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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 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 incorporation or(I.R.S. Employer Identification
organization) Number)
1100 Louisiana Street, Suite 5100
Houston, Texas 77002
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (713) 970 - 3100
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes ___X___ No _______ .
23,844,863 shares of the registrant's $.01 par value Common Stock were
outstanding on September 30, 1998.
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PANACO, Inc.
Consolidated Condensed Balance Sheets
(Unaudited)
ASSETS
As of As of
September 30, 1998 December 31, 1997
CURRENT ASSETS
Cash and cash equivalents $3,217,000 $36,909,000
Accounts receivable 11,704,000 9,735,000
Prepaid and other 643,000 626,000
Total current assets 15,564,000 47,270,000
OIL AND GAS PROPERTIES, AS DETERMINED BY THE
SUCCESSFUL EFFORTS METHOD OF ACCOUNTING
Oil and gas properties, proved 241,651,000 198,840,000
Oil and gas properties, unproved 10,863,000 12,947,000
Less: accumulated depletion, depreciation,
and amortization (123,201,000) (99,239,000)
Net oil and gas properties 129,313,000 112,548,000
PROPERTY, PLANT AND EQUIPMENT
Pipelines and equipment 26,236,000 14,875,000
Less: accumulated depreciation (2,726,000) (1,416,000)
Net property, plant and equipment 23,510,000 13,459,000
OTHER ASSETS
Deferred debt costs, net 3,416,000 3,813,000
Restricted deposits and other 3,831,000 2,539,000
Total other assets 7,247,000 6,352,000
TOTAL ASSETS $ 175,634,000 $ 179,629,000
PANACO, Inc.
Consolidated Condensed Balance Sheets
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
As of As of
September 30, 1998 December 31, 1997
CURRENT LIABILITIES
Accounts payable $ 12,530,000 $ 17,225,000
Interest payable 5,380,000 2,416,000
Current portion of long-term debt
- -
Total current liabilities 17,910,000 19,641,000
LONG-TERM DEBT 115,249,000 101,700,000
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;
23,844,863 and 23,913,531 shares
issued and outstanding, respectively 240,000 239,000
Additional paid-in capital 69,131,000 69,041,000
Treasury stock, held at cost (250,000) -
Accumulated deficit (26,646,000) (14,092,000)
Total stockholders' equity 42,475,000 55,188,000
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 175,634,000 $ 179,629,000
PANACO, Inc.
Consolidated Statements of Income (Operations)
For the Nine Months Ended September 30,
(Unaudited)
1998 1997
------------------ -------------------
REVENUES
Oil and natural gas sales $ 38,901,000 $ 23,434,000
COSTS AND EXPENSES
Lease operating expense 12,608,000 8,010,000
Depletion, depreciation & amortization 25,761,000 10,568,000
General and administrative expense 1,593,000 999,000
Office consolidation and severance expense 987,000 -
Production and ad valorem taxes 866,000 329,000
Exploratory dry hole expense 4,813,000 67,000
Geological and geophysical expense 828,000 -
------------------ -------------------
Total 47,456,000 19,973,000
------------------ -------------------
OPERATING INCOME (LOSS) (8,555,000) 3,461,000
------------------ -------------------
OTHER INCOME (EXPENSE)
Gain on sale of common stock - 75,000
Interest income 790,000 92,000
Interest expense (7,881,000) (2,297,000)
------------------ -------------------
Total (7,091,000) (2,130,000)
------------------ -------------------
INCOME (LOSS) BEFORE INCOME TAXES (15,646,000) 1,331,000
INCOME TAX (BENEFIT) (3,100,000)
-
------------------ -------------------
NET INCOME (LOSS) $ (12,546,000) $ 1,331,000
================== ===================
Net income (loss) per share $(0.52) $0.07
================== ===================
Basic Shares Outstanding 23,979,004 19,735,016
================== ===================
Diluted Shares Outstanding 23,979,004 19,735,016
================== ===================
PANACO, Inc.
Consolidated Statements of Income (Operations)
For the Three Months Ended September 30,
(Unaudited)
1998 1997
------------------ -------------------
REVENUES
Oil and natural gas sales $ 14,128,000 $ 9,146,000
COSTS AND EXPENSES
Lease operating expense 4,413,000 2,888,000
Depletion, depreciation & amortization 9,312,000 4,384,000
General and administrative expense 572,000 610,000
Office consolidation and severance expense 987,000 -
Production and ad valorem taxes 470,000 155,000
Exploratory dry hole expense 876,000 -
Geological and geophysical expense 346,000 -
------------------ -------------------
Total 16,976,000 8,037,000
------------------ -------------------
OPERATING INCOME (LOSS) (2,848,000) 1,109,000
------------------ -------------------
OTHER INCOME (EXPENSE)
Gain on sale of common stock - 16,000
Interest income 39,000 18,000
Interest expense (2,744,000) (958,000)
------------------ -------------------
Total (2,705,000) (924,000)
------------------ -------------------
INCOME (LOSS) BEFORE INCOME TAXES (5,553,000) 185,000
INCOME TAX (BENEFIT) 398,000 -
------------------ -------------------
NET INCOME (LOSS) $ (5,951,000) $ 185,000
================== ===================
Net income (loss) per share $(0.25) $ -
================== ===================
Basic Shares Outstanding 23,993,585 22,660,702
================== ===================
Diluted Shares Outstanding 23,993,585 22,660,702
================== ===================
PANACO, Inc.
Consolidated Statement of Changes in Stockholders' Equity
(Unaudited)
Amount ($)
Number of Additional
Common Common Paid-in Treasury Accumulated
Shares Stock Capital Stock Deficit
---------------- ---------------- ---------------- ----------------- ----------------
Balances, December 31, 1997 23,913,531 $239,000 $ 69,041,000 $- $(14,100,000)
Net Loss - - - (12,546,000)
1998 treasury stock purchases (118,700) - - (250,000) -
Shareholder rights redemption - - (118,000) - -
Common shares issued - director 50,032 1,000 208,000 - -
stock bonuses, ESOP
---------------- ---------------- ---------------- ----------------- ----------------
Balances, September 30, 1998 $23,844,863 $240,000 $ 69,131,000 $ (250,000) $(26,646,000)
================ ================ ================ ================= ================
PANACO, Inc.
Consolidated Statement of Cash Flows
For the Nine Months Ended September 30,
(Unaudited)
1998 1997
----------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $(12,546,000) $ 1,331,000
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depletion, depreciation and amortization 25,761,000 10,568,000
Exploratory dry hole expense 4,813,000
67,000
Deferred income tax benefit (3,100,000) -
Office consolidation and severance expense 987,000
Unrealized gain on investment in common stock - (75,000)
Other, net (1,643,000) (20,000)
Changes in operating assets and liabilities:
Accounts receivable (1,969,000) 733,000
Prepaid and other 266,000 (960,000)
Accounts payable (4,695,000) 4,536,000
Interest payable 2,964,000 (72,000)
----------------- -----------------
Net cash provided by operating activities 10,838,000 16,108,000
----------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Sale of oil and gas properties
23,000 24,000
Capital expenditures and acquisitions (56,924,000) (27,518,000)
Sale of investment in common stock - 1,717,000
Decrease/(increase) in restricted deposits (1,178,000) 65,000
----------------- -----------------
Net cash used by investing activities (58,079,000) (25,712,000)
----------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from common stock offering, net - 21,997,000
Long term debt proceeds 36,549,000 15,800,000
Repayment of long-term debt (23,000,000) (28,600,000)
----------------- -----------------
Net cash provided by financing activities 13,549,000 9,197,000
----------------- -----------------
NET DECREASE IN CASH (33,692,000) (407,000)
CASH AT BEGINNING OF YEAR 36,909,000 1,736,000
----------------- -----------------
CASH AT SEPTEMBER 30 $ 3,217,000 $ 1,329,000
================= =================
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 September 30, 1998 and December 31, 1997 and the
results of operations and cash flows for the periods ended September 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 $19.6 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,
acquired on May 26, 1998, and the Goldking Companies, Inc., acquired on July 31,
1997. This pro forma data may not be indicative of the results that actually
would have occurred if these acquisitions had been completed 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.
Nine months ended Nine months ended
September 30, 1998 September 30, 1997
Oil and natural gas sales $43,929,000 $42,159,000
Net income (loss) before
income taxes (14,669,000) 5,785,000
Net income (loss) (11,569,000) 5,785,000
Net income (loss) per share $(.48) $0.27
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.
Unproved property costs are assessed periodically, on a field-by-field basis to
determine if an impairment has occurred. As unproved property costs are
determined to be productive, the costs are transferred to proved property costs
and are amortized over the life of the proved reserves.
The Company performs a review for impairment of proved oil and gas
properties on a depletable unit basis when circumstances suggest there is a need
for such a review. For each depletable unit determined to be impaired, an
impairment loss equal to the difference between the carrying value and fair
value of the depletable unit will be recognized. Fair value, on a depletable
unit basis, is estimated to be the present value of expected future cash flows
computed by applying estimated future oil and natural gas prices, as determined
by management, to estimated future production of oil and natural gas reserves
over the economic lives of the reserves.
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 $9,920,000 and $1,787,000
during the first nine months of 1998 and 1997, respectively. No cash payments
for income taxes were made during the first nine 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.
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 (601,000) (14,330,000)
Estimated reserves at September 30, 1998 7,618,000 89,733,000
No major discovery or other favorable or adverse event has caused a
significant change in the estimated proved reserves since September 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
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 Compan'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
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 September 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 September 30, 1998, the company was in
default of conenants in its Bank Facility which it expects to be cured by
amendments to the agreement of by a waiver letter no later than November 30,
1998.
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 September 30, 1998, 87% 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 nine months ended September 30, 1998, cash payments
with respect to this NPI totaled $278,000.
The product prices received by the Company, including the impact of hedge
transactions discussed below, averaged $2.08 per Mcf for natural gas and $15.05
per barrel for oil for the nine months ended September 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 also hedged an additional 20,000 MMbtu per day from April
1999 through September 1999 at a swap price of $2.06 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 $17.35 per Bbl.
The Company produces and sells natural gas, oil and natural gas liquids. As
a result, its financial results can be significantly affected by changes in
these commodity prices. The Company uses derivative financial instruments to
hedge its exposure to changes in the market price of natural gas and oil. While
commodity financial instruments are intended to reduce the Company's exposure to
declines in these market prices, the commodity financial instruments may also
limit the Company's gains from increases in the market price of natural gas and
oil. As a result, gains and losses on commodity financial instruments are
generally offset by similar changes in the realized prices of natural gas and
oil. Gains or losses on these 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 $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 $56.9 million for the first nine months of 1998
represent an increase of $29.4 million over 1997. These expenditures, funded by
operating cash flows, proceeds from the Senior Note offering and borrowings
under the Company's Bank Facility, 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 $56.9 million in capital expenditures,
35% was invested in the properties acquired from BP, 24% was invested in the
High Island 309 Field, 7% 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. The
Company expects that its cash flows from operations along with borrowing
availability under its Bank Facility will be sufficient to meet its operating
and capital requirements for 1998.
Results of Operations
For the nine months ended September 30, 1998 and 1997:
"Oil and natural gas sales" increased 66% for the nine months ended
September 30, 1998 despite a 17% decrease in oil prices and a 11% decrease in
natural gas prices. Increases in natural gas and oil production brought about
the increase in oil and natural gas sales. The increased production in 1998, as
discussed below, would have been greater had the storms in the Gulf of Mexico in
August and September not occurred. During August and September, the Company was
required for safety reasons to shut in at least a portion of its production
facilities due to severe weather on four separate occasions.
Production. Natural gas production increased 93%, to 14,330,000 Mcf in
1998, from 7,446,000 Mcf in 1997. The BP acquisition in May 1998, the Goldking
acquisition in July 1997 and successful developmental drilling program in 1997
and 1998 were the primary factors in the increased production. The Goldking
acquisition and several wells completed on those properties during 1998
accounted for an increase of 3,115,000 Mcf. Successful developmental drilling in
the High Island 309 and 310 Fields accounted for an increase in production of
3,293,000 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 577,000 Mcf.
Oil production increased 79% in 1998 to 601,000 barrels, from 336,000
barrels in 1997. The primary factors in the increased oil production were the
acquisition of the East Breaks 165 Field in May 1998 and a successful
developmental well completed in the Umbrella Point Field in January 1998.
Prices. Average natural gas prices, net of the impacts of hedging
transactions, decreased 11% in 1998, from $2.33 per Mcf in 1997 to $2.08 in
1998. The 1998 natural gas hedge program had the effect of increasing the
natural gas price realized by $0.03 per Mcf in 1998 and decreasing it by $0.07
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
17%, to $15.05 per barrel, from $18.02 per barrel in 1997. The 1998 oil hedge
program had the effect of increasing the average net oil price realized by $2.26
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. Depressed commodity prices will continue
to have a negative impact on the Company's results of operations. At current
prices, the Company expects to incur an additional loss from operations for the
fourth quarter of 1998.
"Lease operating expense" decreased to 32% of oil and natural gas sales,
from 34% in 1997. Moreover, on an Mcf equivalent ("Mcfe") basis, lease operating
expenses decreased from $0.85 in 1997 to $0.70 in 1998.
"Depletion, depreciation and amortization" increased $15.2 million
primarily due to the increase in 1998 production as discussed above. The amount
per Mcfe also increased from $1.12 in 1997 to $1.44 in 1998. The increase in the
amount per Mcfe was in part due to the decline in reserve value of a small,
non-operated oil property. The magnitude of depletion is also impacted by the
relatively short lives of the Company's proved reserves. Currently, the average
life of the Company's proved reserves is approximately six years.
"General and administrative expense" increased $594,000 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
remained flat at 4% of oil and natural gas sales, and decreased to $0.09 per
Mcfe from $0.11 per Mcfe in 1997.
"Office consolidation and severance expense" was a non-recurring charge for
the costs associated with closing the Company's Kansas City, Missouri office.
The charge includes costs for the relocation of personnel and equipment to its
Houston, Texas office and severance costs for several former employees.
"Production and ad valorem taxes" increased $537,000 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 $4.7 million due to the Company's
increased exploratory activities in 1998. Of the 18 wells the Company has
drilled or participated in during the first nine months of 1998, five of the
exploratory wells were not commercially productive. One of the wells was spudded
and completed during the first quarter of 1998, three others reached total depth
during the second quarter and the final one reached total depth during the third
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 $698,000 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 $5.6 million 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 September 30, 1998 and 1997:
"Oil and natural gas sales" increased 55% for the third quarter of 1998
despite a 21% decrease in oil prices and a 6% decrease in natural gas prices.
Increases in natural gas and in oil production brought about the increase in oil
and natural gas sales. The increased production in 1998, as discussed below,
would have been greater had the storms in the Gulf of Mexico in August and
September not occurred. During August and September, the Company was required
for safety reasons to shut in at least a portion of its production facilities
due to severe weather on four separate occasions.
Production. Natural gas production increased 65%, to 5,005,000 Mcf in 1998,
from 3,025,000 Mcf in 1997. Successful developmental drilling on the properties
acquired from Goldking accounted for an increase in production of 1,835,000 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
138,000 Mcf. Production for 1998 also includes production from the East Breaks
165 Field, acquired May 26, 1998 from BP.
Oil production increased 89% in 1998 to 280,000 barrels, from 148,000
barrels in 1997. The primary factors in the increased oil production are the
acquisition of the East Breaks 165 Field in May 1998 and a successful
developmental well completed in the Umbrella Point Field in January 1998.
Prices. Average natural gas prices, net of the impacts of hedging
transactions, decreased 6%, from $2.14 per Mcf in 1997 to $2.02 in 1998. The
1998 natural gas hedge program had the effect of increasing the natural gas
price realized by $0.12 per Mcf in 1998 and decreasing it by $0.11 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
21% in 1998 to $14.29 per barrel, from $18.09 per barrel in 1997. The 1998 oil
hedge program had the effect of increasing the net oil price realized in 1998 by
$2.01 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. Depressed commodity prices
will continue to have a negative impact on the Company's results of operations.
At current prices, the Company expects to incur an additional loss from
operations for the fourth quarter of 1998.
"Lease operating expense" decreased to 31% of oil and natural gas sales,
from 32% in 1997. Moreover, on an Mcfe basis, lease operating expenses decreased
from $0.74 in 1997 to $0.66 in 1998.
"Depletion, depreciation and amortization" increased $4.9 million primarily
due to the increase in 1998 production as discussed above. The amount per Mcfe
also increased from $1.12 in 1997 to $1.39 in 1998. The increase in the amount
per Mcfe was in part due to the decline in reserve value of a small,
non-operated oil property. The magnitude of depletion is also impacted by the
relatively short lives of the Company's proved reserves. Currently, the average
life of the Company's proved reserves is approximately six years.
"Office consolidation and severance expense" was a non-recurring charge for
the costs associated with closing the Company's Kansas City, Missouri office.
The charge includes costs for the relocation of personnel and equipment to its
Houston, Texas office and severance costs for several former employees.
"Production and ad valorem taxes" increased $315,000 in 1998. As a
percentage of oil and natural gas sales, they increased from 2% in 1997 to 3% in
1998. On an Mcfe basis, these expenses also increased from $0.04 per Mcfe in
1997 to $0.07 per Mcfe in 1998.
"Exploratory dry hole expense" increased $876,000 due to the Company's
increased exploratory activities in 1998. One of the exploratory wells the
Company participated during the third quarter was not commercially productive.
The well was operated by a third party and the Company owned a 7.5% working
interest. 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 expense" increased $1.8 million 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 and addressing the issues of the associated computer programs and
hardware and their ability to distinguish between the year 1900 and 2000. The
Company is performing this review with the help of a third-party support
provider. This review involves evaluating each component of this infrastructure
by the Company and its support provider and includes a critical review of each
component as well as discussions with the providers or manufacturers of those
components. Throughout this review, the Company has retired or replaced several
components of its information technology infrastructure. The costs incurred by
the Company for this process have been immaterial to its results of operations.
The Company believes that this review and replacement process is substantially
complete, and should be finished during the first quarter of 1999. Once this
review is complete, the Company and its service provider will begin testing its
entire information technology infrastructure, which should be completed by June
30, 1999. The Company believes that the costs of testing and subsequent
modifications, if necessary, will be immaterial to its results of operations. At
this time the Company does not have a contingency plan for the Year 2000 problem
as it believes that it substantially has, and will have completely addressed the
Year 2000 problem internally by June 30, 1999.
The Company has also begun the process of identifying and prioritizing
critical suppliers and customers and communicating with them regarding their
plans and progress in addressing the Year 2000 problem. These evaluations will
be followed by the development of contingency plans, as necessary, which are
scheduled to begin in the first and second quarters of 1999 and should be
completed by mid-1999.
The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business operations. Such
failures could materially and adversely affect the Company's results of
operations, liquidity and financial condition. Due to the general uncertainty
inherent in the Year 2000 problem, resulting in part from the uncertainty of the
Year 2000 readiness of third-party suppliers and customers and the reliance on
third-party information technology support providers, the Company is unable to
determine at this time whether the consequences of the Year 2000 failures will
have a material impact on the Company's results of operations, liquidity or
financial condition. The completion of the Company's Year 2000 review is
expected to reduce the Company's level of uncertainty about the Year 2000
problem and, in particular, about the Year 2000 readiness of its third-party
suppliers and customers. The Company believes that with the completion of its
review and development of contingency plans as necessary, the possibility of
significant interruptions of normal operations should be reduced.
PART II
OTHER INFORMATION
Item 4. OTHER EVENTS
On October 6, 1998 the Company held its annual meeting of shareholders in
Houston, Texas. With 68% of the shareholders voting, Donald W. Chesser, Mark C.
Licata and James B. Kreamer were elected to serve on the board of directors for
the next three years.
A motion to allow 25% or more of the Company's shareholders to call an
annual meeting was not approved due to less than 50% of the shareholders voting.
The choice of KPMG Peat Marwick LLP as independent accountants was approved
by the shareholders.
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.
October 23,1998 Registrant's new certifying accountant
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 16,1998 /s/Todd R.BartTodd R. Bart,
Chief Financial Officer