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 September 30, 1998 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 ___
The number of outstanding shares of the issuer's common stock, $.01
par value, was 18,156,858 shares as of October 1, 1998.
2
TABLE OF CONTENTS
PART I. - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Reference is made to the succeeding pages for the following financial
statements:
- Balance Sheets as of December 31, 1997 and September 30, 1998
- Statements of Operations for the three months ended September 30,
1997 and 1998 and nine months ended September 30, 1997 and 1998
- Statements of Cash Flows for the nine months ended September 30,
1997 and 1998
- Notes to Financial Statements
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
PART II. - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
/a/ Exhibits
4.1 Certificate of Designations, Preferences and Rights of
Serial Preferred Stock - 6% Convertible Preferred Stock
27. Financial Data Schedule
/b/ Reports on Form 8-K
No reports were filed on Form 8-K during the quarterly period
ended September 30, 1998.
3
PARALLEL PETROLEUM CORPORATION
BALANCE SHEETS
December 31, September 30, 1998
ASSETS 1997 (Unaudited)
- ------ ------------ -----------
Current assets:
Cash and cash equivalents $ 597,149 $ 7,932
Accounts receivable:
Oil and gas 1,649,350 1,795,975
Other, net of allowance for doubtful accounts
of $28,130 in 1997 and 1998 915,358 751,562
Affiliate 9,506 10,055
----------- -----------
2,574,214 2,557,592
Other assets 37,183 98,384
----------- -----------
Total current assets 3,208,546 2,663,908
----------- -----------
Property and equipment, at cost:
Oil and gas properties, full cost method 62,659,570 79,075,135
Other 433,922 287,619
----------- -----------
63,093,492 79,362,754
Less accumulated depreciation and depletion 16,514,102 19,421,854
----------- -----------
Net property and equipment 46,579,390 59,940,900
----------- -----------
Other assets, net of accumulated amortization of
$52,263 in 1997 and $79,355 in 1998 67,596 72,127
----------- -----------
$49,855,532 $62,676,935
=========== ===========
4
December 31, September 30, 1998
1997 (Unaudited)
------------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Accounts payable and accrued liabilities:
Trade $ 5,313,439 $ 5,981,542
Affiliates 14,660 1,688
Other -- 105,000
Income taxes payable 42,586 --
----------- -----------
Total current liabilities 5,370,685 6,088,230
----------- -----------
Long-term debt 12,182,610 17,906,000
Deferred income taxes 3,183,484 3,369,448
Stockholders' equity:
Preferred stock - $.60 Cumulative Convertible
Preferred stock - par value $.10 per share,
(aggregate liquidation preference of $10),
authorized 10,000,000 shares, issued and
outstanding 600,000 in 1998 -- 60,000
Common stock - par value $.01 per share,
authorized 60,000,000 shares, issued and
outstanding 18,114,358 in 1997 and 18,156,858
in 1998 181,144 181,569
Additional paid-in surplus 22,839,049 28,663,398
Retained earnings 6,098,560 6,408,290
----------- -----------
Total stockholders' equity 29,118,753 35,313,257
Contingencies
----------- -----------
$49,855,532 $62,676,935
=========== ===========
* The balance sheet as of December 31, 1997 has been derived from the Company's
audited financial statements. The accompanying notes are an integral part
of these financial statements.
5
PARALLEL PETROLEUM CORPORATION
STATEMENTS OF OPERATIONS
Three Months Ended September 30, 1997 and 1998
Nine Months Ended September 30, 1997 and 1998
(Unaudited)
Three Months Nine Months
1997 1998 1997 1998
---------- ---------- ---------- ----------
Oil and gas revenues $2,878,040 $2,540,809 $9,573,421 $7,106,512
---------- ---------- ---------- ----------
Cost and expenses:
Lease Operating expense 713,319 622,205 2,253,102 1,792,895
General and administrative 123,125 227,865 421,038 647,371
Depreciation, depletion and amortization 793,416 1,114,438 2,608,024 3,108,721
---------- --------- ---------- ----------
1,629,860 1,964,508 5,282,164 5,548,987
---------- --------- ---------- ----------
Operating income 1,248,180 576,301 4,291,257 1,557,525
---------- --------- ---------- ----------
Other income (expense), net:
Interest income 3,629 403 8,232 873
Other income 8,031 8,226 24,996 59,337
Interest expense (216,041) (396,682) (592,958)(1,042,777)
Other expense (1,545) (2,687) (6,329) (11,264)
---------- ---------- ---------- ----------
Total other expense, net (205,926) (390,740) (566,059) (993,831)
---------- ---------- ---------- ----------
Income before income taxes 1,042,254 185,561 3,725,198 563,694
Income tax expense - deferred 343,943 61,269 1,229,315 185,964
---------- ---------- ---------- ----------
Net income $ 698,311 $ 124,292 $2,495,883 $ 377,730
========== ========== ========== ==========
Cumulative preferred stock dividend $ -- $ 90,000 $ -- $ 173,000
========== ========== ========== ==========
Net income available to
Common stockholders $ 698,311 $ 34,292 $2,495,883 $ 204,730
========== ========== ========== ==========
Net income per common share
Basic $ .039 $ .002 $ .140 $ .011
========== ========== ========== ==========
Diluted $ .037 $ .002 $ .134 $ .011
========== ========== ========== ==========
Weighted average common shares
Outstanding - basic 17,815,043 18,381,967 17,778,775 18,207,852
========== ========== ========== ==========
Outstanding - diluted 18,720,939 18,756,045 18,574,554 18,751,500
========== ========== ========== ==========
The accompanying notes are an integral part of these financial statements
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PARALLEL PETROLEUM CORPORATION
STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 1997 and 1998
(Unaudited)
1997 1998
----------- -----------
Cash flows from operating activities:
Net income $2,495,883 $ 377,730
Adjustments to reconcile net income to net cash
Provided by operating activities:
Depreciation, depletion and amortization 2,608,024 3,108,721
Income taxes 1,229,315 185,964
Decrease (increase) in other, net 1,882 (4,531)
Changes in assets and liabilities:
Decrease in accounts receivable 887,510 16,622
Increase in prepaid expenses and other (115,628) (61,201)
(Decrease) increase in accounts payable and
accrued liabilities (493,329) 612,545
--------- ----------
Net cash provided by operating activities 6,613,657 4,235,850
--------- ----------
Cash flows from investing activities:
Additions of property and equipment (13,620,405) (17,353,375)
Proceeds from disposition of property and equipment 5,662,408 883,144
---------- -----------
Net cash used in investing activities (7,957,997) (16,470,231)
---------- -----------
Cash flows from financing activities:
Proceeds from the issuance of long-term debt 11,215,000 14,307,390
Payment of long-term debt (11,433,781) (8,584,000)
Proceeds from exercise of options and warrants 71,968 70,625
Stock offering costs -- (80,851)
Proceeds from common stock issuance 1,469,915 --
Proceeds from preferred stock issuance -- 6,000,000
Payment of preferred stock dividend -- (68,000)
---------- ----------
Net cash provided by financing activities 1,323,102 11,645,164
---------- ----------
Net decrease in cash and cash equivalents (21,238) (589,217)
Beginning cash and cash equivalents 41,569 597,149
---------- ----------
Ending cash and cash equivalents $ 20,331 $ 7,932
========== ==========
The accompanying notes are an integral part of these financial statements
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PARALLEL PETROLEUM CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 1. OPINION OF MANAGEMENT
The financial information included herein is unaudited. However,
such information includes all adjustments (consisting solely of normal
recurring adjustments) which are, in the opinion of management, necessary
for a fair statement of the results of operations for the interim periods.
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 pursuant to the
rules and regulations of the Securities and Exchange Commission. These
financial statements should be read in connection with the financial
statements and notes thereto included in the Company's 1997 Annual Report
and Form 10-K.
NOTE 2. LONG TERM DEBT
The Company and its bank lender are parties to a loan agreement
pursuant to which the Company may borrow up to the lesser of $30,000,000 or
the "borrowing base" then in effect. The borrowing base at September 30, 1998
was $21,100,000 includes (i) a $19,100,000 revolving credit facility
(the "Revolving Facility") and (ii) an additional $2,000,000 non-revolving
line of credit (the "Development Facility"). Loans are made to the Company
under a promissory note secured by substantially all of the Company's oil and
gas properties. All indebtedness under the Revolving Facility matures on
July 1, 2001 and all indebtedness under the Development Facility is due and
payable on March 31, 1999. Loans made to the Company under the Revolving
Facility bear interest at the election of the Company at a rate equal to (i)
the bank's base lending rate less .25% or (ii) the bank's Eurodollar rate
plus a margin of 2.50%. Loans made under the Development Facility bear
interest at the bank's base lending rate plus 5.50%. Interest only is payable
monthly until maturity. On September 30, 1998, the interest rate in effect
under the Revolving Facility was the bank's base lending rate less .25%, or
8.25%. The interest rate in effect for the Development Facility was the
bank's base rate plus 5.5% or 14.0% at September 30, 1998. Commitment fees
of .25% per annum on the difference between the borrowing base and the
average daily amount outstanding are due quarterly. Under terms of the loan
facility, the principal amount outstanding at any one time may never exceed
the borrowing base established by the bank. The borrowing base reduces
automatically each month at a rate of $380,000 (the "monthly reduction
amount"). The borrowing base and the monthly reduction amount are
redetermined by the bank on or about April 1 and October 1 of each year or at
such other times as the bank may elect. At September 30, 1998, the principal
amount outstanding under the Revolving Facility was $17,906,000 and the
Company had no borrowings outstanding under the Development Facility at the
same date. In October, 1998, the Company borrowed $100,000 under the
Development Facility, which amount is outstanding at the date of this report.
The loan agreement requires the Company to comply with certain
covenants including limits on additional debt, maintenance of minimum levels
of financial ratios and dividend payment restrictions.
At September 30, 1998, the Company was in default under the loan
agreement for an event of noncompliance with a certain covenant of the loan
agreement. The Company has obtained a waiver of the default from its bank
lender. However, as of November 10, 1998, the Company was again in compliance
with the covenant.
NOTE 3. CONVERTIBLE PREFERRED STOCK
On October 30, 1998, the Company completed a private placement of
374,500 shares of its 6% Convertible Preferred Stock, $0.10 par value per
share (the "Preferred Stock"). Cumulative dividends of $0.60 are payable
semi-annually on June 15 and December 15 of each year, commencing on December
15, 1998. 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. See Part II -
Other Information - Item 2.
The Company may redeem the Preferred Stock, in whole or part, after
October 20, 1999, for $10 per share plus accrued dividends.
Proceeds received, net of expenses, were approximately $3,734,000.
The net proceeds from the sale of the Preferred Stock were used to reduce the
indebtedness under the Company's loan agreement.
On October 16, 1998, the Company completed an exchange offer of 600,000
shares of its 6% Convertible Preferred Stock, $0.10 par value per share (the
8
"Preferred Stock") in exchange for all of the outstanding shares of the
Company's $.60 Cumulative Convertible Preferred Stock ("Old Preferred Stock").
The exchange offer was conditioned on 100% of the Old Preferred Stock being
exchanged and the Company's agreement to offer to holders (or their affiliates),
additional shares of Preferred Stock equal to not less than 10% of the number
of shares of Old Preferred Stock held by them. In the Exchange Offer, one
share of Preferred Stock was exchanged for each share of Old Preferred Stock.
Holders of Old Preferred Stock who exchanged shares in the Exchange
Offer have substantially the same rights as holders of Old Preferred Stock,
except that (i) the date on which the Preferred Stock can be converted is six
months and one day after the closing of the Exchange Offer; (ii) the date on
which the Company can redeem the Preferred Stock will be October 20, 1999
rather than April 8, 1999; and (iii) the conversion price is lower. 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. See Part II - Other
Information - Item 2.
NOTE 4: FULL COST CEILING TEST
The Company uses the full cost method to account for its 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 the Securities and Exchange Commission rules
and regulations, 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.
At December 31, 1997, March 31, 1998, June 30, 1998, and September 30,
1998, the Company's net book value of oil gas properties, less related deferred
income taxes, was below the calculated ceiling. As a result, the Company was
not required to record a reduction of its oil and gas properties under the
full cost method of accounting. If oil prices continue to deteriorate and
natural gas prices further weaken, the Company may be required to record a
non-cash charge to earnings in subsequent accounting periods if the net book
value of its oil and gas properties exceeds the ceiling limitation. Non-cash
charges to earnings resulting from ceiling test impairment do not represent
a write-down of the Company's proved oil and gas reserves and do not affect
the Company's cash flows. However, a ceiling test impairment would have the
effect of reducing future depreciation, depletion and amortization charges
and, therefore, increasing reported earnings in subsequent periods.
NOTE 5. NET INCOME PER COMMON SHARE
The Company implemented Statement of Financial Accounting Standards
No. 128 ("SFAS 128") - Earnings per Share, for the year ended December 31,
1997. SFAS 128 replaces the presentation of primary earnings per share
("EPS") with the presentation of basic EPS, which excludes dilution and is
computed by dividing income available to common shareholders by the weighted-
average number of common shares outstanding for the period. SFAS 128 has
been applied retroactively for each period presented. In accordance with SFAS
128, the reconciliation of the numerators and denominators for diluted DPS is
presented below:
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1998 1997 1998
---------- ---------- ---------- ----------
Basic EPS Computation:
Numerator -
Net income $ 698,311 $ 124,292 $2,495,883 $ 377,730
Preferred stock dividends -- (90,000) -- (173,000)
---------- ---------- ---------- ----------
Net income available to common Stockholders 698,311 34,292 2,495,883 204,730
Denominator
Weighted average common shares outstanding 17,815,043 18,381,967 17,778,775 18,207,852
---------- ---------- ---------- ----------
Basic EPS $ 0.039 $ 0.002 $ 0.140 $ 0.011
========== ========== ========== ==========
9
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1998 1997 1998
---------- ---------- ---------- ----------
Diluted EPS Computation:
Numerator -
Net income $ 698,311 $ 124,292 $2,495,883 $ 377,730
Preferred stock dividend -- (90,000) -- (173,000)
---------- ---------- ---------- ----------
Net income available to common stockholders 698,311 34,292 2,495,883 204,730
========== ========== ========== ==========
Denominator
Weighted average common shares outstanding 17,815,043 18,381,967 17,778,775 18,207,852
Employee stock options 888,979 370,530 788,525 537,307
Warrants 16,917 3,548 7,254 6,341
---------- ---------- ---------- ----------
18,720,939 18,756,045 18,574,554 18,751,500
========== ========== ========== ==========
Diluted EPS $ 0.037 $ 0.002 $ 0.134 $ 0.011
========== ========== ========== ==========
Convertible preferred stock equivalents of 937,500 shares and 600,292
shares for the three month and nine month periods ended September 30, 1998,
respectively, that could potentially dilute basic EPS 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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion and analysis should be read in conjunction
with the Company's Financial Statements and the related notes thereto.
OVERVIEW
The Company's long-term business strategy is to increase the Company's
reserve base by utilizing 3-D seismic technology to obtain exploratory drilling
returns on capital invested with developmental drilling risks.
The Company intends to exploit its existing properties and acquire
those properties which it believes can be exploited by developing reserves
not previously produced. The Company undertakes projects only when it believes
the project has the potential for initial cash flow adequate to return the
project's capital expenditures within a short period of time, generally less
than 36 months. The Company also endeavors to maximize the present value of
its projects by accelerating production of its reserves consistent with
prudent reservoir management.
As part of this business strategy, the Company has made acquisitions
of oil and gas producing properties in the Permian Basin of West Texas and
has discovered oil and gas reserves through the use of 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. Capital utilized to acquire such reserves
has been provided primarily by secured bank financing, sales of the Company's
equity securities and cash flow from operations.
The Company's operating performance is influenced by several factors,
the most significant of which are the prices received for its oil and gas and
the Company's production volumes. The world price for oil has overall influence
on the prices that the Company receives for its 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
the Company receives are primarily influenced by seasonal demand, weather,
hurricane conditions in the Gulf of Mexico, availability of pipeline
transportation to end users and proximity of the Company's wells to major
transportation pipeline infrastructure and, to a lesser extent, world oil
prices. Additional factors influencing operating performance include
production expenses, overhead requirements, and cost of capital.
Industry conditions have deteriorated significantly during the latter
part of 1997 and the first ten months of 1998 as a result of declining oil
prices and weakening gas prices. There is an excess supply of, and reduced
10
demand for, crude oil worldwide. This excess supply has placed downward
pressure on oil prices in the United States as well as worldwide. Natural gas
prices have declined, primarily due to decreased demand and normal seasonal
conditions. There is substantial uncertainty regarding future oil and gas
prices. There can be no assurance that oil and gas prices will not further
decline in the future.
If the decline in crude oil and natural gas prices worsens or continues
for a protracted period, it would adversely affect the Company's revenues,
net income and cash flows from operations. Also, if prices stay at present
levels for an extended period of time or decline further, the Company may
delay or postpone certain of its capital projects.
For the three months ended September 30, 1998, the average sales
price received by the Company for its crude oil production averaged $12.15
per barrel compared with $19.88 per barrel at December 31, 1997. The average
sales price for natural gas during this same period was $2.25 per mcf compared
with $2.70 per mcf at December 31, 1997.
The Company's oil and gas producing activities are accounted for using
the full cost method of accounting. Accordingly, the Company capitalizes 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.
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.
The Company's quarterly production and results of operations vary
from quarter to quarter. Based on its scheduled drilling activities, the
Company does not currently anticipate that its production volumes in the
fourth quarter of 1998 will decrease significantly compared to its production
volumes in the prior year. However, normal operating considerations and
other factors could result in decreased production volumes in the fourth
quarter.
RESULTS OF OPERATIONS
Because of the Company's ever-changing reserve base and sources of
production, year to year or quarter to quarter comparisons of the Company's
results of operations can be difficult. This situation is further complicated
by significant changes in product mix (oil vs. gas volumes) and related price
fluctuations for both oil and gas. For these reasons, the table below
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.
Three Months Ended Three Months Ended
3-31-98 6-30-98 9-30-98 9-30-97 9-30-98
------- ------- ------- ------- -------
Production and Prices:
Oil (Bbls) 43,375 44,484 48,321 35,217 48,321
Natural gas (Mcf) 719,905 818,631 869,215 793,660 869,215
Equivalent barrels of oil (EBO) 163,359 180,923 193,190 167,494 193,190
Oil price (per Bbl) $14.08 $13.64 $12.15 $21.57 $12.15
Gas price (per Mcf) $ 2.09 $ 2.26 $ 2.25 $ 2.67 $ 2.25
Price per EBO $12.93 $13.56 $13.15 $17.18 $13.15
Results of Operations per EBO
Oil and gas revenues $12.93 $13.56 $13.15 $17.18 $13.15
Costs and expenses:
Lease operating expense 3.41 3.39 3.22 4.26 3.22
General and administrative 1.35 1.10 1.18 .73 1.18
Depreciation and depletion 5.70 5.88 5.77 4.74 5.77
------ ------ ------ ------ ------
Total costs and expenses 10.46 10.37 10.17 9.73 10.17
------ ------ ------ ------ ------
Operating income 2.47 3.19 2.98 7.45 2.98
11
Three Months Ended Three Months Ended
3-31-98 6-30-98 9-30-98 9-30-97 9-30-98
------- ------- ------- ------- -------
Interest expense (net) 1.86 1.89 2.05 1.27 2.05
Other expense (income) (.06) (.18) (.03) (.04) (.03)
------ ------ ------ ------ ------
Pretax income .67 1.48 .96 6.22 .96
Income tax expense - deferred (.22) .49 .32 2.05 .32
------ ------ ------ ------ ------
Net income $ .45 $ .99 .64 4.17 .64
------ ------ ------ ------ ------
Income before working
capital adjustments $ 6.37 $ 7.36 $ 6.73 $10.96 $ 6.73
====== ====== ====== ====== ======
11
Nine Months Ended
9-30-96 9-30-97 9-30-98
------- ------- -------
Production and Prices:
Oil (Bbls) 163,303 133,924 136,180
Natural gas (Mcf) 2,672,242 2,632,460 2,407,751
Equivalent barrels of oil (EBO) 608,677 572,667 537,472
Oil price (per Bbl) $21.00 $20.45 $13.25
Gas price (per Mcf) $ 2.34 $ 2.60 $ 2.20
Price per EBO $15.93 $16.72 $13.22
Results of Operations per EBO
Oil and gas revenues $15.93 $16.72 $13.22
Costs and expenses:
Lease operating expense 3.13 3.93 3.34
General and administrative .64 .74 1.20
Depreciation and depletion 4.30 4.55 5.78
------ ------ ------
Total costs and expenses 8.07 9.22 10.32
------ ------ ------
Operating income 7.86 7.50 2.90
------ ------ ------
Interest expense, net 1.53 1.03 1.94
Other expense (income) (.09) (.03) (.09)
------ ------ ------
Pretax income 6.42 6.50 1.05
Income tax expense 2.18 2.15 .35
------ ------ ------
Net income 4.24 4.35 .70
------ ------ ------
Net cash flow before working
capital adjustments $10.72 $11.05 $ 6.83
====== ====== ======
The following table sets forth for the periods indicated the percentage of t
otal revenues represented by each item reflected on the Company's statement
of operations.
Three Months Ended Nine Months Ended
3-31-98 6-30-98 9-30-98 9-30-97 9-30-98
------- ------- ------- ------- -------
Oil and gas revenues 100.0% 100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Lease operating expense 26.4 25.0 24.5 23.5 25.3
General and administrative 10.4 8.1 9.0 4.4 9.1
Depreciation and depletion 44.1 43.4 43.8 27.2 43.7
------ ------ ------ ------ ------
Total costs and expenses 80.9 76.5 77.3 55.1 78.1
------ ------ ------ ------ ------
Operating income 19.1 23.5 22.7 44.9 21.9
------ ------ ------ ------ ------
12
Three Months Ended Nine Months Ended
3-31-98 6-30-98 9-30-98 9-30-97 9-30-98
------- ------- ------- ------- -------
Interest expense, net 14.4 13.9 15.6 6.2 14.7
Other expense (income) (.5) (1.4) (.2) (.2) (.7)
------ ------ ------ ------ ------
Pretax income 5.2 11.0 7.3 38.9 7.9
Income tax expense - deferred 1.7 3.6 2.4 12.8 2.6
------ ------ ------ ------ ------
Net income 3.5% 7.4% 4.9% 26.1% 5.3%
====== ====== ====== ====== ======
THREE MONTHS ENDED SEPTEMBER 30, 1997 AND SEPTEMBER 30, 1998:
Oil and Gas Revenues. Oil and gas revenues decreased $337,231, or
12%, to $2,540,809 for the three months ended September 30, 1998, from
$2,878,040 for the same period of 1997. The decrease was primarily the
result of a decrease of 24% in the average sales price per EBO from $17.18
in the three months ended September 30, 1997 to $13.15 for the same period
of 1998, offset by an increase of 25,696 EBO, or 15%, to 193,190 EBO in the
Company's oil and gas production. Approximately 230% of the decrease in
revenues were attributable to the decrease in the average sales price offset
by approximately 130% increase attributable to an increase in oil and gas
production volumes.
Production Costs. Production costs decreased $91,114, or 13%, to
$622,205 during the third three months of 1998, compared with $713,319 for
the same period of 1997. Average production costs per EBO decreased $1.04,
or 24%, to $3.22 for the third three months in 1998 compared to $4.26 for the
same period in 1997, primarily a result of adding lower cost oil and gas
production.
General and Administrative Expenses. General and administrative
expenses increased by 104,740 or 85% to $227,865 for the third three months
of 1998, from $123,125 for the same period of 1997. The increase was
primarily due to an increase in the state of Delaware franchise taxes, the
Company capitalizing less of its general and administrative expenses and the
addition of one employee. General and administrative expenses were $1.18
per EBO in the third three months of 1998 compared to $.73 per EBO in the
third three months of 1997. 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 $321,022, or 41%, to
$1,114,438 for the third three months of 1998 compared with $793,416 for the
same period of 1997. As a percentage of revenues, the DD&A rate increased by
16% when compared with the prior year third quarter, a result of increased
production volumes, a decrease in the average sales price per EBO received by
the Company and an increase in the DD&A rate per EBO. The DD&A rate per EBO
increased to $5.77 for the third quarter 1998 compared with $4.74 per EBO for
the third quarter of 1997. The increase in the DD&A rate per EBO is
attributable to a revision in the Company's proven reserve estimates,
primarily the result of lower oil and gas prices in effect at September 30,
1998, compared with prices in effect at December 31, 1997, and the effect of
limited reserve additions for new wells brought on production by the Company
in the third quarter of 1998. Until production histories are established for
new wells, the quantities of estimated reserves to be added are limited.
Generally, after production histories are established, additional quantities
of reserves can be booked, thereby increasing the quantities of reserves used
in calculating the DD&A rates.
Historically, the Company has reviewed its estimates of proven
reserve quantities on an annual basis. However, due to the current weakness
in oil and gas prices, the Company's expected level of drilling activity and
the potential that new discoveries could significantly impact its operations,
the Company conducts internal reviews of its estimated proven reserves on a
more frequent basis and makes necessary adjustments to its DD&A rate
accordingly. The Company believes 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 increased $183,867, or 87%,
to $396,279 for the three months ended September 30, 1998 compared with
$212,412 for the same period of 1997, due principally to increased borrowings
against the Company's revolving line of credit associated with an accelerated
level of 3-D seismic acquisition and drilling activities.
Income Tax Expense. The Company had an effective tax rate of 33% for
the three months ended September 30, 1998 and 1997.
Net Income and Operating Cash Flow. Net income decreased $574,019,
or 82%, to $124,292 for the three months ended September 30, 1998, compared
to $698,311 for the three months ended September 30, 1997. Operating cash
13
flow decreased $535,671, or 29%, to $1,299,999 for the three months ended
September 30, 1998 compared to $1,835,670 for the three months ended
September 30, 1997. The decreases in net income and operating cash flow
resulted from a 12% decrease in oil and gas revenues, an 85% increase in
general and administrative costs, a 41% increase in DD&A, and a 87% increase
in interest expense offset by a 13% decrease in production costs.
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1997:
Oil and Gas Revenues. Oil and gas revenues decreased $2,466,909, or
26%, to $7,106,512 for the nine months ended September 30, 1998, from $9,573,421
for the same period of 1997. The decrease was primarily the result of a
decrease of 21% in the average sales price per EBO from $16.72 in the nine
months ended September 30, 1997 to $13.22 for the same period of 1998, a
decrease of 35,195 EBO, or 6%, to 537,472 EBO in the Company's oil and gas
production. Approximately 76% of the decrease in revenues were attributable
to the decrease in the average sales price and approximately 24% were
attributable to decreased oil and gas production volumes.
Production Costs. Production costs decreased $460,207, or 20%, to
$1,792,895 during the first nine months of 1998, compared with $2,253,102 for
the same period of 1997. The 6% decrease in production of 35,195 EBO was
primarily responsible for the decrease in production costs per EBO. Average
production costs per EBO decreased $.59, or 15%, to $3.34 for the first nine
months in 1998 compared to $3.93 for the same period in 1997, primarily a
result of adding lower cost oil and gas production.
13
General and Administrative Expenses. General and administrative
expenses increased by 226,333 or 54% to $647,371 for the first nine months of
1998, from $421,038 for the same period of 1997. The increase was primarily
due to an increase in the state of Delaware franchise taxes, the Company
capitalizing less of its general and administrative expenses and the addition
of one employee. General and Administrative expenses were $1.20 per EBO in
the first nine months of 1998 compared to $.74 per EBO in the first nine
months of 1997. 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 $500,697, or 19%,
to $3,108,721 for the first nine months of 1998 compared with $2,608,024 for
the same period of 1997. As a percentage of revenues, the DD&A rate
increased by 17% when compared with the prior year nine-month period, a
result of increased production volumes, a decrease in the average sales
price per EBO received by the Company and an increase in the DD&A rate per
EBO. The DD&A rate per EBO increased to $5.78 for the first nine months
1998 compared with $4.55 per EBO for the first nine months of 1997. The
increase in the DD&A rate per EBO is attributable to a revision in the
Company's proven reserve estimates, primarily the result of lower oil and gas
prices in effect at September 30, 1998 compared with prices in effect at
December 31, 1997, and the effect of limited reserve additions for new wells
brought on production by the Company in the third quarter of 1998. Until
production histories are established for new wells, the quantities of
estimated reserves to be added are limited. Generally, after production
histories are established, additional quantities of reserves can be booked,
thereby increasing the quantities of reserves used in calculating the DD&A
rates.
Historically, the Company has reviewed its estimates of proven
reserve quantities on an annual basis. However, due to the current weakness
in oil and gas prices, the Company's expected level of drilling activity and
the potential that new discoveries could significantly impact its operations,
the Company conducts internal reviews of its estimated proven reserves on a
more frequent basis and makes necessary adjustments to its DD&A rate
accordingly. The Company believes 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 increased $457,178, or 78%,
to $1,041,904 for the nine months ended September 30, 1998 compared with
$584,726 for the same period of 1997, due principally to increased borrowings
against the Company's revolving line of credit associated with an accelerated
level of 3-D seismic acquisition and drilling activities.
Income Tax Expense. The Company had an effective tax rate of 33% for
the nine months ended September 30, 1998 and 1997.
Net Income and Operating Cash Flow. Net income decreased $2,118,153,
or 85%, to $377,730 for the nine months ended September 30, 1998, compared to
$2,495,883 for the nine months ended September 30, 1997. Operating cash
flow decreased $2,660,807, or 42%, to $3,672,415 for the nine months ended
September 30, 1998 compared to $6,333,222 for the nine months ended September
30, 1997. The decreases in net income and operating cash flow resulted from
a 26% decrease in oil and gas revenues, a 54% increase in general and
administrative costs, a 19% increase in DD&A, and a 78% increase in interest
expense offset by a 20% decrease in production costs.
14
LIQUIDITY AND CAPITAL RESOURCES
Working capital decreased $1,157,183 as of September 30, 1998
compared to December 31, 1997. Current liabilities exceeded current assets
by $3,319,322 at September 30, 1998 compared to $2,162,139 at December 31,
1997. Current assets decreased primarily due to a slight decrease of
$16,622 in accounts receivable offset by an increase of $61,201 in prepaid
expenses and a decrease in cash of $589,217 . The decrease in cash was
primarily due to the Company's investments in oil and gas drilling activities,
payment of trade payables and the Company's cash management system, whereby
it maintains minimum cash balances with any excess cash applied against its
bank line of credit. The Company continues to employ 3-D seismic technology
in conjunction with its drilling activities, which are concentrated on
certain gas prospects located onshore the Texas Gulf Coast.
The Company incurred net property costs of $16,415,565 primarily for
its oil and gas property acquisition, development, and enhancement activities
for the nine months ended September 30, 1998. Such costs were financed by
the utilization of the Company's cash provided by operations, proceeds from
the sale of certain properties, net cash provided by its line of credit and
proceeds from the issuance of preferred stock.
Based on the Company's projected oil and gas revenues and related
expenses, management believes that its internally generated cash flow,
coupled with proceeds from borrowings under the Company's lending facility,
will be sufficient to fund its current operations. The Company continually
reviews and considers alternative methods of financing.
TRENDS AND PRICES
The Company's revenues, cash flows and borrowing capacity are
affected by changes in oil and gas prices. The 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 the
control of the Company. The Company is unable to accurately predict domestic
or worldwide political events or the effects of such other factors on the
prices received by the Company for its oil and gas. The Company historically
has not entered into transactions to hedge against changes in oil and gas
prices, but may elect to enter into hedging transactions in the future to
protect against fluctuations in oil and gas prices.
Industry conditions have deteriorated significantly during the latter
part of 1997 and the first ten months of 1998 as a result of declining oil
prices and weakening gas prices. There is an excess supply of, and reduced
demand for, crude oil worldwide. This excess supply has placed downward
pressure on oil prices in the United States as well as worldwide. Natural
gas prices have declined, primarily due to decreased demand and normal
seasonal conditions. There is substantial uncertainty regarding future oil
and gas prices. There can be no assurance that oil and gas prices will not
further decline in the future.
If the decline in crude oil and natural gas prices worsens or
continues for a protracted period, it would adversely affect the Company's
revenues, net income and cash flows from operations. Also, if prices stay at
present levels for an extended period of time or decline further, the
Company may delay or postpone certain of its capital projects.
During 1997, the average sales price received by the Company for its
oil was approximately $19.88 per barrel ("Bbl"), as compared to $21.83 in
1996, while the average sales prices for the Company's gas was approximately
$2.70 per thousand cubic feet ("Mcf") in 1997, as compared to $2.55 per Mcf
in 1996. At September 30, 1998, the average price received by the Company
for its oil production was approximately $13.25 per Bbl, while the average
price received by the Company, at that same date, for its gas production was
approximately $2.20 per Mcf.
INFORMATION SYSTEMS FOR THE YEAR 2000
The Company will be required to modify its information systems in
order to accurately process data referencing the year 2000. Because of the
importance of occurrence dates in the oil and gas industry, the consequences
of not pursuing these modifications could significantly affect the Company's
operation and financial condition, as well as the Company's ability to manage
operating activities. Currently, the Company plans to purchase software
modifications from third parties in order to correct any existing deficiencies.
The total cost will be approximately $10,000 and the information systems are
anticipated to be updated in early or mid 1999. Year 2000 issues as they
relate to field operation programs, suppliers, contractors and other third
parties are in the process of evaluation by the Company. In this regard,
the Company has commenced discussions with its software providers for the
Company's accounting system and the Company's software provider for
individual personal computers. The Company has received written assurances
from its accounting software provider that the program leased by the Company
will be in compliance in early 1999. Software providers for the Company's
personal computers have verbally confirmed their readiness for the year 2000,
but have not, as of this date of this report, furnished any written
confirmation of compliance. Based on current available information, the
Company does not anticipate that the costs associated with any necessary in
house modifications will be material to the Company's operations or financial
condition.
15
The Company has not completed its evaluation of its vendors or
suppliers systems to determine the effect, if any, the non-compliance of
such systems would have on the operations of the Company. Plans are under
way to perform an evaluation in late 1998 or early 1999 to determine the
effect of non-compliance of its vendors and suppliers on the Company. A
potential source of risk includes, but is not limited to, the inability of
significant purchasers, suppliers and exploration partners to be Year 2000
compliant, which could have a material effect on the Company's production,
cash flow and overall financial condition. The Company is aware that at
least one operator of a prospect in which the company owns an interest is
not Year 2000 compliant, payment of revenues from the prospect could be
disrupted, depending upon the extent to which the operator is computer
reliant for processing and generating revenue checks for working interest
owners such as the Company. The Company currently does not have a
contingency plan in place to cover any problems relating to the year 2000,
but is taking steps necessary to produce such a plan.
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
On October 16, 1998, the Company issued 600,000 shares of its 6%
Convertible Preferred Stock, $0.10 par value per share (the "Preferred Stock")
in exchange for all of the outstanding shares of the Company's $.60
Cumulative Convertible Preferred Stock ("Exchange Stock"). The exchange
offer was conditioned on, among other things, 100% of the Exchange Stock
being exchanged and the Company's agreement to offer to holders (or their
affiliates) additional shares of Preferred Stock equal to not less than 10%
of the number of shares of Exchange Stock held by them. In the exchange
offer, one share of Preferred Stock was exchanged for each share of Exchange
Stock.
Dividends of $.60 per share per annum, cumulative from date of issue,
are payable semi-annually on June 15 and December 15 of each year, commencing
on December 15, 1998. Each share of Preferred Stock may be converted at any
time after April 21, 1999, 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 may be redeemed at the
Company's option, in whole or part, after October 20, 1999, for $10 per share
plus accrued dividends. The Preferred Stock does not have any voting rights,
except as required by applicable law and except that as long as any shares of
Preferred Stock remain outstanding, the holders of a majority of the
outstanding shares of the Preferred Stock may vote on any proposal to change
any provision of the Preferred Stock which materially and adversely affects
the rights, preferences or privileges of the Preferred Stock. The Preferred
Stock is senior to the Common Stock with respect to dividends and on
liquidation, dissolution or winding up of the Company. The Preferred Stock
has a liquidation preference of $10 per share, plus accrued and unpaid
dividends. The rights, privileges and preferences of the Preferred Stock are
generally the same as the Exchange Stock, except that the initial conversion
price of the Preferred Stock is $3.50 per share, while the initial conversion
price of the Exchange Stock was $6.40 per share.
On October 30, 1998, and following the exchange offer, the Company
completed a private placement of 374,500 additional shares of Preferred Stock
at a price of $10 per share. Proceeds received, net of expenses, were
approximately $3,734,000. The net proceeds from the sale of the Preferred
Stock were used to reduce outstanding bank indebtedness under the Company's
loan agreement.
The 600,000 shares of Preferred Stock issued in the exchange offer
and the additional 374,500 shares of Preferred Stock sold in the private
placement were issued to a total of thirteen accredited investors. The
Preferred Stock was issued in reliance upon the exemption from registration
provided by Section 4(2) of the Securities Act of 1933, as amended, and Rule
506 thereunder.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
4.1 Certificate of Designations, Preferences and Rights of
Serial Preferred Stock - 6% Convertible Preferred Stock
27. Financial Data Schedule
(b) Reports on form 8-K
No reports were filed on Form 8-K during the quarter
ended September 30, 1998.
16
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES 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
Date: November 16, 1998 /s/ THOMAS R. CAMBRIDGE
---------------------------
THOMAS R. CAMBRIDGE
CHIEF EXECUTIVE OFFICER
Date: November 16, 1998 /s/ LARRY C. OLDHAM
---------------------------
LARRY C. OLDHAM,
PRESIDENT AND
PRINCIPAL FINANCIAL OFFICER
17
INDEX TO EXHIBITS
Exhibit
No. Description of Exhibit
- ------ --------------------------
*4.1 Certificate of Designations, Preferences and Rights of
Serial Preferred Stock - 6% Convertible Preferred Stock
*27 Financial Data Schedule
- -----------------------
* Filed herewith