Page 1
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the quarterly period ended
March 31, 1998
Commission File Number 1-12322
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SABA PETROLEUM COMPANY
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(Exact name of registrant as specified in its charter)
Delaware 47-0617589
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3201 Airpark Drive, Suite 201
Santa Maria, CA 93455
(Address of principal executive offices)
Registrant's telephone number, including area code: (805) 347-8700
Indicate by check mark whether the registrant (1) filed all reports required to
be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days.
YES X NO_____
At May 11, 1998, 11,027,393 shares of Common Stock, $.001 par value, were
outstanding.
SABA PETROLEUM COMPANY AND SUBSIDIARIES
CONTENTS
Page(s)
PART I. - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of March 31, 1998
(Unaudited) and December 31, 1997 3
Condensed Consolidated Statements of Operations for the
Three Months Ended March 31, 1998 and 1997 (Unaudited) 4
Condensed Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 1998 and 1997 (Unaudited) 5
Notes to Condensed Consolidated Financial Statements (Unaudited) 6 - 11
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12 - 20
PART II. - OTHER INFORMATION
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 21
SIGNATURES 22
PART I - FINANCIAL INFORMATION
SABA PETROLEUM COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, December 31,
1998 1997
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $ 317,902 $ 1,507,641
Accounts receivable, net of allowance for doubtful
accounts of $72,000 (1998) and $69,000 (1997) 5,704,157 6,459,074
Other current assets 4,166,540 4,589,501
----------------------- ------------------------
----------------------- ------------------------
Total current assets 10,188,599 12,556,216
----------------------- ------------------------
----------------------- ------------------------
Property and equipment (Note 4):
Oil and gas properties (full cost method) 79,205,396 76,562,279
Land, plant and equipment 9,004,519 8,368,405
----------------------- ------------------------
----------------------- ------------------------
88,209,915 84,930,684
Less accumulated depletion and depreciation (35,013,745) (22,325,276)
----------------------- ------------------------
----------------------- ------------------------
Total property and equipment 53,196,170 62,605,408
----------------------- ------------------------
----------------------- ------------------------
Other assets 2,341,038 2,495,322
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======================= ========================
$ 65,725,807 $ 77,656,946
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======================= ========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 10,598,799 $ 10,104,519
Income taxes payable 998,995 733,887
Current portion of long-term debt 26,943,731 13,441,542
----------------------- ------------------------
----------------------- ------------------------
Total current liabilities 38,541,525 24,279,948
Long-term debt, net of current portion (Note 4) 5,855,725 19,609,855
Other liabilities and deferred taxes 186,293 862,999
Minority interest in consolidated subsidiary 751,024 752,570
Preferred stock - $.001 par value, authorized
50,000,000 shares; issued and
outstanding 10,000 shares 8,661,450 8,511,450
Commitments and contingencies (Note 6)
Stockholders' equity:
Common stock - no par value, authorized
150,000,000 shares; issued and outstanding
10,967,393 (1998) and 10,883,908 (1997) shares 10,967 10,884
Capital in excess of par value 16,759,966 17,321,680
Retained earnings (deficit) (4,966,209) 7,200,292
Unearned compensation (803,000)
-
Cumulative translation adjustment (74,934) (89,732)
----------------------- ------------------------
----------------------- ------------------------
Total stockholders' equity 11,729,790 23,640,124
----------------------- ------------------------
----------------------- ------------------------
$ 65,725,807 $ 77,656,946
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SABA PETROLEUM COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended March 31, 1998 and 1997
(Unaudited)
1998 1997
----- ----
Revenues:
Oil and gas sales $ 6,109,831 $ 9,668,592
Other 363,638 (105,118)
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----------------------- -------------------
Total revenues 6,473,469 9,563,474
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----------------------- -------------------
Expenses:
Production costs 3,704,877 4,245,210
General and administrative 1,622,802 926,422
Depletion, depreciation and amortization 2,019,409 1,586,960
Writedown of oil and gas properties 10,700,000
-
----------------------- -------------------
----------------------- -------------------
Total expenses 18,047,088 6,758,592
----------------------- -------------------
----------------------- -------------------
Operating income (loss) (11,573,619) 2,804,882
----------------------- -------------------
----------------------- -------------------
Other income (expense):
Other 56,010 203,439
Interest expense (727,210) (390,800)
----------------------- -------------------
----------------------- -------------------
Total other income (expense) (671,200) (187,361)
----------------------- -------------------
----------------------- -------------------
Income (loss) before income taxes (12,244,819) 2,617,521
Provision (benefit) for taxes on income (loss) (221,618) 1,087,509
Minority interest in earnings (loss) of
consolidated subsidiary (6,701) 88,430
----------------------- -------------------
----------------------- -------------------
Net income (loss) $ (12,016,500) $ 1,441,582
======================= ===================
======================= ===================
Comprehensive income (loss) $ (12,001,702) $ 1,418,358
======================= ===================
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Net earnings (loss) per common share:
Basic $ (1.11) $ 0.14
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======================= ===================
Diluted $ (1.11) $ 0.12
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Weighted average common shares outstanding:
Basic 10,917,991 10,442,356
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======================= ===================
Diluted 10,917,991 12,017,860
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SABA PETROLEUM COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31, 1998 and 1997
(Unaudited)
1998 1997
---- ----
Cash flows from operating activities:
Net income (loss) $ (12,016,500) $ 1,441,582
Adjustments to reconcile net income (loss) to net cash
provided by operations:
Depletion, depreciation and amortization 2,019,409 1,586,960
Writedown of oil and gas properties 10,700,000
-
Deferred tax benefit (685,550)
-
Compensation expense attributable to issuance of Common
Stock options and shares of Common Stock 137,977
-
Minority interest in earnings (loss) of consolidated subsidiary (6,701) 88,430
Gain on issuance of shares of subsidiary (5,533)
-
Changes in:
Accounts receivable 759,147 458,035
Other assets 320,531 340,271
Accounts payable and accrued liabilities 748,505 2,638,402
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----------------------- -----------------
Net cash provided by operating activities 1,976,818 6,548,147
----------------------- -----------------
----------------------- -----------------
Cash flows from investing activities:
Expenditures for property and equipment (2,854,204) (5,826,396)
----------------------- -----------------
----------------------- -----------------
Net cash used in investing activities (2,854,204) (5,826,396)
----------------------- -----------------
----------------------- -----------------
Cash flows from financing activities:
Proceeds from notes payable and long-term debt 4,551,129
-
Principal payments on notes payable and long-term debt (618,040) (5,490,159)
Decrease in notes receivable 222,406 89,223
Net proceeds from exercise of Common Stock options 82,500 130,000
----------------------- -----------------
----------------------- -----------------
Net cash used in financing activities (313,134) (719,807)
----------------------- -----------------
----------------------- -----------------
Effect of exchange rate changes on cash and cash equivalents (2,536)
781
----------------------- -----------------
----------------------- -----------------
Net decrease in cash (1,189,739) (592)
Cash at beginning of period 1,507,641 734,036
----------------------- -----------------
----------------------- -----------------
Cash at end of period $ 317,902 $ 733,444
======================= =================
SABA PETROLEUM COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Page 22
1. General
The accompanying unaudited condensed consolidated financial statements have been
prepared on a basis consistent with the accounting principles and policies
reflected in the financial statements for the year ended December 31, 1997 and
should be read in conjunction with the consolidated financial statements and
notes thereto included in the Company's 1997 Form 10-K. In the opinion of
management, the accompanying unaudited condensed consolidated financial
statements contain all adjustments (consisting of normal recurring accruals
only) necessary to present fairly the Company's consolidated financial position
as of March 31, 1998, and the consolidated results of operations for the three
month periods ended March 31, 1998 and 1997 and the consolidated cash flows for
the three month periods ended March 31, 1998 and 1997.
In June 1997, the Financial Accounting Standards Board issued FAS No. 130,
"Reporting Comprehensive Income." FAS No. 130 establishes standards for the
reporting and display of comprehensive income and its components in a full set
of general-purpose financial statements. The statement is effective for fiscal
years beginning after December 15, 1997. The Company adopted FAS No. 130 in
1998. Adoption of this statement did not have a material impact on the financial
statements of the Company for the three months ended March 31, 1998.
In June 1997, the Financial Accounting Standards Board issued FAS No. 131,
"Disclosure About Segments of an Enterprise and Related Information." FAS No.
131 establishes standards for reporting information about operating segments in
annual financial statements and requires that interim financial reports issued
to shareholders include selected information about reporting segments. The
statement is effective for fiscal years beginning after December 15, 1997. The
Company will adopt FAS No. 131 in 1998.
2. Statements of Cash Flows
Following is certain supplemental information regarding cash flows for the three
month periods ended March 31, 1998 and 1997:
1998 1997
---- ----
Interest paid $ 685,954 $ 313,676
============ =============
Income taxes paid $ 129,892 $ 234,459
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Non-cash investing and financing transactions:
Debentures in the principal amount of $24,000, less related costs of $3,108,
were converted into 5,485 shares of Common Stock during the three months ended
March 31, 1998.
The Company incurred credits to Stockholders' Equity in the amounts of $22,600
and $77,500 resulting from the issuance of fully vested stock options and
performance shares of Common Stock, respectively, to a consultant during the
three months ended March 31, 1998.
The quarterly dividend obligation of $150,000 on the Series A Preferred Stock
that was due and payable on March 31, 1998 was settled by an increase to that
issue's Conversion Amount.
Options to acquire 125,000 shares of Common Stock issued to a consultant in May
1997 resulted in deferred compensation expense of $909,000. Of this amount,
$106,000 was reported as compensation expense during the year ended December 31,
1997. The options were cancelled in March 1998, resulting in a credit to
Stockholders' Equity in the amount of $37,877 and a reduction of deferred
compensation expense in the amount of $765,123 during the three months ended
March 31, 1998.
Fee interest in an oil property owned by the Company was acquired by
seller-provided financing in the amount of $375,000 during the three months
ended March 31, 1998.
Cumulative foreign currency translation gains (losses) of $19,172 and ($25,760)
were recorded during the three month periods ended March 31, 1998 and 1997,
respectively.
Debentures in the principal amount of $1,992,000, less related costs of
$155,122, were converted into 455,295 shares of Common Stock during the three
months ended March 31, 1997.
3. Oil and Gas Properties
The Company periodically reviews the carrying value of its oil and gas
properties in accordance with requirements of the full cost method of
accounting. Under these rules, capitalized costs of oil and gas properties may
not exceed the present value of estimated future net revenues from proved
reserves, discounted at 10%, plus the lower of cost or fair market value of
unproved properties ("ceiling"). Application of this ceiling test generally
requires pricing future revenue at the unescalated prices in effect as of the
end of each fiscal quarter and requires a writedown for accounting purposes if
the ceiling is exceeded. At March 31, 1998, the capitalized costs for the United
States cost center exceeded the calculated ceiling amount by approximately $10.7
million, resulting in a charge against operations of that amount.
4. Long-Term Debt
Long-term debt consists of the following at March 31, 1998:
9% convertible senior subordinated debentures - due 2005 $ 3,575,000
Revolving loan agreement with a bank 17,100,000
Term loan agreements with a bank 8,661,769
Demand loan agreement with a bank 2,239,752
Capital lease obligations 499,571
Promissory note 348,364
Term loan with a bank 375,000
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32,799,456
Less current portion 26,943,731
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$ 5,855,725
===================
On December 26, 1995, the Company issued $11,000,000 of 9% convertible senior
subordinated debentures ("Debentures") due December 15, 2005. On February 7,
1996, the Company issued an additional $1,650,000 of Debentures pursuant to the
exercise of an over-allotment option by the underwriting group. The Debentures
are convertible into Common Stock of the Company, at the option of the holders
of the Debentures, at any time prior to maturity at a conversion price of $4.38
per share, subject to adjustment in certain events. The Company has reserved
3,000,000 shares of its Common Stock for the conversion of the Debentures. The
principal use of proceeds from the sale of the Debentures was to retire
short-term indebtedness incurred by the Company in connection with its
acquisitions of producing oil and gas properties in Colombia. A portion of the
proceeds was used to reduce the balance outstanding under the Company's
revolving credit agreement.
Debentures in the amount of $9,051,000 had been converted into 2,068,728 shares
of Common Stock as of December 31, 1997. An additional $24,000 of Debentures
were converted into 5,485 shares of Common Stock during the three months ended
March 31, 1998.
The revolving loan ("Agreement") is subject to semi-annual redeterminations and
is presently scheduled to convert to a three-year term loan on July 1, 1999.
Funds advanced under the facility are collateralized by substantially all of the
Company's U.S. oil and gas producing properties and the common stock of its
principal subsidiaries. The Agreement also provides for a second borrowing base
term loan of which $3.4 million was borrowed for the purpose of development of
oil and gas properties in California, with the outstanding balance ($3.0
million) at March 31, 1998, due April 30, 1998. At March 31, 1998, the borrowing
bases for the two loans were $17.1 million and $3.0 million, respectively.
Interest on the two loans is payable at the prime rate plus 0.25%, or LIBOR rate
pricing options plus 2.25%. The weighted average interest rate for borrowings
outstanding under the loans at March 31, 1998 was 7.9%. The Agreement requires,
among other things, that the Company maintain at least a 1 to 1 working capital
ratio, stockholders' equity of $18.0 million, a ratio of cash flow to debt
service of not less than 1.25 to 1.0 and general and administrative expenses at
a level not greater than 20% of revenue, all as defined in the Agreement.
Additionally, the Company is restricted from paying dividends and advancing
funds in excess of specified limits to affiliates. On March 30, 1998, the
Agreement was amended to provide for deferrals of borrowing base reductions in
the amount of $542,000 per month for a period of three months.
In September 1997, the Company borrowed $9.7 million from its principal
commercial lender to finance the acquisition cost of a producing oil and gas
property. Interest is payable at the prime rate (8.5% at March 31, 1998) plus
3.0%. On December 31, 1997, a principal payment in the amount of $7.0 million
was made reducing the outstanding balance to $2.7 million due April 30, 1998.
In November 1997 the Company established a term loan ($3.0 million) with its
principal commercial lender. Interest is payable at the prime rate (8.5% at
March 31, 1998) plus 3.0%, with the outstanding balance ($3.0 million) at March
31, 1998, due April 30, 1998. Payment of this loan is personally guaranteed by
the Company's Chief Executive Officer.
Loans in the aggregate principal amount of $8.7 million that matured on April
30, 1998, were neither paid nor extended. Based on the events described above,
the entire principal indebtedness to the bank ($25.8 million) has been
classified as currently payable at March 31, 1998.
The Company's Canadian subsidiary has available a demand revolving reducing loan
in the face amount of $2.8 million. Interest is payable at a variable rate equal
to the Canadian prime rate plus 0.75% per annum (7.25% at March 31, 1998). The
loan is collateralized by the subsidiary's oil and gas producing properties, and
a first and fixed floating charge debenture in the principal amount of $3.6
million over all assets of the company. The borrowing base reduces at the rate
of $56,000 per month. In accordance with the terms of the loan agreement,
$676,000 of the loan balance is classified as currently payable at March 31,
1998. Although the bank can demand payment in full of the loan at any time, it
has provided a written commitment not to do so except in the event of default.
The Company leases certain equipment under agreements that are classified as
capital leases. Lease payments vary from three to four years. The effective
interest rate on the total amount of capitalized leases at March 31, 1998 was
8.8%.
The promissory note ($348,364) is due to the seller of an oil and gas property,
which was acquired by the Company in December 1997. The note bears interest at
the rate of 13.5%, and is classified as a current liability.
The promissory note ($375,000) is due to the seller of a fee interest in
property in which the Company owns mineral interests. The note bears interest at
the rate of 9.5%, is scheduled for repayment in monthly installments to a
maturity date of February 2001, and is collateralized by the fee interest
acquired by the Company.
5. Common Stock and Stock Options
In March 1998, the Company issued options to acquire 30,000 shares of Common
Stock to a consultant. The options have an exercise price equal to the market
value at date of grant and are fully vested. The Company recognized compensation
expense of $22,600 in the three months ended March 31, 1998, attributable to the
option grant.
In March 1998, the Company issued 20,000 performance shares of Common Stock to a
consultant and recognized compensation expense of $77,500 in the three months
ended March 31, 1998.
As of March 31, 1998, the Company had outstanding options to acquire 490,000
shares of Common Stock to certain employees of the Company. These options, which
are not covered by the Incentive Equity Plan, become exercisable ratably over a
period of five years from the date of issue. The exercise price of the options,
which ranges from $1.25 to $4.38, is the fair market value of the Common Stock
at the date of grant. There is no contractual expiration date for exercise of a
portion of these options. Options to acquire 58,000 shares of Common Stock were
exercised during the three months ended March 31, 1998. Options to acquire
338,000 shares of Common Stock were exercisable at March 31, 1998.
On May 30, 1997, the Company issued options to acquire 470,000 and 125,000
shares of Common Stock to certain employees and a consultant, respectively, in
accordance with the provisions of the 1996 Incentive Equity Plan. Options to
acquire 22,500 shares of Common Stock granted to certain employees were
subsequently cancelled. The options have an exercise price equal to the market
value at date of grant and become exercisable over various periods ranging from
two to five years from the date of grant. No options were exercised as of March
31, 1998. The Company recognized deferred compensation expense of $909,000 in
the year ended December 31, 1997, resulting from the grant to the consultant. Of
this amount, $106,000 was reported as compensation expense during the year ended
December 31, 1997, and an additional $37,877 was reported as compensation
expense during the three months ended March 31, 1998. The option grant was
cancelled in March 1998, and the unamortized portion of deferred compensation
expense was reversed from the applicable accounts.
In May 1997, the Company's stockholders approved the Company's 1997 Stock Option
Plan for Non-Employee Directors (the "Directors Plan"), which provided that each
non-employee director shall be granted, as of the date such person first becomes
a director and automatically on the first day of each year thereafter for so
long as he continues to serve as a non-employee director, an option to acquire
3,000 shares of the Company's Common Stock at fair market value at the date of
grant. For as long as the director continues to serve, the option shall vest
over five years at the rate of 20% per year on the first anniversary of the date
of grant. Subject to shareholder approval, the Board of Directors increased the
number of shares of the Company's Common Stock subject to option from 3,000 to
15,000 vesting 20% per year. Subject to certain adjustments, a maximum of
250,000 options to purchase shares (or shares transferred upon exercise of
options received) may be outstanding under the Directors Plan. At March 31,
1998, a total of 45,000 options had been granted under the Directors Plan.
6. Contingencies
The Company is subject to extensive Federal, state, and local environmental laws
and regulations. These requirements, which change frequently, regulate the
discharge of materials into the environment. The Company believes that it is in
compliance with existing laws and regulations.
Environmental Contingencies
Pursuant to the purchase and sale agreement of an asphalt refinery in Santa
Maria, California, the sellers agreed to perform certain remediation and other
environmental activities on portions of the refinery property for a five year
period to June 1999. Because the purchase and sale agreement contemplates that
the Company might also incur remediation obligations with respect to the
refinery, the Company engaged an independent consultant to perform an
environmental compliance survey for the refinery. The survey did not disclose
required remediation in areas other than those where the sellers are responsible
for remediation, but did disclose that it was possible that all of the required
remediation may not be completed in the five-year period. Should the sellers not
complete the work during the five-year period, because of uncertainties in the
language of the agreement, there is some risk that a court could interpret the
agreement to shift the burden of remediation to the Company. The Company,
however, believes that all required remediation will be completed by the sellers
within the five-year period. Environmental compliance surveys such as those the
Company has had performed are limited in their scope and should not be expected
to disclose all environmental contamination as may exist.
In accordance with the Articles of Association for the Cocorna Concession, the
Concession expired during the quarter ended March 31, 1997, and the property
interest reverted to Ecopetrol. The property is presently under operation by
Ecopetrol. Under the terms of the acquisition of the Concession, the Company and
the operator were required to perform various environmental remedial operations,
which the operator advises have been substantially, if not wholly, completed.
The Company and the operator are awaiting an inspection of the Concession area
by Colombian officials to determine whether the government concurs with the
operator's conclusions. Based upon the advice of the operator, the Company does
not anticipate any significant future expenditures associated with the
environmental requirements for the Cocorna Concession.
In 1993, the Company acquired a producing mineral interest in California from a
major oil company ("Seller"). At the time of acquisition, the Company's
investigation revealed that the Seller had suffered a discharge of diluent (a
light oil based fluid which is often mixed with heavier grade crudes). The
purchase agreement required the Seller to remediate the area of the diluent
spill. After the Company assumed operation of the property, the Company became
aware of the fact that diluent was seeping into a drainage area, which traverses
the property. The Company took action to eliminate the fluvial contamination and
requested that the Seller bear the cost of remediation. The Seller has taken the
position that its obligation is limited to the specified contaminated area and
that the source of the contamination is not within the area that the Seller has
agreed to remediate. The Company has commenced an investigation into the source
of the contamination to ascertain whether it is physically part of the area
which the Seller agreed to remediate or is a separate spill area. Investigation
and discussions with the Seller are ongoing. Should the Company be required to
remediate the area itself, the cost to the Company could be significant. The
Company has spent approximately $240,000 to date in remediation activities, and
present estimates are that the cost of complete remediation could approach $1.0
million. Since the investigation is not complete, an accurate estimate of cost
cannot be made.
In 1995, the Company agreed to acquire, for less than $50,000, an oil and gas
interest in California on which a number of oil wells had been drilled by the
seller. None of the wells were in production at the time of acquisition. The
acquisition agreement required that the Company assume the obligation to abandon
any wells that the Company did not return to production, irrespective of whether
certain consents of third parties necessary to transfer the property to the
Company would be obtained. The Company was unable to secure all of the requisite
consents to transfer the property but nevertheless may have the obligation to
abandon the wells. The leases have expired and the Company is presently
considering whether to attempt to secure new leases. The Company has been unable
to determine its exposure to third parties if the Company elects to plug and
abandon such wells without first obtaining necessary consents. A preliminary
estimate of the cost of abandoning the wells and restoring the well sites is
approximately $800,000.
The Company, as is customary in the industry, is required to plug and abandon
wells and remediate facility sites on its properties after production operations
are completed. There can be no assurance that material costs for remediation or
other environmental compliance will not be incurred in the future. The
incurrence of such environmental compliance costs could be materially adverse to
the Company.
7. Subsequent Event
Approximately $8.7 million in principal amount of bank debt matured for payment
on April 30, 1998. The Company and its bank were in discussions to restructure
the terms of the loan agreement and extend the maturities of the short-term
loans to a time which would accommodate the proposed business combination with
Omimex provided that a $2.0 million payment was made on April 30, 1998 and a
definitive agreement with Omimex was executed. The definitive agreement with
Omimex has not as yet been concluded and the Company was unable to make the $2.0
million payment. Therefore, no extension was secured and the $8.7 million of
principal indebtedness remains due and payable. The Company is continuing its
discussions with the bank in an attempt to restructure the indebtedness and is
continuing its discussions with Omimex to negotiate a definitive agreement. The
bank has not declared the loan in default by giving notice to the Company as
required pursuant to the terms of the loan agreement.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion should be read in conjunction with the condensed
consolidated financial statements of the Company and notes thereto, included
elsewhere herein.
Overview
The Company is an independent energy company engaged in the acquisition,
exploration and development of oil and gas properties. To date, the Company has
grown primarily through the acquisition of producing properties with significant
exploration and development potential in the United States, Colombia and Canada.
This strategy has enabled the Company to assemble a significant inventory of
properties over the past five years. The Company's strategy has expanded to
emphasize growth through exploration and development drilling.
The Company's revenues are primarily comprised of oil and gas sales attributable
to properties in which the Company owns a majority or substantial interest. The
Company accounts for its oil and gas producing activities under the full cost
method of accounting. Accordingly, the Company capitalizes, in separate cost
centers, all costs incurred in connection with the acquisition of oil and gas
properties and the exploration for and development of oil and gas reserves. The
Company's financial statements have been consolidated to reflect the operations
of its subsidiaries, including the Company's approximate 74% ownership interest
in Beaver Lake Resources Corporation, a Canadian public company.
The Company's operating performance is influenced by several factors, the most
significant of which are the price received for its oil and gas and the
Company's production volumes. The price received by the Company for its oil
produced in North America is influenced by the world price for crude oil, as
adjusted for the particular grade of oil. The oil produced from the Company's
California properties is predominantly a heavy grade of oil, which is typically
sold at a discount to lighter oil. The oil produced from the Company's Colombian
properties is predominantly a heavy grade of oil. The prices received by the
Company for its Colombian produced oil are determined based on formulas set by
Ecopetrol. Additional factors influencing operating performance include
production expenses, overhead requirements, the Company's method of depleting
reserves, and cost of capital.
Possible Business Combination
In early 1998, the Board of Directors of the Company engaged CIBC-Oppenheimer,
Inc. ("Oppenheimer"), an investment banking firm, to explore ways to enhance
shareholder values. This engagement was prompted by several factors,
predominately the declining price of Common Stock and the lack of working
capital available to the Company. In March 1998, Oppenheimer presented the Board
with its recommendations, which included exploring a possible business
combination of the Company with another oil and gas company. In March 1998, the
Company achieved a preliminary agreement with Omimex Resources, Inc., a
privately held Fort Worth, Texas oil and gas company ("Omimex") which operates a
substantial portion of the Company's producing properties, to enter into a
business combination. At this time, all of the details of the business
combination have not been fully negotiated. However, it is intended that all of
the assets of the Company, except possibly for its California operations, would
be combined with the assets of Omimex, with the Company being the surviving
corporation. The economic terms of the transaction include issuing Common Stock
to the shareholders of Omimex on a basis proportionate to the respective net
asset values of the two companies, determined by replacing the property accounts
on the respective balance sheets with the present value, calculated at a ten
percent discount, of the proved reserves of the apposite company and adjusting
that number for other assets and liabilities. Credit is to be given for oil and
gas properties deemed to have exploration or development potential. Should a
definitive agreement be obtained and the combination consummated, it is expected
that the Company will issue Common Stock to the holders of Omimex stock
resulting in such holders owning in the range of sixty percent of the then
outstanding Common Stock. Management of Omimex would become management of the
Company, which would be headquartered in Fort Worth, Texas. The Company's
California operations, if excluded from the transaction, may be sold or combined
into an existing subsidiary, the shares of which would be distributed
proportionately to the Company's shareholders. Consummation of the transaction
would require the consent of the holders of the Company's 9% Convertible Senior
Subordinate Debentures due 2005 ("the Debentures"), the consent of the holders
of the Company's Series A Convertible Preferred Stock ("Series A Preferred
Stock"), shareholder approval, various governmental approvals and agreement on
various matters which are yet unresolved.
Acquisition, Exploration and Development
Drilling activity during the quarter ended March 31, 1998, consisted of the
drilling and completion of four gross (1.0 net) development oil wells in
Colombia. On March 9, 1998, drilling commenced on an exploratory prospect in
Glenn County, California, in which the Company will earn a 20% working interest
if the well is commercial. At March 31, 1998, the drilled depth was at
approximately 6,000 feet with a scheduled total depth of approximately 8,250
feet.
On April 9, 1998, the Company completed the acquisition of additional working
interests from one of the joint interest partners in the two Louisiana
properties that had been acquired by the Company in 1996 and 1997. Consideration
for the two acquisitions consisted of the assumption of indebtedness owed to the
Company as a result of the original purchases, and the issuance of 200,000
shares of Common Stock. As a result of the acquisitions, the Company now owns a
50.73% working interest in the Manila Village property, and a 100.0% working
interest in the Potash Field.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
Results of Oil and Gas Producing Operations
Results of the Company's oil and gas producing activities for the three month
periods ended March 31, 1998 and 1997, are as follows:
Three Months Ended March 31, 1998 United
- ---------------------------------
Total States Canada Colombia
----------------- ---------------- ---------------- -----------------
Oil and gas sales $ 6,109,831 $ 3,668,143 $ 432,453 $ 2,009,235
Production costs $ 3,704,877 $ 2,490,011 $ 184,924 $ 1,029,942
Depletion $ 1,838,648 $ 1,542,600 $ 108,848 $ 187,200
General and administrative expenses $ 1,527,753 $ 1,334,258 $ 138,318 $ 55,177
Oil volume (Bbls) 489,965 256,152 20,140 213,673
Gas volume (Mcf) 744,294 574,001 170,293
-
Barrels of oil equivalent (BOE) 614,013 351,818 48,522 213,673
Average per BOE:
Sales price $ 9.95 $ 10.43 $ 8.91 $ 9.40
Production costs $ 6.03 $ 7.08 $ 3.81 $ 4.82
Depletion $ 2.99 $ 4.38 $ 2.24 $ 0.88
General and administrative expenses $ 2.49 $ 3.79 $ 2.85 $ 0.26
Three Months Ended March 31, 1997 United
- ---------------------------------
Total States Canada Colombia
----------------- ---------------- ---------------- -----------------
Oil and gas sales $ 9,668,592 $ 5,623,441 $ 737,230 $ 3,307,921
Production costs $ 4,245,210 $ 2,318,381 $ 223,262 $ 1,703,567
Depletion $ 1,450,049 $ 855,914 $ 69,102 $ 525,033
General and administrative expenses $ 892,331 $ 754,477 $ 101,672 $ 36,182
Oil volume (Bbls) 534,459 258,609 27,674 248,176
Gas volume (Mcf) 563,630 396,426 167,204
-
Barrels of oil equivalent (BOE) 628,397 324,680 55,541 248,176
Average per BOE:
Sales price $ 15.39 $ 17.32 $ 13.27 $ 13.33
Production costs $ 6.76 $ 7.14 $ 4.02 $ 6.86
Depletion $ 2.31 $ 2.64 $ 1.24 $ 2.12
General and administrative expenses $ 1.42 $ 2.32 $ 1.83 $ 0.15
Results of Refining Operations:
In June 1995, the Company entered into a processing agreement with an
unaffiliated company pursuant to which the latter company purchases crude oil
(including that produced by the Company), delivers the crude oil to the
Company's refinery, reimburses the Company's out of pocket costs for refining,
then markets the asphalt and other refinery products. Profits from the refinery
operations (computed after recovery of crude oil costs and other costs of
operations) are generally shared equally by the Company and the unaffiliated
company. The processing agreement has a term that ends December 31, 1998, and
the Company does not intend to renew the arrangement on its present terms. The
Company may negotiate an alternative arrangement with the other company or may
assume complete responsibility for the services currently provided by the other
company, including marketing and financing of working capital for crude oil
purchases, operating expenses, asphalt inventory and accounts receivable.
Processing operations for the three month periods ended March 31, 1998 and 1997
are as follows:
1998 1997
---- ----
Crude oil throughput (Bbls) 345,241 285,000
Production:
Asphalt (tons) 38,228 32,000
Other products (Bbls) 131,166 105,000
Sales:
Asphalt (tons) 10,061 25,000
Other products (Bbls) 159,044 91,000
Processing fee income $ 50,616 $ -
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
The asphalt refining business is seasonal in nature, and is influenced by
several factors, including weather conditions in the marketing area. A majority
of the Company's processing fee income is attributable to asphalt sales which
are recorded during the period April to October.
1998 compared to 1997
Oil and Gas Sales
Oil and gas sales decreased 37.1% to $6.1 million for the three month period
ended March 31, 1998, from $9.7 million for the three month period ended March
31, 1997. Average sales price per BOE decreased 35.3% to $9.95 for the three
month period ended March 31, 1998, from $15.39 per BOE for the same period in
1997.
In the United States, production from the Company's mid-continent properties
increased 52.6%, to 125,900 BOE for the three month period ended March 31, 1998,
from 82,500 BOE for the same period in 1997. The increase was primarily
attributable to the Company's property acquisitions in Louisiana in November
1996 and September 1997. Average sales price per BOE decreased 35.2% to $12.59
in 1998 from $19.44 in 1997. As a result of the production increase and the
price decrease, oil and gas sales from these properties were unchanged at $1.6
million. Production volumes from the Company's Michigan properties were
unchanged; however, average sales price per BOE decreased 36.9% to $12.72 in
1998 from $20.15 in 1997, resulting in a 36.8% decrease in oil and gas sales to
$486,000 in 1998 from $769,000 in 1997. Production from the Company's California
properties decreased 7.9% to 187,800 BOE in 1998 from 204,000 BOE in 1997.
Severe weather conditions resulting in flooding and loss of electrical power
hampered production during the three month period ended March 31, 1998,
resulting in a decrease in production of approximately 29,000 BOE. Average sales
price per BOE decreased 46.6% to $8.51 in 1998 from $15.93 in 1997. The
decreases in production and sales price per BOE resulted in a 51.5% decrease in
oil and gas sales to $1.6 million in 1998 from $3.3 million in 1997.
In Canada, production decreased 12.6% to 48,500 BOE in 1998 from 55,500 BOE in
1997, and sales price per BOE decreased 32.9% to $8.91 in 1998 from $13.27 in
1997, resulting in a 41.4% decrease in oil and gas sales to $432,000 in 1998
from $737,000 in 1997.
Production from the Company's Colombia properties decreased 13.8% to 213,700 BOE
in 1998, from 248,000 BOE in 1997. Of this decrease, approximately 20,000 BOE
was attributable to reversion of the Cocorna Concession property in February
1997; the remainder was due to normal production declines partially offset by
production resulting from the development drilling program that began in May
1997. Sales price per BOE decreased 29.5% to $9.40 in 1998 from $13.33 in 1997.
The decreases in production and sales price per BOE resulted in a 39.4% decrease
in oil and gas sales to $2.0 million in 1998 from $3.3 million in 1997.
Other Revenues
Other revenues increased 446.7% to $364,000 for the three month period ended
March 31, 1998, from a loss of $105,000 for the same period in 1997. The
increase was due primarily to additional Velasquez-Galan Pipeline operating
expenses in the amount of $414,000 which were invoiced to the Company by the
facility's operator in the first quarter of the year 1997.
Production Costs
Production costs decreased 11.9% to $3.7 million for the three month period
ended March 31, 1998, from $4.2 million for the same period in 1997. Average
production costs per BOE decreased 10.8%, to $6.03 in 1998 from $6.76 in 1997.
In the United States, production increased 8.2%, to 351,800 BOE for the three
month period ended March 31, 1998, from 325,000 BOE for the same period in 1997.
Production costs per BOE decreased 0.8%, to $7.08 in 1998 from $7.14 in 1997.
The increase in production volume and decrease in production costs per BOE
resulted in a 8.7% increase in production costs to $2.5 million in 1998 from
$2.3 million in 1997.
In Canada, production decreased 12.6%, to 48,500 BOE in 1998 from 55,500 BOE in
1997. Production costs per BOE decreased 5.2% to $3.81 in 1998 from $4.02 in
1997. The decreases in production and production costs per BOE resulted in a
17.0% decrease in production costs to $185,000 in 1998 from $223,000 in 1997.
In Colombia, production decreased 13.7%, to 214,000 BOE in 1998 from 248,000 BOE
in 1997. Production costs per BOE decreased 29.7%, to $4.82 in 1998 from $6.86
in 1997. The decreases in production and production costs per BOE resulted in a
41.1% decrease in production costs, to $1.0 million in 1998 from $1.7 million in
1997.
General and Administrative Expenses
General and administrative expenses increased 72.8% to $1.6 million for the
three month period ended March 31, 1998, from $926,000 for the same period of
1997. The overall increase in general and administrative expenses was due
principally to the increase in employment in the Company's domestic offices to
support its scheduled oil and gas property drilling programs and expected levels
of operations.
Depletion, Depreciation and Amortization
Depletion, depreciation and amortization expenses increased 25.0% to $2.0
million for the three month period ended March 31, 1998, from $1.6 million for
the same period of 1997. Depletion expense increased 20.0% to $1.8 million for
the three month period ended March 31, 1998, from $1.5 million for the same
period of 1997. The increase was primarily attributable to domestic production
volume increases for the three month period ended March 31, 1998, and capital
costs recorded by the Company in its full cost pools and anticipated future
development and abandonment costs to be incurred in connection with the
management of its oil and gas properties. Depreciation and amortization expenses
increased 39.2%, to $181,000 for the three month period ended March 31, 1998,
from $130,000 for the same period of 1997.
Writedown of Oil and Gas Properties
The Company incurred a cost center ceiling writedown in the amount of $10.7
million attributable to its United States cost center in the three month period
ending March 31, 1998. During the period the price of West Texas Intermediate
crude oil decreased 14.5% to $13.25 per barrel at March 31, 1998, from $15.50
per barrel at December 31, 1997. Application of March 31, 1998, oil prices to
the Company's predominantly heavy oil reserves, which sell at a discount to
higher gravity oil, resulted in a significant reduction to the present value of
future net revenues at that date.
Other Income (Expense)
Other income (expense) decreased 72.4% to income of $56,000 for the three month
period ended March 31, 1998, from income of $203,000 for the same period of
1997. The change was primarily due to non-recurring gains realized by the
Company in the three month period ended March 31, 1997.
Interest Expense
Interest expense increased 85.9% to $727,000 for the three month period ended
March 31, 1998, from $391,000 for the same period of 1997. The change was
principally due to a 116.8% increase in borrowings from the Company's principal
commercial lender to $25.8 million at March 31, 1998, from $ 11.9 million at
March 31, 1997, resulting from loan proceeds used to fund a property acquisition
and development drilling activities. The weighted average interest rate for such
indebtedness increased 22 basis points, to 8.71% at March 31, 1998, from 8.49%
at March 31, 1997.
Provision (Benefit) for Taxes on Income (Loss)
The Company recorded a net tax benefit of $222,000 for the three month period
ended March 31, 1998 due to an operating loss for that period, and a tax
provision of $1.1 million for the three month period ended March 31, 1997.
Net Income (Loss)
Net income (loss) decreased to a loss of $12.0 million for the three month
period ended March 31, 1998, from net income of $1.4 million for the same period
of 1997. The decrease reflects the changes in oil and gas sales, other revenues,
production costs, general and administrative expenses, depletion, depreciation
and amortization expenses, writedown of oil and gas properties, interest
expense, other income (expense) and provision (benefit) for taxes on income
(loss) discussed above.
The Company's oil and gas producing business is not seasonal in nature.
Liquidity and Capital Resources
Since 1991, the Company's strategy has emphasized growth through the acquisition
of producing properties with significant exploration and development potential.
The Company recently expanded its focus to emphasize drilling, enhanced recovery
methods and increased production efficiencies. During the past five years, the
Company financed its acquisitions and other capital expenditures primarily
through secured bank financing, the creation of joint interest operations and
production payment obligations, and sales of Common Stock, Preferred Stock and
the Debentures. During 1997, the Company's capital expenditures did not produce
expected increases in reserves, which, when coupled with the decline in oil and
gas prices, reduced the amount of reserves against which the Company could
borrow and the projected cash flow with which to service debt. The Company has a
working capital deficit due principally to the reclassification as a current
liability of the entire indebtedness with its principal commercial lender. In
connection with the contemplated business combination with Omimex Resources,
Inc., the Company is in discussions with its bank to arrange for an extension of
its debt to a date following the closing of the business combination. It is
expected that the bank debt of both companies will, following the merger, be
consolidated in one credit facility. Apart from these discussions, the Company
is negotiating the sale of certain non-core oil and gas assets and real estate
assets, the proceeds of which would be applied to reduce the bank loan and
provide working capital.
The Company's capital expenditure budget for 1998 is dependent upon the price
for which its oil and gas is sold and upon the ability of the Company to obtain
external financing. Subject to these variables, the Company has budgeted a
minimum of $12.0 million and a maximum of $18.3 million for 1998 capital
expenditures. As presently scheduled, the majority of these expenditures are to
commence during the second calendar quarter and continue throughout the
remainder of 1998. A significant portion of the capital expenditures budget is
discretionary. Due to the decline in oil prices during the first quarter of
1998, the Company deferred certain capital programs. The Company may elect to
make further deferrals of capital expenditures if oil prices remain at current
levels.
Summary cash flow information for the three month periods ended March 31, 1998
and 1997 is as follows:
1998 1997
---- ----
Net cash provided by operating activities $ 1,977,000 $ 6,548,000
Net cash used in investing activities $(2,854,000) $(5,826,000)
Net cash used in financing activities $( 313,000) $( 720,000)
Working Capital
The Company's working capital deficit increased $16.7 million to a deficit of
$28.4 million at March 31, 1998, from a deficit of $11.7 million at December 31,
1997. This decrease was primarily due to the reclassification as a current
liability of all of the Company's long-term debt with its principal commercial
lender. A net increase of $2.7 million in accounts payable, accrued liabilities
and income taxes payable over accounts receivable and cash balances during the
three month period ended March 31, 1998, was due primarily to costs incurred for
the Company's drilling and development activities and contributed to the
increase in the working capital deficit.
In that the current maturities of the Company's bank debt are in excess of the
Company's apparent ability to meet such obligations as they come due, the
Company's auditors have included an explanatory paragraph in their opinion on
the Company's 1997 financial statement to state that there is substantial doubt
as to the Company's ability to continue as a going concern. In the past, the
Company has demonstrated ability to secure capital through debt and equity
placements, and believes that, if given sufficient time, it will be able to
obtain the capital required to continue its operations. Further, the Company is
in negotiations to divest itself of certain of its non-core and gas assets and
possibly its real estate assets, with the proceeds of such divestitures to be
applied to reduction of its bank debt. There can be no assurance that the
Company will be successful in obtaining capital on favorable terms, if at all.
Additionally, there can be no assurance that the assets which are the present
object of the Company's divestitures efforts will be sold at prices sufficient
to reduce the bank debt to levels acceptable to the bank in order to allow for a
restructuring resulting in the elimination of the "Going Concern" opinion.
The Company is taking actions to address the working capital deficit. It is in
discussions with institutions to secure capital either by the placement of debt
or equity. Discussions have been held with the Company's principal lender to
restructure indebtedness to allow sufficient time for the contemplated business
combination to be concluded.
Operating Activities
The Company's operating activities during 1998 provided net cash flow of $2.0
million. Changes in the non-cash components of working capital were responsible
for $1.8 million of this amount.
Cash flows from operating activities provided net cash flow of $6.5 million in
1997.
Investing Activities
Investing activities during 1998, consisting of oil and gas property
acquisition, development and exploration expenditures, resulted in a net cash
outflow of $2.9 million.
Investing activities during 1997, consisting principally of oil and gas property
acquisition, development and exploration expenditures, resulted in a net cash
outflow of $5.8 million.
Financing Activities
Financing activities during 1998, consisting principally of payments on long
term debt, reduced by collections on notes receivable, resulted in net cash
outflow of $313,000.
Financing activities during 1997, which resulted in a net cash outflow of
$720,000, consisted principally of activity on the Company's revolving line of
credit.
Credit Facilities
In September 1993, the Company established a reducing, revolving line of credit
with Bank One, Texas, N.A. to provide funds for the retirement of a production
note payable, the retirement of other short-term fixed rate indebtedness and for
working capital. At March 31, 1998, the borrowing base under the revolving loan
was $17.1 million subject to a monthly reduction of $400,000, of which $17.1
million was outstanding.
The Company has a second borrowing base credit facility to fund development
projects in California. At March 31, 1998, $3.0 million was outstanding that
matured for payment on April 30, 1998. The payment was not made and the note
maturity was not extended. In September 1997, the Company borrowed $9.7 million
from Bank One, Texas, N.A. to fund the acquisition cost of the Potash Field
property. On December 31, 1997, a principal payment in the amount of $7.0
million was made, reducing the outstanding balance to $2.7 million, due on April
30, 1998. The payment was not made and the note maturity was not extended.
In November, 1997, the Company secured a short term loan in the face amount of
$3.0 million with Bank One, Texas, N.A. to be advanced in a series of tranches
as needed to fund working capital requirements. Amounts outstanding under the
loan bear interest at the rate of prime plus 3% and matured for payment on April
30, 1998. At March 31, 1998, the loan was fully advanced. The payment was not
made and the note maturity was not extended.
Pursuant to an amendment dated December 31, 1997, to the loan agreement with
Bank One, Texas N.A., the Company was required to make a payment of $3.0 million
in April 1998 and a minimum payment of $3.0 million in June 1998, in addition to
its scheduled monthly payments of principal and interest. On March 30, 1998, the
loan agreement with Bank One, Texas, N.A. was amended to provide for a deferral
of monthly reductions totaling $542,000 to the borrowing base loans for the
period February to April 1998. In addition, the previous requirement for a $3.0
million payment due April 1, 1998, was reduced to $2.0 million and the payment
was extended to April 30, 1998. This payment, which was to be applied to the
aggregate $8.7 million in debt due on April 30, 1998, has not been made.
Loans in the aggregate principal amount of $8.7 million that matured on April
30, 1998, were neither paid nor extended. Based on the events described above,
the entire principal indebtedness to the bank ($25.8 million) has been
classified as currently payable at March 31, 1998.
The Company's Canadian subsidiary has a demand revolving reducing loan in the
face amount of $2.8 million, that reduces at the rate of $56,000 per month. At
March 31, 1998, the loan was fully advanced with an outstanding balance of $2.2
million.
Safe Harbor for Forward-Looking Statements
Except for historical information contained herein, the statements in this
report are forward-looking statements that are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements involve known and unknown risks and uncertainties
which may cause the Company's actual results in future periods to differ
materially from forecasted results. These risks and uncertainties include, among
other things, volatility of oil prices, product demand, market competition,
risks inherent in the Company's international operations, including future
prices paid for oil produced at the Colombian oil properties, imprecision of
reserve estimates, and the Company's ability to replace and expand oil and gas
reserves. These and other risks are described elsewhere herein and in the
Company's other filings with the Securities and Exchange Commission.
PART II - OTHER INFORMATION
ITEM 5: OTHER INFORMATION
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
o Exhibits filed for the quarter ended March 31, 1998 are as follows:
EXHIBIT NUMBER DESCRIPTION
11.1 Computation of Earnings per Common Share
27.1 Financial Data Schedule
o Reports filed under Form 8-K during the quarter ended March 31, 1998 are as
follows:
FORM DATE FILING
Form 8-K January 16, 1998 Item 5. Other Material Events, including the
issuance of Series A Convertible Preferred Stock
and an amendment of the loan
agreement.
Form 8-K March 31, 1998 Item 5. Other Material Events, including the
proposed business combination with Omimex Resources, Inc.
SIGNATURES
In accordance with the requirements of the Exchange Act, the issuer caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
SABA PETROLEUM COMPANY
Date: May 20, 1998 By: /S/ Ilyas Chaudhary
-------------------
Ilyas Chaudhary
Chief Executive Officer
(Principal Executive
Officer)
Date: May 20, 1998 By: /S/ Walton C. Vance
------------------
Walton C. Vance
Chief Financial Officer
(Principal Financial and
Accounting Officer)