Although the energy sector is in the midst of a multiyear boom, several exploration and production companies reported losses during the second quarter of 2011. Investors should take a deeper look at why these losses occurred to see if they are due to operational issues or the application of GAAP accounting rules.

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Net Losses
PetroQuest Energy (NYSE:PQ) reported a net loss of $3.05 million, or $0.05 per share, for the second quarter of 2011. This loss was caused by a $12.9 million ceiling test write-down during the quarter.

The Securities and Exchange Commission (SEC) requires some exploration and production companies to assess the value of oil and gas reserves given the change in commodity prices and incorporating future development costs. Under certain circumstances a non-cash ceiling test write-down of properties is required.

Penn Virginia (NYSE:PVA) reported a net loss of $72 million, or $1.57 per share, in the quarter ending June 30, 2011. This large loss was caused by a number of items including an impairment charge of $71.1 million related to properties in the Arkoma Basin that are being sold. Penn Virginia also repurchased one of the company's convertible note issues during the quarter and recorded a $24 million loss on the extinguishment of debt.

Crimson Exploration (Nasdaq:CXPO) reported a net loss of $2.8 million, or $0.06 per share, in the most recent quarter. The company had two unusual items in the quarter, with one helping and one hurting its results. Crimson Exploration recorded a $2.1 million gain due to the mark to market of the company's hedging program for commodity and interest rate risk. The company also recorded a $3.9 million loss due to the impairment of undeveloped properties.

Most exploration and production companies report EBITDAX as an alternative non-GAAP financial measure. This is defined as net income before interest expense, taxes, depreciation, amortization and exploration expenses. This measure is sometimes tweaked further and reported as adjusted EBITDAX.

Goodrich Petroleum (NYSE:GDP) had a net loss of $1.4 million, or $0.04 per share in the second quarter of 2011. The company reported adjusted EBITDAX of $43.7 million after excluding the items above as well as some other items.

The Bottom Line
Investors should not overreact to a GAAP net loss and instead must research further to see what caused the reported loss. This does not mean blindly accepting non-GAAP measures like adjusted EBITDAX that are presented by companies as alternative measures since these are designed to present the company's financial performance in a more positive light. (For additional reading, take a look at A Guide To Investing In Oil Markets.)

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