================================================================================
================================================================================
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 June 30, 1998
[ ]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
incorporation or organization) Identification Number)
1050 West Blue Ridge Boulevard, PANACO Building,
Kansas City, Missouri 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 _______ .
23,963,563 shares of the registrant's $.01 par value Common Stock were
outstanding at August 14, 1998.
================================================================================
================================================================================
PART I. ITEM 1.
FINANCIAL INFORMATION
PANACO, Inc.
Consolidated Condensed Balance Sheets
(Unaudited)
ASSETS
As of As of
June 30, 1998 December 31, 1997
CURRENT ASSETS --------------- ----------------
Cash and cash equivalents $ 4,557,000 $ 36,909,000
Accounts receivable 9,616,000 9,735,000
Prepaid and other 810,000 626,000
-------------- -------------
Total current assets 14,983,000 47,270,000
-------------- -------------
OIL AND GAS PROPERTIES, AS DETERMINED BY THE
SUCCESSFUL EFFORTS METHOD OF ACCOUNTING
Oil and gas properties, proved 237,721,000 198,840,000
Oil and gas properties, unproved 10,750,000 12,947,000
Less: accumulated depletion, depreciation,
and amortization (114,711,000) (99,239,000)
-------------- -------------
Net oil and gas properties 133,760,000 112,548,000
-------------- -------------
PROPERTY, PLANT AND EQUIPMENT
Pipelines and equipment 26,451,000 14,875,000
Less: accumulated depreciation (2,230,000) (1,416,000)
-------------- ------------
Net property, plant and equipment 24,221,000 13,459,000
-------------- ------------
OTHER ASSETS
Deferred debt costs, net 3,535,000 3,813,000
Restricted deposits and other 3,223,000 2,539,000
------------- -------------
Total other assets 6,758,000 6,352,000
------------- -------------
============== =============
TOTAL ASSETS $ 179,722,000 $179,629,000
============== =============
The accompanying notes are an integral part of this statement.
2
PANACO, Inc.
Consolidated Condensed Balance Sheets
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
As of As of
June 30, 1998 December 31, 1997
------------- -----------------
CURRENT LIABILITIES
Accounts payable $ 20,031,000 $ 17,225,000
Interest payable 2,649,000 2,416,000
Current portion of long-term debt - -
------------- -----------------
Total current liabilities 22,680,000 19,641,000
------------- -----------------
LONG-TERM DEBT 108,249,000 101,700,000
DEFERRED INCOME TAXES - 3,100,000
COMMITMENTS AND CONTINGENCIES - -
STOCKHOLDERS' EQUITY
Preferred Shares, $.01 par value,
5,000,000 shares authorized; no
shares issued and outstanding - -
Common Shares, $.01 par value,
40,000,000 shares authorized;
23,963,563 and 23,913,531 shares
issued and outstanding, respectively 240,000 239,000
Additional paid-in capital 69,249,000 69,041,000
Retained earnings (deficit) (20,696,000) (14,092,000)
------------ -------------
Total stockholders' equity 48,793,000 55,188,000
------------ -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 179,722,000 $ 179,629,000
============= =============
The accompanying notes are an integral part of this statement.
3
PANACO, Inc.
Consolidated Statements of Income (Operations)
For the Six Months Ended June 30,
(Unaudited)
1998 1997
------------- -------------
REVENUES
Oil and natural gas sales $ 24,773,000 $ 14,287,000
COSTS AND EXPENSES
Lease operating expense 8,195,000 5,122,000
Depletion, depreciation & amortization 16,450,000 6,184,000
General and administrative expense 1,021,000 389,000
Production and ad valorem taxes 396,000 174,000
Exploratory dry hole expense 3,937,000 67,000
Geological and geophysical expense 482,000 -
------------ -----------
Total 30,481,000 11,936,000
------------ -----------
OPERATING INCOME (LOSS) (5,708,000) 2,351,000
------------ -----------
OTHER INCOME (EXPENSE)
Unrealized gain on investment in common stock - 60,000
Interest income 751,000 74,000
Interest expense (5,137,000) (1,339,000)
----------- -----------
TOTAL (4,386,000) (1,205,000)
----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES (10,094,000) 1,146,000
INCOME TAX (BENEFIT) (3,498,000) -
----------- -----------
NET INCOME (LOSS) $ (6,596,000) $ 1,146,000
============ ===========
Net income (loss) per share $ (0.28) $ 0.07
============ ===========
Basic Shares Outstanding 23,961,390 18,247,926
============ ===========
Diluted Shares Outstanding 23,961,390 18,247,926
============ ===========
The accompanying notes are an integral part of this statement.
4
PANACO, Inc.
Consolidated Statements of Income (Operations)
For the Three Months Ended June 30,
(Unaudited)
1998 1997
------------ -----------
REVENUES
Oil and natural gas sales $ 13,578,000 $ 6,220,000
COSTS AND EXPENSES
Lease operating expense 4,359,000 2,210,000
Depletion, depreciation & amortization 9,475,000 3,072,000
General and administrative expense 505,000 191,000
Production and ad valorem taxes 196,000 89,000
Exploratory dry hole expense 2,924,000 -
Geological and geophysical expense 231,000 -
------------ -----------
TOTAL 17,690,000 5,562,000
------------ -----------
OPERATING INCOME (LOSS) (4,112,000) 658,000
------------ -----------
OTHER INCOME (EXPENSE)
Unrealized gain on investment in common stock - -
Interest income 327,000 32,000
Interest expense (2,624,000) (376,000)
------------ -----------
TOTAL (2,297,000) (344,000)
------------ -----------
INCOME (LOSS) BEFORE INCOME TAXES (6,409,000) 314,000
INCOME TAX (BENEFIT) (2,225,000) -
------------ -----------
NET INCOME (LOSS) $ (4,184,000) $ 314,000
============ ===========
Net income (loss) per share $ (0.18) $ 0.02
============ ===========
Basic Shares Outstanding 23,972,215 20,382,087
============ ===========
Diluted Shares Outstanding 23,972,215 20,382,087
============ ===========
The accompanying notes are an integral part of this statement.
5
PANACO, Inc.
Consolidated Statement of Changes in Stockholders' Equity
(Unaudited)
Amount ($)
------------------------------------------------------
Number of Additional Retained
Common Common Paid-in Earnings
Shares Stock Capital (Deficit)
---------------- ---------------- --------------- ---------------
Balances, December 31, 1997 23,913,531 $ 239,000 $ 69,041,000 $(14,100,000)
Net Loss - - - (6,596,000)
Common shares issued - director
stock bonuses, ESOP 50,032 1,000 208,000 -
---------------- ---------------- -------------- ---------------
Balances, June 30, 1998 23,963,563 $ 240,000 $ 69,249,000 $(20,696,000)
================ ================ ============== ===============
The accompanying notes are an integral part of this statement.
6
PANACO, Inc.
Consolidated Statement of Cash Flows
For the Six Months Ended June 30,
(Unaudited)
1998 1997
------------ -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (6,596,000) $ 1,146,000
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depletion, depreciation and amortization 16,450,000 6,184,000
Exploratory dry hole expense 3,937,000 67,000
Deferred income tax benefit (3,498,000) -
Unrealized gain on investment in common stock - (60,000)
Other, net 713,000 16,000
Changes in operating assets and liabilities:
Accounts receivable 119,000 167,000
Prepaid and other (712,000) 400,000
Accounts payable 2,806,000 (476,000)
Interest payable 233,000 (261,000)
------------ -----------
Net cash provided by operating activities 13,452,000 7,183,000
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Sale of oil and gas properties 23,000 24,000
Capital expenditures and acquisitions (52,220,000) (8,227,000)
Decrease/(increase) in restricted deposits (156,000) 123,000
------------ -----------
Net cash used by investing activities (52,353,000) (8,080,000)
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from common stock offering, net - 22,014,000
Long term debt proceeds 24,549,000 4,500,000
Repayment of long-term debt (18,000,000) (26,000,000)
------------ -----------
Net cash used by financing activities 6,549,000 514,000
------------ -----------
NET INCREASE (DECREASE) IN CASH (32,352,000) (383,000)
CASH AT BEGINNING OF YEAR 36,909,000 1,736,000
------------ -----------
CASH AT JUNE 30 $ 4,557,000 $ 1,353,000
============ ===========
The accompanying notes are an integral part of this statement.
7
PANACO, Inc.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments necessary to present fairly the
financial position as of June 30, 1998 and December 31, 1997 and the results of
operations and cash flows for the periods ended June 30, 1998 and 1997. 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, 1997. These financial statements should be read in conjunction with
the financial statements and notes included in the Form 10-K.
Note 2 - ACQUISITIONS
On May 14, 1998 the Company entered into a definitive agreement with BP
Exploration and Oil, Inc. ("BP") to acquire BP's 100% working interest in East
Breaks Blocks 165 and 209 and 75% working interest in High Island Block 587. The
acquisition was accounted for using the purchase method and closed on May 26,
1998. PANACO became the operator of all three blocks effective June 1, 1998. The
Company acquired the properties for $19.5 million in cash. Included in the
acquisition is the production platform, located in 863 feet of water in East
Breaks Block 165. The Company also acquired 31.72 miles of 12" pipeline, with
capacity of over 20,000 barrels of oil per day, which ties the production
platform to the High Island Pipeline System, the major oil transportation system
in the area. It also acquired 9.3 miles of 12 3/4" pipeline, which ties the
production platform to the High Island Offshore System, the major gas
transportation system in the area. The allocation of the purchase price is
preliminary, however, management does not expect that any change in the final
allocation of the purchase price and the resulting effect on depletion,
depreciation and amortization will be material.
The following pro forma statement of income (operations) data is based
on the historical financial information of PANACO, Inc., The BP Properties and
the Goldking Companies, Inc., acquired by PANACO on July 31, 1997. This pro
forma data may not be indicative of the results that actually would have
occurred if these transactions had occurred on the dates indicated or which may
be obtained in the future. The pro forma financial information should be read in
conjunction with the historical financial statements of PANACO, Inc. and the
historical statements of revenues and direct operating expenses of the BP
Properties and historical statements of income (operations) of the Goldking
Companies.
Six months ended Six months ended
June 30, 1998 June 30, 1997
---------------- ----------------
Oil and natural gas sales $29,801,000 $29,106,000
Net income (loss) before
extraordinary items (4,279,000) 4,171,000
Net income (loss) (5,961,000) 4,171,000
Net income (loss) per share $(.25) $0.21
8
Note 3 - 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 capitalized. Non-drilling exploratory costs including geological and
geophysical costs and delay rentals are expensed. Exploratory drilling costs are
capitalized pending determination of proved reserves. If proved reserves are not
discovered, the exploratory costs are expensed. All development costs are
capitalized. Interest on unproved properties is capitalized based on the
carrying amount of the properties. Provision for depreciation and depletion is
determined on a field-by-field 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
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.
Pipelines and equipment are carried at cost. Oil and natural gas
pipelines are depreciated on the straight-line method over their estimated
useful lives, primarily fifteen years. Other property is also depreciated on the
straight-line method over their useful lives, ranging from three to seven years.
Note 4 - CASH FLOW INFORMATION
For purposes of the 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 $5,203,000 and
$1,526,000 during the first six months of 1998 and 1997, respectively. No cash
payments for income taxes were made during the first six months of 1998 or 1997.
Note 5 - RESTRICTED DEPOSITS
The Company is party to various escrow and trust agreements which
provide for monthly deposits into escrow and trust 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 or trustee of evidence that the operation was or is being
conducted in compliance with applicable laws and regulations. These amounts are
included on the financial statements as Restricted Deposits.
Note 6 - SUPPLEMENTAL INFORMATION RELATED TO OIL AND GAS PRODUCING
ACTIVITIES
The reserve information presented in the following table was prepared
by the Company 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.
9
Proved developed and undeveloped reserves Oil Gas
(Bbls) (Mcf)
--------- ----------
December 31, 1997 4,506,000 73,632,000
Acquisitions and other 3,713,000 30,431,000
Production (322,000) (9,326,000)
--------- ----------
Estimated reserves at June 30, 1998 7,897,000 94,737,000
========= ==========
No major discovery or other favorable or adverse event has caused a significant
change in the estimated proved reserves since June 30, 1998. 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 - INCOME TAXES
The Company had net operating loss carryforwards for federal income tax
purposes of approximately $40,000,000 at December 31, 1997 which are available
to offset future federal taxable income through 2012. The timing of the
Company's future utilization of net operating loss carry forwards may be limited
on an annual basis due to its issuance of common shares in a public offering and
in the acquisition of Goldking. In connection with the Goldking acquisition the
Company recorded a $3.1 million deferred tax liability based upon the complete
utilization of the Company's deferred tax asset valuation allowance and the
requirement for additional deferred tax liabilities resulting from the
acquisition. The Company recorded an income tax benefit for the first six months
of 1998 which eliminated this deferred tax liability and created a deferred tax
asset.
10
PART I Item 2.
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Forward-looking Statements
Forward-looking statements in this Form 10-Q, future filings by the
Company with the Securities and Exchange Commission, the Company's press
releases and oral statements by authorized officers of the Company are intended
to be subject to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Investors are cautioned that all forward-looking statements
involve risks and uncertainty, including without limitation, the risk of a
significant natural disaster, the inability of the Company to insure against
certain risks, the adequacy of its loss reserves, fluctuations in commodity
prices, the inherent limitations in the inability to estimate oil and gas
reserves, changing government regulations, as well as general market conditions,
competition and pricing. The Company believes that forward-looking statements
made by it are based upon reasonable expectations. However, no assurances can be
given that actual results will not differ materially from those contained in
such forward-looking statements. The words "estimate", "anticipate", "expect",
"predict", "believe" and similar expressions are intended to identify
forward-looking statements.
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.
Liquidity and Capital Resources
On May 14, 1998 the Company entered into a definitive agreement with BP
Exploration and Oil, Inc. ("BP") to acquire BP's 100% working interest in East
Breaks Blocks 165 and 209 and 75% working interest in High Island Block 587. The
acquisition was accounted for using the purchase method and closed on May 26,
1998. PANACO became the operator of all three blocks effective June 1, 1998. The
Company acquired the properties for $19.5 million in cash. Included in the
acquisition is the production platform, located in 863 feet of water in East
Breaks Block 165. The Company also acquired 31.72 miles of 12" pipeline, with
capacity of over 20,000 barrels of oil per day, which ties the production
platform to the High Island Pipeline System, the major oil transportation system
in the area. It also acquired 9.3 miles of 12 3/4" pipeline, which ties the
production platform to the High Island Offshore System, the major gas
transportation system in the area.
On October 9, 1997 the Company completed an offering of $100,000,000 10
5/8% Senior Subordinated Notes due 2004. Interest is payable April 1 and October
1 of each year. The net proceeds of $96,250,000 were used to repay or prepay
substantially all of its outstanding debt in the amount of $55,460,000. The
remaining proceeds were used primarily for the development and acquisition of
oil and gas properties.
11
On October 22, 1997 the Company replaced its existing Bank Facility and
entered into a new, five year $75,000,000 revolving credit facility (the "New
Credit Facility") with First Union National Bank, as administrative agent, and
Banque Paribas. The purpose of the New Credit Facility is to provide funds for
working capital support and general corporate purposes and to have available
letters of credit. The borrowing base on June 30, 1998 was $40,000,000. The
Company may elect to pay interest on the New Credit Facility at either the
Bank's prime rate or at the London Interbank Offered Rate on Eurodollar loans
("LIBOR") plus 1 to 1.75%, depending upon the percentage of utilization of the
borrowing base. Eurodollar loans can be for terms of one, two, three or six
months and interest is due at the expiration of the terms of such loans, but no
less frequently than three months.
On March 5, 1997 the Company completed an offering of 8,403,305 common
shares at $4.00 per share, $3.728 net of the underwriter's commission. The
offering consisted of 6,000,000 shares sold by the Company and 2,403,305 shares
sold by shareholders, primarily Amoco Production Company (2,000,000 shares) and
lenders advised by Kayne, Anderson Investment Management, Inc. (373,305 shares).
The Company's net proceeds of $22,000,000 from the offering were used to prepay
$13,500,000 of its 12% subordinated debt and the remaining funds were
temporarily paid on the Company's revolving bank loan and ultimately used for
the development of its properties.
At June 30, 1998, 88% of the Company's total assets were represented by
oil and gas properties and pipelines and equipment, net of depreciation,
depletion and amortization.
In 1991 certain lenders received a net profits interest (NPI) in the
West Delta properties. During the six months ended June 30, 1998, cash payments
with respect to this NPI totaled $206,000.
The product prices received by the Company, including the impact of
hedge transactions discussed below, averaged $2.11 per Mcf for natural gas and
$15.71 per barrel for oil for the six months ended June 30, 1998.
For 1998 the Company's natural gas hedge transactions are based upon
published gas pipeline index prices. The Company has natural gas hedged in
quantities ranging from 10,000 to 50,000 MMbtu per day in each month in 1998 for
a total of 11,980,000 MMbtu, at pipeline prices averaging approximately $2.05
per MMbtu, for a NYMEX equivalent of approximately $2.20 per MMbtu. Including
hedge transactions that Goldking had in place, the Company has hedged 7,356
MMbtu per day in 1999, all at an average pipeline index swap price of $1.89 per
MMbtu. The Company has hedged 218 MMbtu for each day in 2000 at an average
pipeline index swap price of $1.87. The Company has also hedged its oil prices
by hedging 1,268 Bbls of oil for each day in 1998 at an average swap price of
$19.06 per Bbl, with a 40% participation above $19.28 on 500 of the 1,268 Bbls.
The Company has hedged 223 Bbls of oil for each day in 1999 at an average price
of $17.27 per Bbl and 232 Bbls of oil for each day in 2000 at an average price
of $17.28 per Bbl. For accounting purposes, gains or losses on swap transactions
are recognized in the production month to which a hedge contract relates.
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. 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 the Minerals Management Service of the U.S. Department of the
Interior. This trust required an initial funding of $846,720 in December 1996,
and remaining deposits of
12
$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 connection with the BP
acquisition, the Company deposited $1,000,000 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
$6,500,000. In addition, the Company has $9,250,000 in surety bonds to secure
its plugging and abandonment operations.
Capital expenditures of $52.2 million for the first six months of 1998
represent an increase of $44 million over 1997. These expenditures, funded by
operating cash flows and proceeds from the Senior Note offering, consisted
primarily of drilling and development activities on its oil and natural gas
properties and the acquisition of oil and natural gas properties. Of the $52.2
million in capital expenditures, 38% was invested in the properties acquired
from BP, 25% was invested in the High Island 309 Field, 6% was invested in the
West Cameron 144 Field, 5% was invested in the Umbrella Point Field, 3% was
invested in the East Breaks 160 Field with the remaining capital expenditures
being incurred primarily on development of its smaller onshore properties and on
exploratory projects.
Results of Operations
For the six months ended June 30, 1998 and 1997:
"Oil and natural gas sales" increased 73% for the six months ended June
30, 1998 despite a 13% decrease in oil prices and a 15% decrease in natural gas
prices. Significant increases in natural gas and oil production brought about
the increase in oil and natural gas sales.
Production. Natural gas production increased 111%, to 9,326,000 Mcf in
1998, from 4,421,000 Mcf in 1997. The Company's developmental drilling program
in 1997 and 1998 was the primary factor in the increased production. A
successful developmental well completed in January 1998 in the Umbrella Point
Field accounted for an increase of 985,000 Mcf in 1998. Successful developmental
drilling in the High Island 309 and 310 Fields accounted for an increase in
production of 3,014,000 Mcf, while a successful developmental well and the
acquisition of a co-owner's working interest in the West Cameron 144 Field
accounted for an increase of 440,000 Mcf. Production for 1998 also includes one
month from the East Breaks 165 Field, acquired May 26, 1998 from BP.
Oil production increased 71% in 1998 to 322,000 barrels, from 188,000
barrels in 1997. The primary factors in the increased oil production are the
acquisition of the East Breaks 165 Field in May 1998 and the successful
developmental well completed the Umbrella Point Field.
Prices. Average natural gas prices, net of the impacts of hedging
transactions, decreased 15% in 1998, from $2.47 per Mcf in 1997 to $2.11 in
1998. The 1998 natural gas hedge program had the effect of decreasing the
natural gas price realized by $0.02 per Mcf in 1998 and $0.04 per Mcf in 1997.
The Company has natural gas hedged in quantities ranging from 10,000 to 50,000
MMbtu per day in each month in 1998 for a total of 11,980,000 MMbtu, at pipeline
prices averaging approximately $2.05 per MMbtu, for a NYMEX equivalent of
approximately $2.20 per MMbtu.
Average oil prices, net of the impacts of hedging transactions,
decreased 13%, to $15.71 per barrel, from $17.96 per barrel in 1997. The 1998
oil hedge program had the effect of increasing the net oil price realized by
$2.49 per barrel. The Company has hedged its oil prices on 1,268 Bbls of oil for
each day in 1998 at an average swap price of $19.06 per Bbl, with a 40%
participation above $19.28 on 500 of the 1,268 Bbls.
13
"Lease operating expense" decreased to 33% of oil and natural gas
sales, from 36% in 1997. Moreover, on an Mcf equivalent ("Mcfe") basis, lease
operating expenses decreased from $0.92 in 1997 to $0.73 in 1998.
"Depletion, depreciation and amortization" increased $10,265,000
primarily due to the increase in 1998 production as discussed above. The amount
per Mcfe also increased from $1.11 in 1997 to $1.46 in 1998.
"General and administrative expense" increased $632,000 in 1998 due to
acquisitions made by the Company in July 1997, April 1998 and May 1998. As a
percentage of oil and natural gas sales and on an Mcfe basis, these expenses
also increased to 4% of oil and natural gas sales from 3% in 1997, and to $0.09
per Mcfe from $0.07 per Mcfe in 1997.
"Production and ad valorem taxes" increased $222,000 in 1998, to 2% of
oil and natural gas sales, from 1% in 1997. The increase is due to production
from properties subject to state taxes which were acquired in July 1997.
"Exploratory dry hole expense" increased $3,937,000 due to the
Company's increased exploratory activities in 1998. Of the sixteen wells the
Company has drilled or participated in during the first six months of 1998, four
of the exploratory wells were not commercially productive. One of the wells was
spudded and completed during the first quarter of 1998, and the other three
reached total depth during the second quarter. The wells were operated by third
parties and the Company owned interests ranging from 10 to 20%. The Company
believes that its continued participation in a modest amount of exploratory
activities is an important factor in increasing shareholder value.
"Geological and geophysical expense" during 1998 resulted from the
Company's non-drilling exploratory activities.
"Interest income" increased $677,000 in 1998 primarily due to interest
income earned on the excess proceeds from the Company's Senior Note offering
completed in October 1997.
"Interest expense" increased $3,798,000 in 1998 primarily due to
increased borrowing levels. The increase in borrowing is due to the Company's
Senior Note offering completed in October 1997. The increase in borrowing levels
is somewhat offset by a reduced interest rate on a majority of the Company's
long term debt. In connection with the offering, the Company prepaid or repaid
long term debt, a significant amount of which had rates in excess of the 10 5/8%
rate on the Notes. This included amounts borrowed in connection with the Amoco
acquisition in October 1996 and debt assumed in connection with the Goldking
acquisition in July 1997.
Results of Operations
For the three months ended June 30, 1998 and 1997:
"Oil and natural gas sales" increased 118% for the second quarter of
1998 despite a 10% decrease in oil prices. Natural gas prices for the second
quarter of 1998 increased 6% over 1997. A significant increase in natural gas
and an increase in oil production brought about the increase in oil and natural
gas sales.
14
Production. Natural gas production increased 126%, to 5,068,000 Mcf in
1998, from 2,246,000 Mcf in 1997. The Company's developmental drilling program
in 1997 and 1998 was the primary factor in the increased production. A
successful developmental well completed in January 1998 in the Umbrella Point
Field accounted for an increase of 882,000 Mcf in 1998. Successful developmental
drilling in the High Island 309 and 310 Fields accounted for an increase in
production of 1,496,000 Mcf, while a successful developmental well and the
acquisition of a co-owner's working interest in the West Cameron 144 Field
accounted for an increase of 268,000 Mcf. Production for 1998 also includes one
month from the East Breaks 165 Field, acquired May 26, 1998 from BP.
Oil production increased 91% in 1998 to 206,000 barrels, from 108,000
barrels in 1997. The primary factors in the increased oil production are the
acquisition of the East Breaks 165 Field in May 1998 and the successful
developmental well completed the Umbrella Point Field.
Prices. Average natural gas prices, net of the impacts of hedging
transactions, increased 6%, from $1.95 per Mcf in 1997 to $2.06 in 1998. The
1998 natural gas hedge program had the effect of decreasing the natural gas
price realized by $.06 per Mcf in 1998 and 1997. The Company has natural gas
hedged in quantities ranging from 10,000 to 50,000 MMbtu per day in each month
in 1998 for a total of 11,980,000 MMbtu, at pipeline prices averaging
approximately $2.05 per MMbtu, for a NYMEX equivalent of approximately $2.20 per
MMbtu.
Average oil prices, net of the impacts of hedging transactions,
decreased 10% in 1998 to $15.32 per barrel, from $17.03 per barrel in 1997. The
1998 oil hedge program had the effect of increasing the net oil price realized
by $2.30 per barrel. The Company has hedged its oil prices on 1,268 Bbls of oil
for each day in 1998 at an average swap price of $19.06 per Bbl, with a 40%
participation above $19.28 on 500 of the 1,268 Bbls.
"Lease operating expense" decreased to 32% of oil and natural gas
sales, from 36% in 1997. Moreover, on an Mcfe basis, lease operating expenses
decreased from $0.76 in 1997 to $0.69 in 1998.
"Depletion, depreciation and amortization" increased $6,404,000
primarily due to the increase in 1998 production as discussed above. The amount
per Mcfe also increased from $1.06 in 1997 to $1.50 in 1998.
"General and administrative expense" increased $313,000 in 1998 due to
acquisitions made by the Company in July 1997, April 1998 and May 1998. As a
percentage of oil and natural gas sales and on an Mcfe basis, these expenses
also increased to 4% of oil and natural gas sales from 3% in 1997 and to $0.08
per Mcfe from $0.07 per Mcfe in 1997.
"Production and ad valorem taxes" increased $107,000 in 1998. However,
as a percentage of oil and natural gas sales and on an Mcfe basis, these
remained flat at 1%, and $0.03 per Mcfe, respectively.
"Exploratory dry hole expense" increased $2,924,000 due to the
Company's increased exploratory activities in 1998. Three of the exploratory
wells the Company participated during the second quarter were not commercially
productive. The wells were operated by third parties and the Company owned
interests ranging from 10 to 20%. The Company believes that its continued
participation in a modest amount of exploratory activities is an important
factor in increasing shareholder value.
"Geological and geophysical expense" during 1998 resulted from the
Company's non-drilling exploratory activities.
15
"Interest income" increased $295,000 in 1998 primarily due to interest
income earned on the excess proceeds from the Company's Senior Note offering
completed in October 1997.
"Interest expense" increased $2,248,000 in 1998 primarily due to
increased borrowing levels. The increase in borrowing is due to the Company's
Senior Note offering completed in October 1997. The increase in borrowing levels
is somewhat offset by a reduced interest rate on a majority of the Company's
long term debt. In connection with the offering, the Company prepaid or repaid
long term debt, a significant amount of which had rates in excess of the 10 5/8%
rate on the Notes. This included amounts borrowed in connection with the Amoco
acquisition in October 1996 and debt assumed in connection with the Goldking
acquisition in July 1997.
Year 2000
The Company is currently reviewing its information technology
infrastructure in order to evaluate necessary modifications for the year 2000.
The Company does not expect that the cost to modify and replace this
infrastructure, if necessary, in order for it to be Year 2000 compliant will be
material to its results of operations. The Company has not yet fully evaluated
the status of third-party systems and the effect, if any, on the Company if
third-party systems are not Year 2000 compliant. At this time, the Company is
uncertain as to the impact that the year 2000 issue will have on its information
technology infrastructure and as to how the Company may be indirectly affected
by the impact that the year 2000 will have on companies with which it conducts
business.
16
PART II
OTHER INFORMATION
Item 5. OTHER EVENTS
On August 11, 1998, H. James Maxwell resigned from his positions as
Chairman of the board, Chief Executive Officer and a director. Larry M.
Wright, President, was elected to the positions of Chairman of the
board and Chief Executive Officer.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
June 16, 1998 Change in registrant's certifying accountant
June 16, 1998 Acquisition of properties from BP Exploration
& Oil, Inc.
August 13, 1998 Amended 8-K, acquisition of properties from BP
Exploration & Oil, 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: August 14, 1998 /s/ Todd R.Bart
------------------------- -------------------------------------
Todd R. Bart, Chief Financial Officer
17