SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A Number 1
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report
January 27, 1997
Abraxas Petroleum Corporation
(Exact name of registrant as specified in its charter)
Nevada
(State or other jurisdiction of incorporation)
0-19118 74-2584033
(Commission File Number) (I.R.S. Employer Identification Number)
500 N. Loop 1604 East, Suite 100
San Antonio, Texas 78232
(Address of principal executive offices)
Registrant's telephone number, including area code:
(210) 490-4788
1
The undersigned registrant hereby amends the following items, financial
statements, exhibits or other portions of its Current Report on Form 8-K dated
November 27, 1996, as set forth in the pages attached hereto:
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
(a) Financial Statements of business acquired.
See numbers 1,2,3 and 4 set forth on the attached index to Item 7.,
Financial Statements and Exhibits, for a listing of the Financial
Statements of:
1. CGGS - Canadian Gas Gathering Systems Inc.
2. Canadian Abraxas Petroleum Limited
3. Certain Overriding Royalty Interests in the Portilla Field
Acquired by Abraxas Petroleum Corporation
4. Portilla - 1996, L. P., (A Texas Limited Partnership)
(b) Pro Forma financial information.
See numbers 5 and 6 set forth on the attached index to Item 7.,
Financial Statements and Exhibits, for a listing of the unaudited
pro forma information relating to the Registrant.
2
Item 7. Financial Statements and Exhibits
(a) Financial Statements
1. CGGS - Canadian Gas Gathering Systems Inc.
Auditors' report to the Directors
Balance Sheets at October 31, 1994 and 1995
and October 31, 1996 (Unaudited)
Statements and Earnings (Loss) and Deficit for the years ended
October 31, 1993, 1994, and 1995 and for the year ended October
31, 1996 (Unaudited)
Statements of Changes in Financial Position for the years ended
October 31, 1993, 1994 and 1995 and for the year ended October
31, 1996 (Unaudited)
Notes to Financial Statements
2. Canadian Abraxas Petroleum Limited
Report of Independent Auditors
Balance Sheet at September 30, 1996
Notes to Balance Sheet
3. Certain Overriding Royalty Interests in the Portilla Field Acquired
by Abraxas Petroleum Corporation
Report of Independent Auditors
Statements of Combined Oil and Gas Revenues and Direct Operating
Expenses for the years ended December 31, 1994 and 1995 and for
the nine months ended September 30, 1995 and 1996 (Unaudited)
Notes to Statements of Combined Oil and Gas Revenues and Direct
Operating Expenses
4. Portilla - 1996, L. P., (A Texas Limited Partnership)
Balance Sheet at September 30, 1996 (Unaudited)
Statement of Income for the Period from March 20, 1996 (date of
formation) through September 30, 1996 (Unaudited)
Statement of Partners' Equity at September 30, 1996 (Unaudited)
Statement of Cash Flows for the Period from March 20, 1996 (date
of formation) through September 30, 1996 (Unaudited)
Notes to Financial Statements
(b) Unaudited Pro Forma Information
5. Pro Forma Condensed Balance Sheet at September 30, 1996
6. Pro Forma Statements of Operations for the year ended December 31,
1996 and the nine months ended September 30, 1996
3
AUDITORS' REPORT TO THE DIRECTORS
To the Board of Directors of
Canadian Gas Gathering Systems Inc.
We have audited the balance sheets of CGGS Canadian Gas Gathering Systems
Inc. as at October 31, 1995 and 1994 and the statements of earnings (loss) and
deficit and changes in financial position for the years ended October 31, 1995,
1994 and 1993. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatements. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
In our opinion, these financial statements present fairly, in all material
respects, the financial position of the Company as of October 31, 1995 and 1994
and the results of its operations and the changes in its financial position for
the years ended October 31, 1995, 1994 and 1993 in accordance with generally
accepted accounting principles.
KPMG
Chartered Accountants
Calgary, Canada
January 12, 1996
4
CGGS CANADIAN GAS GATHERING SYSTEMS INC.
BALANCE SHEETS
(In Canadian Dollars)
ASSETS
October 31
--------------------------- October 31
1994 1995 1996
------------ ------------- -------------
(Unaudited)
Current assets:
Cash and short-term deposits ....... $ 8,326,000 $ 1,274,000 $ 10,050,000
Accounts receivable ................ 11,619,000 12,850,000 13,540,000
------------ ------------ ------------
19,945,000 14,124,000 23,590,000
Capital assets (note 3) .............. 129,432,000 128,095,000 123,857,000
Deferred financing costs (note 4)..... 1,628,000 1,482,000 1,336,000
Deferred foreign exchange loss ....... 9,775,000 7,882,000 6,858,000
------------ ------------ ------------
Total assets ....................... $160,780,000 $151,583,000 $155,641,000
============ ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
October 31
----------------------------- October 31
1994 1995 1996
-------------- -------------- ------------
(Unaudited)
Current liabilities:
Debenture interest payable to
shareholders ..................... $ 1,399,000 $ 1,344,000 $ 1,342,000
Accounts payable .................. 10,108,000 4,335,000 7,201,000
------------- ------------- -------------
Total current liabilities ........ 11,507,000 5,679,000 8,543,000
Long-term shareholders' debt (note 5) 114,167,000 113,070,000 113,179,000
Provision for future site
restoration ....................... 2,236,000 3,015,000 4,148,000
------------- ------------- -------------
127,910,000 121,764,000 125,870,000
Shareholders' equity:
Share capital (note 6) ............ 34,213,000 34,213,000 34,213,000
Deficit ........................... (1,343,000) (4,394,000) (4,442,000)
------------- ------------- -------------
Total shareholders' equity ....... 32,870,000 29,819,000 29,771,000
Commitments (note 10)
------------- ------------- -------------
Total liabilities and
shareholders' equity ........... $ 160,780,000 $ 151,583,000 $155,641,000
============= ============= =============
See accompanying notes to financial statements.
5
CGGS CANADIAN GAS GATHERING SYSTEMS INC.
STATEMENTS OF EARNINGS (LOSS) AND DEFICIT
(In Canadian Dollars)
Year Ended
Year Ended October 31 October 31
----------------------------------------- -------------
1993 1994 1995 1996
------------- ----------- ------------- -------------
(Unaudited)
Revenues:
Processing ............... $ 25,818,000 $ 30,408,000 $ 33,100,000 $ 36,954,000
Production ............... 28,620,000 35,855,000 22,408,000 26,791,000
Royalties, net ........... (5,321,000) (6,787,000) (3,366,000) (3,975,000)
Other income ............. 264,000 1,028,000 996,000 690,000
------------ ------------ ------------ -----------
49,381,000 60,504,000 53,138,000 60,460,000
Expenses:
Processing ............... 16,707,000 15,621,000 14,763,000 19,207,000
Production ............... 4,649,000 4,866,000 5,689,000 5,308,000
Administration (note 7) .. 3,685,000 3,960,000 4,507,000 4,117,000
Interest on acquisitions . 1,280,000 -- -- --
Interest on long-term .... 12,175,000 15,998,000 16,227,000 16,172,000
shareholders' debt
Depletion and depreciation 13,408,000 14,361,000 13,754,000 14,092,000
Amortization of deferred . 146,000 146,000 146,000 146,000
financing costs
Foreign exchange loss .... 760,000 772,000 795,000 1,134,000
------------ ------------ ------------ ------------
52,810,000 55,724,000 55,881,000 60,176,000
------------ ------------ ------------ ------------
Earnings (loss) before taxes (3,429,000) 4,780,000 (2,743,000) 284,000
Large corporation tax ...... 262,000 274,000 308,000 332,000
------------ ------------ ------------ ------------
Net earnings (loss) ........ (3,691,000) 4,506,000 (3,051,000) (48,000)
Deficit - beginning of year (2,158,000) (5,849,000) (1,343,000) (4,394,000)
------------ ------------ ------------ ------------
Deficit - end of year ...... $ (5,849,000) $ (1,343,000) $ (4,394,000) $ (4,442,000)
============ ============ ============ ============
See accompanying notes to financial statements.
6
CGGS CANADIAN GAS GATHERING SYSTEMS INC.
STATEMENTS OF CHANGES IN FINANCIAL POSITION
(In Canadian Dollars)
Year Ended
Year Ended October 31 October 31
----------------------------------------- ------------
1993 1994 1995 1996
------------- ------------- ------------- ------------
(Unaudited)
Operating Activities:
Net earnings (loss) ....... $ (3,691,000) $ 4,506,000 $ (3,051,000) $ (48,000)
Depletion and depreciation 13,408,000 14,361,000 13,754,000 14,092,000
Amortization of deferred
financing costs .......... 146,000 146,000 146,000 146,000
Foreign exchange loss ..... 760,000 772,000 795,000 1,134,000
Decrease (increase) in
non-cash working capital
items .................... 6,004,000 (5,443,000) (7,004,000) 2,176,000
------------ ------------ ------------ ------------
16,627,000 14,342,000 4,640,000 17,500,000
Financing Activities:
Issuance of share capital . 17,692,000 583,000 -- --
Increase in long-term
shareholders' debt ....... 53,057,000 1,726,000 -- --
------------ ------------ ------------ ------------
70,749,000 2,309,000 -- --
Investing Activities:
Expenditures on capital
assets ................... (49,010,000) (15,024,000) (11,638,000) (8,722,000)
Decrease in deferred
revenue .................. (1,473,000) -- -- --
(Increase) decrease in
non-cash working capital . (35,281,000) (3,771,000) (54,000) (2,000)
------------ ------------ ------------ ------------
(85,764,000) (18,795,000) (11,692,000) (8,724,000)
Increase (decrease) in cash
and short-term deposits ... 1,612,000 (2,144,000) (7,052,000) 8,776,000
Cash and Short-Term Deposits:
Beginning of year ......... 8,858,000 10,470,000 8,326,000 1,274,000
------------ ------------ ------------ ------------
End of year ............... $ 10,470,000 $ 8,326,000 $ 1,274,000 $ 10,050,000
============ ============ ============ ============
See accompanying notes to financial statements.
7
CGGS CANADIAN GAS GATHERING SYSTEMS INC.
NOTES TO FINANCIAL STATEMENTS
(Information as to October 31, 1996 and for the Year Then Ended is Unaudited)
The Company was incorporated on March 9, 1990 under the Canada Business
Corporations Act. The Company was formed to invest in gas plants, gas gathering
systems and related gas reserves in Canada. Morrison Petroleums Ltd., a
shareholder, manages the Company.
1. Summary of Significant Accounting Policies
The financial statements are prepared in accordance with generally
accepted accounting principles in Canada.
Foreign Currency Translation
Monetary assets and monetary liabilities are translated at the exchange
rate in effect at the balance sheet date. Gains and losses on translation are
recorded in the statement of earnings, except that gains or losses on monetary
liabilities with a fixed or ascertainable life are deferred and amortized over
the repayment period.
Joint Ventures
The Company's exploration and production activities related to oil and gas
are substantially conducted in joint participation with others and, accordingly,
the accounts reflect only the Company's proportionate interest in such
activities.
Capital Assets
The Company follows the full cost method of accounting for exploration and
development expenditures wherein all costs related to the exploration for and
the development of oil and gas reserves are capitalized. These costs include
leasehold acquisition costs, carrying charges of non-producing properties, costs
of drilling and completing wells, and oil and gas production equipment. Proceeds
received from the disposal of properties are normally credited against
accumulated costs unless this would result in a significant change in the
depletion rate, in which case, a gain or loss is computed and reflected in the
earnings statement.
The Company carries its oil and gas properties at the lower of capitalized
cost and net recoverable value. Net recoverable value is future net revenues
from proven reserves plus unproven properties at cost less impairment, if any,
net of the provision for future site restoration. Future net revenues are
determined using unit prices and production costs in effect at year-end and
include an allowance for future overhead costs, site restoration, financing
charges and income taxes that will be incurred in earning these revenues.
Petroleum and natural gas properties are depleted and tangible production
equipment is depreciated using the unit-of-production method based upon the
estimated proven oil and gas reserves after royalties. Reserves are converted to
common units based on the approximate equivalent energy content of each unit of
reserves, which results in a conversion ratio of six thousand cubic feet of gas
to one barrel of oil equivalent.
Processing facilities are depreciated on a straight-line basis over the
estimated useful life of each facility.
8
CGGS CANADIAN GAS GATHERING SYSTEMS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Provision for Future Site Restoration
Provision is made for future site restoration costs. This provision is
charged to earnings over the estimated life of the proven oil and gas reserves
and processing facilities using the unit of production and the straight-line
methods respectively, and is included with depletion and depreciation.
Royalties
Crown, freehold and overriding royalties and mineral taxes are net of
Alberta Royalty Tax Credits.
Deferred Financing Costs
The deferred financing costs are associated with obtaining the
subscriptions for units (see Note 2). These costs were amortized evenly over
fifteen years.
2. Formation and Unit Subscriptions
Under the Unit Subscription Agreement, the investors have subscribed for
units at U.S. $100,000 per unit consisting of U.S. $75,000 of debentures and
U.S. $25,000 of Class A shares (2,500 Class A shares at a price of U.S. $10 per
share) in a 3-to-1 ratio. The Company received commitments for unit
subscriptions totaling U.S. $114,700,000 (U.S. $86,025,000 of debentures and
2,867,500 Class A shares at U.S. $10 per share). At October 31, 1996, 1995 and
1994 98.12% of the subscriptions were paid for and debentures and shares issued.
On September 14, 1994, the Board of Directors approved a resolution to end
any further acquisitions by the investors and to close out the investor
obligations.
At October 31, 1996, U.S. $84,411,829 of debentures and U.S. $28,137,367
Class A shares were issued and outstanding.
Under Amendment No. 4 to the Unit Subscription Agreement dated May 15,
1995, in 1995 the Company is permitted to expend all of its funds from
operations after debt servicing and all applicable corporate tax, on capital
enhancements, repairs and maintenance. In 1996 and subsequent years, subject to
approval by eighty percent of all shareholders, the Company is permitted to
expend two-thirds of its funds from operations after debt servicing and all
applicable corporate tax on, capital enhancements, repairs and maintenance.
9
CGGS CANADIAN GAS GATHERING SYSTEMS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. Capital Assets
October 31
------------------------------------------
1994 1995 1996
-------------- ------------- -------------
(unaudited)
Oil and Gas Properties:
Cost $42,310,000 $43,361,000 $44,963,000
Accumulated depletion (20,267,000) (24,540,000) (28,197,000)
------------- ------------- ------------
22,043,000 18,821,000 16,766,000
------------- ------------- ------------
Tangible Production
Equipment:
Cost 7,889,000 9,402,000 10,239,000
Accumulated depreciation (3,523,000) (4,450,000) (5,283,000)
------------ ------------ -----------
4,366,000 4,952,000 4,956,000
------------ ------------ -----------
Processing Facilities:
Cost 118,623,000 127,696,000 133,979,000
Accumulated depreciation (15,600,000) (23,374,000) (31,844,000)
------------ ----------- -----------
103,023,000 104,322,000 102,135,000
------------ ----------- -----------
$129,432,000 $128,095,000 $123,857,000
============ ============ ============
During 1996 no acquisition fees (1995 - $0, 1994 - $27,000) were included
in the cost of capital assets. A provision for future site restoration of
$1,132,347 (1995 - $779,000, 1994 - $740,000, 1993 - $644,935) was expensed
during 1996.
4. Deferred Financing Costs
October 31
--------------------------------------
1994 1995 1996
------------ ---------- -----------
(unaudited)
Deferred financing costs $2,187,000 $2,187,000 $2,187,000
Accumulated amortization (559,000) (705,000) (851,000)
========== ========== ==========
$1,628,000 $1,482,000 $1,336,000
========== ========== ==========
5. Long-Term Shareholders' Debt
The debentures are payable in U.S. dollars fifteen years from the date of
issue which is in the period 2005 to 2008. The debentures bear interest at 14%
per annum payable on a quarterly basis.
The Company is entitled, if the after-tax cash flow is not sufficient to
make interest payments, to satisfy interest payments by issuing additional
debentures valued at an amount equal to 100% of the principal amount thereof,
and Class A shares at $10.00 per share.
The debentures are held by the Class A shareholders.
10
CGGS CANADIAN GAS GATHERING SYSTEMS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. Share Capital
Authorized
Unlimited Class A voting common shares.
Unlimited Class B non-voting common shares.
The Class B shares are not entitled to dividends. Upon payout, as defined
in the Company's Articles, each Class B share may be converted to a Class A
share and the Class B shareholders have a call option to purchase, in the
aggregate, 25% of the then outstanding debentures at a price of U.S. $10 for
each U.S. $75,000 principal amount of debentures.
Class B shares are issued equal to 33% of the Class A shares issued
pursuant to subscription calls. Class B shares are issued for U.S. $.01 per
share.
Issued for Cash
Class A Class B
---------------------------------------------------
Inception to October 31,
1993 2,770,599 $33,619,000 923,530 $11,000
Issued during 1994 43,139 582,000 14,380 -
------------- ------------ --------- ----------
Balance at October 31,
1994, 1995 and 1996
(unaudited) 2,813,738 $34,201,000 937,910 $11,000
=========== ============ ========= =========
7. Administration
Pursuant to the administration and management agreements, the following
expenses have been recorded:
Year Ended October 31
---------------------------------------------------
1993 1994 1995 1996
------------ ---------- ---------- ----------
(unaudited)
Management fees $2,105,000 $2,384,000 $2,613,000 $2,531,000
Administration fees 1,394,000 1,959,000 1,628,000 1,632,000
------------ ---------- ---------- ----------
3,499,000 4,343,000 4,241,000 4,163,000
Directors' fees and
expenses 38,000 63,000 311,000 113,000
General corporate
expenses 148,000 550,000 400,000 299,000
------------ ---------- ---------- ----------
3,685,000 4,956,000 4,952,000 4,575,000
Recoveries - (996,000) (445,000) (458,000)
------------ ---------- ---------- ----------
$3,685,000 $3,960,000 $4,507,000 $4,117,000
============ ========== ========== ==========
11
CGGS CANADIAN GAS GATHERING SYSTEMS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
General corporate expenses include third-party professional fees,
insurance and other items of a general corporate nature.
8. Income Taxes
At October 31, 1996, the Company has estimated deductions for income tax
purposes which exceed the related book value by $3,400,000, the potential
benefit of which have not been recognized in these financial statements. For
income tax purposes, the Company has reported non-capital loss carryforwards of
$50,350,000 at October 31, 1996, which expire as follows: 1997 - $415,000; 1998
- - $1,658,000; 1999 - $12,543,000; 2000 - $11,991,000; 2001 - $9,061,000; 2002 -
$11,247,000; 2003 - $3,435,000.
9. Related Party Transactions
At times, the Company enters into agreements and transactions related to
gas plants and gas reserves with Morrison Petroleums Ltd. and Canadian Gas
Gathering Systems II, Inc. These transactions are carried out in accordance with
industry standard terms.
During 1995, a consulting fee of $158,000 was paid to a founder and
director.
10. Commitments
The Company has a Management Agreement with Morrison Petroleums Ltd. to
provide services with respect to evaluation, acquisition, development and
construction of projects and Consulting Agreements with two other founders. The
Agreements are for ten years and provide for annual management and consulting
fees to be paid to the three parties totaling 1.5% of the original cost of all
projects, subject to certain adjustments as provided in the Agreements.
The Company has an Administration Agreement with Morrison Petroleums Ltd.
to provide administrative functions to the Company. This Agreement is for ten
years and provides for an annual administration fee of 5% of the net operating
income as defined in the agreement.
Under these agreements, fees were incurred and accrue to the founders as
follows:
Morrison Gas B.
Petroleums Systems Feshbach
Ltd. III & Sons
------------- ----------- -----------
Year ended October 31, 1993 $3,187,000 $496,000 $192,000
Year ended October 31, 1994 3,653,000 443,000 247,000
Year ended October 31, 1995 3,485,000 485,000 271,000
Year ended October 31, 1996
(unaudited) 3,363,000 513,000 287,000
12
CGGS CANADIAN GAS GATHERING SYSTEMS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Of the above fees which accrued to the founders, the following amounts
were outstanding at the periods ended as follows:
Morrison Gas B.Fesbach
Petroleums Systems & Sons
Ltd. III
------------ ----------- -----------
Year ended October 31, 1994 $854,000 $92,000 $53,000
Year ended October 31, 1995 850,000 88,000 40,000
Year ended October 31, 1996 616,000 131,000 1,000
In addition, under the Administration Agreement, where Morrison Petroleums
Ltd. is the operator of a gas system, capital and operating overhead is
recovered from the Company by Morrison Petroleums Ltd. following guidelines
prescribed by the Petroleum Accountants Society of Canada, Accounting Procedure
at negotiated rates.
11. Subsequent Events
Subsequent to October 31, 1996 the Company became a wholly owned
subsidiary of Abraxas Petroleum Corporation. Prior to the change in ownership,
the Company sold its interest in the Nevis gas plant and related facilities to
Morrison Petroleums Ltd. for a consideration of $120,000,000, converted its U.S.
dollar denominated debt to Canadian dollars and repaid the debt.
12. Differences Between Canadian and United States Generally Accepted Accounting
Principles
These financial statements have been prepared in accordance with Canadian
generally accepted accounting principles ("Canadian GAAP") which, in the case of
the Company, conforms with United States generally accepted accounting
principles ("US GAAP") in all material respects except as follows:
(a)In accordance with U.S. GAAP, exchange gains and losses arising on
translation of long-term monetary liabilities, unless designated as a
hedge, are included in income currently instead of deferred and
amortized over the lives of such long term liabilities.
(b)The Company has applied Statement of Financial Accounting Standards
Number 109 "Accounting for Income Taxes" ("SFAS 109") effective
November 1, 1992. SFAS 109 requires the Company to account for income
taxes using the liability method for US GAAP purposes. There was no
cumulative effect or effect on current results as a consequence of
adopting SFAS 109.
13
CGGS CANADIAN GAS GATHERING SYSTEMS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The impact of these changes on the Company's financial statements is as
follows:
Statement of Earnings
Year Ended October 31
------------------------------------------------------
1993 1994 1995 1996
------------- ------------- --------------------------
(unaudited)
Net earnings (loss) as
reported $(3,691,000) $4,506,000 $(3,051,000) $(1,384,000)
Foreign currency
translation (4,409,000) (1,829,000) 1,893,000 1,024,000
------------- ---------- ----------- -----------
Net earnings (loss) in
accordance with U.S.
GAAP $(8,100,000) $2,677,000 $(1,158,000) $ (360,000)
========== ========== =========== ===========
Increase
As Reported (Decrease) U.S. GAAP
------------- ------------- -------------
October 31, 1994
Deferred foreign exchange
loss $9,775,000 $(9,775,000) $ -
Deficit (1,343,000) 9,776,000 (11,119,000)
October 31, 1995
Deferred foreign exchange
loss 7,882,000 (7,882,000) -
Deficit (4,394,000) 7,883,000 (12,277,000)
October 31, 1996
Deferred foreign exchange
loss 6,858,000 (6,858,000) -
Deficit (5,778,000) 6,859,000 (12,637,000)
13. Changes in non-cash working capital components
Year Ended October 31
------------------------------------------ -----------
1993 1994 1995 1996
------------- ------------- -------------- -----------
(unaudited)
Decrease (increase) in
non-cash working
capital
Operating:
Accounts receivable $ (5,558,000) $ (562,000) $(1,231,000) $ (690,000)
Accounts payable 11,562,000 (4,881,000) (5,773,000) 2,866,000
------------ ---------- ----------- ----------
$ 6,004,000 $(5,443,000) $(7,004,000) $2,176,000
============= =========== =========== ==========
Investing:
Accounts payable $(38,023,000) $ -- $ -- $ --
Debenture interest
payable to
shareholders 2,742,000 (3,771,000) (54,000) (2,000)
------------ ------------ ------------ ----------
$(35,281,000) (3,771,000) (54,000) $ (2,000)
============ ============ ============ ===========
14
Report of Independent Auditors
The Board of Directors and Shareholders
Canadian Abraxas Petroleum Limited (a Canadian corporation)
We have audited the accompanying balance sheet of Canadian Abraxas
Petroleum Limited as of September 30, 1996. This balance sheet is the
responsibility of the Company's management. Our responsibility is to express an
opinion on this balance sheet based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in
all material respects, the financial position of Canadian Abraxas Petroleum
Limited at September 30, 1996, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
San Antonio, Texas
October 7, 1996
15
CANADIAN ABRAXAS PETROLEUM LIMITED
BALANCE SHEET
September 30, 1996
ASSETS
Subscription receivable $ 1
==========
Total assets $ 1
==========
LIABILITIES AND SHAREHOLDER'S EQUITY
Shareholder's equity:
Common stock, no par value; unlimited number
of shares authorized, issued and outstanding
-0- shares (Subscribed 1 share) $ 1
Preferred stock, no par value; unlimited
number of shares authorized, issued and
outstanding -0- shares
==========
Total liabilities and shareholder's equity $ 1
==========
See accompanying notes.
16
CANADIAN ABRAXAS PETROLEUM LIMITED
NOTES TO BALANCE SHEET
September 30, 1996
1. Organization and Operations
Canadian Abraxas Petroleum Limited, a Canadian Corporation (Canadian
Abraxas), was capitalized by Abraxas Petroleum Corporation for the principal
purpose of acquiring 100% of the outstanding capital stock of CGGS Canadian Gas
Gathering Systems, Inc. (CGGS), after the consummation of the sale of the Nevis
Plant. CGGS owns producing properties in western Canada, consisting primarily of
natural gas reserves, natural gas gathering systems, and processing facilities.
Canadian Abraxas has conducted no business and has no employees or operating
history as of September 30, 1996. Due to the absence of business activity as of
September 30, 1996, no statement of operations or cash flows is presented.
2. Subsequent Events (unaudited)
On November 14, 1996, Abraxas Petroleum Corporation, through its wholly
owned subsidiary, Canadian Abraxas, closed the acquisition of CGGS with a
portion of the proceeds from the issuance of $215,000,000 of Senior Notes due
2004 (Notes). Abraxas Petroleum Corporation and Canadian Abraxas are jointly and
severally liable for all obligations under the Notes. In connection with the
close of the transaction, Canadian Abraxas incurred a liability of approximately
$82,000,000 of the $215,000,000 liability. The notes are redeemable, in whole or
in part, at the option of the Company and Abraxas Petroleum Corporation on or
after November 1, 2000, and any time prior to November 1, 1999, the Company and
Abraxas Petroleum Corporation may redeem up to 35% of the aggregate principal
amount of the Notes with cash proceeds of equity offerings at a redemption price
of 111.5% of the aggregate principal amount of the Notes to be redeemed. The
terms of the Indenture related to the notes provide for certain financial
covenants which may limit the ability of the Company to incur additional debt.
Additionally, in connection with the close of the transaction, CGGS was
immediately merged with and into Canadian Abraxas, and Canadian Abraxas, as the
surviving entity, used the net proceeds from the sale of the Nevis gas
processing plant to retire all of the outstanding debentures of CGGS.
17
Report of Independent Auditors
Board of Directors
Abraxas Petroleum Corporation
We have audited the accompanying statements of combined oil and gas revenues and
direct operating expenses of the Certain Overriding Royalty Interests in the
Portilla Field Acquired by Abraxas Petroleum Corporation (Abraxas) for the years
ended December 31, 1994 and 1995. These statements are the responsibility of
Abraxas' management. Our responsibility is to express an opinion on the
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the statements of combined oil and gas
revenues and direct operating expenses are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the statements of combined oil and gas revenues and direct
operating expenses. An audit also includes assessing the basis of accounting
used and significant estimates made by management, as well as evaluating the
overall presentation of the statements. We believe that our audits provide a
reasonable basis for our opinion.
The accompanying statements of combined oil and gas revenues and direct
operating expenses were prepared for the purpose of complying with the rules and
regulations of the Securities and Exchange Commission as described in Note 1,
are not intended to be a complete presentation of the combined oil and gas
revenues and expenses of Certain Overriding Royalty Interests in the Portilla
Field Acquired by Abraxas.
In our opinion, the statements referred to above present fairly, in all material
respects, the combined oil and gas revenues and direct operating expenses of
Certain Overriding Royalty Interests in the Portilla Field Acquired by Abraxas
for the years ended December 31, 1994 and 1995 in conformity with generally
accepted accounting principles.
ERNST & YOUNG LLP
San Antonio, Texas
August 30, 1996
18
CERTAIN OVERRIDING ROYALTY INTERESTS IN THE PORTILLA FIELD
ACQUIRED BY ABRAXAS PETROLEUM CORPORATION
STATEMENTS OF COMBINED OIL AND GAS REVENUES
AND DIRECT OPERATING EXPENSES
Nine Months Ended
Year Ended December 31 September 30
-------------------------- --------------------------
1994 1995 1995 1996
-------------------------- --------------------------
(Unaudited)
Oil and gas
revenues $3,529,234 $3,675,596 $2,608,169 $2,821,855
Direct operating
expenses:
Production
taxes 908,421 835,092 590,019 621,656
----------- ----------- ---------- ----------
Oil and gas
revenues in
excess of
direct
operating
expenses $2,620,813 $2,840,504 $2,018,150 $2,200,199
=========== ========== ========== ==========
See accompanying notes.
19
CERTAIN OVERRIDING ROYALTY INTERESTS IN THE PORTILLA FIELD
ACQUIRED BY ABRAXAS PETROLEUM CORPORATION
NOTES TO STATEMENTS OF COMBINED OIL AND GAS REVENUES
AND DIRECT OPERATING EXPENSES
Years Ended December 31, 1994 and 1995
(Information as to the Nine Months Ended September 30, 1995 and 1996 is
Unaudited)
1. Basis of Presentation
The accompanying statement of combined oil and gas revenues and direct
operating expenses represents the results from certain oil and gas producing
properties located in the Portilla Field, San Patricio County, Texas --
(Properties) which were previously owned by the Commingled Pension Trust Fund
(Petroleum II) (the Pension Fund) which were acquired in connection with the
acquisition by Abraxas Petroleum Corporation (Abraxas). Abraxas acquired the
remaining 75% partnership interest in Portilla-1996, L.P., the limited partner
of which acquired the above interests from the Pension Fund on March 21, 1996
and contributed such interest to the Partnership.
Full historical financial statements reflecting financial position,
results of operations, and cash flows required by generally accepted accounting
principles are not presented, as such information is not readily available on an
individual property basis nor meaningful for the properties acquired because the
entire acquisition cost is being assigned to oil and gas properties.
Accordingly, these statements of combined oil and gas revenues and direct
operating expenses are presented in lieu of the financial statements required
under Rule 3-05 of Regulation S-X of the Securities and Exchange Commission.
The accompanying statements of combined oil and gas revenues and direct
operating expenses represent the net overriding royalty interests in the
Properties to be acquired by Abraxas and are presented on the accrual basis of
accounting. Depreciation, depletion and amortization, general and administrative
expenses, interest expense, and federal and state income taxes have been
excluded because the property interests acquired represent only a portion of a
business and the expenses incurred are not necessarily indicative of the
expenses to be incurred by Abraxas.
The unaudited statements of combined oil and gas revenues and direct
operating expenses for the nine months ended September 30, 1995 and 1996
include, in the opinion of management, all material adjustments (consisting of
only normal recurring adjustments) necessary for a fair presentation. The
results of the nine months ended September 30, 1996, are not necessarily
indicative of the results to be expected for the full year.
20
CERTAIN OVERRIDING ROYALTY INTERESTS IN THE PORTILLA FIELD
ACQUIRED BY ABRAXAS PETROLEUM CORPORATION
NOTES TO STATEMENTS OF COMBINED OIL AND GAS REVENUES
AND DIRECT OPERATING EXPENSES (CONTINUED)
2. Supplemental Information Relating to Oil and Gas Producing Activities
(Unaudited)
The following table presents the estimate of the net proved crude oil and
natural gas quantities related to the interests in the Properties acquired and
have been prepared utilizing the estimates of reserve quantities prepared by
independent petroleum reserve engineers.
Liquid Natural
Hydrocarbons Gas
-------------- --------------
(Barrels) (Mcf)
Proved developed and undeveloped reserves:
Balance at December 31, 1993 2,060,000 7,309,000
Revisions of previous estimates 240,000 (1,374,000)
Production (207,000) (256,000)
-------------- --------------
Balance at December 31, 1994 2,093,000 5,679,000
Revisions of previous estimates (245,000) (2,290,000)
Production (176,000) (497,000)
Other changes, net 306,000 681,000
-------------- --------------
Balance at December 31, 1995 1,978,000 3,573,000
Revisions of previous estimates (417,000) (974,000)
Production (81,000) (209,000)
Other changes, net 208,000 10,000
-------------- --------------
Balance at June 30, 1996 1,688,000 2,400,000
============== ==============
Proved developed reserves:
December 31, 1994 1,782,000 4,727,000
December 31, 1995 1,722,000 3,378,000
June 30, 1996 1,677,000 2,331,000
All of the above reserves are located in the United States.
21
CERTAIN OVERRIDING ROYALTY INTERESTS IN THE PORTILLA FIELD
ACQUIRED BY ABRAXAS PETROLEUM CORPORATION
NOTES TO STATEMENTS OF COMBINED OIL AND GAS REVENUES
AND DIRECT OPERATING EXPENSES (CONTINUED)
Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil
and Gas Reserves
The following disclosures concerning the standardized measure of future
cash flows from proved crude oil and natural gas reserves are presented in
accordance with Statement of Financial Accounting Standards No. 69. The
standardized measure does not purport to represent the fair market value of the
Properties' proved crude oil and natural gas reserves. An estimate of fair
market value would also take into account, among other factors, the recovery of
reserves not classified as proved, anticipated future changes in prices and
costs and a discount factor more representative of the time value of money and
the risks inherent in reserve estimates.
Under the standardized measure, future cash inflows were estimated by
applying prices at December 31, 1995 and June 30, 1996 to the estimated future
production of period-end proved reserves. Future cash inflows were reduced by
estimated future production and development costs based on period-end costs to
determine pre-tax cash inflows. The Properties are not, nor is the Owner, a
separate tax paying entity. Accordingly, the standardized measure of discounted
future net cash flows from proved reserves is presented before deduction of
federal income taxes.
Future net cash inflows were discounted using a 10% annual discount rate
to arrive at the Standardized Measure.
22
CERTAIN OVERRIDING ROYALTY INTERESTS IN THE PORTILLA FIELD
ACQUIRED BY ABRAXAS PETROLEUM CORPORATION
NOTES TO STATEMENTS OF COMBINED OIL AND GAS REVENUES
AND DIRECT OPERATING EXPENSES (CONTINUED)
Set forth below is the Standardized Measure relating to proved oil and gas
reserves for December 31, 1995 and June 30, 1996:
December 31
--------------------------- June 30
1994 1995 1996
------------ ------------- -------------
Standardized Measure:
Future cash inflows $40,963,000 $43,052,000 $38,232,000
Future production and
development costs 12,078,000 13,490,000 12,268,000
----------- ----------- -----------
28,885,000 29,562,000 25,964,000
Discount (11,498,000) (10,622,000) (11,703,000)
----------- ----------- -----------
Discounted future net cash
flows before income
taxes $17,387,000 $18,940,000 $14,261,000
=========== =========== ===========
Change in Standardized Measure (in thousands):
Standardized Measure,
beginning of period $11,427,000 $17,387,000 $18,940,000
Sales and transfers
of gas and oil
produced, net of
production costs (2,621,000) (2,841,000) (1,482,000)
Changes in prices,
net of production
and future
development costs 6,639,000 2,661,000 627,000
Revisions of
previous quantity
estimates 63,000 (3,168,000) (4,001,000)
Accretion of
discount 1,854,000 1,739,000 947,000
Additions,
revisions, and
other changes 25,000 3,162,000 (770,000)
----------- ----------- -----------
Standardized Measure,
end of period $17,387,000 $18,940,000 $14,261,000
=========== =========== ===========
23
Portilla - 1996, L.P.,
(a Texas Limited Partnership)
Financial Statements
(Unaudited)
Period From March 20, 1996 (Date of Formation)
Through September 30, 1996
24
Portilla - 1996, L.P.,
(a Texas Limited Partnership)
Balance Sheet
(Unaudited)
September 30
1996
--------------
(In Thousands)
Assets
Current assets:
Accounts receivable: $ 380
---------
380
Property and equipment:
Oil and gas properties, including gas processing plant
(full cost method), less accumulated depreciation, depletion,
and amortization of $1,738,000 29,360
Deferred financing fees, net of accumulated amortization 223
Organization cost, net of accumulated amortization 166
---------
Total assets $ 30,129
=========
25
Portilla - 1996, L.P.,
(a Texas Limited Partnership)
Balance Sheet
(Unaudited - continued)
September 30
1996
--------------
(In Thousands)
Liabilities and Partners' Equity Current liabilities:
Accounts payable $ 380
Payable to Abraxas Petroleum Corporation 398
Payables to note holders 538
Current portion of long-term debt 6,285
-----
Total current liabilities 7,601
Long-term debt, net of current portions:
Credit agreement 14,304
Notes payable 5,920
------
20,224
Commitments and contingencies
Partners' equity:
General partner 2,000
Limited partner 304
------
Total partners' equity 2,304
------
Total liabilities and partners' equity $ 30,129
======
See accompanying notes.
26
Portilla - 1996, L.P.
(a Texas Limited Partnership)
Statement of Income
(Unaudited)
Period From March 20, 1996 (Date of Formation)
Through September 30, 1996
(In Thousands)
Oil and gas production sales $ 4,255
Operating costs and expenses:
Lease operating and production taxes 871
Depreciation, depletion and amortization 1,738
Hedging loss 369
------
2,978
------
1,277
Other expense:
Amortization of deferred financing fee and organization costs 70
Interest expense 916
Other 67
-------
1,053
-------
Net income $ 224
======
See accompanying notes.
27
Portilla - 1996, L.P.
(a Texas Limited Partnership)
Statement of Partners' Equity
(Unaudited)
Total
General Limited Partners'
Partner Partner Equity
-----------------------------------
(In Thousands)
Balance at March 20, 1996
(date of formation)
Contribution to capital $ 2,000 $ 80 $ 2,080
Net income for the period March 20,
1996 (date of formation)
through September 30, 1996 -- 224 224
----------------------------------
Balance at September 30, 1996 $ 2,000 $ 304 $ 2,304
==================================
See accompanying notes.
28
Portilla - 1996, L.P.
(a Texas Limited Partnership)
Statement of Cash Flows
(Unaudited)
Period From March 20, 1996 (Date of Formation)
Through September 30, 1996
(In Thousands)
Operating Activities
Net income $ 224
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation, depletion, and amortization 1,738
Amortization of deferred financing fees
and organization costs 70
Changes in operating assets and liabilities:
Accounts receivable (380)
Current payables 1,316
---------
Net cash provided by operating activities 2,968
Investing Activities
Capital expenditures (31,098)
--------
Net cash used in investing activities (31,098)
Financing Activities
Capital contributions 2,080
Borrowings under credit agreement 21,750
Payments on credit agreement (1,161)
Borrowings under notes payable 5,920
Financing fees (273)
Organizational costs (186)
---------
Increase in cash 28,130
Cash at beginning of period --
---------
Cash at end of period, including restricted cash $ --
=========
Supplemental Disclosures
Supplemental disclosures of cash flow information:
Interest paid $ 916
=========
See accompanying notes.
29
Portilla-1996, L.P.
(a Texas Limited Partnership)
Notes to Financial Statements
(Unaudited)
Period From March 20, 1996 (Date of Formation)
Through September 30, 1996
1. Organization and Significant Accounting Policies
Nature of Operations
Portilla-1996, L.P., a Texas limited partnership (Partnership), was formed on
March 20, 1996. The Partnership is an independent energy partnership engaged
primarily in the production of crude oil and natural gas along the Texas Gulf
Coast and in the Permian Basin of western Texas for sale into the U.S. energy
market. The accompanying unaudited financial statements include all adjustments,
consisting of normal recurring adjustments, that, in the opinion of management,
are necessary for a fair presentation. In March, 1996, Abraxas Petroleum
Corporation (Abraxas) sold its 50% working interest in its Portilla Field and
its 12% working interest in its Happy Field to ACCO, LLC (Limited Partner). The
Limited Partner also obtained the release of a 50% overriding royalty interest
in the Portilla Field previously owned by the Commingled Pension Trust Fund
(Pension Fund).
In connection with the purchase of both Abraxas' interests in the Portilla and
Happy Fields and the Pension Fund's interest in the Portilla Field (together,
the Properties), the Limited Partner entered into a credit agreement with a
bank, secured by the Properties, and contributed the Properties to the
Partnership. A subsidiary of Abraxas, Portilla-Happy Corporation
(Portilla-Happy), is the general partner of the Partnership.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
30
1. Organization and Significant Accounting Policies (continued)
Oil and Gas Properties
The Partnership follows the full cost method of accounting for crude oil and
natural gas properties. Under this method, all costs associated with
acquisition, exploration, and development are capitalized. The Partnership does
not capitalize internal costs. Depreciation, depletion, and amortization (DD&A)
of crude oil and natural gas properties are based on the unit-of-production
method. If unamortized capitalized costs are in excess of the discounted present
value of future cash flows relating to proved reserves (ceiling), a charge to
operations is recorded. No gain or loss is recognized upon sale or disposition
of crude oil and natural gas properties, except in unusual circumstances.
Revenue Recognition
The Partnership recognizes crude oil and natural gas revenue from its interest
in producing wells as crude oil and natural gas is sold from those wells.
Deferred Financing Fees
Deferred financing fees are being amortized on a level yield basis over the term
of the related debt.
Organization Costs
Organization costs are being amortized on a straight line basis over five years.
Income Taxes
The Partnership is not subject to federal income taxes; rather, its income
(loss) from operations is passed directly through to its partners.
2. Partnership Formation and Agreement
In connection with the formation of the Partnership, the General Partner
contributed cash of $2,000,000 and the Limited Partner contributed the
Properties and cash of $80,000. These Properties have been recorded in the
Partnership's property and equipment at $27,500,000 representing the amount paid
by the Limited Partner for the Properties. No partner is obligated to make
additional contributions to the Partnership.
The Partnership agreement provides for cash to be distributed to the partners as
follows:
* Until cumulative cash distributions have equaled the original contribution of
$21,580,000 to the Limited Partner and $2,000,000 to the General Partner,
cash in excess of amounts necessary to pay the Partnership's current
obligations shall be distributed 91.5% to the Limited Partner and 8.3% to the
General Partner, then
31
2. Partnership Formation and Agreement (continued)
* from the time that cumulative cash distribution equals the original capital
contribution until the operator of the Properties is entitled to cash
distribution equal to a 25% net revenue interest in the Properties with the
remainder to the Limited Partner, and thereafter
* the operator is entitled to a percentage of 43.75% of the net revenue
interest in the Partnership Properties with the remainder to the Limited
Partner.
3. Long-Term Debt
In connection with the Limited Partner's purchase of the interest in the
Portilla and Happy Fields, it entered into a credit agreement with a bank
providing financing in the amount of $21,750,000. The borrowings under the
credit agreement are collateralized by the Partnership's interest in the
Portilla and Happy Fields, the Limited Partner's ownership interest in the
Partnership, the Partnership bank accounts and a guaranty agreement. Although
the bank credit agreement is between the Limited Partner and the bank, the
Partnership has recorded the debt in its financial statements because the
Partnership Properties have been pledged as collateral for the debt. The
borrowings bear interest generally at LIBOR or the bank's prime rate. Under an
interest rate swap agreement, the interest rate has been fixed at 6.12% on
approximately 80% of the outstanding borrowings through October 31, 2001.
Principal is due in monthly installments of 2.70% of the original principal
balance through April 1997, 2.00% through April 1998; 1.46% through April 1999,
1.29% through April 2009, .67% through April 2001 and .42% through October 2001.
The Partnership incurred financing fees of $273,000.
Notes payable consist of three promissory notes payable to private investment
funds totaling $5,920,000. Each note bears interest at 10%, is due on March 30,
2004 and can be prepaid without penalty after four years. The notes are recourse
to the Partners only to the extent of distribution made by the Partnership to
such Partners. The Partnership has granted each noteholder an option to purchase
an overriding royalty interest in the Partnership's oil and gas properties,
which will entitle the noteholders, on a combined basis, to 74% of the net
revenue for the oil and gas properties through the time that such aggregate
royalty payments have equaled the sum of 10% of the option price per annum
compounded annually and 150% of the option price; then at 56.25% of net revenue
until the termination of the royalty interest. The noteholder may apply to the
payment of the purchase price all or any part of the principal amount of the
promissory notes from the Partnership and any accrued and unpaid interest
thereon on a dollar-for-dollar basis. The portion of the purchase price not so
applied shall be paid in cash. The option can be exercised at any time until
April 30, 2004.
As of September 30, 1996, the private investment funds had advanced to the
Partnership $538,000 for working capital purposes.
4. Advisory and Operating Agreements
The Partnership has entered into an advisory agreement with an entity related to
the Limited Partner to provide various advisory services relating to the
32
identification and acquisition of oil and gas properties, the marketing of
production, the monitoring of costs by the operator and preparation of reports
and all material financial matters related to the Partnership or its oil and gas
properties. Such advisor is entitled to quarterly compensation equal to the
lesser of 1/4 of 1% of the debt payable to the investment funds or 1% of the
partnership gross proceeds plus reimbursement of reasonable out-of-pocket
expenses incurred in rendering its services. For the period ended September 30,
1996, the Partnership accrued $42,000 related to the advisory agreement, the
payable of which is included in accounts payable.
The parent Company of the General Partner, Abraxas, is the operator of the oil
and gas properties of the Partnership and also provides certain executive,
administrative, legal, and accounting support to the Partnership for which it is
not reimbursed.
During the period ended September 30, 1996, as operator, Abraxas has collected
net revenues from the sale of oil and gas production on behalf of the
Partnership. Abraxas has also advanced funds on behalf of the Partnership for
development drilling and working capital purposes. As of September 30, 1996, the
Partnership has recorded a net payable to Abraxas of $398,000 for such activity.
The Partnership agreement provides that the General Partner shall have all the
rights and powers of a General Partner except the Limited Partner must approve
in writing any transfer of the oil and gas properties, any acquisition of any
other mineral property, the lending of money or the guarantee of obligations,
and any material amendment of an operating agreement. The Limited Partner may
remove the General Partner upon 60 days written notice.
5. Commodity Swap Agreement
In April 1996, the Partnership entered into a commodity swap agreement with its
bank lender to reduce its exposure to price risk in the spot market. Under the
commodity swap agreement, the Partnership receives or makes payments to the bank
based on the differential between a fixed and variable price for natural gas. At
September 30, 1996, the Partnership had agreed to exchange payments monthly on
volumes ranging from 8,160 to 20,000 barrels of crude oil per month and 14,850
to 87,406 MMBTU of natural gas per month extending through November 2001. Under
the swap agreement, the Partnership receives fixed prices ranging from $17.20 to
$18.55 per barrel of crude oil and $1.793 to $1.925 per MMBTU of natural gas and
makes payments based on the price for west Texas intermediate light sweet crude
oil on the NYMEX for crude oil and the Inside FERC, Tennessee Gas Pipeline Co:
Texas (zone 0) price for natural gas.
6. Subsequent Event
In November, 1996, Abraxas acquired the Limited Partner's 75% interest in the
Partnership and repaid the bank debt as well as the notes payable to the private
investment funds resulting in Abraxas effectively owning all of the equity
interests in the Partnership. Upon the acquisition of the Limited Partner's
interest, Abraxas had title to the Properties transferred to its name.
33
PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma financial data are derived from the
historical financial statements of Abraxas Petroleum Corporation (Company) and
are adjusted to reflect the consummation of the acquisitions of CGGS Canadian
Gas Gathering Systems, Inc. (CGGS) by Canadian Abraxas Petroleum Limited (a
wholly owned subsidiary of Abraxas Petroleum Corporation) (Canadian Abraxas) and
of Certain Overriding Royalty Interests in the Portilla Field acquired by
Abraxas Petroleum Corporation which were previously owned by the Commingled
Pension Trust Fund (Pension Fund) (the Acquisitions) and also reflects the sale
of $215,000,000, 11.5% Senior Notes due 2004 (Notes) and the repayment of all
amounts outstanding under the Credit Agreement dated September 30, 1996 with
Bankers Trust Company and other lenders in the amount of $85,000,000 (Credit
Agreement). The pro forma statements of operations also reflects the acquisition
of the oil and gas producing properties acquired from Enserch Exploration, Inc.
on September 30, 1996 (Wyoming Properties). The historical balance sheet of the
Company at September 30, 1996 includes the acquisition cost of the Wyoming
Properties.
The Unaudited Pro Forma Condensed Balance Sheet of the Company as of
September 30, 1996 has been prepared assuming the Acquisitions, sale of Notes
and repayment of the Credit Agreement were consummated on September 30, 1996,
and the Unaudited Pro Forma Statements of Operations of the Company for the year
ended December 31, 1995 and the nine months ended September 30, 1996 have been
prepared assuming the Acquisitions, sale of Notes and repayment of the Credit
Agreement were consummated on January 1, 1995 and January 1, 1996, respectively.
The historical revenues and expenses of CGGS and Portilla and Happy represent
amounts recorded by or with respect to such businesses or properties for the
periods indicated.
The historical financial statements of CGGS were prepared in Canadian
dollars in accordance with Canadian generally accepted accounting principles.
This information has been adjusted to present the historical financial
statements in accordance with United States generally accepted accounting
principles. The statements of operations have been translated into U.S. dollars
at the average exchange rates of $0.7321 and $0.7273 to one Canadian dollar for
the nine months ended October 31, 1996 and the fiscal year ended October 31,
1995, respectively. The monetary amounts on the unaudited balance sheet as of
October 31, 1996 have been translated at the period-end exchange rate of $0.7458
to one Canadian dollar. Non-monetary amounts have been translated at a
historical November 1, 1994 rate with changes in the amounts since that date
translated at the average rate over the twenty five-month period. The historical
financial statements of CGGS include the results of the Hoole Area. In January,
1997, Canadian Abraxas entered into a letter of intent to sell its interest in
the Hoole Area for approximately $9.3 million. For the nine months ended
September 30, 1996, the Hoole Area properties and natural gas processing plants
contributed $2.4 million of revenues to CGGS.
The Company previously owned a 50% working interest in the Portilla Field
and a 12% working interest in the Happy Field. In March 1996, the Company sold
its interests in the Portilla and Happy Fields to Acco LLC (Acco) for net
consideration of $15.6 million. Acco separately obtained the release of the 50%
overriding royalty interest in the Portilla previously owned by the Pension Fund
and contributed its interests in the Portilla and Happy Fields , acquired from
Abraxas and the Pension Fund (Portilla and Happy) to the Portilla - 1996 LP (the
Partnership). The pro forma adjustments assume that the Company acquired the
Pension Fund's interest in the Portilla Field at the beginning of the periods
indicated and that the Company owned the Portilla and Happy Fields during the
period from March 21, 1996 to September 30, 1996.
34
The unaudited pro forma Condensed Balance Sheet reflects the preliminary
allocations of the purchase prices for the Acquisitions to the assets and
liabilities of the Company. The final allocation of the purchase prices, and the
resulting effect on DD&A expense in the accompanying unaudited Pro Forma
Statements of Operations, will differ from the preliminary estimates because the
final allocation will be based on purchase prices allocated to assets and
liabilities on the basis if the estimated fair values of the assets and
liabilities determined at the end of the allocation period as allowed by
accounting Principles Board Opinion Number 38.
The unaudited pro forma financial data should be read in conjunction with
the notes thereto, the Consolidated Financial Statements of the Company and the
notes thereto and the historical financial information and the notes relating to
CGGS and the Certain Overriding Royalty Interests in the Portilla Field acquired
by Abraxas Petroleum Corporation included herein.
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
For the Year Ended December 31, 1995
Historical Acquisitions
--------- -------------------------------------------------
Adjusments Acquisition
Abraxas to Reflect and
Petroleum Wyoming Sale of Offering
Corporation CGGS Properties Portilla(1) Nevis(a) Adjustments Pro Forma
------------ ------- ---------- ------------ ----------- ----------- -----------
(dollars in thousands)
Operating revenue:
Oil and gas $ 13,660 $ 13,849 $ 7,542 $ 3,676 $ -- $ -- $ 38,727
production sales
Processing -- 24,072 -- -- (20,012) -- 4,060
Rig revenue 108 -- -- -- -- -- 108
Other 49 690 -- -- -- -- 739
-------- -------- -------- -------- -------- -------- --------
Total operating revenue 13,817 38,611 7,542 3,676 (20,012) -- 43,634
revenue
Operating costs
and expenses:
LOE 4,333 4,137 2,142 835 -- -- 11,447
Processing -- 10,737 -- -- (9,501) -- 1,236
DD&A 5,434 10,003 -- -- (3,672) 8,666 (b) 20,431
Rig operations 125 -- -- -- -- -- 125
G&A 1,042 3,257 -- -- (1,173) (534)(c) 2,592
-------- -------- -------- -------- -------- ------ -------
Total operating expenses 10,934 28,134 2,142 835 (14,346) 8,132 35,831
-------- -------- -------- -------- -------- -------- -------
Operating Income 2,883 10,477 5,400 2,841 (5,666) (8,132) 7,803
Other (income) expense:
Interest income (34) (82) -- -- -- -- (116)
Amortization of deferred
financing fee 214 106 -- -- -- 705 (d) 1,025
Interest expense 3,911 11,822 -- -- (5,782) 14,030 (e) 23,981
Unrealized foreign
exchange gain -- (795) -- -- -- 795 (f) --
Realized foreign
exchange loss -- 44 -- -- -- -- 44
--------- ------- ------ ------- -------- ------- ----------
Income (loss) (1,208) (618) 5,400 2,841 116 (23,662) (17,131)
before tax
Income tax
(benefit):
Current -- 224 -- -- (128) -- 96
Deferred -- -- -- -- -- (670)(g) (670)
-------- ------- ------- ------- -------- ------- --------
Net income loss) $ (1,208) $ (842) $ 5,400 $ 2,841 $ 244 $(22,992) $(16,557)
Less dividend requirement
on cumulative
preferred stock (366) -- -- -- -- -- (366)
-------- -------- ------- -------- -------- -------- -------
Net income (loss)
available to
common stockholders $ (1,574) $ (842) $ 5,400 $ 2,841 $ 244 $(22,992) $(16,923)
======== ======= ======= ======== ======== ======== =======
Earnings (loss)
per share: $ (0.34) $ (3.65)
======== ========
(1) The data for Portilla reflects that portion of Portilla previously owned by
the Pension Fund.
See notes to unaudited pro forma financial statements.
35
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
For the Nine Months Ended September 30, 1996
Historical Acquisitions
----------- --------------------------------------------------
Adjustment
Abraxas to Reflect Acquisition
Petroleum Wyoming Portilla & Sale of and Offering
Corporation CGGS Properties Happy (h) Nevis (a) Adjustments Pro Forma
----------- ---------- ----------- ----------- ----------- ------------- ---------
(dollars in thousands)
Operating revenue:
Oil and gas
production $ 11,786 $ 12,246 $ 7,280 $ 5,232 $ -- $ -- $ 36,544
Processing -- 20,279 -- -- (17,214) -- 3,065
Rig revenue 106 -- -- -- -- -- 106
Other 17 160 -- -- -- -- 177
----------- ---------- ----------- ----------- ----------- ----------- --------
Total operating
revenue 11,909 32,685 7,280 5,232 (17,214) -- 39,892
Operating costs
and expenses:
LOE 3,296 2,920 1,844 1,086 -- -- 9,146
Processing -- 11,289 -- -- (10,097) -- 1,192
DD&A 4,145 7,722 -- -- (3,098) 8,229 (b) 16,998
Rig operations 113 -- -- -- -- -- 113
G&A 1,250 2,156 -- -- (481) (380)(c) 2,545
Hedging loss 511 -- -- 370 -- -- 881
----------- ---------- ----------- ----------- ----------- ----------- --------
Total operating
expense 9,315 24,087 1,844 1,456 (13,676) 7,849 30,875
----------- ---------- ----------- ----------- ----------- ----------- --------
Operating income 2,594 8,598 5,436 3,776 (3,538) (7,849) 9,017
Other (income)
expense:
Interest income (156) (226) -- -- -- -- (382)
Amortization
of deferred
financing fee 192 80 -- -- -- 497(d) 769
Interest expense 2,142 8,870 -- -- (4,255) 11,195(e) 17,952
Minority interest 58 -- -- -- -- -- 58
Unrealized foreign
exchange gain -- (2,070) -- -- -- 2,070(f) --
Realized foreign
exchange gain -- (51) -- -- -- -- (51)
Loss on
Securities 235 -- -- -- -- -- 235
----------- ---------- ----------- ----------- ----------- ------------ --------
Income (loss)
before tax 123 1,995 5,436 3,776 717 (21,611) (9,564)
Income Tax (benefit):
Current -- 190 -- -- (89) -- 101
Deferred -- -- -- -- -- (541)(g) (541)
----------- ---------- ----------- ----------- ----------- ------------ --------
Net income (loss)
excluding
extraordinary
items 123 1,805 5,436 3,776 806 (21,070) (9,124)
Less dividend
requirement on
cumulative
preferred stock (274) -- -- -- -- -- (274)
----------- ---------- ----------- ----------- ----------- ------------ --------
Net income (loss)
available to
common
stockholders $ (151) $ 1,805 $ 5,436 $ 3,776 $ 806 $ (21,070) $(9,398)
=========== ========== =========== =========== =========== =========== ========
Earnings (loss)
per share $ (0.03) $ (1.62)
=========== ========
See notes to unaudited pro forma financial statements.
36
UNAUDITED PRO FORMA CONDENSED BALANCE SHEET
As of September 30, 1996
Historical Acquisitions
------------ --------------------
Adjustments
Abraxas to Reflect Acquisition
Petroleum Sale of Adjustments Offering
Corporation CGGS Nevis(a) including Portilla Adjustments ProForma
------------ -------- ----------- ------------------ ------------ ----------
(dollars in thousands)
Assets:
Cash $ 9,993 $ 7,495 $ 87,000 $ (84,412) (b) $ 181 $ 20,257
Accounts receivable 3,965 10,099 (5,769) -- -- 8,295
Other 280 -- -- -- -- 280
-------- -------- ----------- ----------- --------- ---------
Total current assets 14,238 17,594 81,231 (84,412) 181 28,832
Property and equipment:
Oil and gas properties 111,104 12,769 -- 49,336 (b) --
29,022 (d) -- 202,231
Processing facilities -- 78,860 (50,790) 18,190 (b) -- 46,260
Other property and
equipment 872 -- -- 3,600 (b) -- 4,472
Investment and advances
to partnership 2,397 -- -- (2,397) (d) -- --
Deferred financing fees 971 992 -- 223 (d) 8,200 (f)
(992) (b) (223)(b) 9,171
Other assets 858 -- -- -- 858
-------- -------- ----------- ----------- --------- ---------
Total assets $130,440 $110,215 $ 30,441 $ 12,570 $ 8,158 $ 291,824
======== ======== =========== =========== ========= =========
Liabilities and
stockholders' equity:
Total current liabilities $ 6,556 $ 5,586 $ (2,050) $ (2,135) (b) $ -- $ 7,957
Long-term debt:
Financing agreement 85,000 -- -- -- (85,000)(f) --
CGGS debentures -- 84,412 -- (84,412) (b) -- --
Acquisition debt:
CGGS shareholders -- -- -- 94,771 (b) (94,771)(f) --
Portilla -- -- -- 26,848 (d) (26,848)(f) --
Notes -- -- -- -- 215,000 (f) 215,000
Other liabilities 124 3,834 (1,664) -- -- 2,294
Deferred income taxes 187 -- -- 28,036 (b) -- 28,223
Minority interest 2,153 -- -- -- -- 2,153
Shareholders' equity:
Preferred stock -- -- -- -- -- --
Common stock 58 25,296 -- (25,296) (c) -- 58
Additional paid in
capital 50,920 -- -- -- -- 50,920
Retained earnings
(deficit) (14,184) (8,672) 34,155 (25,483) (c) (223)(g) (14,407)
Cumulative foreign
exchange adjustment -- (241) -- 241 (c) -- --
exchange
Treasury stock (374) -- -- -- -- (374)
--------- --------- --------- ----------- --------- ---------
Total stockholders' equity 36,420 16,383 34,155 (50,538) (223) 36,197
--------- --------- --------- ----------- --------- ---------
Total liabilities and
Stockholders' equity $130,440 $110,215 $30,441 $ 12,570 $ 8,158 $291,824
========= ========= ========= ========== ========= =========
- -------------
See notes to unaudited pro forma financial statements.
37
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS
Note 1. The pro forma unaudited Statements of Operations for the periods ended
December 31, 1995 and September 30, 1996 reflect the Acquisitions, the sale of
Notes and repayment of the Credit Agreement as if consummated on January 1, 1995
and January 1, 1996, respectively. The statements also reflect the operations
relating to the acquisition of the oil and gas properties acquired from Enserch
Exploration, Inc. on September 30, 1996 (Wyoming Properties).
a. To adjust for the sale of the Nevis Plant prior to the Company's acquisition
of CGGS.
The reduction in G&A expense represents the contractual management and
administrative fee paid to the operator related to the results of the Nevis
Plant, net of overhead recoveries charged to third parties for processing of
natural gas.
The reduction in interest expense relates to the repayment of a portion of
the debentures issued by CGGS in connection with its acquisition of the Nevis
Plant.
b. To adjust DD&A expense for the year ended December 31, 1995 to reflect the
acquisition of CGGS, the 50% overriding royalty interest in Portilla previously
owned by the Pension Fund and the Wyoming Properties for the twelve months ended
December 31, 1995 and to adjust DD&A expense for the nine months ended September
30, 1996 to reflect the acquisitions of CGGS, the reacquisition of Portilla and
Happy for the period March 21, 1996 to September 30, 1996, the acquisition of
the 50% overriding royalty interest in the Portilla Field previously owned by
the Pension Fund and the Wyoming Properties for the nine months ended September
30, 1996. DD&A expense of crude oil and natural gas properties is computed using
the units of production method. Depreciation of natural gas processing
facilities is computed using the straight line method over the estimated useful
life of 18 years.
c. To adjust G&A expense of CGGS to reflect the following:
Nine Months
Ended
Fiscal September 30,
1995 1996
------- - ------------
(dollars in thousands)
Reversal of management and administrative fees paid
to third party $(1,649) $(1,340)
Additional expenses relating to salaries and
benefits, office rent and other G&A expenses 1,115 960
------ -----
$ (534) $(380)
------ -----
d. To adjust the amortization of the deferred financing fee for the credit
facility oweed to First Union National Bank of North Carolina and the repayment
of the CGGS debentures and the fees and expenses related to the issuance of the
Notes. e. To adjust interest expense using a rate of 11.5% for the issuance of
the Notes and to reflect the repayment of the Credit Agreement and the
retirement of the CGGS debentures. f. To adjust the foreign exchange gain
realized by CGGS with respect to certain U.S.dollar-denominated debentures.
g. To reflect the deferred tax benefit.
Nine Months
Ended
Year Ended September 30,
December 31, 1995 1996
------------------ -----------------
(dollars in thousands)
Deferred tax benefit $679 $541
==== ====
38
h. The following reflects the results of operations of the 50% overriding
royalty interest in Portilla Field previously owned by the Pension Fund for the
nine months ended September 30, 1996 and the results from Portilla and Happy
previously owned by the Partnership for the period March 21, 1996 to September
30, 1996:
Certain
Overriding
Royalty
Interests in
the Portilla
Field Acquired
by Abraxas Portilla and Happy
Petroleum previously owned
Corporation by the Company
for the Nine for the period Portilla
Months Ended March 21, 1996 to and
September 30, 1996 September 30, 1996 Happy
------------------ ------------------ ----------
(dollars in thousands)
Oil and gas production sales $ 2,822 $ 2,410 $ 5,232
LOE (622) (464) (1,086)
Hedging loss -- (370) (370)
================== ================== ==========
$ 2,200 $ 1,576 $ 3,776
================== ================== ==========
Note 2. The pro forma unaudited Condensed Balance Sheet as of September 30,
1996, reflects the Acquisitions, the sale of Notes and repayment of the Credit
Agreement as if they had occurred as of September 30, 1996.
a. Canadian Abraxas purchased all of the outstanding shares of capital stock of
CGGS and immediately thereafter merged CGGS with and into Canadian Abraxas.
Prior to the Canadian Abraxas' acquisition of CGGS, the Nevis Plant was sold and
Canadian Abraxas, as the surviving entity of the CGGS acquisition, used the net
proceeds from the sale of the Nevis Plant to retire the outstanding debentures
of CGGS. The CGGS balance sheet included in the accompanying Unaudited Pro Forma
Condensed Balance Sheet dated as of September 30, 1996 represents the historical
unaudited balance sheet of CGGS as of October 31, 1996, converted into United
States generally accepted accounting principles and into U.S. dollars. The
balances included in the "Adjustments to Reflect Sale of Nevis" column on the
accompanying Unaudited Pro Forma Condensed Balance Sheet represent the sale of
the Nevis Plant and related accounts receivable and payable at a sales price of
approximately CDN$116.1 million, net of estimated selling costs and related
closing adjustments, or approximately U.S.$87.0 million, and the removal of the
historical net book value of the Nevis Plant and the working capital and other
liabilities associated with the operations of the Nevis Plant as of October 31,
1996. Retained earnings represent the approximate gain from the sale of the
Nevis Plant.
b. The acquisition of CGGS was accounted for as a purchase in accordance with
Accounting Principles Board Opinion No. 16 "Business Combinations." The purchase
price was allocated to the crude oil and natural gas properties, the natural gas
processing plants and other assets based upon estimated fair values. A deferred
income tax liability has been established representing the tax effect of the
difference in the fair value of the assets acquired and their historical tax
basis and has been allocated as additional basis of the crude oil and natural
gas properties, the natural gas processing plants and other assets.
39
- --------------------------------------------------------------------------------
(dollars in
thousands)
- -------------------------------------------------------------------------------
The total purchase price has been allocated as follows:
Purchase price for the outstanding capital
stock of CGGS $ 94,771
Book value of net assets acquired 49,546
--------
Increase in basis $ 45,225
Allocation of increase in basis:
Increase in crude oil and natural gas properties $ 49,336
Increase in natural gas processing facilities 18,190
Increase in other property and equipment 3,600
Deferred financing fee (992)
Change in accounts payable 3,127
Change in deferred tax liabilities (28,036)
-------
$ 45,225
=======
Retirement of CGGS debentures:
Cash $(84,412)
CGGS debentures 84,412
c. To reflect the elimination of CGGS equity
balance:
Common stock $ 25,296
Retained earnings 25,483
Cumulative foreign exchange adjustment (241)
d. To reflect the purchase of Portilla and Happy:
Purchase price of Portilla and Happy $ 27,600
Estimated adjustments to purchase price for
accrual of net crude oil and natural gas revenues to
November 14, 1996 (752)
------
Net amount due to seller 26,848
Elimination of the Company's equity
investment in and advances to the Partnership 2,397
Deferred financing fee related to debt repaid
(223)
------
Net purchase price allocated to oil and gas properties $ 29,022
======
40
Acco entered into a commodity price hedge with Christiania which was
assumed by the Company in connection with the consummation of the Transactions.
Under the terms of this commodity price hedge, the Company is required to
receive or make payment to Christiania based on a differential between a fixed
and variable price for crude oil and natural gas through the last business day
of November 2001 on volumes ranging from 8,160 barrels of crude oil to 20,000
barrels of crude oil per month and 14,850 MMBTU of natural gas to 87,406 MMBTU
of natural gas per month. Under this agreement, the Company receives fixed
prices ranging from $17.20 per barrel of crude oil to $18.55 per barrel of crude
oil and $1.793 per MMBTU of natural gas to $1.925 per MMBTU of natural gas and
makes payments based on the price for west Texas intermediate light sweet crude
oil on the NYMEX for crude oil and the Inside FERC, Tennessee Gas Pipeline Co:
Texas (Zone 0) price for natural gas. Currently there is a net unrealized loss
of approximately $1.8 million under the commodity price hedge.
e. To reflect the issuance of Notes and application of
the proceeds
therefrom:
Issuance of Notes $215,000
Expense for issuance of Notes (8,200)
Repayment of the Credit Agreement (85,000)
Payment of amount due to CGGS (94,771)
Payment of amounts due to seller of Portilla and Happy (26,848)
--------
Increase in existing cash 181
========
f. To reflect the write-off of deferred financing fees upon
retirement of certain related debt $ 223
========
In January, 1997, Canadian Abraxas entered into a letter of intent to sell
its interest in the Hoole Area for approximately $9.3 million. The Hoole Area
consists of 9,728 gross acres (3,311 net acres) and 6.4 gross wells (3.2 net
wells), of which are operated by Canadian Abraxas. As of September 1, 1996, the
Hoole Area natural gas properties had total proved reserves of 1,477.0 MBOE with
an aggregate PV-10 of $6.3 million, 89.3% of which was attributable to proved
developed reserves. The Hoole Area natural gas processing plant had aggregate
net natural gas processing capacity of 32.0 Mmcf per day at September 1, 1996.
For the nine months ended September 30, 1996, the Hoole Area natural gas
processing plant processed an average of 18.9 gross MMcf (9.5 net MMcf ) of
natural gas per day, of which 4.4% (2.2% net) was custom processed for third
parties. For the nine months ended September 30, 1996, the Hoole Area properties
and natural gas processing plants contributed $2.4 million of revenue to CGGS.
41
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
ABRAXAS PETROLEUM CORPORATION
By: /s/Chris Williford
---------------------
Chris Williford
Executive Vice President/
Chief Financial Officer
Dated: January 27, 1997
42
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the RegistrationStatement (Form
S-3 No. 33-3398 of Abraxas Petroleum Corporation and in the related Prospectus
of our report dated August 30, 1996 with respect to the statements of combined
oil and gas revenues and direct operating expenses of Certain Overriding Royalty
Interests in the Portilla Field acquired by Abraxas Petroleum Corporation for
the years ended December 31, 1994 and 1995 and our report dated October 7, 1996
with respect to the balance sheet of Canadian Abraxas Petroleum Limited as of
September 30, 1996, included in this Current Report (Form 8-K/A Number 1) dated
January 27, 1997.
Ernst & Young LLP
San Antonio, Texas
January 27, 1997
43
Consent of Independent Chartered Accountants
To the Board of Directors of
CGGS Canadian Gas Gathering Systems Inc.
We consent to the incorporation by reference in the registration statement (No.
33-3398) on Form S-3 of Abraxas Petroleum Corporation of our report dated
January 12, 1996 with respect to the balance sheets of CGGS Canadian Gas
Gathering Systems Inc. as at October 31, 1995 and 1994, and the related
statements of earnings (loss) and deficit and changes in financial position for
the years ended October 31, 1995, 1994 and 1993, which report appears in the
Form 8-K/A Number 1 of Abraxas Petroleum Corporation dated January 27, 1997.
Calgary, Canada KPMG
January 24, 1997 Chartered Accountants