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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-26662
PANACO, Inc.
(Exact name of registrant as specified in its charter)
Delaware 43 - 1593374
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
1100 Louisiana Street, Suite 5100
Houston, Texas 77002
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (713) 970 - 3100
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 _______.
24,323,521 shares of the registrant's $.01 par value Common Stock were
outstanding on March 31, 2000.
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PANACO, Inc.
Consolidated Condensed Balance Sheets
ASSETS
As of As of
March 31, 2000 December 31, 1999
-------------- -----------------
(Unaudited)
CURRENT ASSETS
Cash and cash equivalents $ 6,145,000 $ 5,575,000
Accounts receivable 13,931,000 9,675,000
Accounts receivable-employee 21,000 16,000
Prepaid and other 678,000 729,000
---------------- -----------------
Total current assets 20,775,000 15,995,000
---------------- -----------------
OIL AND GAS PROPERTIES, AS DETERMINED BY THE
SUCCESSFUL EFFORTS METHOD OF ACCOUNTING
Oil and gas properties, proved 269,653,000 262,043,000
Oil and gas properties, unproved 15,724,000 15,672,000
Less accumulated depletion, depreciation,
and amortization (193,514,000) (188,827,000)
---------------- -----------------
Net oil and gas properties 91,863,000 88,888,000
---------------- -----------------
PIPELINES AND EQUIPMENT
Pipelines and equipment 26,343,000 26,327,000
Less accumulated depreciation (6,792,000) (6,130,000)
---------------- -----------------
Net pipelines and equipment 19,551,000 20,197,000
---------------- -----------------
OTHER ASSETS
Deferred debt costs, net 4,109,000 4,456,000
Employee note receivable 300,000 300,000
Restricted deposits and other 6,103,000 5,602,000
---------------- -----------------
Total other assets 10,512,000 10,358,000
---------------- -----------------
TOTAL ASSETS $ 142,701,000 $ 135,438,000
================ =================
(continued)
The accompanying notes are an integral part of this statement.
2
PANACO, Inc.
Consolidated Condensed Balance Sheets
LIABILITIES AND STOCKHOLDERS' DEFICIT
As of As of
March 31, 2000 December 31, 1999
------------------ -------------------
CURRENT LIABILITIES (Unaudited)
Accounts payable $ 19,687,000 $ 20,408,000
Interest payable 5,665,000 3,003,000
---------------- ----------------
Total current liabilities 25,352,000 23,411,000
---------------- -----------------
LONG-TERM DEBT 143,940,000 138,902,000
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT
Preferred Shares, $.01 par value,
5,000,000 shares authorized; no
shares issued and outstanding - -
Common Shares, $.01 par value,
100,000,000 shares authorized;
24,323,521 and 23,986,521 shares
issued and outstanding, respectively 246,000 243,000
Additional paid-in capital 68,978,000 68,852,000
Accumulated deficit (95,815,000) (95,970,000)
---------------- -----------------
Total stockholders' deficit (26,591,000) (26,875,000)
---------------- -----------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 142,701,000 $ 135,438,000
================ =================
The accompanying notes are an integral part of this statement.
3
PANACO, Inc.
Consolidated Statements of Operations
For the Three Months Ended March 31,
(Unaudited)
2000 1999
------------- ----------------
REVENUES
Oil and natural gas sales $ 15,556,000 $ 9,499,000
COSTS AND EXPENSES
Lease operating expense 4,191,000 4,120,000
Depletion, depreciation & amortization 5,746,000 6,630,000
General and administrative expense 984,000 1,122,000
Production and ad valorem taxes 259,000 154,000
Exploratory dry hole expense 320,000 -
Geological and geophysical expense 301,000 387,000
--------------- -----------------
Total 11,801,000 12,413,000
--------------- -----------------
OPERATING INCOME (LOSS) 3,755,000 (2,914,000)
--------------- -----------------
OTHER INCOME (EXPENSE)
Interest income 54,000 12,000
Interest expense (3,654,000) (2,723,000)
--------------- -----------------
Total (3,600,000) (2,711,000)
--------------- -----------------
NET INCOME (LOSS) $ 155,000 $ (5,625,000)
=============== =================
Net income (loss) per share $ 0.01 $ (0.24)
=============== =================
Basic Shares Outstanding 24,075,400 23,801,734
=============== =================
Diluted Shares Outstanding 24,075,400 23,801,734
=============== =================
The accompanying notes are an integral part of this statement.
4
PANACO, Inc.
Consolidated Statement of Cash Flows
For the Three Months Ended March 31,
(Unaudited)
2000 1999
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 155,000 $ (5,625,000)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depletion, depreciation and amortization 5,746,000 6,630,000
Exploratory dry hole expense 320,000 -
Changes in operating assets and liabilities:
Accounts receivable (4,256,000) 8,000
Prepaid and other 46,000 164,000
Accounts payable (721,000) 364,000
Interest payable 2,662,000 2,645,000
------------- ---------------
Net cash provided by operating activities 3,952,000 4,186,000
------------- ---------------
CASH FLOWS USED IN INVESTING ACTIVITIES
Capital expenditures and acquisitions (7,998,000) (9,359,000)
Increase in restricted deposits (500,000) (249,000)
------------- ---------------
Net cash used in investing activities (8,498,000) (9,608,000)
------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common shares 129,000 250,000
Long-term debt borrowings 8,538,000 9,500,000
Repayment of long-term debt (3,500,000) -
Additional deferred financing costs (51,000) -
------------- ---------------
Net cash provided by financing activities 5,116,000 9,750,000
------------- ---------------
NET INCREASE IN CASH 570,000 4,328,000
CASH AT BEGINNING OF YEAR 5,575,000 3,452,000
------------- ---------------
CASH AT MARCH 31 $ 6,145,000 $ 7,780,000
============= ===============
The accompanying notes are an integral part of this statement.
5
PANACO, Inc.
Consolidated Statement of Changes in Stockholders' Deficit
(Unaudited)
Amount ($)
-----------------------------------------------------------------------
Number of Additional Total
Common Common Paid-in Accumulated Stockholders'
Shares Stock Capital Deficit Deficit
--------------- --------------- --------------- ---------------- ------------------
Balances, December 31, 1999 23,986,521 $ 243,000 $ 68,852,000 $ (95,970,000) $ (26,875,000)
Net Income - - - 155,000 155,000
Common shares issued to the ESOP 337,000 3,000 126,000 - 129,000
------------- ------------- ------------- -------------- ---------------
Balances, March 31, 2000 24,323,521 $ 246,000 $ 68,978,000 $ (95,815,000) $ (26,591,000)
============= ============= ============= ============== ===============
The accompanying notes are an integral part of this statement.
6
PANACO, Inc.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all adjustments necessary to present
fairly the financial position as of March 31, 2000 and December 31, 1999 and the
results of operations and cash flows for the periods ended March 31, 2000 and
1999. Most adjustments made to the financial statements are of a normal,
recurring nature. Although the Company believes that the disclosures are
adequate to make the information presented not misleading, certain information
and footnote disclosures, including significant accounting policies, normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to the rules and
regulations of the Securities and Exchange Commission (the "SEC"). A more
complete description of the accounting policies followed by the Company are set
forth in Note 1 to the Company's financial statements in Form 10-K for the year
ended December 31, 1999. These financial statements should be read in
conjunction with the financial statements and notes included in the Form 10-K.
Certain reclassifications have been made in order to make the information
comparable.
The Company currently has 1,150,000 stock options outstanding at March 31,
2000 that are excluded from per share calculations in 2000 as they are "out of
the money" at $4.45 per share and they expire June 20, 2000. They are excluded
from 1999 per share calculations as they are anti-dilutive. The options were
issued in 1997 to officers and directors.
Note 2 - OIL AND GAS PROPERTIES AND PIPELINES AND EQUIPMENT
The Company utilizes the successful efforts method of accounting for its
oil and gas properties. Under the successful efforts method, lease acquisition
costs are initially capitalized. Exploratory drilling costs are also capitalized
pending determination of proved reserves. If proved reserves are not discovered,
the exploratory costs and associated lease acquisition costs are expensed. All
development costs are capitalized. Non-drilling exploratory costs, including
geological and geophysical costs and delay rentals, are expensed. Unproved
leaseholds with significant acquisition costs are assessed periodically, on a
property-by-property basis, and a loss is recognized to the extent, if any, that
the cost of the property has been impaired. Unproved leaseholds whose
acquisition costs are not individually significant are aggregated, and the
portion of such are amortized over an average holding period. As unproved
leaseholds are determined to be productive, the related costs are transferred to
proved leaseholds. Provision for depreciation and depletion is determined on a
depletable unit basis using the unit-of-production method. Estimated future
abandonment costs are recorded by charges to depreciation and depletion expense
over the lives of the proved reserves of the properties.
The Company performs a review for impairment of proved oil and gas
properties on a depletable unit basis when circumstances suggest there is a need
for such a review. For each depletable unit determined to be impaired, an
impairment loss equal to the difference between the carrying value and the fair
value of the depletable unit will be recognized. Fair value, on a depletable
unit basis, is estimated to be the present value of expected future cash flows
computed by applying estimated future oil and gas prices, as determined by
management, to estimated future production of oil and gas reserves over the
economic lives of the reserves. Future cash flows are based upon the Company's
estimate of proved reserves.
Property and equipment are carried at cost. Oil and natural gas pipelines
and equipment are depreciated on the straight-line method over their estimated
lives, primarily fifteen years. Other property is also depreciated on the
7
PANACO, Inc.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
straight-line method over their estimated lives, ranging from three to ten
years. Fees for processing oil and natural gas for others are treated as a
reduction of lease operating expense related to the facilities and
infrastructure.
Note 3 - CASH FLOW INFORMATION
For purposes of the consolidated statement of cash flows, the Company
considers all cash investments purchased with original maturities of three
months or less to be cash equivalents. Cash payments for interest totaled
$1,044,000 and $269,000 during the first three months of 2000 and 1999,
respectively. Cash payments for income taxes totaled $0 during the first three
months of 2000 and 1999, respectively.
Note 4 - RESTRICTED DEPOSITS
Pursuant to existing agreements the Company is required to deposit funds in
bank trust and escrow accounts to provide a reserve against satisfaction of its
eventual responsibility to plug and abandon wells and remove structures when
certain fields no longer produce oil and gas. Through November 30, 1997 the
Company funded $900,000 into an escrow account with respect to the West Delta
Fields. At that time, the Company completed its obligation for the funding under
West Delta agreement. The Company has entered into an escrow agreement with
Amoco Production Company under which the Company deposits, for the life of the
fields, in a bank escrow account ten percent (10%) of the net cash flow, as
defined in the agreement, from the Amoco properties. The Company has established
the "PANACO East Breaks 110 Platform Trust" in favor of RLI, Underwriter's
Indemnity. This trust required an initial funding of $846,720 in December 1996,
and remaining deposits of $250,000 due at the end of each quarter until the
balance in the account reaches $5.4 million. In connection with the BP
Acquisition, the Company deposited $1.0 million into an escrow account on July
1, 1998. On the first day of each quarter thereafter, the Company will deposit
$250,000 into the escrow account until the balance in the escrow account reaches
$6.5 million.
Note 5 - COMMITMENTS AND CONTINGENCIES
An action was filed against the Company in Louisiana, along with Exxon
Pipeline Company ("Exxon"), National Energy Group, Inc. ("NEG"), Mendoza Marine,
Inc., Shell Western Exploration & Production, Inc. ("Shell"), and the Louisiana
Department of Transportation and Development. The petition was filed in August
1998, and alleges that, in 1997 and perhaps earlier, leaks from a buried crude
oil pipeline contaminated the plaintiff's property.
Pursuant to the purchase and sales agreement between the Company and NEG,
NEG is required to indemnify the Company from any damages attributable to NEG's
operations on the property after the sale. However, NEG is in Chapter 11
bankruptcy proceedings, and so any action by the Company to assert indemnity
rights against NEG is currently stayed. The Company's Counsel has prepared and
may file a motion to lift the stay so that the Company may assert its
indemnification rights against NEG. But even if the Company is successful in
proving its right to indemnity, NEG's ability to satisfy the judgement is
questionable because of the bankruptcy.
8
PANACO, Inc.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Pursuant to another purchase and sale agreement, the Company may owe
indemnity to Shell and Exxon, from whom it acquired the property prior to
selling same to NEG. The Company may have insurance coverage for the claims
asserted in the petition, and has notified all insurance carriers that might
provide coverage under its policies. Some discovery has occurred in the case,
but discovery is not yet complete. Therefore, at this point it is not possible
to evaluate the likelihood of an unfavorable outcome, or to estimate the amount
or range of potential loss.
The Company is subject to various legal proceedings and claims which arise
in the ordinary course of business. In the opinion of management, the amount of
liability, if any, with the respect to these actions would not materially affect
the financial position of the Company or its results of operation.
Note 6 - LONG-TERM DEBT
In October 1999 the Company put in place a new credit facility. The loan is
a reducing revolver which will provide the Company with up to $60 million,
depending on the borrowing base. The Company's borrowing base at March 31, 2000
was $60.0 million, with availability of $16.1 million. The principal amount of
the loan is due September 30, 2001, and may be extended for an additional year
at the option of the Company. Interest on the loan is computed at Wells Fargo's
prime rate plus .5% to 3.0%, depending on the percentage of the facility being
used. The Credit Facility is collateralized by a first mortgage on the Company's
properties. The loan agreement contains certain covenants including an EBITDA
(as defined in the agreement) to interest expense ratio of at least 1.5 to 1.0
and a working capital ratio (as defined in the agreement) of at least .25 to
1.0. The loan agreement also contains limitations on additional debt, dividends,
mergers and sales of assets.
9
PART I
Item 2.
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Forward-looking Statements
With the exception of historical information, the matters discussed in this
Form 10-Q contain forward-looking statements. The forward-looking statements we
make, not only in this Form 10-Q, but also in press releases, oral statements
and other reports that we file with the Securities and Exchange Commission
("SEC") are intended to be subject to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. These statements relate to future
results of operations, the ability to satisfy future capital requirements, the
growth of our Company and other matters. You are cautioned that all
forward-looking statements involve risks and uncertainties. The words
"estimate," "anticipate," "expect," "predict," "believe" and similar expressions
are intended to qualify these forward-looking statements. We believe that the
forward-looking statements that we make are based on reasonable expectations.
However, due to the nature of the business we are in and other factors, we can
not assure you that the actual results of our Company will not differ from those
expectations.
General
The oil and natural gas industry has experienced significant volatility in
recent years because of the fluctuatory relationship of the supply of most
fossil fuels relative to the demand for those products and other uncertainties
in the world energy markets. You should consider the volatility of this industry
when reading the following.
Liquidity and Capital Resources
In implementing our business strategy of increasing our reserve base and
cash flows from operations, we have reinvested our cash flows from operations as
capital expenditures. During the first quarter of 2000, our cash flows from
operations totaled $4.0 million, while long-term borrowings under our Credit
Facility increased $5.0 million both of which were used to fund our capital
expenditures of $8.0 million and our required restricted deposit increase of $.5
million. Our capital expenditures of $8.0 million for the first quarter of 2000
were down slightly from $9.4 million during the first quarter of 1999.
For the year 2000, our Board of Directors has approved a $30 million
capital budget. This budget is based primarily on the resources available to us
at this time. We believe that our cash flows from operations and borrowings
under our Credit Facility will fund this level of capital expenditures and that
we will have sufficient availability under our Credit Facility to do so.
Credit Facility
Our primary source of capital beyond discretionary cash flows is our Credit
Facility. Our Credit Facility is secured by a first mortgage on most of our oil
and natural gas properties, and is used primarily as development capital on
properties that we own. We may also use the Credit Facility for working capital
support, to provide letters of credit and general corporate purposes.
In September 1999 we put in place a new Credit Facility, with Foothill
Capital Corp. as the Agent, and includes Foothill Partners, L.P. and Ableco
Finance, a subsidiary of Cereberus Capital Management, L.P. This Credit Facility
10
is a $60 million line, with a term of two years, and extendable for an
additional year at our option. Borrowings under this Facility bear interest at
rates ranging from prime plus .5% up to prime plus 3.0% depending on the amounts
borrowed. We had $41.7 million outstanding at March 31, 2000. We will continue
to use this Facility in 2000 to fund part of our $30 million capital budget.
The Credit Facility is a revolving credit agreement subject to monthly
borrowing base determinations. These determinations are made based on internally
prepared engineering reports, using a two year average of NYMEX future commodity
process and are based on our semi-annual third party reserve reports.
Indebtedness under this Credit Facility constitutes senior indebtedness with
respect to the Senior Notes.
Under the terms of this Credit Facility, we must maintain a ratio of
trailing twelve-month EBITDA to net interest expense of not less than 1.5 to 1.0
throughout the term of the Facility. We must also maintain a working capital
ratio, as defined in the agreement, of not less than .25 to 1.0. Also, the
Credit Facility contains certain limitations on mergers, additional indebtedness
and pledging or selling assets. We were in compliance with all covenants on
March 31, 2000 and anticipate compliance throughout the term of the loan.
Senior Note offering
On October 9, 1997, we issued $100 million principal amount of 10 5/8%
Senior Notes due October 1, 2004. Interest on the Notes is payable semi-annually
in arrears on each April 1 and October 1, commencing April 1, 1998. Of the $96.2
million net proceeds, $54.7 million was used to repay substantially all of our
outstanding indebtedness with the remaining $41.5 million used for capital
expenditures including the BP Acquisition.
Commodity price hedges
We follow a hedging strategy designed to protect against the possibility of
severe price declines due to unusual market conditions. We usually make hedging
decisions to assure a payout of a specific acquisition or development project or
to take advantage of unusual strength in the market.
For the year 2000, we have purchased options to put oil and natural gas
produced to a purchaser at an agreed upon price. The natural gas put option is
for 10,000 MMbtu per day at a NYMEX price of $2.04 per MMbtu. The cost of the
natural gas put option was $366,000 which will be amortized over the period the
hedge item is produced, fiscal year 2000. We have also purchased an oil put
option for 1,000 barrels of oil per day beginning March 1 and continuing through
December 31 at NYMEX price of $20.00 per barrel. The oil put option cost
$275,000 and will also be amortized over the period the hedge item is produced,
fiscal year 2000. We also have a swap in place on an average of 232 barrels of
oil for each day at $17.00 per barrel. This swap was assumed with the
acquisition of the Goldking in 1997.
On December 31, 1999 our open hedge position had a fair value of estimated
future losses totaling $800,000, to be realized over the periods hedged. On
March 31, 2000 this open hedge position had decreased to a fair value of
estimated future losses totaling $667,000.
We produce and sell natural gas, oil and natural gas liquids. As a result,
our financial results can be significantly affected by changes in these
commodity prices. We use derivative financial instruments to attempt to hedge
our exposure to changes in the market price of natural gas and oil. While
commodity financial instruments are intended to reduce exposure to declines in
these market prices, the commodity financial instruments may also limit the
gains from increases in the market price of natural gas and oil. Gains or losses
on these transactions are recognized in the production month to which a hedge
contract relates.
11
Capital expenditures
Capital expenditures totaled $8.0 million for the first three months of
2000, which represents a 15% decrease from the $9.4 million of capital
expenditures incurred in the comparable period of 1999. The capital expenditures
incurred in 2000 were primarily for three new wells completed during the first
quarter and two acquisitions. The first development well was in the Price Lake
Field, the Sturlese #3 that was successfully completed in March 2000. We also
drilled a new development well in the Umbrella Point Field, the ST #87-12 well,
which was also successfully completed in March 2000. A third new development
well was completed in the West Delta Fields in January. In addition, we acquired
minority, non-operating interests in our North Coward's Gully Field and in the
East Breaks 109 Fields, giving us essentially 100% ownership of both of these
Fields.
These expenditures were funded with cash flows from operations and
borrowings under our Credit Facility, accounting for the $5.0 million increase
in debt outstanding at March 31, 2000. Our total capital expenditures during
fiscal year 2000 are estimated to be $30 million.
Results of Operations
For the three months ended March 31, 2000 and 1999:
"Oil and natural gas sales"
Production and Prices:
% Increase
2000 1999 (Decrease)
---- ---- ----------
Natural gas production (MMcf) 3,248 3,359 (3%)
Average price per Mcf
excluding hedging $ 2.57 $ 1.72 49%
Average price per Mcf
including hedging $ 2.53 $ 1.77 43%
Oil Production (MBbl) 266 262 2%
Average price per Bbl
excluding hedging $ 27.92 $ 13.36 109%
Average price per Bbl
including hedging $ 27.64 $ 13.51 105%
Both natural gas and oil production remained relatively flat during the
first quarter of 2000 when compared to the first quarter of 1999. The resumption
of capital spending during the fourth quarter of 1999 and continuing in the
first quarter of 2000 resulted in additional production in several Fields that
we operate. This additional production resulted in offsetting production
declines that occur naturally on some of our other properties.
The Fields that we experienced increased production were the Price Lake
Field, which did not produce during the first quarter of 1999. Initial
production from the Price Lake Field began in September 1999 and was increased
further with a second successful well completed in March 2000. We also increased
production with two successful projects in the Umbrella Point Field. A workover
12
of the ST #74-10 well in December 1999 was the primary factor in increasing
natural gas production in the Umbrella Point Field. We also completed a
successful development well in this Field, the ST #87-12, which did not begin
production until March 2000.
"Lease operating expense" remained relatively flat at $4.2 million in 2000
when compared to $4.1 million in 1999. On an Mcf equivalent ("Mcfe") basis,
lease operating expenses also remained relatively flat at $0.87 in 2000 compared
to $0.84 in 1999.
"Depletion, depreciation and amortization" decreased $0.9 million primarily
due to a decrease in depletion costs per Mcfe. Depletion per Mcfe decreased to
$1.19 in 2000 compared to $1.34 in 1999 primarily due to a property impairment
on High Island 309 and 310 in 1999.
"General and administrative expense" decreased $138,000 primarily due to
lower legal fees in 2000.
"Exploratory dry hole expense" increased $320,000 in 2000. These
exploration expenses incurred in 2000 related to two successful wells completed
during the first quarter, the Umbrella Point Field ST#87-12 and the Price Lake
Field D.T. Sturlese #3. Although the wells were completed and are producing,
portions of the targeted zones in each well were exploratory and did not
encounter an economical quantity of reserves. The incremental costs for drilling
to these zones were expensed based on their proportional costs of the entire
well.
"Geological and geophysical expense" decreased in 2000 as a result of lower
lease and right-of-way rental expenses incurred.
"Interest expense" increased primarily due to higher average borrowings
outstanding under our Credit Facility. Our average interest rates have also
increased with the three prime rate increases since the first quarter of 1999.
New Accounting Principles
Accounting for Derivatives
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting
for Derivative Instruments and for Hedging Activities," provides guidance for
accounting for derivative instruments and hedging activities. In July 1999, SFAS
No. 137 "Deferring Statement 133's Effective Date," was issued which delays the
effective date for one year, to fiscal years beginning after June 15, 2000. We
have not yet completed an evaluation of the impact of the provisions of SFAS No.
133.
Other Contingencies
We are subject to various legal proceedings and claims that arise in the
ordinary course of business. We believe, based on the information available to
us, that the amount of liability, if any, with the respect to these actions
would not materially affect the financial position of the Company or its results
of operation.
An action was filed against the Company, Exxon Pipeline Company ("Exxon"),
National Energy Group, Inc. ("NEG"), Mendoza Marine, Inc., Shell Western
Exploration & Production, Inc. ("Shell") and the Louisiana Department of
Transportation and Development. The petition was filed in August 1998, and
alleges that, in 1997 and perhaps earlier, leaks from a buried crude oil
pipeline contaminated the plaintiff's property.
13
Pursuant to the purchase and sale agreement between the Company and NEG,
NEG is required to indemnify us from any damages attributable to NEG's
operations on the property after the sale. However, NEG is in Chapter 11
bankruptcy proceedings, and so any action we take to assert our indemnity rights
against NEG is currently stayed. Our Counsel has prepared and may file a motion
to lift the stay so that we may assert our indemnification rights against NEG.
But even if we are successful in proving our right to indemnity, NEG's
judgementworthiness is questionable because of the bankruptcy.
Pursuant to another purchase and sale agreement, we may owe indemnity to
Shell and Exxon, from whom we acquired the property prior to selling same to
NEG. We believe we have insurance coverage for the claims asserted in the
petition, and have notified all insurance carriers that might provide coverage
under our policies. Some discovery has occurred in the case, but discovery is
not yet complete. Therefore, at this point it is not possible to evaluate the
likelihood of an unfavorable outcome, or to estimate the amount or range of
potential loss.
In January 2000 we received a favorable judgement in a lawsuit we had filed
with our insurance carrier in 1996 related to the West Delta Fields. Our part of
the lawsuit was primarily for lost revenues in 1996 from a fire at Tank Battery
#3, which was caused by a third party service company. The judgement against the
service companies' insurance carrier was $1.1 million. The judgement was
appealed on April 7, 2000 and currently, we can not estimate when, or if, we
will receive the proceeds from this judgement.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Commodity price hedges
We follow a hedging strategy designed to protect against the possibility of
severe price declines due to unusual market conditions. We usually make hedging
decisions to assure a payout of a specific acquisition or development project or
to take advantage of unusual strength in the market.
For the year 2000, we have purchased options to put oil and natural gas
produced to a purchaser at an agreed upon price. The natural gas put option is
for 10,000 MMbtu per day at a NYMEX price of $2.04 per MMbtu. The cost of the
natural gas put option was $366,000, which will be amortized over the period the
hedge item is produced, fiscal year 2000. We have also purchased an oil put
option for 1,000 barrels of oil per day beginning March 1 and continuing through
December 31 at NYMEX price of $20.00 per barrel. The oil put option cost
$275,000 and will also be amortized over the period the hedge item is produced,
fiscal year 2000. We also have a swap in place on an average of 232 barrels of
oil for each day at $17.00 per barrel. This swap was assumed with the
acquisition of the Goldking in 1997.
On December 31, 1999 our open hedge position had a fair value of estimated
future losses totaling $800,000, to be realized over the periods hedged. On
March 31, 2000 this open hedge position had decreased to a fair value of
estimated future losses totaling $667,000.
14
PART II OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Date Schedule
(b) Reports on Form 8-K
None
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.
PANACO, Inc.
Date: May 10, 2000 /s/ Todd R. Bart
--------------------------- -------------------------------------
Todd R. Bart, Chief Financial Officer
15