Page 2
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
June 30, 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 (IRS 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 August 14, 1998, 11,052,393 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 June 30, 1998
(Unaudited) and December 31, 1997 3
Condensed Consolidated Statements of Operations for the
Six and Three Month Periods Ended June 30, 1998 and 1997 (Unaudited) 4
Condensed Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 1998 and 1997 (Unaudited) 5
Notes to Condensed Consolidated Financial Statements (Unaudited) 6 - 12
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 13 - 23
PART II. - OTHER INFORMATION
Item 5. Other Information 24
Item 6. Exhibits and Reports on Form 8-K 24
SIGNATURES 25
SABA PETROLEUM COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
The accompanying notes are an integral part of these consolidated financial
statements
Page 5
June 30, December 31,
1998 1997
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $ 329,335 $ 1,507,641
Accounts receivable, net of allowance for doubtful
accounts of $72,000 (1998) and $69,000 (1997) 5,070,057 6,459,074
Other current assets 3,360,230 4,589,501
----------------------- -------------------------
----------------------- -------------------------
Total current assets 8,759,622 12,556,216
----------------------- -------------------------
----------------------- -------------------------
Property and equipment (Note 4):
Oil and gas properties (full cost method) 82,851,486 76,562,279
Land, plant and equipment 9,024,144 8,368,405
----------------------- -------------------------
----------------------- -------------------------
91,875,630 84,930,684
Less accumulated depletion and depreciation (43,253,743) (22,325,276)
----------------------- -------------------------
----------------------- -------------------------
Total property and equipment 48,621,887 62,605,408
----------------------- -------------------------
----------------------- -------------------------
Other assets 1,150,014 2,495,322
----------------------- -------------------------
======================= =========================
$ 58,531,523 $ 77,656,946
======================= =========================
======================= =========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 12,201,337 $ 10,104,519
Income taxes payable 1,215,191 733,887
Current portion of long-term debt 28,473,395 13,441,542
----------------------- -------------------------
----------------------- -------------------------
Total current liabilities 41,889,923 24,279,948
Long-term debt, net of current portion (Note 4) 5,565,121 19,609,855
Other liabilities and deferred taxes 1,199,068 862,999
Minority interest in consolidated subsidiary 682,461 752,570
Preferred stock - $.001 par value, authorized
50,000,000 shares; issued and outstanding
8,000 (1998) and 10,000 (1997) shares 7,049,170 8,511,450
Commitments and contingencies (Note 7)
Stockholders' equity:
Common stock - $.001 par value, authorized
150,000,000 shares; issued and outstanding
11,052,393 (1998) and 10,883,908 (1997) shares 11,052 10,884
Capital in excess of par value 16,971,131 17,321,680
Retained earnings (deficit) (14,684,751) 7,200,292
Unearned compensation (803,000)
-
Cumulative translation adjustment (151,652) (89,732)
----------------------- -------------------------
----------------------- -------------------------
Total stockholders' equity 2,145,780 23,640,124
----------------------- -------------------------
----------------------- -------------------------
$ 58,531,523 $ 77,656,946
======================= =========================
SABA PETROLEUM COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Six Months Three Months
Ended June 30, Ended June 30,
1998 1997 1998 1997
----- ----- ----- ----
Revenues:
Oil and gas sales $ 11,613,325 $ 17,363,664 $ 5,503,494 $7,695,072
Other 1,265,920 471,763 902,282 576,881
-------------------- ------------------ ----------------- -------------
-------------------- ------------------ ----------------- -------------
Total revenues 12,879,245 17,835,427 6,405,776 8,271,953
-------------------- ------------------ ----------------- -------------
-------------------- ------------------ ----------------- -------------
Expenses:
Production costs 6,998,214 8,433,089 3,293,337 4,187,879
General and administrative 3,713,294 2,098,533 2,090,492 1,172,111
Depletion, depreciation and amortization 3,854,540 3,233,287 1,835,131 1,646,327
Writedown of oil and gas properties 17,795,025 - 7,095,025 -
-------------------- ------------------ ----------------- -------------
-------------------- ------------------ ----------------- -------------
Total expenses 32,361,073 13,764,909 14,313,985 7,006,317
-------------------- ------------------ ----------------- -------------
-------------------- ------------------ ----------------- -------------
Operating income (loss) (19,481,828) 4,070,518 (7,908,209) 1,265,636
-------------------- ------------------ ----------------- -------------
-------------------- ------------------ ----------------- -------------
:
Other (536,586) 273,540 (592,596) 70,101
Interest expense (1,515,333) (830,785) (788,123) (439,985)
-------------------- ------------------ ----------------- -------------
-------------------- ------------------ ----------------- -------------
Total other income (expense) (2,051,919) (557,245) (1,380,719) (369,884)
-------------------- ------------------ ----------------- -------------
-------------------- ------------------ ----------------- -------------
Income (loss) before income taxes (21,533,747) 3,513,273 (9,288,928) 895,752
Provision for taxes on income 108,458 1,470,000 330,076 382,491
Minority interest in earnings (loss) of
consolidated subsidiary (48,540) 94,391 (41,839) 5,961
-------------------- ------------------ ----------------- -------------
-------------------- ------------------ ----------------- -------------
Net income (loss) $ (21,593,665) $ 1,948,882 $(9,577,165) $ 507,300
==================== ================== ================= =============
==================== ================== ================= =============
Comprehensive income $ (21,655,585) $ 1,930,415 $(9,653,883) $ 512,057
==================== ================== ================= =============
==================== ================== ================= =============
Net earnings (loss) per common share:
Basic $ (2.00) $ 0.18 $ (0.88) $ 0.05
==================== ================== ================= =============
==================== ================== ================= =============
Diluted $ (2.00) $ 0.18 $ (0.88) $ 0.05
==================== ================== ================= =============
==================== ================== ================= =============
Weighted average common shares outstanding:
Basic 10,963,602 10,547,160 11,008,712 10,650,814
==================== ================== ================= =============
==================== ================== ================= =============
Diluted 10,963,602 11,530,431 11,008,712 11,532,913
==================== ================== ================= =============
==================== ================== ================= =============
SABA PETROLEUM COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
1998 1997
---- ----
Cash flows from operating activities:
Net income (loss) $ (21,593,665) $ 1,948,882
Adjustments to reconcile net income (loss) to net cash
provided by operations:
Depletion, depreciation and amortization 3,854,540 3,233,287
Writedown of oil and gas properties 17,795,025
-
Deferred tax benefit (685,533)
-
Compensation expense attributable to issuance of Common
Stock options and shares of Common Stock 349,227
-
Minority interest in earnings (loss) of consolidated subsidiary (48,539) 94,391
Gain on issuance of shares of subsidiary (5,533)
-
Changes in:
Accounts receivable 852,785 1,563,136
Other assets 382,215 149,463
Accounts payable and accrued liabilities 2,900,531 1,910,006
---------------------- ------------------
---------------------- ------------------
Net cash provided by operating activities 3,806,586 8,893,632
---------------------- ------------------
---------------------- ------------------
Cash flows from investing activities:
Expenditures for property and equipment (4,629,795) (12,531,621)
Proceeds from sale of oil and gas properties 394,086
-
Decrease in notes receivable 225,857 200,586
---------------------- ------------------
Net cash used in investing activities (4,009,852) (12,331,035)
---------------------- ------------------
---------------------- ------------------
Cash flows from financing activities:
Proceeds from notes payable and long-term debt 4,151,288 12,423,705
Principal payments on notes payable and long-term debt (3,451,991) (9,105,508)
Redemption of preferred stock (1,702,280)
-
Preferred stock dividends paid (51,288)
-
Net proceeds from exercise of Common Stock options 82,500 130,000
---------------------- ------------------
---------------------- ------------------
Net cash provided by (used in) financing activities (971,771) 3,448,197
---------------------- ------------------
---------------------- ------------------
Effect of exchange rate changes on cash and cash equivalents (3,269) (1,650)
---------------------- ------------------
---------------------- ------------------
Net increase (decrease) in cash (1,178,306)
9,144
Cash at beginning of period 1,507,641 734,036
---------------------- ------------------
---------------------- ------------------
Cash at end of period $ 329,335 $ 743,180
====================== ==================
SABA PETROLEUM COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Page 26
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 June 30, 1998, and the consolidated results of operations for the six and
three month periods ended June 30, 1998 and 1997 and the consolidated cash flows
for the six month periods ended June 30, 1998 and 1997.
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 six
month periods ended June 30, 1998 and 1997:
1998 1997
---- ----
Interest paid $ 1,622,000 $ 889,000
=============== =============
Income taxes paid $ - $ 1,640,000
=============== =============
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 six months ended
June 30, 1998.
The Company incurred credits to Stockholders' Equity in the amounts of $22,600
and $288,750 resulting from the issuance of fully vested stock options and
performance shares of Common Stock, respectively, during the six months ended
June 30, 1998.
Quarterly dividend obligations on the Series A Preferred Stock that were due and
payable on March 31, 1998 and June 30, 1998 in the total amount of $240,000 were
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 six months ended June
30, 1998.
The acquisition of two producing oil and gas properties in April 1998, at a
total cost of $3,239,835, was partially funded by the assumption of accounts and
notes receivable due to the Company in the amount of $2,390,354, and the
issuance of a stock subscription payable recorded at a cost of $750,000.
Fee interest in an oil property owned by the Company was acquired in February
1998 by seller-provided financing in the amount of $375,000.
Debentures in the principal amount of $2,157,000 were converted into 493,006
shares of Common Stock during the six months ended June 30, 1997.
Cumulative foreign currency translation losses in the amount of $80,221 and
$18,729 were recorded during the six month periods ended June 30, 1998 and 1997,
respectively.
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.
Crude oil prices continued to decline during the second quarter of 1998,
resulting in an additional writedown of capitalized costs for the United States
cost center in the amount of $6.5 million. Capitalized costs attributable to
foreign operations in the amount of $595,000 were also charged to operations
during the three months ended June 30, 1998.
4. Long-Term Debt
Long-term debt consists of the following at June 30, 1998:
9% convertible senior subordinated debentures - due 2005 $ 3,575,000
Revolving loan agreement with a bank 16,500,000
Term loan agreements with a bank 6,661,769
Demand loan agreement with a bank 1,968,933
Capital lease obligations 463,835
Promissory note 345,290
Term loan with a bank 372,401
Promissory note-Omimex 4,151,288
-------------------
34,038,516
Less current portion 28,473,395
===================
$ 5,565,121
===================
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 six months ended
June 30, 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 June 30, 1998, due July 31, 1998. At June 30, 1998, the borrowing
bases for the two loans were $16.5 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 June 30, 1998 was 8.1%. 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. Effective May 1, 1998, the
Agreement was amended to provide for borrowing base reductions in the amount of
$300,000 per month beginning May 15, 1998.The Company was not in compliance with
the financial covenants at June 30, 1998.
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 June 30, 1998) plus
3.0%. Principal payments of $7.0 million on December 31, 1997, and $2.0 million
on June 5, 1998, reduced the outstanding balance to $688,000 due July 31, 1998.
Payment of this loan is personally guaranteed by the Company's Chief Executive
Officer.
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 June
30, 1998) plus 3.0%, with the outstanding balance ($3.0 million) at June 30,
1998, due July 31, 1998. Payment of this loan is personally guaranteed by the
Company's Chief Executive Officer.
Loans in the aggregate principal amount of $6.7 million that matured on July 31,
1998, were neither paid nor extended. Based on the events described above, the
entire principal indebtedness to the bank ($23.2 million) has been classified as
currently payable at June 30, 1998.
The Company's Canadian subsidiary has available a demand revolving reducing loan
with a borrowing base of $2.0 million. Interest is payable at a variable rate
equal to the Canadian prime rate plus 0.75% per annum (7.25% at June 30, 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 $54,500 per month. In accordance with the terms of the loan agreement,
$654,000 of the total loan balance of $2.0 million is classified as currently
payable at June 30, 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 June 30, 1998 was
8.8%.
The promissory note ($345,290) 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 ($372,401) 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.
In June 1998, the Company borrowed $4.2 million from Omimex Resources, Inc.
(Omimex), of which $2.0 million was paid to the Company's principal commercial
lender to reduce indebtedness under one of the Company's short-term loans, and
the balance was used for a partial redemption of Preferred Stock in the face
amount of $2.0 million, plus accrued dividends. Interest is payable at the prime
rate (8.5% at June 30, 1998) plus 2.0%. The loan will be cancelled upon closing
of the contemplated merger with Omimex, or, if the merger is terminated, the
loan is due to be repaid within 90 days of such termination. The loan is
collateralized by the Company's 50% interest in the Velasquez-Galan pipeline in
Colombia.
5. Preferred Stock
In June, 1998, the Company redeemed 2,000 shares of Preferred Stock in the face
amount of $2.0 million at a total cost of $2.15 million, which included a 5%
redemption premium of $100,000 and accrued dividends of $51,000. The Company
incurred a charge to operations in the amount of $398,000 in connection with the
redemption. Accrued dividends for the second quarter of $120,000 on the
remaining outstanding issue were deemed paid by an increase to the Preferred
Stock's conversion amount.
6. 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 six months ended June 30, 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 $61,000 in the six months
ended June 30, 1998.
In May 1998, the Company issued 85,000 performance shares to employees and
consultants and recognized compensation expense of $228,000 in the six months
ended June 30, 1998.
As of June 30, 1998, the Company had outstanding options to acquire 480,000
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 six months ended June 30, 1998. Options to acquire 340,000
shares of Common Stock were exercisable at June 30, 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 30,000 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 ($15.50) and become exercisable over various periods
ranging from two to five years from the date of grant. No options were exercised
as of June 30, 1998. Options to acquire 104,000 shares of Common Stock were
exercisable at June 30, 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 six months ended June 30, 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 June 30, 1998,
a total of 45,000 options had been granted under the Directors Plan. Options to
acquire 9,000 shares of Common Stock were exercisable at June 30, 1998.
7. 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
The party who sold the asphalt refinery in Santa Maria, California, to the
Company, agreed to remediate portions of the refinery property in a five-year
period ending June 1999. Prior to the acquisition of the refinery, the Company
had an independent consultant perform an environmental compliance survey for the
refinery. The survey did not disclose required remediation in areas other than
those where the seller is 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. The Company, however, believes that either all required
remediation will be completed by the seller within the five-year period or the
Company will provide the seller with additional time to complete the
remediation. Should the seller not complete the work during the five year
period, because of uncertainties in the language of the agreement, there is a
risk that a court could interpret the agreement to shift the burden of
remediation to the Company.
In addition, the Company had been advised in June 1998 by the seller's
consulting engineers that groundwater monitoring conducted in May 1998 had
revealed unacceptable levels of light hydrocarbons contamination. Groundwater
monitoring wells have not shown evidence of groundwater contamination, with the
exceptions of monitoring conducted in May 1998. The May 1998 results indicated
the presence of benzene in all four monitoring wells which exceeds allowable
limits. In addition, detectable amounts of toluene, ethylbenzene and xylenes
were reported. Historically, BTEX compounds have not been detected in
groundwater samples obtained since 1992. At the request of the Regional Water
Quality Control Board (RWQCB), the wells were resampled in July 1998. Consistent
with the historical analytical results, petroleum hydrocarbons were not detected
in the July 1998 samples. The environmental contractor, who has used the same
sampling protocol since 1992, could not identify any specific reason for the
apparent inconsistency found in the May 1998 samples. The RWQCB has requested
additional monitoring wells to be placed on site and on property directly west
of the refinery perimeter. It is the Company's opinion that the additional wells
will confirm historical results from the existing wells that ground water
contamination has not occurred from past or present operation of the refinery.
The Company believes that the contamination is attributable to its predecessor's
operations, since the Company does not produce the particular contaminates at
the refinery and such was produced by the Company's predecessor. Appropriate
authorities have been notified of this condition.
Ultimate responsibility for remediation of the foregoing condition depends upon
an interpretation of the contract of purchase and factual matters. The Company
is in contact with its predecessor about the foregoing; however, no agreement
has been reached on responsibility nor has the cost of remediation been
estimated. Further, the owner of land adjoining the refinery, and the seller of
said property to an affiliate of the Company, has advised the Company that his
property has been contaminated by underground emissions from the refinery. This
condition also creates an uncertainty as to whether remediation is the
responsibility of the Company or its predecessor in interest. Discussions are
also in progress with respect to this matter. Should the foregoing matters not
be resolved satisfactorily, they may result in litigation. It is also possible
that a failure to resolve the matters could result in significant liability to
the Company. While the seller of the subject property retains a mortgaged
interest in the property, the Company's subsidiary that operates the refinery
has agreed to toll the statute of limitations for any claims by the seller
against the subsidiary and to obtain the seller's prior consent prior to
entering into any agreement with respect to hazardous materials on the property.
In accordance with the Articles of Association for the Cocorna Concession in
Colombia, the Concession expired in February 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
$750,000. 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 $1.5 million.
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 $6.7 million in principal amount of bank debt matured for payment
on July 31, 1998. Additionally, the Company was not in compliance with the loan
agreement's financial covenants at June 30, 1998.The Company and its bank are 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. 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.
The Company has negotiated, and continues to negotiate the sale of certain
producing oil and gas assets and real estate assets, the proceeds of which have
been and will continue to be applied to reduce bank indebtedness and provide
working capital. At July 31, 1998, the Company had sold its interest in over 150
producing wells in Michigan, had entered into a sale agreement to sell its
interest in two producing wells in Alabama, and was in negotiations to sell its
interest in other domestic properties.
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. In June 1998, the Company entered into the Merger
Agreement with Omimex pursuant to which Omimex would acquire the Company in a
reverse acquisition. 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 the combination be consummated, 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, 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 requires 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") (whose consent has been received),
shareholder approval, and various governmental approvals.
During August 1998, Omimex requested an extension of the October 31, 1998
termination date of the Merger Agreement. Both the Company and Omimex were of
the view that it was highly unlikely that a Proxy Statement could be prepared,
filed with the Securities and Exchange Commission and circulated to shareholders
in time to meet the termination date. The delay in filing the Proxy materials
was occasioned by unavailability to the Company in a timely manner of
information required for preparation of the Proxy materials. The Company has
declined to extend the termination date; however, it and Omimex are in
discussion concerning possible revisions to the merger terms and an extension of
the termination date.
The terms under which the Series A Preferred Stock were issued required that the
Company cause to have declared effective by April 30, 1998, a registration
statement covering the Common Stock underlying the Preferred Stock and certain
warrants which were issued in connection with the issuance of the Preferred
Stock. By agreement with the holders of the Preferred Stock, such date was
extended to May 15, 1998. Because of the imminence of the merger with Omimex,
proforma financial statements reflecting the merger were required to be
contained in the registration statement.The Company was unable to comply with
this requirement in a timely manner, as the information was not readily
available. Under the terms of the Preferred Stock arrangement, the Company
incurs a penalty of $20,000 per month per $1 million of outstanding Preferred
Stock until the registration statement is declared effective. Included in the
second quarter results is $262,000 accrued in respect of such penalty. The
Company is discussing with Omimex the effect of such penalty on the merger.
In July 1998, the Company terminated the engagement of Oppenheimer effective
August 1998.
Acquisition, Exploration and Development
Drilling activity during the quarter ended June 30, 1998, consisted of the
drilling and completion of three gross (0.75 net) development oil wells in
Colombia. In addition, three gross (0.75 net) wells in the Velasquez field in
Colombia were recompleted in a different formation as the Company continued its
plan to increase production from that property. On March 9, 1998, drilling
commenced on an exploratory prospect in Glenn County, California, in which the
Company earned a 20% working interest. During March and April, 1998, the
prospect encountered shows of hydrocarbons at several intervals. At June 30,
1998, the drilled depth was at approximately 6,000 feet with a scheduled total
depth of approximately 8,250 feet. Attempts were made to complete the well in
several sections, but the completion attempts were unsuccessful and the well has
been temporarily abandoned. Consideration is being given to drill a second
exploratory well on this prospect, but no firm decision has been made.
In May 1998, drilling commenced on an exploratory well under one of two
exploration licenses within a 123,000 acre exploration area in southern Great
Britain in which the Company has a 37.5% working interest. Drilling of the test
well did not produce any hydrocarbons and the well is being abandoned. Results
from the initial well did not condemn the entire prospect and data obtained from
the test well is being evaluated for further interpretation.
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.
Results of Oil and Gas Producing Operations
Results of the Company's oil and gas producing activities for the six and three month periods ended June 30, 1998 and 1997, are
as follows:
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Six Months Ended June 30, 1998 Total USA Canada Colombia
- ------------------------------------------------------------------------------------------------------------------------------------
Oil and gas sales:
Oil $ 9,111,661 $ 4,908,001 $ 415,777 $ 3,787,883
Gas $ 2,501,664 $ 2,161,901 $ 339,763 $ -
Total oil and gas sales $11,613,325 $ 7,069,902 $ 755,540 $ 3,787,883
Production costs $ 6,998,214 $ 4,627,418 $ 383,616 $ 1,987,180
Depletion $ 3,494,214 $ 2,895,570 $ 218,644 $ 380,000
General and administrative expenses $ 3,519,697 $ 3,109,155 $ 292,966 $ 117,576
Oil volume (Bbls) 996,827 524,471 39,519 432,837
Gas volume (Mcf) 1,384,360 1,058,435 325,925 -
Barrels of oil equivalent (BOE) 1,227,554 700,877 93,840 432,837
Average per unit:
Sales price-oil (Bbls) $ 9.14 $ 9.36 $ 10.52 $ 8.75
Sales price-gas (Mcf) $ 1.81 $ 2.04 $ 1.04 $ -
Production costs (BOE) $ 5.70 $ 6.60 $ 4.09 $ 4.59
Depletion (BOE) $ 2.85 $ 4.13 $ 2.33 $ 0.88
General and administrative expenses (BOE) $ 2.87 $ 4.44 $ 3.12 $ 0.27
- ------------------------------------------------------------------------------------------------------------------------------------
Six Months Ended June 30, 1997 Total USA Canada Colombia
- ------------------------------------------------------------------------------------------------------------------------------------
Oil and gas sales:
Oil $15,217,213 $ 8,786,617 $ 871,000 $ 5,559,596
Gas $ 2,146,451 $ 1,768,341 $ 378,110 $ -
Total oil and gas sales $17,363,664 $10,554,958 $ 1,249,110 $ 5,559,596
Production costs $ 8,433,089 $ 5,081,512 $ 503,617 $ 2,847,960
Depletion $ 2,938,140 $ 1,792,000 $ 155,805 $ 990,335
General and administrative expenses $ 2,039,535 $ 1,723,788 $ 216,788 $ 98,959
Oil volume (Bbls) 1,066,407 555,784 54,822 455,801
Gas volume (Mcf) 1,096,629 732,222 364,407 -
Barrels of oil equivalent (BOE) 1,249,179 677,821 115,557 455,801
Average per unit:
Sales price-oil (Bbls) $ 14.27 $ 15.81 $ 15.89 $ 12.20
Sales price-gas (Mcf) $ 1.96 $ 2.42 $ 1.04 $ -
Production costs (BOE) $ 6.75 $ 7.50 $ 4.36 $ 6.25
Depletion (BOE) $ 2.35 $ 2.64 $ 1.35 $ 2.17
General and administrative expenses (BOE) $ 1.63 $ 2.54 $ 1.88 $ 0.22
- ------------------------------------------------------------------------------------------------------------------------------------
Three Months Ended June 30, 1998 Total USA Canada Colombia
- ------------------------------------------------------------------------------------------------------------------------------------
Oil and gas sales:
Oil $ 4,330,586 $ 2,378,701 $ 173,237 $ 1,778,648
Gas $ 1,172,908 $ 1,023,058 $ 149,850 $ -
Total oil and gas sales $ 5,503,494 $ 3,401,759 $ 323,087 $ 1,778,648
Production costs $ 3,293,337 $ 2,137,407 $ 198,692 $ 957,238
Depletion $ 1,649,975 $ 1,352,979 $ 109,796 $ 187,200
General and administrative expenses $ 1,991,941 $ 1,774,894 $ 154,648 $ 62,399
Oil volume (Bbls) 506,862 268,319 19,379 219,164
Gas volume (Mcf) 640,066 484,434 155,632 -
Barrels of oil equivalent (BOE) 613,540 349,058 45,318 219,164
Average per unit:
Sales price-oil (Bbls) $ 8.54 $ 8.87 $ 8.94 $ 8.12
Sales price-gas (Mcf) $ 1.83 $ 2.11 $ 0.96 $ -
Production costs (BOE) $ 5.37 $ 6.12 $ 4.38 $ 4.37
Depletion (BOE) $ 2.69 $ 3.88 $ 2.42 $ 0.85
General and administrative expenses (BOE) $ 3.25 $ 5.08 $ 3.41 $ 0.28
- ------------------------------------------------------------------------------------------------------------------------------------
Three Months Ended June 30, 1997 Total USA Canada Colombia
- ------------------------------------------------------------------------------------------------------------------------------------
Oil and gas sales:
Oil $ 6,890,003 $ 4,276,582 $ 361,746 $ 2,251,675
Gas $ 805,069 $ 654,935 $ 150,134 $ -
Total oil and gas sales $ 7,695,072 $ 4,931,517 $ 511,880 $ 2,251,675
Production costs $ 4,187,879 $ 2,763,131 $ 280,355 $ 1,144,393
Depletion $ 1,488,091 $ 936,086 $ 86,703 $ 465,302
General and administrative expenses $ 1,147,204 $ 969,311 $ 115,116 $ 62,777
Oil volume (Bbls) 531,948 297,175 27,148 207,625
Gas volume (Mcf) 532,999 335,796 197,203 -
Barrels of oil equivalent (BOE) 620,781 353,141 60,015 207,625
Average per unit:
Sales price-oil (Bbls) $ 12.95 $ 14.39 $ 13.32 $ 10.84
Sales price-gas (Mcf) $ 1.51 $ 1.95 $ 0.76 $ -
Production costs (BOE) $ 6.75 $ 7.82 $ 4.67 $ 5.51
Depletion (BOE) $ 2.40 $ 2.65 $ 1.44 $ 2.24
General and administrative expenses (BOE) $ 1.85 $ 2.74 $ 1.92 $ 0.30
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 six and three month periods ended June 30, 1998
and 1997 are as follows:
Six Months Three Months
Ended June 30, Ended June 30,
1998 1997 1998 1997
Crude oil throughput (Bbls) 719,587 659,889 374,346 375,320
Production:
Asphalt (tons) 77,425 72,855 40,404 40,937
Other products (Bbls) 281,916 249,480 148,082 144,552
Sales:
Asphalt (tons) 59,956 70,846 48,477 45,638
Other products (Bbls) 277,422 226,933 124,308 135,588
Processing fee income $ 545,200 $ 212,200 $ 494,600 $ 212,200
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 33.3% to $11.6 million and 28.6% to $5.5 million for
the six and three month periods ended June 30, 1998, from $17.4 million and $7.7
million for the same periods of 1997. Average sales price per BOE decreased
31.9% to $9.46 and 27.7% to $8.97 for the six and three month periods ended June
30, 1998, from $13.90 per BOE and $12.40 per BOE for the same periods of 1997.
In the United States, production from the Company's mid-continent properties
increased 48.8% to 232,500 BOE and 44.6% to 106,600 BOE for the six and three
month periods ended June 30, 1998, from 156,200 BOE and 73,700 BOE for the same
periods of 1997. The increases were primarily attributable to the Company's
property acquisitions in Louisiana in November 1996 and September 1997. Average
sales price per BOE decreased 32.0% to $12.50 and 28.0% to $12.38 for the six
and three month periods ended June 30, 1998, from $18.37 and $17.17 for the same
periods of 1997. As a result of the production increases and the price
decreases, oil and gas sales from these properties were unchanged at $2.9
million and $1.3 million for the six and three month periods ended June 30,
1998, from the same periods of 1997. Production volumes from the Company's
Michigan properties decreased 4.2% to 73,800 BOE and 8.0% to 35,700 BOE for the
six and three month periods ended June 30, 1998, from 77,000 BOE and 38,800 BOE
for the same periods of 1997. Average sales price per BOE decreased 22.6% to
$13.63 and 3.4% to $14.59 for the six and three month periods ended June 30,
1998, from $17.61 and $15.10 for the same periods of 1997, resulting in 28.6%
and 11.3% decreases in oil and gas sales to $1.0 million and $520,000 for the
six and three month periods ended June 30, 1998, from $1.4 million and $586,000
for the same periods of 1997. Production from the Company's California
properties decreased 11.3% to 394,600 BOE and 14.1% to 206,800 BOE for the six
and three month periods ended June 30, 1998, from 444,700 BOE and 240,700 BOE
for the same periods of 1997. Severe weather conditions resulting in flooding
and loss of electrical power hampered production during the first quarter of
1998, resulting in a decrease in production of approximately 29,000 BOE. Average
sales price per BOE decreased 43.8% to $8.01and 41.0% to $7.55 for the six and
three month periods ended June 30, 1998, from $14.24 and $12.80 for the same
periods of 1997. The decreases in production and sales price per BOE resulted in
decreases in oil and gas sales of 49.2% to $3.2 million and 48.4% to $1.6
million for the six and three month periods ended June 30, 1998, from $6.3
million and $3.1 million for the same periods of 1997.
In Canada, production decreased 18.9% to 93,800 BOE and 24.5% to 45,300 BOE for
the six and three month periods ended June 30, 1998, from 115,600 BOE and 60,000
BOE for the same periods of 1997, and sales price per BOE decreased 25.5 % to
$8.05 and 16.4% to $7.13 for the six and three month periods ended June 30,
1998, from $10.81 and $8.53 for the same periods of 1997, resulting in decreases
in oil and gas sales of 37.0% to $755,500 and 36.9% to $323,100 for the six and
three month periods ended June 30, 1998, from $1.2 million and $511,900 for the
same periods of 1997.
Production from the Company's Colombia properties decreased 5.0% to 432,800 BOE
and increased 5.6% to 219,200 BOE for the six and three month periods ended June
30, 1998, from 455,800 BOE and 207,600 BOE for the same periods of 1997.
Approximately 20,000 BOE of the decrease for the six month period was
attributable to reversion of the Cocorna Concession property in February 1997.
The increase in the second quarter was attributed to production resulting from
the development drilling and recompletion programs that began in May 1997. Sales
price per BOE decreased 28.3% to $8.75 and 25.1% to $8.12 for the six and three
month periods ended June 30, 1998, from $12.20 and $10.84 for the same periods
of 1997. The production variances and decreases in sales price per BOE resulted
in decreases in oil and gas sales of 32.1% to $3.8 million and 21.7% to $1.8
million for the six and three month periods ended June 30, 1998, from $5.6
million and $2.3 million for the same periods of 1997.
Other Revenues
Other revenues increased 175.5% to $1.3 million and 56.4% to $902.300 for the
six and three month periods ended June 30, 1998, from $471,800 and $576,900 for
the same periods of 1997. The increase for the six month period was due
primarily to an increase in processing fee income of $333,000 from the Company's
asphalt refinery, and an increase in net pipeline tariffs in Colombia due to
non-recurring 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. The increase for the three month period was attributed to an increase
in gross profit of $110,600 from the Company's agricultural operations and a
increase in processing fee income of $282,400 from the Company's asphalt
refinery.
Production Costs
Production costs decreased 16.7% to $7.0 million and 21.4% to $3.3 million for
the six and three month periods ended June 30, 1998, from $8.4 million and $4.2
million for the same periods of 1997. Average production costs per BOE decreased
15.6% to $5.70 and 20.4% to $5.37 for the six and three month periods ended June
30, 1998 from $6.75 and $6.75 for the same periods of 1997.
In the United States, production increased 3.4% to 700,900 BOE and decreased
1.1% to 349,100 for the six and three month periods ended June 30, 1998, from
677,800 BOE and 353,100 BOE for the same periods of 1997. Production costs per
BOE decreased 12.0%, to $6.60 and 21.7% to $6.12 for the six and three month
periods ended June 30, 1998, from $7.50 and $7.82 for the same periods of 1997.
The variances in production volume and decreases in production costs per BOE
resulted in a 9.8% decrease to $4.6 million and a 25.0% decrease to $2.1 million
of production costs for the six and three month periods ended June 30, 1998,
from $5.1 million and $2.8 million from the same periods of 1997.
In Canada, production decreased 18.9% to 93,800 BOE and 24.5% to 45,300 BOE for
the six and three month periods ended June 30, 1998, from 115,600 BOE and 60,000
BOE for the same periods of 1997. Production costs per BOE decreased 6.2% to
$4.09 and 6.2% to $4.38 for the six and three month periods ended June 30, 1998,
from $4.36 and $4.67 for the same periods of 1997. The decreases in production
volume and production costs per BOE resulted in a 23.8% decrease to $383,600 and
a 29.1% decrease to $198,700 of production costs for the six and three month
periods ended June 30, 1998, from $503,600 and $280,400 for the same periods of
1997.
In Colombia, production decreased 5.0% to 432,800 BOE and increased 5.6% to
219,200 BOE for the six and three month periods ended June 30, 1998, from
455,800 BOE and 207,600 BOE for the same periods of 1997. Production costs per
BOE decreased 26.6% to $4.59 and 20.7% to $4.37 for the six and three month
periods ended June 30, 1998, from $6.25 and $5.51 for the same periods of 1997.
The variances in production volume and decreases in production costs per BOE
resulted in a 31.0% decrease to $2.0 million and a13.0% decrease to $957,200 of
production costs for the six and three month periods ended June 30, 1998, from
$2.9 million and $1.1 million for the same periods of 1997.
General and Administrative Expenses
General and administrative expenses increased 76.2% to $3.7 million and 75.0% to
$2.1 million for the six and three month periods ended June 30, 1998, from $2.1
million and $1.2 million for the same periods of 1997. The overall increase in
general and administrative expenses was due principally to the increase in
employment levels to administer planned acquisitions and the Company's drilling
programs. The Company incurred approximately $475,000 and $357,400 in expenses
during the six and three month periods ended June 30, 1998, in connection with
its efforts to restructure its commercial credit facilities and provide for
additional financing and capitalization, including the planned merger with
Omimex Resources, Inc. In addition, the Company incurred non-cash expenses in
the amount of $349,200 and $211,300 in the six and three month periods ended
June 30, 1998, attributable to the issuance of stock options and Common Stock.
Depletion, Depreciation and Amortization
Depletion, depreciation and amortization expenses increased 21.9% to $3.9
million and 12.5% to $1.8 million for the six and three month periods ended June
30, 1998, from $3.2 million and $1.6 million for the same periods of 1997.
Depletion expense increased 20.7% to $3.5 million and 6.7% to $1.6 million for
the six and three month periods ended June 30, 1998, from $2.9 million and $1.5
million for the same periods of 1997. The increases were primarily attributable
to 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 28.7%, to $360,300 and 19.6% to $179,600 for the six and three month
periods ended June 30, 1998, from $279,900 and $150,200 for the same periods of
1997.
Writedown of Oil and Gas Properties
The Company incurred cost center ceiling writedowns of $17.2 million and $6.5
million for the six and three month periods ended June 30, 1998, attributable to
its United States cost center During these periods, the price of West Texas
Intermediate crude oil decreased 25.8% to $11.50 per barrel at June 30, 1998,
and 14.5% to $13.25 per barrel at March 31, 1998, from $15.50 per barrel at
December 31, 1997. Application of quarter ending oil prices to the Company's
predominantly heavy oil reserves, which sell at a discount to higher gravity
oil, resulted in significant reductions to the present value of future net
revenues at each quarter ending date. Capitalized costs attributable to foreign
operations in the amount of $595,000 were also charged to operations during the
three months ended June 30, 1998.
Other Income (Expense)
Other income (expense) decreased 292.9% to expense of $527,600 and 932.5% to
expense of $583,600 for the six and three month periods ended June 30, 1998,
from income of $273,500 and $70,100 for the same periods of 1997. The changes
were primarily due to charges incurred by the Company in the three months ended
June 30, 1998, attributable to the partial redemption of its Preferred Stock
($397,700) and the accrual of a penalty ($262,000) for failing to cause to have
declared effective a registration statement covering the common stock
underlying the Preferred Stock.
Interest Expense
Interest expense increased 80.5% to $1.5 million and 81.2% to $797,100 for the
six and three month periods ended June 30, 1998, from $830,800 and $440,000 for
the same periods of 1997. The changes were principally due to a 117.9% increase
in the weighted average of borrowings from the Company's principal commercial
lender to $25.5 million for the six months ended June 30, 1998, from $11.7
million for the six months ended June 30, 1997, resulting from loan proceeds
used to fund a property acquisition and development drilling activities. The
weighted average interest rate for such indebtedness increased 17 basis points,
to 9.25% for the six months ended June 30, 1998, from 9.08% for the six months
ended June 30, 1997.
Provision (Benefit) for Taxes on Income (Loss)
The Company recorded net tax provisions of $108,500 and $330,100 for the six and
three month periods ended June 30, 1998 due to foreign taxable income for those
periods. The provision for the six month period ended June 30, 1998 was reduced
for the tax benefits resulting from the loss for that period. Tax provisions of
$1.5 million and $382,500 were recorded for the same periods of 1997.
Net Income (Loss)
Net income (loss) decreased to losses of $21.6 million and $9.6 million for the
six and three month periods ended June 30, 1998, from net income of $1.9 million
and $507,300 for the same periods of 1997. The decreases reflect 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.
In 1996, the Company 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 cash flow with which to service debt and fund its ongoing operations.
The Company has a working capital deficit due principally to this condition and
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 short-term 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
producing oil and gas and real estate assets, the proceeds of which would be
applied to reduce the bank indebtedness and provide working capital. In July
1998, the Company closed the sale of one of the designated properties and
realized proceeds of $3.7 million.
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. A significant portion of the Company's capital expenditures
budget as initially prepared in the amount of $12 million is discretionary. Due
to the decline in oil prices during the first half of 1998, the Company deferred
most of its capital programs and will make further deferrals in the second half
of 1998 of capital expenditures if oil prices remain at current levels.
Summary cash flow information for the six month periods ended June 30, 1998 and
1997 is as follows:
1998 1997
---- ----
Net cash provided by operating activities $3,807,000 $ 8,894,000
Net cash used in investing activities $(4,010,000) $(12,331,000)
Net cash provided by (used in) financing activities $ (972,000) $ 3,448,000
Working Capital
The Company's working capital deficit increased $21.4 million to a deficit of
$33.1 million at June 30, 1998, from a deficit of $11.7 million at December 31,
1997. This decrease was due in part to the classification of the Company's
revolving long-term debt of $13.0 million with its principal commercial lender
as a current liability. A net increase of $6.4 million in accounts payable,
accrued liabilities and income taxes payable over accounts receivable, cash
balances and other current assets during the six month period ended June 30,
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 addition, the Company borrowed $2.1 million from Omimex Resources, Inc. in
June 1998 to fund a partial redemption of outstanding Preferred Stock. The
indebtedness is classified as a current liability.
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 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 producing oil 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.
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.
In conjunction with the Company's intention to divest of several producing
properties in the mid-continent area, and in contemplation of the merger with
Omimex Resources, Inc., the Company will close its Edmond, OK office on August
31, 1998. Employment levels in California have also been reduced as a result of
the Company's decision to postpone additional development drilling in the Santa
Maria Valley ("SMV") area, pending an increase in product prices and further
evaluation of production performance from wells previously drilled in 1996 and
1997. In June 1998, the Company renegotiated the pricing structure for oil
produced in the SMV and sold to its asphalt refinery. Such oil will now be sold
at a minimum of $7.00 per barrel. Current postings are approximately $5.63 per
barrel of oil. The Company produces approximately 1,500 barrels of oil per day
in the SMV area.
Operating Activities
The Company's operating activities during 1998 provided net cash flow of $3.8
million. Changes in the non-cash components of working capital were responsible
for $4.1 million of this amount.
Cash flows from operating activities provided net cash flow of $8.9 million in
1997. Changes in the non-cash components of working capital were responsible for
$4.2 million of this amount.
Investing Activities
Investing activities during 1998, consisting of oil and gas property
acquisition, development and exploration expenditures, reduced by collections on
notes receivable, resulted in a net cash outflow of $4.0 million.
Investing activities during 1997, consisting of oil and gas property
acquisition, development and exploration expenditures, reduced by collections on
notes receivable, resulted in a net cash outflow of $12.3 million.
Financing Activities
Financing activities during 1998 resulted in net cash outflow of $971,800.
Borrowings from Omimex Resources, Inc. provided $4.2 million in cash inflow.
Cash outflow during the period was attributed to payments in the amount of $3.5
million and $1.7 million to reduce outstanding balances on the Company's credit
facilities and to redeem a portion of Preferred Stock, respectively.
Financing activities during 1997 resulted in net cash inflow of $3.4 million.
Net borrowings under the Company's credit facilities provided $3.3 million of
this inflow. Proceeds from the exercise of options provided cash inflows in the
amount of $130,000 during 1997.
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 June 30, 1998, the borrowing base under the revolving loan
was $16.5 million subject to a monthly reduction of $300,000, of which $16.5
million was outstanding.
The Company has a second borrowing base credit facility to fund development
projects in California. At June 30, 1998, $3.0 million was outstanding that
matured for payment on July 31, 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. Principal payments of $7.0 million on December 31, 1997, and $2.0
million on June 5, 1998, reduced the outstanding balance to $688,000, due on
July 31, 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 July
31, 1998. At June 30, 1998, the loan was fully advanced. The payment was not
made and the note maturity was not extended.
Loans in the aggregate principal amount of $6.8 million that matured on July 31,
1998, were neither paid nor extended. Based on the events described above, the
entire principal indebtedness to the bank of $23.2 million has been classified
as currently payable at June 30, 1998.
The Company's Canadian subsidiary has a demand revolving reducing loan with a
borrowing base of $2.0 million, that reduces at the rate of $54,500 per month.
At June 30, 1998, the loan was fully advanced with an outstanding balance of
$2.0 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
Office Locations
In May 1998, the Company elected to close its Edmond, Oklahoma office effective
August 31, 1998.
Directors and Officers
In June and July 1998, Messrs. Rodney C. Hill and Ronald Ormand, respectively,
resigned as members of the Company's Board of Directors, leaving two vacancies
on the Board.
In June 1998, Ilyas Chaudhary resigned as Chief Executive Officer of the Company
and Alex S. Cathcart resigned as President and Chief Operating Officer, both in
favor of the appointments of Charles A. Kohlhaas, Ph.D. as Chief Executive
Officer and President and Imran Jattala as Executive Vice President and Chief
Operating Officer. Messrs. Chaudhary and Cathcart had agreed to continue to
provide consulting services to the Company on an as needed basis and at a level
of compensation to be mutually agreed upon.
In July 1998, Walton C. Vance resigned as Vice President, Chief Financial
Officer, Treasurer and Secretary of the Company. In August, 1998, Ilyas
Chaudhary's appointment as Chief Executive Officer and President of the Company
was reinstated pursuant to the terminated employment of Dr. Kohlhaas,
and Imran Jattala was appointed as the Company's Principal
Accounting Officer.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
Exhibits filed for the quarter ended June 30, 1998 are as follows:
EXHIBIT NUMBER DESCRIPTION
11.1 Computation of Earnings per Common Share
27.1 Financial Data Schedule
Reports filed under Form 8-K during the quarter ended June 30, 1998 are as
follows:
FORM DATE FILING
Form 8-K June 16, 1998 Item 5. Other Material Events, including
the Omimex merger agreement and an
amendment of the loan agreement.
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: _August 19, 1998 By: /s/_________________
-------------------
Ilyas Chaudhary
Chief Executive Officer
(Principal Executive
Officer)
Date: August 19, 1998 By: /s/_______________
------------------
Imran Jattala
Executive Vice President
(Principal Accounting Officer)