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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
[ ] 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 incorporation or organization) (I.R.S. Employer Identification Number)
1050 West Blue Ridge Boulevard, PANACO Building,
Kansas City, MO 64145-1216
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (816) 942 - 6300
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 _______ .
12,345,361 shares of the registrant's $.01 par value Common Stock were
outstanding as of September 30, 1996.
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PANACO, INC.
Condensed Balance Sheets (Successful Efforts Method)
(Unaudited)
ASSETS As of As of
September 30, 1996 December 31, 1995
---------------------------------------------------
CURRENT ASSETS:
Cash and cash equivalents $ 766,000 $ 1,198,000
Accounts receivable 4,435,000 4,386,000
Accounts receivable - sale of Bayou Sorrel 11,152,000
-
Prepaid expenses 359,000 465,000
------------------------ ------------------------
Total Current Assets 16,712,000
6,049,000
------------------------ ------------------------
OIL AND GAS PROPERTIES, AS DETERMINED BY THE
SUCCESSFUL EFFORTS METHOD OF ACCOUNTING:
Oil and gas properties 103,015,000 103,105,000
Less: accumulated depreciation,
depletion and amortization (77,526,000) (73,620,000)
------------------------ ------------------------
Net Oil and Gas Properties 25,489,000 29,485,000
------------------------ ------------------------
PROPERTY, PLANT AND EQUIPMENT:
Equipment 248,000 196,000
Less: accumulated depreciation (122,000) (92,000)
------------------------ ------------------------
Net Property, Plant and Equipment
126,000 104,000
------------------------ ------------------------
OTHER ASSETS:
Restricted deposits 1,733,000 -
Loan costs, net 323,000 471,000
Certificate of deposit 27,000 26,000
Note receivable 21,000 21,000
Other 13,000 13,000
------------------------ ------------------------
Total Other Assets 2,117,000 531,000
------------------------ ------------------------
TOTAL ASSETS $ 44,444,000 $ 36,169,000
======================== ========================
PANACO, INC.
Condensed Balance Sheets (Successful Efforts Method)
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY As of As of
September 30, 1996 December 31, 1995
--------------------------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 8,569,000 $ 4,444,000
Interest payable 240,000 161,000
Current portion of long-term debt - -
----------------------- ------------------------
Total Current Liabilities 8,809,000 4,605,000
----------------------- ------------------------
LONG-TERM DEBT 25,137,000 22,390,000
----------------------- ------------------------
STOCKHOLDERS' EQUITY:
Preferred stock, ($.01 par value,
5,000,000 shares authorized; no
shares issued and outstanding) - -
Common stock, ($.01 par value, 40,000,000 shares authorized and 12,345,361
and 11,504,615 shares issued and outstanding, respectively) 123,000 115,000
Additional paid-in capital 23,090,000 21,155,000
Retained earnings (deficit) (12,715,000) (12,096,000)
----------------------- ------------------------
Total Stockholders' Equity 10,498,000 9,174,000
----------------------- ------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 44,444,000 $ 36,169,000
======================= ========================
PANACO, INC.
Statements of Income (Successful Efforts Method)
For the Nine Months Ended September 30,
(Unaudited)
1996 1995
---------- ----------
REVENUES
Oil and natural gas sales $ 13,257,000 $ 13,660,000
COSTS AND EXPENSES
General & administrative 573,000 442,000
Depletion, depreciation & amortization 4,981,000 6,277,000
Exploration expenses - 2,174,000
Provision for losses and (gains) on
disposition and write-downs of assets (4,000) -
Lease operating 6,049,000 5,729,000
Taxes 429,000 810,000
--------------- --------------
Total 12,028,000 15,432,000
--------------- --------------
NET OPERATING INCOME (LOSS) 1,229,000 (1,772,000)
--------------- --------------
OTHER INCOME (EXPENSE)
Interest expense (net) (1,347,000) (720,000)
--------------- --------------
NET INCOME (LOSS) BEFORE INCOME TAXES
& EXTRAORDINARY ITEM (118,000) (2,492,000)
INCOME TAXES - -
--------------- --------------
NET INCOME (LOSS) BEFORE EXTRAORDINARY ITEM (118,000) (2,492,000)
EXTRAORDINARY LOSS (500,000) -
--------------- --------------
NET INCOME (LOSS) $ (618,000) $ (2,492,000)
=============== ==============
Net income (loss) per share $ (0.05) $ (0.21)
=============== ==============
PANACO, INC.
Statements of Income (Successful Efforts Method)
For the Three Months Ended September 30,
(Unaudited)
1996 1995
--------- ---------
REVENUES
Oil and natural gas sales $ 2,449,000 $ 4,001,000
COSTS AND EXPENSES
General & administrative 191,000 128,000
Depletion, depreciation & amortization 1,169,000 1,879,000
Exploration expenses - -
Provision for losses and (gains) on
disposition and write-downs of assets (4,000) -
Lease operating 1,865,000 2,112,000
Taxes 102,000 184,000
--------------- -------------
Total 3,323,000 4,303,000
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NET OPERATING INCOME (LOSS) (874,000) (302,000)
--------------- -------------
OTHER INCOME (EXPENSE)
Interest expense (net) (445,000) (241,000)
--------------- -------------
NET INCOME (LOSS) BEFORE INCOME TAXES
& EXTRAORDINARY ITEM (1,319,000) (543,000)
INCOME TAXES - -
--------------- -------------
NET INCOME (LOSS) BEFORE EXTRAORDINARY ITEM (1,319,000) (543,000)
EXTRAORDINARY LOSS - -
--------------- -------------
NET INCOME (LOSS) $ (1,319,000) $ (543,000)
=============== =============
Net income (loss) per share $ (0.11) $ (0.04)
=============== =============
PANACO, INC.
Statement of Changes in Stockholders' Equity
(Unaudited)
Amount ($)
-----------------------------------------------------
Number of Additional Retained
Common Common Paid-in Earnings
Shares Stock Capital (Deficit)
------------ ----------- --------------- -------------
Balance, December 31, 1995 11,504,615 $ 115,000 $ 21,155,000 $(12,096,000)
Net income - - - (618,000)
Common shares issued - warrants
exercised and ESOP contribution 840,746 8,000 1,935,000 -
----------- ----------- --------------- -------------
Balance, September 30, 1996 12,345,361 $ 123,000 $ 23,090,000 $(12,714,000)
========== =========== =============== =============
PANACO, INC.
Statement of Cash Flows
Nine Months Ended September 30,
(Unaudited)
1996 1995
----------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) before extraordinary item $ (118,000) $ (2,492,000)
Adjustments to reconcile net income (loss) before extraordinary
item to net cash provided by operating activities:
Depletion, depreciation and amortization 4,824,000 6,052,000
Exploration expenses - 2,174,000
Amortization of loan costs 157,000 225,000
Changes in operating assets and liabilities:
Certificates of Deposits - escrow (1,000) 21,000
Accounts receivable (49,000) (110,000)
Prepaid expenses 106,000 (405,000)
Other assets - 44,000
Accounts payable 4,231,000 916,000
Interest payable 79,000 (34,000)
Extraordinary item - fire loss (500,000) -
------------ ------------
Net cash provided by operating activities 8,729,000 6,391,000
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Accounts receivable - sale of Bayou Sorrel (11,152,000) -
Sale of oil and gas properties 11,158,000 9,000
Capital expenditures and acquisitions (11,804,000) (5,396,000)
Purchase of other property and equipment (52,000) (33,000)
Increase in restricted deposits (1,886,000) -
------------ ------------
Net cash used by investing activities (13,736,000) (5,420,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term debt proceeds 7,500,000 3,365,000
Repayment of long-term debt (4,753,000) (7,000,000)
Issuance of common stock-exercise of warrants 1,837,000 2,554,000
Additional loan costs (9,000) -
------------ ------------
Net cash provided (used) by financing activities 4,575,000 (1,081,000)
------------ ------------
NET INCREASE (DECREASE) IN CASH (432,000) (110,000)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 1,198,000 1,583,000
------------ ------------
CASH AND CASH EQUIVALENTS AT SEPTEMBER 30, $ 766,000 $ 1,473,000
============ ============
Supplemental disclosures of cash flow information: Cash paid for nine
months ended September 30:
Interest $ 1,180,000 $ 757,000
Disclosure of accounting policies:
1. For purposes of the statement of cash flows, the Company considers all highly liquid debt
instruments purchased with a maturity of six months or less to be cash equivalents.
2. 24,220 Common Shares were issued related to the Company's ESOP in a non-cash
transaction.
PANACO, INC.
NOTES TO FINANCIAL STATEMENTS
1. In the opinion of management, the accompanying unaudited financial statements
contain all adjustments necessary to present fairly the financial position as of
September 30, 1996 and December 31, 1995 and the results of operations and
changes in stockholders' equity and cash flows for the periods ended September
30, 1996 and 1995. Most adjustments made to the financial statements are of a
normal, recurring nature. Other adjustments, if any, are discussed in later
notes.
2. Effective December 31, 1995, the Company changed its method of accounting for
oil and gas operations from the full cost to the successful efforts method.
Management concluded that the successful efforts method will better enable
investors and others to compare the Company to similar oil and gas companies,
the majority of which follow the successful efforts method.
Under the successful efforts method, lease acquisition costs are
capitalized. Exploratory drilling costs are also capitalized pending
determination of proved reserves. If proved reserves are not discovered, the
exploratory costs are expensed. All development costs are capitalized. Provision
for depreciation and depletion is determined on a field-by-field basis using the
unit-of-production method. The carrying amounts of proven and unproved
properties are reviewed periodically on a property-by-property basis, based on
future net cash flows determined by an independent engineering firm, with an
impairment reserve provided if conditions warrant.
The Company recognizes its ownership interest in oil and gas sales as
revenue and records revenues on an accrual basis.
Capital costs of oil and gas properties including the estimated costs
to develop proved reserves and estimated future costs of capital expenditures
and plugging offshore wells and removing structures, are amortized on the units
of production method, using the ratio of current production to the calculated
future production from the remaining proved oil and gas reserves.
Reserve determinations are subject to revision due to inherent
imprecisions in estimating reserves and are revised as additional information
becomes available.
3. The results of operations for the nine months ended September 30, 1996 are
not indicative of the results to be expected for the full year. On April 24,
1996 the Company experienced an explosion and fire at Tank Battery #3 in West
Delta. The fields were shut-in through October 7th while repairs were being
made. No revenues for the 67 remaining days in the second quarter and the full
third quarter of 1996 were recorded, while at the same time, a large part of
lease operating expenses associated with West Delta are fixed costs, and have
stayed at relatively the same level as before the fire. Production taxes
decreased as a result of the lost production from West Delta , a large part of
which is in Louisiana State waters and is subject to severance taxes. Interest
expense is also up as a result of the fire due to reduced cash flows, coupled
with increased spending to repair Tank Battery #3. The Company did not begin to
receive insurance reimbursement for repairing the platform until the third
quarter of 1996. The Company began producing oil and natural gas from the West
Delta fields on October 7th.
4. The net income per share for the nine months ended September 30, 1996 and
1995 has been calculated based on 12,253,382 and 11,649,091 weighted average
shares outstanding, respectively and 12,345,361 and 11,661,540 weighted average
shares for the three months ended September 30, 1996 and 1995, respectively.
5. The reserves presented in the following table are based upon reports of
independent petroleum engineers and are estimates only and should not be
construed as being exact amounts. All reserves presented are proved reserves
that are defined as estimated quantities which geological and engineering data
demonstrate with reasonable certainty to be recoverable in future years from
known reservoirs under existing economic and operating conditions.
Proved developed and undeveloped reserves Oil Gas
(Bbls) (Mcf)
December 31, 1995 1,900,000 46,711,000
Purchase of minerals-in-place -0- -0-
Production (203,000) (4,590,000)
Sale of minerals-in-place (805,000) (3,102,000)
Revisions of previous estimates -0- -0-
Estimated reserves at September 30, 1996 892,000 39,019,000
No major discovery or other favorable or adverse event has caused a significant
change in the estimated proved reserves since September 30, 1996. The Company
does not have proved reserves applicable to long-term supply agreements with
governments or authorities. All proved reserves are located in the United
States.
6. The Company's common stock is quoted on the National Market System of
NASDAQ. The last trade on September 30 was at $5.375 per share.
7. The Company is party to various escrow agreements which provide for monthly
deposits into escrow accounts to satisfy future plugging and abandonment
obligations. The terms of the agreements vary as to deposit amounts, based upon
fixed monthly amounts or percentages of the properties' net income. With respect
to plugging and abandonment operations, funds are partially or completely
released upon the presentation by the Company to the escrow agent of evidence
that the operation was or is being conducted in compliance with applicable laws
and regulations. These escrow amounts are included on the financial statements
as Restricted Deposits.
8. On April 24, 1996 the Company experienced an explosion and fire on Tank
Battery #3 in West Delta. The fire was caused by a service company performing
work on the facility. The extraordinary loss, recorded in the second quarter of
1996, is management's estimate of the Company's shortfall on insurance
reimbursement of repairing the facilities, which includes a $225,000 deductible.
The Company will seek to recover these costs, along with lost profits, from the
company whose workers caused the fire.
9. As of September 1, 1996 the Company sold its Bayou Sorrel Field to
National Energy Group, Inc. for $11,000,000, $9,000,000 in cash and $2,000,000
in National Energy Group, Inc. common stock. National Energy Group, Inc. will
also reimburse the Company for deposits it has made into an escrow agreement for
the plugging and abandonment obligation, through September 30, this amount was
$152,000. The Company will also retain an overriding royalty interest in the
deep rights of the field.
10. At December 31, 1995 the Company had net operating loss carryforwards for
federal income tax purposes of $15,765,000 which are available to offset future
federal taxable income through the year 2010.
PART I
Item 2.
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
General
The oil and gas industry has experienced significant volatility in
recent years because of the oversupply of most fossil fuels relative to the
demand for such products and other uncertainties in the world energy markets.
These industry conditions should be considered when this analysis of the
Company's operations is read. Accordingly, the energy market has been unsettled,
making it difficult to predict future prices.
Liquidity and Capital Resources
As discussed in notes to the financial statements, the Company
experienced an explosion and fire on April 24, 1996 at Tank Battery #3 in West
Delta resulting in the fields being shut-in through October 7, 1996. The loss of
67 days of production in the second quarter and the entire third quarter, an
extraordinary loss incurred in repairing the facility and a decrease in some of
the direct operating expenses and production taxes have resulted in a loss of
($.19) per share for the second and third quarters of 1996 versus per share net
income of $.02 from previous estimates.
The shut-in of West Delta brought about a loss in year to date revenues
of $5.4 million. The decrease in production also brought about a decrease in
operating taxes of $178,000, as a portion of the production from West Delta is
in Louisiana State waters and is subject to State severance taxes. Although
production was shut in for 67 days in the second quarter and the entire third
quarter, resulting in a decrease in West Delta lease operating expenses of
$805,000 from expected levels, a large part of the lease operating expenses in
West Delta are fixed expenses and continued throughout both quarters.
The Company is incurring the expenditures of repairing the facility and
being reimbursed by its insurance company. The Company did not begin receiving
these reimbursements until the third quarter of 1996. These repair expenditures,
coupled with the decrease in net operating cash flows discussed above resulted
in higher borrowing levels and interest expense.
The resulting decrease in revenues, net of the corresponding production
taxes, slightly lower lease operating expense levels and higher interest expense
decreased current assets (cash and accounts receivable) by approximately $1.9
million at the end of the third quarter of 1996. The repair expenditures on Tank
Battery #3, with the delay in insurance reimbursement, also decreased cash and
increased accounts payable and long-term debt. Through September 30, 1996 the
Company had paid or accrued approximately $7.0 million for repairs of Tank
Battery #3. These expenditures impacted current assets and liabilities as well
as limited the Company's ability to pre-pay its long-term debt.
The price received for natural gas averaged $2.34 per Mcf ($1.55 net of
the natural gas swap agreements) and $19.21 per barrel for oil for the three
month period ended September 30, 1996. Cash flow is currently being used to
reduce liabilities and pay general and administrative overhead.
At September 30, 1996, 57% of the Company's total assets were
represented by oil and gas properties, net of depreciation, depletion and
amortization.
In 1991 certain lenders received a net profits interest (NPI) in the
West Delta properties. During the three months ended March 31, 1996, payments
with respect to this NPI averaged $53,000 per month. Due to the explosion and
fire at Tank Battery #3, no NPI payments were made in the three months ended
June 30 or September 30, 1996.
On October 8, 1996 the Company amended its Bank Facility with First
Union National Bank of North Carolina (60%) and Banque Paribas (40%). The loan
is a reducing revolver designed to provide the Company up to $40 million
depending on the Company's borrowing base. The Company's borrowing base at
October 8, 1996 was $35 million. The principal amount of the loan is due July 1,
1999. However, at no time may the Company have outstanding borrowings under the
Bank Facility in excess of its borrowing base. Should the borrowing base ever be
determined to be less than the outstanding principal owed the Company must
immediately pay that difference to the lenders. Interest on the loan is computed
at the bank's prime rate or at 1 to 1 3/4% (depending upon the percentage of the
facility being used) over the applicable London Interbank Offered Rate ("LIBOR")
on Eurodollar loans. Eurodollar loans can be for terms of one, two, three or six
months and interest on such loans is due at the expiration of the terms of such
loans, but no less frequently than every three months. Beginning April 1, 1997,
the interest rate on the applicable margin will increase by .5% at the beginning
of each quarter to a maximum of 2.0% as long as the Company has in excess of
$8,500,000 in subordinated debt. Management feels that this Bank Facility
greatly facilitates its ability to make necessary capital expenditures to
maintain and improve production from its properties and makes available to the
Company additional funds for future acquisitions.
From time to time the Company has borrowed funds from institutional
lenders who are represented by Kanye, Anderson Investment Management, Inc. In
each case these loans are due at a stated maturity, require payments of interest
only at 12% per annum 45 days after the end of each calendar quarter and are
secured by a second mortgage on the Company's offshore oil and gas properties.
The loans are as follows:
(a) In 1993, $5,000,000 was borrowed, due December 31, 1999, but
prepayable at any time. The Company may deliver up to $1,000,000 in PIK (payment
in kind) notes in satisfaction of interest payment obligations. The lenders were
issued and have exercised warrants to acquire 816,526 Common Shares at $2.25 per
share.
(b) On October 8, 1996, $8,500,000 was borrowed, due October 8, 2003,
but prepayable at any time. Should this loan not be prepaid by August 8, 1997
the interest rate will increase to 14% per annum. The Company may deliver PIK
notes in satisfaction of this additional interest.
(c) On October 8, 1996, $8,500,000 was borrowed, due October 8, 2003,
but prepayable any time after May 8, 1998. This loan is convertible into Common
Shares on the basis of $4.125 per share. The Company may deliver up to
$2,000,000 in PIK notes in satisfaction of interest payment obligations.
Pursuant to existing agreements the Company is required to deposit
funds in escrow accounts to assure satisfaction of its eventual responsibility
to plug and abandon wells and remove structures when certain fields no longer
produce oil and gas. Each month $25,000 is deposited, until another $350,000 has
been deposited, to satisfy such obligations with respect to a portion of its
West Delta properties. Pursuant to the Company's agreement to acquire the
offshore properties with Zapata Exploration Company, it agreed to escrow 80% of
the net income from the East Breaks Fields until such time as the Minerals
Management Service of the Department of the Interior, which has jurisdiction
over oil and gas operations in the Outer Continental Shelf, has approved the
transfer of East Breaks 109 and 110 to the Company, which approval is expected
during fourth quarter 1996. In addition, the Company has $8,150,000 in
performance bonds to secure its plugging and abandonment operations.
Under a swap agreement the Company has hedged the price of natural gas
by selling the equivalent of 15,000 MMBTU per day for 1996 at fixed prices which
range from a high of $2.25 for January to a low of $1.75 for July. If the
closing price (settlement price) on NYMEX for natural gas futures is greater
than the swap price for a given month the Company must pay that difference to
the bank which effected the swap. If the settlement price is less than the swap
price the bank must pay that difference to the Company. By entering into the
swap in December 1995 the Company locked in the fixed prices on 15,000 MMBTU per
day for each month in 1996. Because settlement prices have been above the fixed
prices each month the Company has been required to pay the difference to the
bank which effected the swap. Since the Company sells its natural gas on the
spot market it realizes prices which approximate the settlement prices on NYMEX,
less differences for transportation due to pipeline locations that are varying
distances from Henry Hub, Louisiana which is the delivery point used for natural
gas futures on NYMEX. Generally these differences are anticipatable and not
significant. However, to the extent that these differences become significant
the Company may realize more or less on its spot sales of gas than was
anticipated and may be impacted beneficially or detrimentally by erratic
fluctuations in the natural gas spot market or the futures market on NYMEX. Both
such eventualities have occurred so far this year. These erratic fluctuations
which have characterized the natural gas market in recent months have exposed
the Company to market and credit risks. In those months in which the spot price
is below the settlement price, the net amount realized by the Company on its
total gas sales would be proportionately reduced by the swap agreements. At
present natural gas futures on NYMEX for the remaining months of 1996 are all
above the fixed prices under the swap agreement and the Company anticipates that
this will result in its realizing less for its natural gas due to amounts
required for payments to the bank under the swap agreement. Management entered
into the swap agreement to assure the Company of not receiving less than the
fixed prices established under the agreement for at least 15,000 MMBTU's of
natural gas per day in 1996. This gave the Company assurance that it would be in
a position to timely amortize its long-term debt. Long-term debt had increased
with acquisitions of the Zapata offshore properties and Bayou Sorrel Field from
Shell. Management has generally used hedge transactions to protect its cash
flows when long-term debt has been higher and refrained from hedge transactions
when long-term debt has been lower. For accounting purposes, gains or losses on
swap transactions are recognized in the production month to which a swap
contract relates. The Fair Value of these remaining swap transactions at
September 30, 1996 was ($600,000) due to higher natural gas futures market
prices on that date than those in the agreement put in place in December, 1995.
Through the nine months ended September 30, 1996 the Company had spent
$11.8 million in capital expenditures for development of its oil and gas
properties, the repair and rebuilding of the West Delta Tank Battery #3 and an
earnest deposit and property acquisition costs for the Amoco Properties which
were subsequently acquired on October 8, 1996. The majority of the development
costs were incurred to drill developmental wells in the Bayou Sorrel Field and
for the Company's share of successfully recompleting two wells on Eugene Island
Block 372, which is operated by Unocal.
During 1995 the Company raised $3,173,000 in equity by virtue of the
exercise of options and warrants. Through September 30, 1996 the Company had
raised $1,837,000 in equity as a result of the exercise of warrants.
Results of Operations
For the nine months ended September 30, 1996:
Effective December 31, 1995 the Company changed its method of
accounting for its oil and gas operations from the full cost to the successful
efforts method. As such, the three month and nine month periods ended September
30, 1995 have been restated and will not agree with previously reported amounts.
Oil and natural gas sales decreased 3% for the first nine months of 1996
when compared to the same period in 1995.
Natural gas production decreased 39% to 4,590,000 Mcf for the first
nine months of 1996 from 7,578,000 Mcf for the same period in 1995. This
decrease is primarily due to two factors: no production from West Delta for 67
days in the second quarter and the entire third quarter, due to the April 24,
1996 explosion and fire; and higher production in 1995 in West Delta from four
horizontal wells drilled in 1994 that had declined significantly by the end of
1995. These two factors were offset by the production from the Zapata and Bayou
Sorrel properties not owned during the first and second quarters of 1995. The
Zapata properties were acquired on July 26, 1995 and the Bayou Sorrel Field was
acquired on December 26, 1995.
Oil production was also reduced by the Tank Battery #3 explosion and
fire, however, production for the first nine months of 1996 increased 66% to
203,000 barrels from 122,000 barrels in the same period in 1995. Oil production
from the Zapata and Bayou Sorrel properties more than offset the decrease from
West Delta.
On an Mcf equivalent basis, total oil and natural gas production decreased
30% for the first nine months in 1996 compared to the same period in 1995.
These reductions in production were more than offset by higher oil and
natural gas prices in 1996 when compared to 1995. Natural gas prices averaged
$2.65 per Mcf for the first nine months in 1996 compared to $1.54 for the same
period in 1995. Oil prices also increased to $18.33 per barrel for the first
nine months in 1996 from $16.30 in 1995. The Company entered into a natural gas
swap agreement beginning January 1, 1996 for the sale of 15,000 MMBTU of gas
each day in 1996 with contract prices ranging from $1.75 per MMBTU to $2.25 per
MMBTU. In 1996, this swap agreement averaged ($.57) per Mcf, bringing the net
price received to $2.08 per Mcf for the first nine months of the year.
Depletion, depreciation and amortization decreased 21% for the first
nine months of 1996 primarily due to the decreased production from West Delta as
a result of the explosion and fire.
Exploration expenses in 1995 were due to two dry exploratory wells
drilled on South Timbalier Block 33 and Eugene Island Block 50 in the second
quarter. The Company has not drilled any exploratory wells in 1996.
Lease operating expenses increased due to the addition of five offshore
properties purchased from Zapata Exploration Corporation on July 26, 1995 and
the Bayou Sorrel Field, purchased from Shell Western E & P, Inc. on December 26,
1995. The increase as a percentage of oil and natural gas sales from 42% for the
first nine months of 1995 to 46% for the same period in 1996 is primarily due to
a large part of the West Delta operating expenses which are fixed in nature and
continued, even with the fields being shut-in for the repairs.
Taxes decreased to 3.2% of oil and natural gas sales in the first nine
months of 1996 from 5.9% of oil and natural gas sales for the same period in
1995. A part of the decrease is due to the lost production from West Delta for
67 days in the second quarter and the entire third quarter where a large
percentage of its production is in Louisiana State waters which are subject to
severance taxes.
The decrease is also due to the shift in the Company's production
volumes from properties subject to severance taxes to properties in federal
offshore waters (primarily the Zapata properties) that are not subject to such
taxes.
Interest expense (net) increased 87% for the first nine months of 1996
compared to the same period in 1995 due to higher borrowing levels in 1996
versus 1995. On December 27, 1995 the Company borrowed $10 million in connection
with the Bayou Sorrel Field acquisition. The Company began an aggressive debt
reduction process and through April it had reduced debt by $4 million. The April
24 West Delta explosion and repairs resulting in decreased discretionary cash
flows which restricted the Company's ability to lower its long-term debt levels
as quickly as anticipated, and correspondingly contributed to the increase in
interest expense.
The Company borrowed $5 million on the Bank Facility in late August for
an earnest deposit in connection with the acquisition of the Amoco Properties,
the Amoco transaction was closed on October 8th.
For the three months ended September 30, 1996:
Effective December 31, 1995 the Company changed its method of
accounting for its oil and gas operations from the full cost to the successful
efforts method. As such, the three month and nine month periods ended September
30, 1995 have been restated and will not agree with previously reported amounts.
Oil and natural gas sales decreased 39% for the three months ended
September 30, 1996 when compared to the same period in 1995.
Natural gas production decreased 60% to 924,000 Mcf for the third
quarter of 1996 from 2,294,000 Mcf for the same period in 1995. This decrease is
primarily due to two factors: no production from West Delta due to the April 24,
1996 explosion and fire; and higher production in 1995 in West Delta from four
horizontal wells drilled in 1994 that had declined significantly by the end of
1995. These two factors are offset by the production from the Zapata properties
acquired July 26, 1995, and the Bayou Sorrel acquisition which closed on
December 26, 1995.
Oil production was also reduced by the Tank Battery #3 explosion and
fire, however, production for the three months ended September 30, 1996 only
decreased 9% to 52,000 barrels from 57,000 barrels in the same period in 1995.
Oil production from the Zapata and Bayou Sorrel properties offset the decrease
from West Delta.
On an Mcf equivalent basis, total oil and natural gas production
decreased 53% for the three months ended September 30, 1996 compared to the same
period in 1995.
The reductions in production were offset by higher natural gas prices
in 1996 when compared to 1995. Natural gas prices averaged $2.34 per Mcf for the
three months ended September 30, 1996 compared to $1.42 for the same period in
1995. Oil prices also increased to $19.60 per barrel for the three months ended
June 30, 1996 from $13.00 in 1995, also offsetting the decreased production.
The Company's natural gas swap agreement averaged ($.79) per Mcf, bringing
the net price received to $1.55 per Mcf for the third quarter of 1996.
Depletion, depreciation and amortization decreased 32% for the three
months ended June 30, 1996 primarily due to the decreased production from West
Delta as a result of the explosion and fire.
Lease operating expenses decreased in part due to expenses associated
with the April 24, 1996 explosion and fire at Tank Battery #3 in West Delta. The
increase as a percentage of oil and natural gas sales from 53% for the third
quarter of 1995 to 76% for the same period in 1996 is primarily due to a large
part of the West Delta operating expenses which are fixed in nature and
continued, even with the fields being shut-in.
Taxes decreased to 4.2% of oil and natural gas sales in the three
months ended September 30, 1996 from 4.6% of oil and natural gas sales for the
same period in 1995. A part of the decrease is due to the lost production from
West Delta for the entire third quarter, which has a large percentage of its
production in Louisiana State waters which are subject to severance taxes.
The decrease is also due to the shift in the Company's production
volumes from properties located in state waters subject to severance taxes to
federal offshore waters (primarily the Zapata properties) that are not subject
to such taxes.
Interest expense (net) increased 85% for the third quarter of 1996
compared to the same period in 1995 due to higher borrowing levels in 1996
versus 1995. On December 27, 1995 the Company borrowed $10 million in connection
with the Bayou Sorrel Field acquisition. The Company began an aggressive debt
reduction process and through April it had reduced debt by $4 million. However,
the April 24 West Delta explosion and repairs resulting in decreased
discretionary cash flows reducing the Company's ability to lower its long-term
debt levels as quickly as anticipated, and correspondingly contributed to an
increase in interest expense.
The Company borrowed $5 million on its Bank Facility in late August for
an earnest deposit in connection with the acquisition of the Amoco Properties,
the Amoco transaction was closed on October 8th.
The Company currently does not intend to pay dividends with respect to
its Common Shares but rather intends to retain and reinvest its cash flow.
PART II.
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
A lawsuit has been filed against the Company seeking $700,000, relating
to a gas gathering system in Oklahoma. The Company has filed a counter claim
against the plaintiff alleging fraud, asking that the contract, which is the
subject of the suit, be declared void. Management feels that the suit is without
merit and can be disposed of for less than the amount claimed, although this
amount cannot be reasonably estimated.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULT UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On September 4, 1996 the Company held its annual meeting of
shareholders in Kansas City, Missouri.
The following directors were elected to serve on the Board for the next
three years:
For Against
Jim Kreamer 9,303,103 139,512
Ted Stautberg 9,289,971 152,644
Michael Springs 9,303,057 139,558
Mark Barrett 9,290,320 152,295
The choice of Arthur Andersen LLP as independent accountants was approved
by a vote of 9,306,864 for to 135,751 against.
The Company's Certificate of Incorporation was amended to increase the
number of authorized shares to 45,000,000 shares of capital stock, consisting of
5,000,000 shares of authorized preferred stock and 40,000,000 shares of
authorized common stock. This matter was approved by a vote of 8,753,301 for the
amendment to 543,888 against.
ITEM 5. OTHER INFORMATION
On November 12, 1996 the Company announced that it had entered into an
agreement to sell its Bayou Sorrel Field located in Iberville Parish, Louisiana
to National Energy Group, Inc. for $11 million. PANACO will receive $9 million
in cash and $2 million in shares of National Energy Group, Inc. common stock.
PANACO will also retain an overriding royalty interest in the deep rights of the
field. The transaction is expected to close on November 22.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
On March 26, 1996 the Company filed a Current Report, Amendment Number
1 on Form 8-K/A describing its acquisition, on December 27, 1995, of the Bayou
Sorrel Field in Iberville Parish, Louisiana from Shell Western E & P, Inc.
On October 28, 1996 the Company filed a Current Report on Form 8-K
describing its acquisition, on October 8, 1996 of the interest in six offshore
fields, comprising 13 blocks in the Gulf of Mexico from Amoco Production
Company.
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: November 15, 1996 /s/ Todd R.Bart
Todd R. Bart, Chief Financial Officer