available. Calculations of estimated future oil and natural gas revenues are also based on estimates of the timing of oil and natural gas production, and there are no assurances that the actual timing of production will conform to or approximate such estimates. Also, certain assumptions must be made with respect to pricing.  The Company’s calculations assume prices will remain constant from the date of the engineer’s estimates, except for changes reflected under natural gas sales contracts.  There can be no assurance that actual future prices will not vary as industry conditions, governmental regulation, political conditions, economic conditions, weather conditions, market uncertainty, and other factors, impact the market price for oil and natural gas.

 
25

 


The Company follows the successful efforts method of accounting, so only costs (including development dry hole costs) associated with producing oil and natural gas wells are capitalized.  Estimated oil and natural gas reserve quantities are the basis for the rate of amortization under the Company’s units of production method for depreciating, depleting and amortizing oil and natural gas properties. Estimated oil and natural gas reserve values also provide the standard for the Company’s periodic review of oil and natural gas properties for impairment.

Contingencies

During 2013 and continuing in 2014, AREC was noticed as a defendant in a number of Louisiana based lawsuits involving alleged environmental contamination from prior drilling operations.  Such suits typically allege improper disposal of oilfield wastes in earthen pits with one suit alleging oil and gas production subsidence contributing to the formation of a sink hole.  The Company is currently named as a defendant in four such suits.  Each suit involves multiple industry defendants with substantially larger proportional interest in the properties.  While management does not believe that a material adverse effect will result from the claims, significant attorney fees will be incurred to defend these items.  As of December 31, 2013, the Company has accrued $200,000 of future legal costs for these matters.

From time to time as incident to its operations, the Company becomes involved in various accidents, lawsuits and/or disputes.  Primarily as an operator of an extensive trucking fleet, the Company is a party to motor vehicle accidents, worker compensation claims or other items of general liability as are typical for the industry.  In addition, the Company has extensive operations that must comply with a wide variety of tax laws, environmental laws and labor laws, among others.  Should an incident occur, management evaluates the claim based on its nature, the facts and circumstances and the applicability of insurance coverage.  To the extent management believes that such event may impact the financial condition of the Company, management will estimate the monetary value of the claim and make appropriate accruals or disclosure as provided in the appropriate accounting literature guidelines.

Revenue Recognition

The Company’s crude oil marketing customers are invoiced daily or monthly based on contractually agreed upon terms.  Revenue is recognized in the month in which the physical product is delivered to the customer.  Where required, the Company also recognizes fair value or mark-to-market gains and losses related to its commodity activities. See discussion under Revenue Recognition policy in Note (1) to the Consolidated Financial Statements.

Transportation segment customers are invoiced, and the related revenue is recognized as the service is provided.  Oil and natural gas revenue from the Company’s interests in producing wells is recognized as title and physical possession of the oil and natural gas passes to the purchaser.

Recent Accounting Pronouncements

In December 2011, the Financial Accounting Standards Board (‟FASB”) issued ASU 2011-11.  This update requires additional disclosures about an entity’s right of setoff and related arrangements associated with its financial and derivative instruments.  The ASU requires a tabular presentation that reflects the gross, net and setoff amounts associated with such assets and liabilities among other requirements.  The Company adopted ASU 2011-11 effective January 1, 2013 and the adoption of ASU 2011-11 did not have a material impact on the Company’s consolidated financial statements, but additional disclosures regarding fair value measurements resulted.

Management believes the impact of other recently issued standards and updates, which are not yet effective, will not have a material impact on the Company’s consolidated financial position, results of operations, or cash flows upon adoption.

 
26

 


Item 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company’s exposure to market risk includes potential adverse changes in interest rates and commodity prices.

Interest Rate Risk

The Company had no long-term debt outstanding at December 31, 2013 and 2012.  A hypothetical ten percent adverse change in the floating rate would not have a material effect on the Company’s results of operations for the fiscal year ended December 31, 2013.

Commodity Price Risk

The Company’s major market risk exposure is in the pricing applicable to its marketing and production of crude oil and natural gas.  Realized pricing is primarily driven by the prevailing spot prices applicable to oil and gas.  Commodity price risk in the Company’s marketing operations represents the potential loss that may result from a change in the market value of an asset or a commitment.  From time to time, the Company enters into forward contracts to minimize or hedge the impact of market fluctuations on its purchases of crude oil and natural gas. The Company may also enter into price support contracts with certain customers to secure a floor price on the purchase of certain supply. In each instance, the Company locks in a separate matching price support contract with a third party in order to minimize the risk of these financial instruments.  Substantially all forward contracts fall within a six-month to eighteen-month term with no contracts extending longer than two years in duration.

Certain forward contracts are recorded at fair value, depending on management’s assessments of numerous accounting standards and positions that comply with generally accepted accounting principles in the United States. The fair value of such contracts is reflected in the balance sheet as fair value assets and liabilities and any revaluation is recognized on a net basis in the Company’s results of operations.  See discussion under ‟Fair Value Measurements” in Note 1 to the Consolidated Financial Statements.

Historically, prices received for oil and natural gas sales have been volatile and unpredictable with price volatility expected to continue.  From January 1, 2012 through December 31, 2013, the Company’s crude oil monthly average wholesale purchase costs ranged from an average low of $86.05 per barrel to a monthly average high of $113.10 per barrel during the same period. A hypothetical ten percent adverse change in average hydrocarbon prices, assuming no changes in volume levels, would have reduced earnings by approximately $4,173,000 and $3,937,000 for the comparative years ended December 31, 2013 and 2012, respectively.

 
27

 


ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA



ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES

INDEX TO FINANCIAL STATEMENTS



 
Page
   
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
29
   
FINANCIAL STATEMENTS:
 
   
Consolidated Balance Sheets as of December 31, 2013 and 2012
30
   
Consolidated Statements of Operations for the Years Ended
 
December 31, 2013, 2012 and 2011
31
   
Consolidated Statements of Shareholders’ Equity for the Years Ended
 
December 31, 2013, 2012 and 2011
32
   
Consolidated Statements of Cash Flows for the Years Ended
 
December 31, 2013, 2012 and 2011
33
   
Notes to Consolidated Financial Statements
34


 
28

 


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 

 
To the Board of Directors and Stockholders of
Adams Resources & Energy, Inc.
Houston, Texas
 
We have audited the accompanying consolidated balance sheets of Adams Resources & Energy, Inc. and subsidiaries (the "Company") as of December 31, 2013 and 2012, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2013. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Adams Resources & Energy, Inc. and subsidiaries at December 31, 2013 and 2012, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2013, in conformity with accounting principles generally accepted in the United States of America.
 
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of December 31, 2013, based on the criteria established in Internal Control—Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 13, 2014, expressed an unqualified opinion on the Company's internal control over financial reporting.
 

/s/ Deloitte & Touche LLP
 
Houston, Texas
March 13, 2014
 
 
29

 

ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
   
December 31,
 
ASSETS
 
2013
   
2012
 
CURRENT ASSETS:
           
Cash and cash equivalents
  $ 60,733     $ 47,239  
Accounts receivable, net of allowance for doubtful accounts of
               
$252 and $206, respectively
    243,930       228,415  
Inventories
    27,616       28,222  
Fair value contracts
    395       84  
Income tax receivable
    2,097       1,199  
Prepayments
    16,779       7,712  
Current assets of discontinued operations
    180       11,685  
                 
Total current assets
    351,730       324,556  
                 
PROPERTY AND EQUIPMENT:
               
Marketing
    52,996       46,177  
Transportation
    59,185       59,101  
Oil and gas (successful efforts method)
    98,947       90,431  
Other
    1,305       1,406  
      212,433       197,115  
                 
Less – Accumulated depreciation, depletion and amortization
    (120,568 )     (106,403 )
      91,865       90,712  
OTHER ASSETS:
               
Deferred income tax asset
    -       34  
Cash deposits and other
    4,487       4,199  
    $ 448,082     $ 419,501  
LIABILITIES AND SHAREHOLDERS’ EQUITY
               
                 
CURRENT LIABILITIES:
               
Accounts payable
  $ 266,099     $ 249,214  
Accounts payable – related party
    38       42  
Fair value contracts
    -       111  
Accrued and other liabilities
    5,583       6,959  
Current deferred income taxes
    358       240  
Current liabilities of discontinued operations
    91       9,516  
Total current liabilities
    272,169       266,082  
                 
LONG-TERM DEBT
    -       -  
                 
OTHER LIABILITIES:
               
Asset retirement obligations
    2,564       1,886  
Deferred taxes and other liabilities
    18,664       15,675  
      293,397       283,643  
COMMITMENTS AND CONTINGENCIES (NOTE 6)
               
                 
SHAREHOLDERS’ EQUITY:
               
Preferred stock, $1.00 par value, 960,000 shares authorized,
               
none outstanding
    -       -  
Common stock, $.10 par value, 7,500,000 shares authorized,
               
4,217,596 issued and outstanding
    422       422  
Contributed capital
    11,693       11,693  
Retained earnings
    142,570       123,743  
Total shareholders’ equity
    154,685       135,858  
    $ 448,082     $ 419,501  

The accompanying notes are an integral part of these consolidated financial statements.

 
30

 


ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)


   
Years Ended December 31,
 
   
2013
   
2012
   
2011
 
REVENUES:
                 
Marketing
  $ 3,863,057     $ 3,292,948     $ 2,961,176  
Transportation
    68,783       67,183       63,501  
Oil and natural gas
    14,129       15,954       14,060  
      3,945,969       3,376,085       3,038,737  
COSTS AND EXPENSES:
                       
Marketing
    3,815,006       3,240,858       2,908,215  
Transportation
    56,504       51,009       51,068  
Oil and natural gas operations
    8,748       12,941       22,608  
Oil and natural gas property sale (gain)
    -       (2,203 )     (2,923 )
General and administrative
    9,060       8,810       8,678  
Depreciation, depletion and amortization
    22,275       20,714       15,885  
      3,911,593       3,332,129       3,003,531  
                         
Operating Earnings
    34,376       43,956       35,206  
                         
Other Income (Expense):
                       
Interest income
    198       190       237  
Interest expense
    (24 )     (10 )     (8 )
                         
Earnings from continuing operations before income taxes
    34,550       44,136       35,435  
                         
Income Tax (Provision) Benefit:
                       
Current
    (9,269 )     (11,286 )     (5,133 )
Deferred
    (3,160 )     (5,378 )     (7,584 )
      (12,429 )     (16,664 )     (12,717 )
Earnings from continuing operations
    22,121       27,472       22,718  
Earnings (loss) from discontinued operations net of tax
                       
(provision) benefit of $275, $(172) and $(114) respectively
    (511 )     319       213  
                         
Net Earnings
  $ 21,610     $ 27,791     $ 22,931  
                         
 
EARNINGS PER SHARE:
                       
From continuing operations
    5.24       6.51       5.39  
From discontinued operations
    (.12 )     .08       .05  
Basic and diluted net earnings per share
  $ 5.12     $ 6.59     $ 5.44  
                         
Dividends declared per common share
  $ .66     $ .62     $ .57  

 
 
The accompanying notes are an integral part of these consolidated financial statements.

 
31

 




ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(In thousands)

                     
Total
 
   
Common
   
Contributed
   
Retained
   
Shareholders’
 
   
Stock
   
Capital
   
Earnings
   
Equity
 
                         
BALANCE, January 1, 2011
  $ 422     $ 11,693     $ 78,040     $ 90,155  
Net earnings
    -       -       22,931       22,931  
Dividends paid on common stock
    -       -       (2,404 )     (2,404 )
BALANCE, December 31, 2011
  $ 422     $ 11,693     $ 98,567     $ 110,682  
Net earnings
    -       -       27,791       27,791  
Dividends paid on common stock
    -       -       (2,615 )     (2,615 )
BALANCE, December 31, 2012
  $ 422     $ 11,693       123,743       135,858  
Net earnings
    -       -       21,610       21,610  
Dividends paid on common stock
    -       -       (2,783 )     (2,783 )
BALANCE, December 31, 2013
  $ 422     $ 11,693     $ 142,570     $ 154,685  


The accompanying notes are an integral part of these consolidated financial statements.

 
32

 

ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)


   
Years Ended December 31,
 
   
2013
   
2012
   
2011
 
CASH PROVIDED BY OPERATIONS:
                 
Net earnings
  $ 21,610     $ 27,791     $ 22,931  
Adjustments to reconcile net earnings to net cash
                       
from operating activities-
                       
Depreciation, depletion and amortization
    22,275       20,714       16,260  
Property sale (gains)
    (683 )     (6,298 )     (4,394 )
Dry hole costs incurred
    233       43       1,212  
Impairment of oil and natural gas properties
    2,630       5,555       14,749  
Provision for doubtful accounts
    46       (51 )     1,141  
Deferred income taxes
    3,161       5,378       7,308  
Net change in fair value contracts
    (389 )     1,377       (97 )
Decrease (increase) in accounts receivable
    (4,770 )     (4,820 )     (45,487 )
Decrease (increase) in inventories
    606       (9,579 )     (5,598 )
Decrease (increase) in income tax receivable
    (898 )     (719 )     1,836  
Decrease (increase) in prepayments
    (8,687 )     2,559       (2,547 )
Increase (decrease) in accounts payable
    7,809       10,474       47,662  
Increase (decrease) in accrued and other liabilities
    (516 )     1,227       1,378  
Other changes, net
    1,549       843       (539 )
Net cash provided by operating activities
    43,976       54,494       55,815  
                         
INVESTING ACTIVITIES:
                       
Property and equipment additions
    (27,602 )     (51,012 )     (53,276 )
Insurance and state collateral (deposits) refunds
    (1,179 )     (582 )     (495 )
Proceeds from property sales
    1,082       6,342       8,394  
Proceeds from the sale of discontinued operations
    -       3,546       -  
Redemption of short-term investments
    -       -       11,098  
Investment in short-term investments
    -       -       (11,098 )
Net cash (used in) investing activities
    (27,699 )     (41,706 )     (45,377 )
                         
FINANCING ACTIVITIES:
                       
Dividend payments
    (2,783 )     (2,615 )     (2,404 )
Net cash (used in) financing activities
    (2,783 )     (2,615 )     (2,404 )
                         
Increase (decrease) in cash and cash equivalents
    13,494       10,173       8,034  
                         
Cash and cash equivalents at beginning of year
    47,239       37,066       29,032