1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
----------------------------
(Mark One)
/X/ Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended March 31, 2000 or
/ / Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Transition period from to
--------------------------
COMMISSION FILE NUMBER 0-13305
--------------------------
PARALLEL PETROLEUM CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 75-1971716
(State of other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
One Marienfeld Place, Suite 465,
Midland, Texas 79701
(Address of principal executive offices) (Zip Code)
(915) 684-3727
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes 'X' No
At May 10, 2000, there were 20,331,858 shares of the Registrant's Common
Stock, $0.01 par value, outstanding.
================================================================================
2
INDEX
PART I. - FINANCIAL INFORMATION
Page No.
ITEM 1. FINANCIAL STATEMENTS
Reference is made to the succeeding pages for the
following financial statements:
- Balance Sheets as of December 31, 1999 and
March 31, 2000 (unaudited) 3
- Unaudited Statements of Operations for the three
months ended March 31, 1999 and 2000 5
- Unaudited Statements of Cash Flows for the three
months ended March 31, 1999 and 2000 6
- Notes to Financial Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 10
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK 15
PART II. - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 15
3
PARALLEL PETROLEUM CORPORATION
BALANCE SHEETS
December 31, March 31, 2000
ASSETS 1999* (Unaudited)
- ------------- ------------ ---------------
Current assets:
Cash and cash equivalents $ 1,276,417 $ 1,345,562
Accounts receivable:
Oil and gas 1,312,923 1,527,801
Others, net of allowance for doubtful accounts
of $157,187 in 1999 and 2000 314,911 142,597
Affiliate 20,658 4,669
------------ ------------
1,648,492 1,675,067
Other assets 39,677 20,178
Assets held for sale 2,127,734 2,127,734
------------ ------------
Total current assets 5,092,320 5,168,541
------------ ------------
Property and equipment, at cost:
Oil and gas properties, full cost method 65,136,783 66,134,302
Other 289,720 307,516
------------ ------------
65,426,503 66,441,818
Less accumulated depreciation and depletion 27,502,855 28,566,324
------------ ------------
Net property and equipment 37,923,648 37,875,494
------------ ------------
Investment in First Permian, LLC (Notes 1 and 5) 201,311 --
Other assets, net of accumulated amortization of
$141,428 in 1999 and $147,627 in 2000 46,791 59,354
------------ ------------
$ 43,264,070 $ 43,103,389
============ ============
4
PARALLEL PETROLEUM CORPORATION
BALANCE SHEETS
(Continued)
December 31, March 31, 2000
LIABILITIES AND STOCKHOLDERS' EQUITY 1999* (Unaudited)
- ------------------------------------ ------------ ------------------
Current liabilities:
Current maturities of long-term debt $ 3,665,889 $ 3,665,889
Investment liability in
First Permian (Notes 1 and 5) -- 252,700
Accounts payable and accrued liabilities:
Trade 1,471,013 1,788,142
Affiliate 2,702 2,954
Preferred stock dividend 24,363 170,538
------------ ------------
1,498,078 1,961,634
------------ ------------
Total current liabilities 5,163,967 5,880,223
------------ ------------
Long-term debt, excluding current maturities (Note 2) 12,300,000 11,400,000
Stockholders' equity:
Preferred stock - 6% convertible preferred stock -
par value $.10 per share(aggregate liquidation
preference of $10) authorized 10,000,000 shares,
issued and outstanding 974,500 in 1999 and 2000 97,450 97,450
Common stock - par value $.01 per share, authorized
60,000,000 shares, issued and outstanding
20,331,858 in 1999 and 2000 203,319 203,319
Additional paid-in surplus 34,847,141 34,676,603
Retained deficit (9,347,807) (9,154,206)
------------ ------------
Total stockholders' equity 25,800,103 25,823,166
Contingencies
------------ ------------
$ 43,264,070 $ 43,103,389
============ ============
*The balance sheet as of December 31, 1999 has been derived from Parallel's
audited financial statements. The accompanying notes are an integral part of
these financial statements.
5
PARALLEL PETROLEUM CORPORATION
STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended March 31,
----------------------------
1999 2000
---------- ----------
Oil and gas revenues $1,963,089 $2,774,591
Cost and expenses:
Lease operating expense 513,822 613,815
General and administrative 203,237 197,800
Depreciation, depletion and amortization 903,836 1,063,469
---------- ----------
1,620,895 1,875,084
---------- ----------
Operating income 342,194 899,507
---------- ----------
Other income (expense), net:
Equity in loss of First Permian, LLC -- (386,511)
Interest income 13,276 18,755
Other income 6,623 6,461
Interest expense (371,071) (342,905)
Other expense (1,305) (1,706)
---------- ----------
Total other expense, net (352,477) (705,906)
---------- ----------
Income (loss) before income taxes (10,283) 193,601
Income taxes -- --
---------- ----------
Net income (loss) $ (10,283) $ 193,601
========== ==========
Cumulative preferred stock dividend $ 170,538 $ 170,538
========== ==========
Net income (loss) available
to common stockholders $ (180,821) $ 23,063
========== ==========
Net income (loss) per common share
Basic $ (.010) $ .0011
========== ==========
Diluted $ (.010) $ .0011
========== ==========
Weighted average common shares outstanding
Basic 18,328,525 20,331,858
========== ==========
Diluted 18,328,525 20,657,727
========== ==========
The accompanying notes are an integral part of these financial statements.
6
PARALLEL PETROLEUM CORPORATION
STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended March 31,
-----------------------------
1999 2000
----------- -----------
Cash flows from operating activities:
Net income (loss) $ (10,283) $ 193,601
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and depletion 903,836 1,063,469
Equity in loss from investments -- 386,511
Other, net (14,520) (12,563)
Changes in assets and liabilities:
Decrease (increase) in accounts receivables 134,905 (26,575)
Decrease in prepaid expenses and other 48,845 19,499
(Decrease) increase in accounts payable and accrued
liabilities (734,259) 293,018
----------- -----------
Net cash provided by operating activities 328,524 1,916,960
----------- -----------
Cash flows from investing activities:
Additions to property and equipment (1,119,604) (1,048,855)
Proceeds from disposition of property and equipment 255,240 33,540
Distribution from First Permian, LLC -- 67,500
----------- -----------
Net cash used in investing activities (864,364) (947,815)
----------- -----------
Cash flows from financing activities:
Borrowings from bank line of credit 780,000 --
Payments on bank line of credit -- (900,000)
Proceeds from exercise of options and warrants 17,188 --
----------- -----------
Net cash provided by (used in) financing activities 797,188 (900,000)
----------- -----------
Net increase in cash and cash equivalents 261,348 69,145
Beginning cash and cash equivalents 1,178,819 1,276,417
----------- -----------
Ending cash and cash equivalents $ 1,440,167 $ 1,345,562
=========== ===========
Non-cash financing activities:
Accrued preferred stock dividend $ 170,538 $ 170,538
========== ===========
The accompanying notes are an integral part of these financials.
7
PARALLEL PETROLEUM CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The financial information included herein, except the balance sheet as of
December 31, 1999, is unaudited. However, such information includes all
adjustments (consisting solely of normal recurring adjustments), which are, we
think of management, necessary for a fair statement of the results of operations
for the interim periods. The results of operations for the interim period are
not necessarily indicative of the results to be expected for an entire year.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted in this Form 10-Q Report pursuant to certain
rules and regulations of the Securities and Exchange Commission. These financial
statements should be read with the financial statements and notes included in
Parallel's 1998 Annual Report and 1999 Form 10-K.
At March 31, 2000, we had a 35% interest in First Permian, LLC, a limited
liability company. We account for our investment in First Permian on an equity
basis. Accordingly, our investment in First Permian is recorded at cost and is
increased or decreased by our proportionate share of First Permian's income or
loss. Our 35% interest is reported as an investment on the balance sheet and our
share of income or loss is recognized on the income statement as equity in
earnings (loss) of First Permian.
NOTE 2. LONG TERM DEBT
Our long term debt at March 31, 2000 consisted of the following:
Revolving credit facility note payable to bank at the
bank's base lending rate plus .25% (9% at March 31, 2000) $15,065,889
Scheduled maturities of Parallel's debt at March 31, 2000
are as follows:
March 31, 2001 $ 3,665,889
July 1, 2001 11,400,000
-----------
$15,065,889
===========
Revolving Credit Facility. At March 31, 2000, Parallel was a party to a
loan agreement with Bank One, Texas, N.A. On December 27, 1999, our loan
agreement with the bank was restated in its entirety. The loan agreement, as
restated, currently provides for a revolving credit facility under which we may
borrow up to the lesser of (a) $30,000,000 or (b) the borrowing base then in
effect. When we entered into the restated loan agreement, we were required to
make monthly principal payments in the amount of $300,000. After giving effect
to these principal payments, the total outstanding principal amount of our bank
borrowings was $15,965,889 at December 31, 1999. The initial borrowing base
under the restated loan agreement was established at $15,965,889. The borrowing
base automatically reduces by $300,000 each month, which means that we are
required to make a principal payment in the same amount by which the borrowing
base is reduced. Beginning January 1, 2000, the borrowing base will continue to
reduce automatically at the rate of $300,000 per month. The borrowing base and
the borrowing base reduction amount are required to be redetermined by the bank
on February 1, 2000 and on May 1 and November 1 of each year, beginning May 1,
2000. Our borrowing base is currently under review.
At March 31, 2000, we had borrowed all the funds currently available under
the Revolving Facility. All indebtedness under the revolving facility matures
July 1, 2001. The loan is secured by substantially all of our oil and gas
properties. Commitment fees of .25% per annum on the difference between the
commitment and the average daily amount outstanding are due quarterly.
8
The unpaid principal balance of the revolving facility bears interest at
our election at a rate equal to (i) the bank's base lending rate plus .25% or
(ii) the bank's Eurodollar rate plus a margin of 3.0%. Interest under the
Revolving Facility is due and payable monthly. At March 31, 2000, the interest
rate was the bank's base rate plus .25% or 9%.
The loan agreement contains various restrictive covenants and compliance
requirements, which include (1) maintenance of certain financial ratios, (2)
limiting the incurrence of additional indebtedness, (3) prohibiting payment of
dividends on common stock, and (4) prohibiting the payment of dividends on
preferred stock when an event of default under the loan agreement is in
existence.
NOTE 3. PREFERRED STOCK
We have outstanding 974,500 shares of 6% Convertible Preferred Stock, $0.10
par value per share. Cumulative annual dividends of $0.60 per share are payable
semi-annually on June 15 and December 15 of each year. Each share of Preferred
Stock may be converted, at the option of the holder, into 2.8571 shares of
common stock at an initial conversion price of $3.50 per share, subject to
adjustment in certain events. The preferred stock has a liquidation preference
of $10 per share and has no voting rights, except as required by law. We may
redeem the preferred stock, in whole or part, for $10 per share plus accrued and
unpaid dividends.
NOTE 4. FULL COST CEILING TEST
We use the full cost method to account for our oil and gas producing
activities. Under the full cost method of accounting, the net book value of oil
and gas properties, less related deferred income taxes, may not exceed a
calculated "ceiling." The ceiling limitation is the discounted estimated
after-tax future net revenues from proved oil and gas properties. In calculating
future net revenues, current prices and costs are generally held constant
indefinitely. The net book value, less related deferred income taxes, is
compared to the ceiling on a quarterly and annual basis. Any excess of the net
book value, less related deferred income taxes, is generally written off as an
expense. Under rules and regulations of the SEC, the excess above the ceiling is
not written off if, subsequent to the end of the quarter or year but prior to
the release of the financial results, prices increased sufficiently such that an
excess above the ceiling would not have existed if the increased prices were
used in the calculations.
During the fourth quarter of 1999, we recognized a noncash impairment
charge of $1,705,000 related to our oil and gas reserves and unproved
properties. The impairment of oil and gas assets was primarily the result of the
effect a decrease in year-end proved reserves. At March 31, 2000, our net book
value of oil and gas, less related deferred income taxes, was below the
calculated ceiling. As a result, we were not required to record a reduction of
our oil and gas properties under the full cost method of accounting.
NOTE 5. LIABILITY IN FIRST PERMIAN, LLC
At March 31, 2000, our net investment in First Permian, LLC was a liability
as a result of recording our 35% share of the loss of First Permian for the
quarter. We have recorded a liability to the extent that we have guaranteed
$10,000,000 of the debt of First Permian, LLC.
NOTE 6. NET INCOME PER COMMON SHARE
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share" ("FAS 128"). FAS
128 replaced the calculation of primary and fully diluted earnings per share
with basic and diluted earnings per share. Unlike primary earnings per share,
basic earnings per share excludes any dilutive effects of options, warrants and
convertible securities and is computed by dividing income available to common
stockholders by the weighted average number of common shares outstanding for the
period. Diluted earnings per share is computed similarly to the previously
reported fully diluted earnings per share and reflects the assumed conversion of
all potentially dilutive securities.
9
Three Months Ended March 31,
----------------------------
1999 2000
---- ----
Basic EPS Computation:
Numerator -
Net income (loss) $ (10,283) $ 193,601
Preferred stock dividend (170,538) (170,538)
---------- ----------
Net income (loss) available to common stockholders $ (180,821) $ 23,063
========== ==========
Denominator -
Weighted average common shares outstanding 18,328,525 20,331,858
=========== ==========
Basic earnings (loss) per share $ (0.010) $ 0.0011
=========== ==========
Three Months Ended March 31,
----------------------------
1999 2000
---- ----
Diluted EPS Computation:
Numerator -
Net income (loss) $ (10,283) $ 193,601
Preferred stock dividends (170,538) (170,538)
---------- ----------
Net income (loss) available to common stockholders $ (180,821) $ 23,063
========== ==========
Denominator -
Weighted average common shares outstanding 18,328,525 20,331,858
Employee 325,869
---------- ----------
18,328,525 20,657,727
========== ==========
Diluted earnings (loss) per share $ (0.010) $ 0.0011
========== ==========
Convertible preferred stock equivalents of 974,500 shares for the
three-month periods ended March 31, 2000 and March 31, 1999 that could
potentially dilute basic earnings per share in the future, were not included in
the computation of diluted earnings per share for the periods presented because
to do so would have been antidilutive.
NOTE 7: RECENTLY ANNOUNCED ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities" which establishes standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. It establishes conditions
under which a derivative may be designated as a hedge, and establishes standards
for reporting changes in the fair value of a derivative. SFAS No. 133 is
required to be implemented for the first quarter of the fiscal year ended 2000.
Early adoption is permitted. Recently, the FASB deferred the implementation
requirements of SFAS No. 133 for one year. We have not evaluated the effects of
implementing SFAS No. 133.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
In addition to historical information contained herein, this Form 10-Q
Report contains forward-looking statements subject to various risks and
uncertainties that could cause our actual results to differ materially from
those in the forward-looking statements. Forward-looking statements can be
identified by the use of forward-looking terminology such as "may," "will,"
"expect," "intend," "anticipate," "estimate," "continue," "present value,"
"future," "reserves" or other variations thereof or comparable terminology.
Factors, that could cause or contribute to such differences could include, but
are not limited to, those relating to our growth strategy, outstanding
indebtedness, changes in interest rates, dependence on weather conditions,
seasonality, expansion and other activities of competitors, changes in federal
or state environmental laws and the administration of such laws, and the general
condition of the economy and its effect on the securities market. While we
believe our forward-looking statements are based upon reasonable assumptions,
there are factors that are difficult to predict and that are influenced by
economic and other conditions beyond our control. Investors are directed to
consider such risks and other uncertainties discussed in documents filed by
Parallel with the SEC.
The following discussion and analysis should be read in conjunction with
our Financial Statements and the related notes.
OVERVIEW
Our business strategy is to increase oil and gas reserves, production, cash
flow and earnings through:
. using 3-D seismic and other advanced technologies to conduct our
exploratory activities;
. investing in high-potential exploration prospects;
. acquiring producing properties we believe can add incremental value;
. exploiting our existing producing properties;
. emphasizing cost controls; and
. positioning for opportunity.
As part of this business strategy, we have discovered oil and gas reserves
using 3-D seismic technology in the Horseshoe Atoll Reef Trend of west Texas and
the Yegua/Frio Gas Trend onshore the Gulf Coast of Texas. Additionally, we have
acquired oil and gas producing properties in the Permian Basin of west Texas.
Capital utilized to acquire such reserves has been provided primarily by secured
bank financing, sales of our equity securities and cash flow from operations.
Investment in First Permian. During 1999, we joined with three privately
held oil and gas companies to acquire oil and gas properties from Fina Oil and
Chemical Company. The acquisition was effected through the formation of First
Permian, which entered into a cash merger with a wholly owned subsidiary of Fina
Oil and Chemical Company. The primary assets of the acquired subsidiary are oil
and gas reserves and associated assets in producing fields located in the
Permian Basin of west Texas. After giving effect to purchase price adjustments,
First Permian paid to Fina Oil and Chemical Company cash in the aggregate amount
of approximately $92.0 million.
First Permian is owned by Parallel, Baytech, Inc., Tejon Exploration
Company and Mansefeldt Investment Corporation and affiliates. Baytech, Tejon and
Mansefeldt are privately held oil and gas companies. Parallel and Baytech are
the managers of First Permian and each owns a 35% membership interest. Tejon
Exploration and Mansefeldt Investment and affiliates each own a 15% interest in
First Permian. We account for our interest in First Permian using the equity
method of accounting whereby our investment is increased our decreased by our
proportionate share of First Permian's net income or loss.
The purchase was financed, in part, with the proceeds of a $110.0 million
revolving credit facility provided by Bank One, Texas, N.A. to First Permian.
The principal amount of the initial loan was $74.0 million. In addition, First
Permian also borrowed $8.0 million from Tejon Exploration Company and $8.0
million from Mansefeldt Investment Corporation to help finance the purchase.
Operating Performance. Our operating performance is influenced by several
factors, the most significant of which are the prices we receive for our oil and
gas production volumes. The world price for oil has overall influence on the
11
prices we receive for our oil production. The prices received for different
grades of oil are based upon the world price for oil, which is then adjusted
based upon the particular grade. Typically, light oil is sold at a premium,
while heavy grades of crude are discounted. Gas prices we receive are primarily
influenced by seasonal demand, weather, hurricane conditions in the Gulf of
Mexico, availability of pipeline transportation to end users and proximity of
our wells to major transportation pipeline infrastructure and, to a lesser
extent, world oil prices. Additional factors influencing our operating
performance include production expenses, overhead requirements, and cost of
capital.
Our oil and gas exploration, development and acquisition activities require
substantial and continuing capital expenditures. Historically, the sources of
financing to fund our capital expenditures have included:
. cash flow from operations,
. sales of our equity securities, and
. bank borrowings.
For the three months ended March 31, 2000, the average sales price we
received for our crude oil production averaged $26.70 per barrel compared with
$12.18 per barrel at March 31, 1999 and $17.32 per barrel at December 31, 1999.
The average sales price for natural gas during this same period was $3.02 per
mcf compared with $2.03 per mcf at March 31, 1999 and $2.04 per mcf at December
31, 1999.
Primarily because of sustained low oil and gas prices, which have adversely
affected the value of our proved oil and gas reserves, our available borrowing
capacity under our revolving credit facility was reduced from $18,815,889 to
$15,965,889 at December 31, 1999. This means we have borrowed all the funds
currently available under our revolving credit agreement. We have reduced our
drilling activities during this period of reduced cash flow and restricted
capital availability.
Our oil and gas producing activities are accounted for using the full cost
method of accounting. Under this method, we capitalize all costs incurred in
connection with the acquisition of oil and gas properties and the exploration
for and development of oil and gas reserves. See Note 4 to Financial Statements.
These costs include lease acquisition costs, geological and geophysical
expenditures, costs of drilling both productive and non-productive wells, and
overhead expenses directly related to land acquisition and exploration and
development activities. Proceeds from the disposition of oil and gas properties
are accounted for as a reduction in capitalized costs, with no gain or loss
recognized unless such disposition involves a material change in reserves, in
which case the gain or loss is recognized.
Depletion of the capitalized costs of oil and gas properties, including
estimated future development costs, is provided using the equivalent
unit-of-production method based upon estimates of proved oil and gas reserves
and production, which are converted to a common unit of measure based upon their
relative energy content. Unproved oil and gas properties are not amortized, but
are individually assessed for impairment. The cost of any impaired property is
transferred to the balance of oil and gas properties being depleted.
Our production and results of operations vary from quarter to quarter. We
do not expect our 2000 production volumes to increase significantly compared to
our production volumes in the prior year as a result of our drilling activities.
RESULTS OF OPERATIONS
Our business activities are characterized by frequent, and sometimes
significant, changes in our:
. sources of production;
. product mix (oil vs. gas volumes); and
. the prices we receive for our oil and gas production.
Year-to-year or other periodic comparisons of the results of our operations
can be difficult and may not accurately describe our condition. The following
table compares the results of operations on the basis of equivalent barrels of
oil ("EBO") for the period indicated. An EBO means one barrel of oil equivalent
using the ratio of six Mcf of gas to one barrel of oil.
12
Three Months Ended Three Months Ended
------------------------------------------- ---------------------------
9-30-99 12-31-99 3-31-00 3-31-99 3-31-00
--------- ---------- --------- --------- ---------
Production and prices:
Oil (Bbls) 31,991 41,177 39,283 44,619 39,283
Natural gas (Mcf) 645,301 615,766 570,504 697,593 570,504
Equivalent barrels of oil (EBO) 139,542 143,805 134,367 160,884 134,367
Oil price (per Bbl) $ 21.89 $ 23.96 $ 26.70 $ 12.18 $ 26.70
Gas price (per Mcf) $ 2.47 $ 2.82 $ 3.02 $ 2.03 $ 3.02
Price per EBO $ 16.42 $ 18.97 $ 20.65 $ 12.20 $ 20.65
Results of operations per EBO:
Oil and gas revenues $ 16.42 $ 18.97 $ 20.65 $ 12.20 $ 20.65
Costs and expenses:
Lease operating expense 4.29 4.80 4.57 3.19 4.57
Provision for losses on trade receivables 0.00 0.60 0.00 0.00 0.00
General and administrative 1.57 1.13 1.47 1.26 1.47
Depreciation and depletion 10.19 13.49 7.91 5.62 7.91
Impairment of oil and gas properties 0.00 11.86 0.00 0.00 0.00
------- ------- ------- ------- -------
Total costs and expense 16.05 31.88 13.95 10.07 13.95
------- ------- ------- ------- -------
Operating income 0.37 (12.91) 6.70 2.13 6.70
------- ------- ------- ------- -------
Equity in earnings (loss) of First Permian, LLC 1.30 0.12 (2.88) 0.00 (2.88)
Interest expense, net (2.78) (2.50) (2.41) (2.22) (2.41)
Other income, net 0.03 0.03 0.04 0.03 0.04
------- ------- ------- ------- -------
(1.45) (2.35) (5.25) (2.19) (5.25)
------- ------- ------- ------- -------
Net income (loss) $ (1.08) $(15.26) $ 1.45 $ (0.06) $ 1.45
======= ======= ======= ======= -------
Net operating cash flow before
working capital adjustments $ 9.11 $ 10.08 $ 12.24 $ 5.56 $ 12.24
======= ======= ======= ======= -------
The following table sets forth for the periods indicated the percentage of
total revenues represented by each item reflected on our statements of
operations.
Three Months Ended Three Months Ended
------------------------------------------- ---------------------------
9-30-99 12-31-99 3-31-00 3-31-99 3-31-00
--------- ---------- --------- --------- ---------
Oil and gas revenues 100.0% 100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Lease operating expense 26.1 25.3 22.1 26.1 22.1
Provision for losses on trade receivables 0.0 3.2 0.0 0.0 0.0
General and administrative 9.5 6.0 7.1 10.3 7.1
Depreciation and depletion 62.0 71.1 38.3 46.0 38.3
Impairment of oil and gas properties 0.0 62.5 0.0 0.0 0.0
----- ----- ----- ----- -----
Total costs and expenses 97.6 168.1 67.5 82.4 67.5
----- ----- ----- ----- -----
Operating income 2.4 (68.1) 32.5 17.6 32.5
----- ----- ----- ----- -----
Equity in earnings (loss) of First Permian, LLC 7.9 0.6 (13.9) 0.0 (13.9)
Interest expense, net (16.9) (13.2) (11.7) (18.2) (11.7)
Other income, net 0.2 0.2 0.2 0.2 0.2
----- ----- ----- ----- -----
(8.8) (12.4) (25.4) (18.0) (25.4)
----- ----- ----- ----- -----
Net income (loss) (6.4) (80.5) 7.1 (0.4) 7.1
===== ===== ===== ===== =====
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000:
Oil and Gas Revenues. Oil and gas revenues increased $811,502, or 41%, to
$2,774,591 for the three months ended March 31, 2000, from $1,963,089 for the
same period of 1999. The increase was primarily the result of a 69% increase in
the average sales price per EBO. We received $20.65 per EBO in the three months
ended March 31, 2000 compared with $12.20 per EBO for the same period of 1999.
Higher prices were partially offset by a 16% decrease in oil and gas production.
13
Production Costs. Production costs increased $99,993, or 19%, to $613,815
during the first three months of 2000, compared with $513,882 for the same
period of 1999. Average production costs per EBO increased 43%, to $4.57, for
the first three months in 2000 compared to $3.19 for the same period in 1999,
primarily a result of increased production taxes associated with higher oil and
gas revenues and a 16% decrease in oil and gas production.
General and Administrative Expenses. General and administrative expenses
decreased by $5,437 or 3% to $197,800 for the first three months of 2000, from
$203,237 for the same period of 1999. The decrease was primarily due to a
decrease in legal and public reporting costs. General and administrative
expenses were $1.47 per EBO in the first three months of 2000 compared to $1.26
per EBO in the first three months of 1999. The increase per EBO is a result of
lower production volumes in the first quarter of 2000 when compared with the
same period of the prior year. Future general and administrative costs are
expected to remain fairly stable with no material increases expected in any
particular category.
Depreciation, Depletion and Amortization Expense. Depreciation, depletion
and amortization expense ("DD&A") increased by $159,633, or 18%, to $1,063,469
for the first three months of 2000 compared with $903,836 for the same period of
1999. As a percentage of revenues, the DD&A rate decreased by 17% when compared
with the prior year first quarter, a result of an increase in the average sales
price per EBO we received in the first quarter of 2000. The DD&A rate per EBO
increased to $7.91 for the first quarter of 2000 compared with $5.62 per EBO for
the first quarter of 1999. The increase in the DD&A rate per EBO is attributable
to lower production volumes in the current quarter, a decrease in year-end
proved reserves and a noncash impairment charge incurred in the fourth quarter
of 1999 that reduced our full cost pool.
Historically, we have reviewed our estimates of proven reserve quantities
on an annual basis. However, due to the recent volatility of oil and gas prices,
we conduct internal reviews of our estimated proven reserves on a more frequent
basis and make necessary adjustments to our DD&A rate accordingly. We believe
periodic reviews and adjustments, if necessary, will result in a more accurate
reflection of its DD&A rate during the year and minimize possible year-end
adjustments.
Net Interest Expense. Interest expense decreased $33,645, or 9%, to
$324,150 for the three months ended March 31, 2000 compared with $357,795 for
the same period of 1999; due principally to decreased bank borrowings.
Net Income and Operating Cash Flow. We reported net income of $193,601 for
the three months ended March 31, 2000 compared to a net loss of $10,283 for the
three months ended March 31, 1999. Operating cash flow increased $750,028, or
84%, to $1,643,581 for the three months ended March 31, 2000 compared to
$893,553 for the three months ended March 31, 1999. The increase in net income
and operating cash flow resulted from a 41% increase in oil and gas revenues, a
69% increase in the average sales price per EBO and a 9% decrease in interest
expense. These factors were partially offset by a 19% increase in production
costs, an 18% increase in DD&A expenses, and a 16% decrease in production
volumes. In addition, we recorded a loss of $386,511 associated with our 35%
interest in First Permian. This is a non cash charge and does not affect
operating cash flows.
LIQUIDITY AND CAPITAL RESOURCES
Our capital resources consist primarily of cash flows from our oil and gas
properties and bank borrowings supported by our oil and gas reserves. Our level
of earnings and cash flows depends on many factors, including the price of oil
and natural gas.
Working capital decreased $640,035 as of March 31, 2000 compared to
December 31, 1999. Current liabilities exceeded current assets by $458,982 at
March 31, 2000 compared with $71,647 at December 31, 1999. Current liabilities
increased primarily due to an increase in accounts payable and a liability
associated with recording our 35% share of the loss of First Permian.
We incurred property costs of $1,015,315, primarily for our oil and gas
property acquisition, development, and enhancement activities for the three
months ended March 31, 2000. Such costs were financed by the utilization of the
cash provided by operations and proceeds from the sale of certain properties.
14
Based on our projected oil and gas revenues and related expenses, we
believe that our internally generated cash flow will be sufficient to fund
normal operations, interest expense and principal reduction payments on bank
debt and preferred stock dividends. We continually review and consider
alternative methods of financing.
TRENDS AND PRICES
Changes in oil and gas prices significantly affect our revenues, cash flows
and borrowing capacity. Markets for oil and gas have historically been, and will
continue to be, volatile. Prices for oil and gas typically fluctuate in response
to relatively minor changes in supply and demand, market uncertainty, seasonal,
political and other factors beyond our control. We are unable to accurately
predict domestic or worldwide political events or the effects of other such
factors on the prices we receive for our oil and gas. Historically, we have not
entered into transactions to hedge against changes in oil and gas prices, but we
may elect to enter into hedging transactions in the future to protect against
fluctuations in oil and gas prices.
Because of the prolonged deterioration in oil and gas prices experienced in
1998 and the first half of 1999, the capital normally available to us from our
cash flows and bank borrowings has been significantly reduced. In January 1998,
we were receiving approximately $17.00 per barrel of oil and $2.70 per Mcf of
gas for the oil and gas it produced. Since then, oil prices have been as low as
$10.00 per barrel, the lowest level we have seen since Parallel was formed in
1979. At January 1, 1999, we received approximately $10.50 per barrel of oil and
$2.00 per Mcf of gas. In April 1999, oil prices increased to approximately
$16.00 per barrel of oil, while gas prices have remained at approximately $2.00
per Mcf. There can be no assurance that oil and gas prices will not decline in
the future.
Our capital expenditure budget for 2000 is highly dependent on future oil
and gas prices and will be consistent with internally generated cash flows.
During 1999, the average sales price we received for our oil was
approximately $17.32 per barrel while the average sales prices we received for
natural gas was approximately $2.27 per thousand cubic feet ("Mcf"). At March
31, 2000, the average price we received for our oil production was approximately
$26.70 per Bbl, while the average price received at that same date for our
natural gas production was approximately $3.02 per Mcf.
YEAR 2000 ISSUES
We have not incurred any computer failures or problems related to the Year
2000 issue. However, we have no assurance that our business partners or
governmental agencies or other key third parties have not incurred Year 2000
issues that may ultimately affect us. We are continuing to monitor our systems
to identify and rectify any Year 2000 issues that may occur in the future.
FORWARD-LOOKING STATEMENTS
In addition to historical information contained herein, this Form 10-Q
Report contains forward-looking statements subject to various risks and
uncertainties that could cause the Company's actual results to differ materially
from those in the forward-looking statements. Forward-looking statements can be
identified by the use of forward-looking terminology such as "may," "will,"
"expect," "intend," "anticipate," "estimate," "continue," "present value,"
"future," "reserves" or other variations thereof or comparable terminology.
Factors, that could cause or contribute to such differences could include, but
are not limited to, those relating to the Company's growth strategy, outstanding
indebtedness, changes in interest rates, dependence on weather conditions,
seasonality, expansion and other activities of competitors, changes in federal
or state environmental laws and the administration of such laws, and the general
condition of the economy and its effect on the securities market. While the
Company believes its forward-looking statements are based upon reasonable
assumptions, there are factors that are difficult to predict and that are
influenced by economic and other conditions beyond the Company's control.
Investors are directed to consider such risks and other uncertainties discussed
in documents filed by the Company with the Securities and Exchange Commission.
15
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not trade in derivative financial instruments and do not have firmly
committed sales transactions. We have not entered into hedging arrangements and
do not have any delivery commitments. While hedging arrangements reduce exposure
to losses as a result of unfavorable price changes, they also limit our ability
to benefit from favorable market price changes.
Our major market risk exposure is in the pricing applicable to our oil and
natural gas production. Realized pricing is primarily driven by the prevailing
domestic price for crude oil and spot prices applicable to the region in which
we produce natural gas. Historically, prices received for oil and gas production
have been volatile and unpredictable. Pricing volatility is expected to
continue. Oil prices ranged from a monthly low of $24.90 per barrel to a monthly
high of $28.90 per barrel during first quarter 2000. The natural gas prices we
received during first quarter 2000 ranged from a monthly low of $1.75 per Mcf to
a monthly high of $3.80 per Mcf. A significant decline in the prices of oil and
natural gas could have a material adverse effect on our financial condition and
results of operations.
Our only financial instrument sensitive to changes in interest rates is
bank debt. Our annual interest costs in 2000 will fluctuate based on short-term
interest rates. As the interest rate is variable and reflects current market
conditions, the carrying value approximates the fair value. The table below
shows principal cash flows and related weighted average interest rates by
expected maturity dates. Weighted average interest rates were determined using
weighted average interest paid and accrued in December 1999.
March July
2001 2001 Total Fair Value
----- ---- ----- ----------
(in 000's, except interest rates)
Variable rate debt:
Revolving Facility (secured) $3,666 $11,400 $15,066 $15,066
Average interest rate 9.0% 9.0% 9.0%
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Certificate of Incorporation of Registrant. (Incorporated by
reference to Exhibit 3.1 to Form 10-K of the Registrant for the
fiscal year ended December 31, 1998)
3.2 Bylaws of Registrant (Incorporated by reference to Exhibit 3.2 to
Form 10-K of the Registrant for the fiscal year ended December
31, 1995)
4.1 Certificate of Designations, Preferences and Rights of Serial
Preferred Stock - 6% Convertible Preferred Stock (Incorporated by
reference to Exhibit 4.1 to Form 10-Q of the Registrant for the
fiscal quarter ended September 30, 1998)
10.1 Restated Loan Agreement, dated December 27, 1999, between the
Registrant and Bank One, Texas, N.A. (Incorporated by reference
to Exhibit 10.8 to Form 10-K of the Registrant for the fiscal
year ended December 31, 1999)
*27. Financial Data Schedule
(b) Reports on Form 8-K
No reports were filed on Form 8-K during the quarter ended March
31, 2000.
- -----------------------
* Filed herewith.
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SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PARALLEL PETROLEUM CORPORATION
BY: /s/ THOMAS R. CAMBRIDGE
Date: May 10, 2000 ----------------------------------
Thomas R. Cambridge
Chairman of the Board of Directors
and Chief Executive Officer
Date: May 10, 2000 BY: /s/ LARRY C. OLDHAM
----------------------------------
Larry C. Oldham,
President and Principal
Financial Officer