- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-Q/A
(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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PART I.
Item I. Financial Information
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 0
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 98,015,000 103,105,000
Less: accumulated depreciation,
depletion and amortization (77,526,000) (73,620,000)
------------------------ ------------------------
Net Oil and Gas Properties 20,489,000 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:
Earnest deposit - Amoco acquisition 5,000,000 0
Restricted deposits 1,733,000 0
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 7,117,000 531,000
TOTAL ASSETS $44,444,000 $36,169,000
======================== ========================
The accompanying notes are an integral part of this statement.
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 $4,444,000
Interest payable 240,000 161,000
Current portion of long-term debt 0 0
----------- -----------
Total Current Liabilities 8,809,000 4,605,000
LONG-TERM DEBT 25,137,000 22,390,000
STOCKHOLDERS' EQUITY:
Preferred stock, ($.01 par value,
5,000,000 shares authorized; no
shares issued and outstanding) 0 0
Common stock, ($.01 par value,
40,000,000 shares authorized and
12,350,255 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
=========== ===========
The accompanying notes are an integral part of this statement.
PANACO, INC.
Statements of Income (Successful Efforts Method)
For the Nine Months Ended September 30, 1996 and 1995
(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 0 2,174,000
Provision for losses and (gains) on
disposition and write-downs of assets (4,000) 0
Lease operating 6,049,000 5,729,000
Production and ad valorem taxes 429,000 810,000
West Delta fire loss 500,000 0
------------------- ------------------
Total 12,528,000 15,432,000
NET OPERATING INCOME (LOSS) 729,000 (1,772,000)
OTHER INCOME (EXPENSE)
Interest expense (net) (1,347,000) (720,000)
NET INCOME (LOSS) BEFORE INCOME TAXES (618,000) (2,492,000)
INCOME TAXES 0 0
NET INCOME (LOSS) ($618,000) ($2,492,000)
Net income (loss) per share ($0.05) ($0.21)
The accompanying notes are an integral part of this statement.
PANACO, INC.
Statement of Changes in Stockholders' Equity and Retained Earnings (Deficit)
For the nine months ended September 30, 1996
(Unaudited)
Amount ($)
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 0 0 0 (618,000)
Common shares issued - warrants
exercised and ESOP contribution 840,746 8,000 1,935,000 0
Balance, September 30, 1996 12,345,361 $123,000 $23,090,000 ($12,714,000)
The accompanying notes are an integral part of this statement.
PANACO, INC.
Statement of Cash Flows
Nine Months Ended September 30,
(Unaudited)
1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ($618,000) ($2,492,000)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depletion, depreciation and amortization 4,824,000 6,052,000
Exploration expenses 0 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 0 44,000
Accounts payable 4,231,000 916,000
Interest payable 79,000 (34,000)
--------- ---------
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) 0
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) 0
------------ -----------
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) 0
----------- ----------
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 cash investments
with original maturities of three 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.
The accompanying are an integral part of this statement.
PANACO, INC.
NOTES TO FINANCIAL STATEMENTS
For the nine months ended September 30, 1996 and 1995
Note 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.
Note 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. In connection with the change to the successful efforts method
of accounting, all prior periods have been restated, including the nine months
ended September 30, 1995. Net income for the nine months ended September 30,
1995 was reduced by $3,963,000, or $.36 per share from previously reported
amounts. 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 proved 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 include the estimated costs
to develop proved reserves and the costs of plugging offshore wells and removing
structures. The capital costs 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.
Note 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 the facilities were being
repaired and rebuilt . 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 and rebuild Tank Battery #3.
The Company began producing oil and natural gas from the West Delta fields on
October 7th, 1996.
Note 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.
Note 5. For purposes of reporting cash flows, the Company considers all cash
investments with original
maturities of three months or less to be cash equivalents.
Note 6. The reserves presented in the following table were prepared solely by
the Company 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. Sale of minerals-in-place
reflects the sale of the Bayou Sorrel Field, effective September 1, 1996.
Reserves attributable to the Amoco Acquisition, closed on October 8th, are not
included.
Proved developed and undeveloped reserves Oil Gas
(Bbls) (Mcf)
December 31, 1995 reported reserves 1,900,000 46,711,000
Purchase of minerals-in-place -0- -0-
Extensions and discoveries -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.
Note 7. The Company's Common Shares are quoted on the National Market of NASDAQ.
The last trade on September 30 was at $5.375 per share.
Note 8. 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. See "The Company - Plugging and Abandonment Escrows".
Note 9. 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 from April 24th,
until being returned to production on October 7, 1996. The loss of 67 days of
production in the second quarter and the entire third quarter resulted in lost
revenues of approximately $6 million. The fire was the principal contributor to
the losses of $.08 per share for the second quarter of 1996 and $.11 per share
for the third quarter. During the second quarter the Company expensed $500,000
for its loss as a result of this explosion. No further losses have been
recognized or are anticipated. This $500,000 amount included $225,000 in
deductables under the Company's insurance.
The Company has spent $8.5 million on Tank Battery #3 inclusive of
the $500,000 expensed during second quarter and has received reimbursement from
its insurance company of $3.9 million, after satisfaction of the $225,000 in
deductibles. The excess of expenditures over insurance reimbursement will be
capitalized. No additional expenditures have been made or are anticipated. The
Company is considering filing suits against the employers of the persons who
caused the incidents for recovery of these costs and its lost profits. No
assurance can be given that the Company will successfully recover any amounts
sought in any such suits.
Note 10. On October 8,1996, the Company completed the acquisition of interests
in thirteen offshore blocks comprising six fields in the Gulf of Mexico from
Amoco Production Company. Proved reserves, net to the interests acquired, as of
September 1, 1996, the effective date of the Amoco Acquisition, were1,953,000
barrels of oil and condensate and 28.6 Bcf of natural gas, based upon internal
reserve reports prepared by the Company. The purchase price for the assets
acquired in this transaction was $40.4 million, paid by the issuance of
2,000,000 Common Shares and by payment to Amoco of $32 million in cash.
Concurrently with this transaction the Company entered into a new Bank Facility
with First Union National Bank of North Carolina and Banque Paribas under which
its reducing revolving loan was increased to $40 million, with an initial
borrowing base (credit limit) of $35 million. The principal amount of the loan
is due July 1, 1999. 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
will increase by an additional .5% at the beginning of each quarter to a maximum
of 3 3/4% over LIBOR as long as the Company has in excess of $13,500,000 in
Subordinated Notes outstanding, specifically the 1993 Subordinated Notes and the
1996 Tranche B Bridge Loan Subordinated Notes. In addition to that facility, the
Company borrowed $17 million pursuant to the Tranche A Convertible and the
Tranche B Bridge Loan Subordinated Notes, provided by lenders investing through
Kayne, Anderson Investment Management, Inc. Both Tranche A Convertible and
Tranche B Bridge Loan bear interst at 12% per annum and are due October 8, 2003.
After the expiration of 180 days following the conclusion of this offering, the
Tranche A Notes are convertible into 2,060,606 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. Should the Tranche B Notes not be
prepaid by August 8, 1997 the interest rate will increase from 12% to 14% per
annum. The Company may deliver PIK notes in satisfaction of this additional
interest.
Note 11. Effective 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 477,612
shares of National Energy Group, Inc. common stock, which were valued at
$2,000,000 on September 30, 1996. 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 a 3% overriding royalty interest in the
deep rights of the field. The results of the Bayou Sorrel Field are included in
the Company's Statement of Income only through August 31, 1996.
Note 12. At December 31, 1995, the Company had net operating loss carry forwards
for federal income tax purposes of $15,765,000 which are available to offset
future federal taxable income through the year 2010.
PRO FORMA FINANCIAL INFORMATION
On October 8,1996, the Company completed the acquisition of interests
in thirteen offshore blocks comprising six fields in the Gulf of Mexico from
Amoco Production Company. Proved reserves, net to the interests acquired, as of
September 1, 1996 , the effective date of the Amoco Acquisition, were 1,953,000
barrels of oil and condensate and 28.6 Bcf of natural gas, based upon internal
reserve reports prepared by the Company. The purchase price for the assets
acquired in this transaction was $40.4 million, paid by the issuance of
2,000,000 Common Shares and by payment to Amoco of $32 million in cash.
Concurrently with this transaction the Company entered into a new Bank Facility
with First Union National Bank of North Carolina and Banque Paribas under which
its reducing revolving loan was increased to $40 million, with an initial
borrowing base (credit limit) of $35 million. In addition to that facility, the
Company borrowed $17 million pursuant to the Tranche A Convertible and the
Tranche B Bridge Loan Subordinated Notes, provided by lenders investing through
Kayne, Anderson Investment Management, Inc.
On July 26, 1995, the Company completed the acquisition of all of the
offshore oil and gas properties in the Gulf of Mexico owned by Zapata
Exploration Company, the "Zapata Properties." Proved reserves at December 31,
1994 attributable to the oil and gas interests acquired, net to the Company's
interest, were 308,000 barrels of oil and 27.8 Bcf of natural gas, based upon a
rolling forward of reserve reports of Zapata's independent petroleum engineers
as of October 1, 1994. The purchase price for the Zapata properties and a
related receivable of $174,000 ($84,000 at December 31, 1995) was $2,748,000 in
cash and an obligation to pay a production payment to Zapata based on future
production. See "Properties - Zapata Properties."
On November 22, 1996, the Company closed its sale of the Bayou Sorrel
Field to National Energy Group, Inc. for a sales price of $11 million,
consisting of $9 million in cash and 477,612 shares of National Energy Group,
Inc. common stock, which were valued at $2 million as of the closing date.
Because the sale was effective September 1, September revenues and expenses of
the Bayou Sorrel Field are not inlcuded in the Statement of Income for the Nine
Months Ended September 30, 1996.
PANACO, INC.
Pro Forma Combined Statement of Income (Operations)
For the Nine Months Ended September 30, 1996
(Amounts in thousands except per share data)
(Unaudited)
Amoco Bayou
Properties Sorrel
Pro Forma PANACO, Inc.Pro Forma PANACO, Inc.
Amoco Adjustments Pro Forma Adjustments Pro Forma
PANACO, Inc.Properties (Note 2) Combined (Note 3) Combined
REVENUES
Oil and gas sales $13,257 $11,135 $0 $24,392 ($2,010) $22,382
COSTS AND EXPENSES
Lease operating 6,049 3,158 108 9,315 (733) 8,582
Depreciation, depletion and amortization 4,981 0 5,655 10,636 (888) 9,748
Exploration expenses 0 0 0 0 0 0
Provision for losses and (gains) on
disposition and write-down of assets (4) 0 0 (4) 0 (4)
General and administrative 573 0 0 573 0 573
Production and ad valorem taxes 429 0 0 429 (239) 190
West Delta fire loss 500 0 0 500 0 500
Total 12,528 3,158 5,763 21,449 (1,860) 19,589
NET OPERATING INCOME (LOSS) 729 7,977 (5,763) 2,943 (150) 2,793
OTHER INCOME (EXPENSE)
Interest expense (net) (1,347) 0 (1,611) (2,958) 588 (2,370)
NET INCOME (LOSS) BEFORE INCOME TAXES (618) 7,977 (7,374) (15) 438 423
INCOME TAXES (BENEFIT) 0 0 0 0 0 0
NET INCOME (LOSS) ($618) $7,977 ($7,374) ($15) $438 $423
EARNINGS (LOSS) PER COMMON SHARE ($0.05) ($0.00) $0.03
Weighted average shares outstanding 12,253 2,000 14,253 14,253
The accompanying notes to financial statements are an integral part of this
statement
PANACO, Inc.
Pro Forma Combined Statement of Income (Operations)
For the Nine Months Ended September 30, 1995
(Amounts in thousands except per share data)
(Unaudited)
Pro Forma PANACO, Inc.
Zapata Amoco Adjustments Pro Forma
PANACO, Inc. Properties Properties (Note 2) Combined
REVENUES
Oil and gas sales $13,660 $3,623 $9,525 $0 $26,808
COSTS AND EXPENSES
Lease operating 5,729 1,460 1,906 314 9,409
Depreciation, depletion and amortization 6,277 0 0 8,179 14,456
Exploration expenses 2,174 0 0 0 2,174
Provision for losses and (gains) on
disposition and write-down of assets 0 0 0 0 0
General and administrative 442 0 0 0 442
Production and ad valorem taxes 810 0 0 0 810
Total 15,432 1,460 1,906 8,493 27,291
NET OPERATING INCOME (LOSS) (1,772) 2,163 7,619 (8,493) (483)
OTHER INCOME (EXPENSE)
Interest expense (net) (720) 0 0 (2,311) (3,031)
NET INCOME (LOSS) BEFORE INCOME TAXES (2,492) 2,163 7,619 (10,804) (3,514)
INCOME TAXES (BENEFIT) 0 0 0 0 0
NET INCOME (LOSS) ($2,492) $2,163 $7,619 ($10,804) ($3,514)
EARNINGS (LOSS) PER COMMON SHARE ($0.21) ($0.26)
Weighted average shares outstanding 11,649 2,000 13,649
The accompanying notes to financial statements are an integral part of this
statement
NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENTS OF
INCOME (OPERATIONS) For the nine months ended
September 30, 1996 and 1995
1. Basis of Presentation
The Unaudited Pro Forma Statement of Income (Operations) for the nine
months ended September 30, 1996 and 1995present the combined effects of the
acquisition of the Amoco Properties, which closed on October 8, 1996, the Zapata
Properties, closed on July 26, 1995 and the sale of the Bayou Sorrel Field,
closed on November 22, 1996, as if all of these transactions had been
consummated on January 1, 1995.
Because the Bayou Sorrel Field was purchased on December 28, 1995,
there was no activity included in the Company's results of operations in 1995,
and therefore, no pro forma elimination adjustments necessary for 1995.
The results of the Zapata properties are included in the Company's
1995 results of operations after the closing date, July 26, 1995. The pro forma
adjustments for the Zapata properties are only for the period of January 1 to
July 25, 1995. There are no pro forma adjustments in 1996 for the Zapata
Properties as the results from these properties are included in the Company's
results of operations in 1996.
Each period presented includes the issuance of 2,000,000 Common
Shares to Amoco Production Company in connection with the Amoco Acquisition.
There are also no pro forma entries for General and Administrative
expenses because the Company anticipates no increases in this category based on
the nature of the assets acquired.
2. Amoco and Zapata Properties Pro Forma Adjustments
Additional lease operating expenses of $108,000 in 1996 and $314,000
in 1995 represent the estimated additional insurance costs of owning the Amoco
Properties and the Zapata Properties. These amounts are estimated using the
Company's current insurance rates for owning the properties acquired or similar
properties.
Additional depletion and depreciation expense of $5,629,000 in 1996
and $8,179,000 in 1995 represents the estimated depletion and depreciation for
assets acquired in the respective acquisitions assuming the purchase prices and
proved reserve amounts were identical to those that existed at the time of the
actual acquisitions.
Additional interest expense of $2,154,000 in 1996 and $2,311,000 in
1995 represents the increased borrowings at January 1, 1995. The purchase price
assumed for each acquisition is the same as at the actual date of acquisition.
It is assumed that cash on hand at the beginning of 1995 was used for the
acquisitions, with the balance of any cash required being funded with the
Company's Bank Facility and the 1996 Subordinated Notes, using the rates in
effect at the time of the acquisition for the Bank Facility and 12% for the 1996
Subordinated Notes, also the same rate received at the time of the acquisition.
These assumptions would have required the Company to borrow $32 million for the
cash portion of the Amoco Acquisition, $17 million under the 12% subordinated
Notes and $15 million under the Company's Bank Facility, with an assumed
interest rate of 7.25%, the actual weighted average rate the Company incurred at
the time of the acquisition.
3. Bayou Sorrel Pro Forma Adjustments
The adjustments with respect to the sale of the Bayou Sorrel Field
represent the revenues and expenses of the Field from January 1 to August 31,
1996. Interest expense is reduced to reflect the elimination of the financing
for the acquisition, closed on December 28, 1995. The reduction in interest
expense is based on the Company's pro forma elimination of the debt associated
with the purchase of the Bayou Sorrel Field.
The Company borrowed $10.5 million for the purchase which closed on December 28,
1995, and had reduced this amount throughout 1996. The interest rate averaged
approximately 7.5%. The purchase price for the Field was $10,455,000 which
included a related receivable of $600,000 and a brokers fee of $205,000.
Although the sale of the Bayou Sorrel field closed on November 22,
1996, the buyer assumed all benefits and liabilities of the field after the
effective date of the sale, September 1, 1996.
PART I.
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
For the nine months ended September 30, 1996 and 1995:
General
The oil and 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 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.
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 from April 24th,
until being returned to production on October 7, 1996. The loss of 67 days of
production in the second quarter and the entire third quarter resulted in lost
revenues estimated by management to be approximately $6 million. The fire was
the principal contributor to the losses of $.08 per share for the second quarter
of 1996 and $.11 per share for the third quarter of 1996. During the second
quarter the Company expensed $500,000 for its loss as a result of this
explosion. No further losses have been recognized or are anticipated. This
$500,000 amount included $225,000 in deductibles under the Company's insurance.
The Company has spent $8.5 million on Tank Battery #3 inclusive of the
$500,000 expensed during second quarter and has received reimbursement from its
insurance company of $3.9 million, after satisfaction of the $225,000 in
deductibles. The excess of expenditures over insurance reimbursement will be
capitalized. No additional expenditures have been made or are anticipated. The
Company is considering filing suits against the employers of the persons who
caused the incidents for recovery of these costs and its lost profits. No
assurance can be given that the Company will successfully recover any amounts
sought in any such suits.
Results of Operations
"Oil and Gas revenue" decreased only 3% for the nine months ended
September 30, 1996 when compared to the nine months ended September 30, 1995, in
spite of the explosion and fire at West Delta. The fire and explosion
substantially reduced oil and natural gas production for the nine months in
1996, as production from the West Delta Fields was shut-in from the day of the
explosion and fire (April 24, 1996) until October 7, 1996. The decrease in
production from West Delta was offset by production from properties acquired.
The Bayou Sorrel Field was acquired on December 28, 1995 and had no production
realized by the Company in 1995. The offshore properties of Zapata Exploration
Company were acquired on July 26, 1996 with the production from these properties
being included in the Company's results of operations from July 27 through
September 30, 1995.
Production. Natural gas production decreased 39% to 4,590,000 Mcf for the
first nine months of 1996 from 7,578,000 Mcf in 1995. Natural gas production
from West Delta decreased from 6,700,000 Mcf for the first nine months of 1995
to 1,500,000 Mcf for the same period in 1996, primarily a result of the
explosion and fire on April 24, 1996. A secondary factor in the decrease in West
Delta production was a decline in 1996 production from four horizontal wells
drilled in 1994. These four wells produced more natural gas in January to April,
1995 than they did for the same period in 1996 (in the period prior to the
explosion and fire). Natural
gas production primarily from the Zapata Properties, and from the Bayou Sorrel
Field (primarily an oil field), somewhat offset the decrease in West Delta
production. The increase in Zapata production realized by the Company is due to
the fact that they were acquired on July 26, 1995. The production from these
properties included in the nine months ended September 30, 1995 is only from
July 27 to September 30, while the production for the full nine months is
included in 1996.
Oil production from the West Delta Fields also decreased for the nine
months ended September 30, 1996 when compared to the same period in 1995, from
103,000 barrels to 52,000 barrels. However, as with natural gas, 1995
acquisitions offset the decrease from West Delta. The Bayou Sorrel Field
acquisition, which produces primarily oil, produced 93,000 barrels in 1996, with
no oil production realized by the Company in 1995, more than offset the decrease
from West Delta. Also, oil production from the Zapata Properties is included for
the first nine months of 1996, with only the period of July 27 to September 30
included in the same period of 1995, due to the July 26 acquisition date, also
offsetting the decrease from West Delta. These factors resulted in a 66%
increase in oil production, from 122,000 barrels for the first nine months of
1995 to 203,000 barrels in 1996.
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.
Prices. Natural gas prices increased for the first nine months of 1996 to
$2.65 per Mcf compared to $1.54 for the same period 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. A swap loss for the nine months ended September
30, 1996 of $2.7 million, decreased the net price received by the Company to
$2.08 per Mcfe for the same period of 1996.
Oil prices also increased, from $16.30 per barrel in the first nine months
of 1995 to $18.33 per barrel in the same period of 1996.
"Depletion, depreciation and amortization" decreased 21% for the first
nine months of 1996 primarily due to the decreased production from the West
Delta Properties as a result of the April 24th explosion and fire, see
discussion of production volumes in "Oil and Gas revenue".
"Lease operating expenses" increased $320,000 in the first nine months of
1996 primarily due to the acquisition of the Zapata Properties and Bayou Sorrel
Field. With the Zapata Properties, the Company acquired interest in five
offshore producing properties. Since the acquisition of the Zapata Properties
closed on July 26, 1995, only the lease operating expenses from July 27, to
September 30, 1995 are included in the 1995 results of operations, while the
1996 period includes these expenses for the full nine months. 1996 also includes
a full nine months of lease operating expenses for the Bayou Sorrel Field,
acquired on December 28, 1995, with none of these expenses in the same period of
1995. West Delta lease operating expenses did decrease in the first nine months
of 1996 ($805,000 from expected levels) with the fields being shut-in from April
25 through October 7, however, a part of these lease operating expenses are
fixed in nature and continued.
"Production and ad valorem 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 ($178,000 from expected
levels) is due to the lost production from the West Delta Properties for 67 days
in the second quarter and the entire third quarter due to the explosion and
fire. A large percentage of this 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.
"Exploration expenses" in the first nine months of 1995 consist of two dry
exploratory wells drilled on South Timbalier Block 33 and Eugene Island Block 50
in the second quarter. The Company did not drill any exploratory wells in 1996.
The "West Delta fire loss" is the Company's expense of repairing and
rebuilding Tank Battery # 3, the central processing facility in the West Delta
Fields.
"Interest expense (net)" increased $627,000 , or 87% for the first nine
months of 1996 compared to the same period in 1995. Average Long-Term Debt
levels increased from $9 million for the nine months in 1995 to $21 million for
the same period in 1996, resulting in the primary cause of the increase in
interest expense. On December 27, 1995 the Company borrowed $10 million in
connection with the Bayou Sorrel Field acquisition. Through April, 1996, the
Company began to aggressively reduce Long-Term Debt, and it had reduced it by $4
million. The April 24th explosion and fire at West Delta reduced the Company's
discretionary cash flows and restricted the Company's ability to continue to
lower its Long-Term Debt. These two factors caused the average borrowing levels
to be higher in the first nine months of 1996 versus the same period of 1995.
The weighted average interest rate for the first nine months of 1996 was
actually slightly lower than that for the same period of 1995. Throughout both
nine month periods, the Company's Long-Term Debt included the 1993 Subordinated
Notes, bearing interest at 12%. The remainder of Long-Term Debt in each year was
borrowed under the Company's Bank Facility, which carried interest rates ranging
from 7% to 7 3/4%. The increased weighted average Long-Term Debt levels in the
first nine months of 1996, with a smaller percentage borrowed at 12%, decreased
the weighted average interest rate from 10% in the first nine months of 1995 to
8.6% in the same period of 1996. The Company borrowed $5 million on the Bank
Facility in late August 1996, for an earnest money deposit in connection with
the acquisition of the Amoco Properties, which closed on October 8, 1996.
Sale of Bayou Sorrel
Effective September 1, 1996, the Company sold its Bayou Sorrel Field to
National Energy Group, Inc. for $9 million in cash and 477,612 shares of
National Energy Group, Inc. common stock. The Company also retained an
overriding royalty interest in the deep rights of the field at depths below
11,000'. The field was acquired by the Company from Shell Western E.P., Inc. for
$10.5 million on December 28,1995, which included a broker's fee and a related
receivable. During the eight months the Company owned the field two wells were
drilled which did not result in production in commercial quantities. The Company
received an offer to purchase the Field. After having made the Amoco
Acquisition, Management believed that the Company's resources could be better
utilized elsewhere. The effective date of the sale was September 1, 1996, the
date at which National Energy Group, Inc. assumed all benefits and liabilities
of owning the property. The Company did not record a gain or loss on the sale.
For the nine months ended September 30, 1996, the Bayou Sorrel field had
accounted for $2 million, or 15% of the Company's total oil and gas revenue. The
Field had also accounted for $733,000, or 12% of lease operating expenses,
$888,000, or 18% of depreciation, and amortization and $239,000 or 56% of
production and ad valorem taxes. The net results of the field contributed
$150,000 to operating income, or 21%. The purchase price was paid in cash,
borrowed on the Company's Bank Facility. The interest expense incurred in 1996
by owning the field totaled $588,000 for the nine months ended September 30. The
operating income of the field and interest expense incurred resulted in a
decrease in net income of $438,000.
Liquidity and Capital Resources
At September 30, 1996, 46% of the Company's total assets were represented
by oil and gas properties, net of accumulated depreciation, depletion and
amortization.
On October 8, 1996, the Company amended its bank facility with First Union
National Bank of North Carolina (60% participation), and Banque Paribas (40%
participation), herein "Bank Facility". The loan is a reducing revolver designed
to provide the Company up to $40 million depending on the Company's borrowing
base, as determined by the lenders. The Company's borrowing base at December 31,
1996 was $31 million, with an availability under the revolver of $2.5 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 will increase by an additional .5% at the beginning of each
quarter to a maximum of 3 3/4% over LIBOR as long as the Company has in excess
of $13,500,000 in Subordinated Notes outstanding, specifically the 1993
Subordinated Notes and the 1996 Tranche B Bridge Loan Subordinated Notes. See
"Use of Proceeds." Management feels that this bank facility greatly enhances 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. The bank facility is collateralized by a first
mortgage on the Company's offshore properties. The loan agreement contains
certain covenants including a requirement to maintain a positive indebtedness to
cash flow ratio, a positive working capital ratio, a certain tangible net worth,
as well as limitations on future debt, guarantees, liens, dividends, mergers,
material change in ownership by management, and sale of assets.
From time to time the Company has borrowed funds from institutional
lenders who are represented by Kayne, 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 respective loan documents contain certain covenants including a requirement
to maintain a net worth ratio, as well as limitations on future debt,
guarantees, liens, dividends, mergers, material change in ownership by
management, and sale of assets.
The loans are as follows:
(a) 1993 Subordinated Notes. 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 during 1996 exercised,
warrants to acquire 816,526 Common Shares at $2.25 per share.
(b) 1996 Tranche A Convertible Subordinated Notes. On October 8,
1996, $8,500,000 was borrowed, due October 8, 2003, but prepayable any
time after May 8, 1998. The Notes are convertible into 2,060,606 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.
(c) 1996 Tranche B Bridge Loan Subordinated Notes. 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 from 12% to 14% per annum. The Company may deliver PIK notes
in satisfaction of this additional interest.
Management intends to pre-pay the 1993 Subordinated Notes and the 1996
Tranche B Bridge Loan Subordinated Notes with a portion of the proceeds of this
Offering. (See - "Use of Proceeds").
In 1991, in connection with a debt financing which has subsequently been
repaid, certain lenders received a net profits interest (NPI) in the West Delta
Properties, which is a continuing obligation with respect to these 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.
Pursuant to existing agreements the Company is required to deposit funds
in 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. Each month, until November 1997, $25,000
is deposited in a bank escrow account, to satisfy such obligations with respect
to a portion of its West Delta Properties. The Company has entered into an
escrow agreement with Amoco Production Company under which the Company will
deposit, 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.
These funds and interest earned thereon will be available for the expenses of
plugging wells and removing structures when that time comes. The Company has
established
the "PANACO East Breaks 110 Platform Trust" at Bank One, Texas, NA in favor of
the Minerals Management Service of the U.S. Department of the Interior. This
Trust requires an initial funding of $846,720 in December 1996, and remaining
deposits of $244,320 due at the end of each quarter in 1999 and $144,000 due at
the end of each quarter in 2000 for a total of $2,400,000. In addition, the
Company has $9,250,000 in surety bonds to secure its plugging and abandonment
obligations; including a $4,100,000 bond which was provided to the original
sellers of the West Delta Properties; a $2,400,000 supplemental bond provided to
the Minerals Management Service of the U.S. Department of the Interior in
connection with the plugging and structure removal obligations for the Company's
East Breaks Block 110 Platform and a $300,000 Pipeline Right-of-Way Bond.
During 1996 the Company hedged the price of natural gas by selling the
equivalent of 15,000 MMBtu per day for 1996 at fixed prices which ranged from
$2.25 for January to $1.75 for July. When the closing price (settlement price)
on NYMEX for natural gas futures was greater than the swap price for a given
month the Company paid that difference to the bank which effected the swap. If
the settlement price was less than the swap price the bank paid 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. Since the
Company sells its natural gas on the spot market, in 1996 it realized prices
which approximated 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. Starting in 1997 the Company's hedge transactions on natural gas are
based upon published gas pipeline index prices and not the NYMEX. This change
has eliminated the possibility of price differences due to transportation. The
company expects that for 1997, 14,000 MMBtu's per day are to be hedged, reduced
to 10,000 MMBtu's in 1998 and 7,000 MMBtu's in 1999. Also the Company is hedging
at a swap price of $1.80 for 1997, which was below the market when the hedges
were put in place. The Company then has varying levels of participation (93% in
January of 1997 to 40% in September) in settlement prices above to $1.80 swap
price level. Management has generally used hedge transactions to protect its
cash flows when the Company's borrowings under long-term debt have 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.
Despite a net loss for the nine months ended September 30, 1996 of
$618,000, the Company had cash provided by operations of $8.7 million. A
significant factor in cash flows from operations was a $4.2 million increase in
accounts payable, primarily a result of work being done on repairing and
rebuilding West Delta through the second and third quarters of 1996, while the
Company had not begun to receive any advances from its insurance company until
the third quarter.
Through September 30, 1996, the Company had borrowed $7.5 million under
its Bank Facility, $5 million of which was used for the earnest deposit made in
August in connection with the Amoco Acquisition. The remaining borrowings were
for development of oil and gas properties and repair and rebuilding of the West
Delta Tank Battery #3. The Company had repaid $4.8 million of these borrowings
through September, most of which was repaid through April.
During 1995, Shareholders' Equity increased $3,173,000, by virtue of the
exercise of options and warrants. During the first nine months of quarter 1996
Shareholders' Equity increased $1,837,000, as a result of the exercise of
warrants.
Capital Spending
In the nine month period ended September 30, 1996, the Company had $11.8
million in capital expenditures, including (1) a $5 million earnest money
deposit with respect to the purchase of the Amoco Properties, which were
subsequently acquired on October 8, 1996, (2) $1.9 million for repair and
rebuilding of the West Delta Tank Battery #3, net of insurance reimbursements,
and (3) $4.5 million for development of its oil and gas properties. The majority
of the development costs were incurred to drill two unsuccessful development
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
Corporation.
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 seeking damages for fraud. Management feels the
plaintiff's suit is without merit and any outcome would be immaterial to results
of operations or financial position.
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.
On January 29, 1997 the Company filed a Current Report on Form 8-K
describing its sale of the Bayou Sorrel Field to National Energy Group, Inc.
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: February 4, 1997 /s/ Todd R.Bart
Todd R. Bart, Chief Financial Officer