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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
Commission file number: 0-12633
TEXOIL, INC.
(EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
NEVADA 88-0177083
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
110 CYPRESS STATION DRIVE
SUITE 220
HOUSTON, TEXAS 77090
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(281) 537-9920
(ISSUER'S TELEPHONE NUMBER)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: 6,666,525 shares of common
stock, $.01 par value, issued and outstanding at November 2, 2000.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
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TEXOIL, INC.
TABLE OF CONTENTS
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
CONSOLIDATED FINANCIAL
STATEMENTS:
Consolidated Balance Sheet as of September 30, 2000................ 3
Consolidated Statements of Income
for the three and nine months ended September 30, 2000 and 1999.. 4
Consolidated Statements of Cash Flows
for the nine months ended September 30, 2000 and 1999............ 5
Notes to Consolidated Financial Statements......................... 6
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION............................... 9
PART II. OTHER INFORMATION............................................. 18
2
TEXOIL, INC.
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
SEPTEMBER 30,
2000
-------------
ASSETS:
Current Assets:
Cash and cash equivalents ..................................... $ 1,721
Accounts receivable and other ................................. 8,746
Other current assets .......................................... 1,649
-------------
Total current assets ..................................... 12,116
-------------
Property, plant and equipment, at cost:
Oil and natural gas properties (full-cost method)
Evaluated properties ..................................... 71,538
Unevaluated properties ................................... 5,015
Office and other equipment ......................................... 803
-------------
77,356
Less -- accumulated depletion, depreciation and amortization ....... (15,022)
-------------
Net property, plant and equipment .................................. 62,334
-------------
Other assets, net .................................................. 273
-------------
Total assets ............................................. $ 74,723
=============
Liabilities and Stockholders' Equity:
Current liabilities:
Accounts payable and accrued liabilities ...................... $ 5,057
Revenue royalties payable ..................................... 3,917
-------------
Total current liabilities ................................ 8,974
-------------
Long-term debt ..................................................... 14,500
Deferred tax liability ............................................. 6,079
Stockholders' equity:
Series A Preferred Stock -- 9% cumulative, $.01 par value
and liquidation preference of $8.00 per share, 10,000,000
shares authorized; 2,936,487 issued and outstanding at
September 30, 2000 ........................................... 29
Common stock -- $.01 par value; 25,000,000 shares authorized;
6,665,402 shares issued and outstanding at September 30, 2000 68
Class B Common Stock -- $.01 par value, 10,000,000 shares
authorized and none issued and outstanding at September 30,
2000 ......................................................... --
Additional paid-in capital ......................................... 33,669
Retained earnings .................................................. 11,404
-------------
Total stockholders' equity ............................... 45,170
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Total liabilities and stockholders' equity ............... $ 74,723
=============
The accompanying notes are an integral part of these consolidated financial
statements.
3
TEXOIL, INC.
CONSOLIDATED STATEMENTS OF INCOME
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30 ENDED SEPTEMBER 30
------------------------- -------------------------
2000 1999 2000 1999
----------- ---------- ----------- ----------
Revenues:
Oil and gas sales............... $ 12,600 $ 5,253 $ 34,548 $ 13,925
Operator and management fees.... 290 241 959 720
Interest and other.............. 57 69 164 81
----------- ---------- ----------- ----------
Total Revenues............. 12,947 5,563 35,671 14,726
----------- ---------- ----------- ----------
Costs and Expenses:
Lease operating................. 3,110 1,561 8,494 4,595
Workover........................ 57 41 163 87
Production taxes................ 1,322 435 3,515 1,047
General and administrative...... 642 507 1,772 1,403
Depletion, depreciation and
amortization.................. 1,580 1,391 5,021 3,485
Interest........................ 246 759 955 1,841
----------- ---------- ----------- ----------
Total expenses............. 6,957 4,694 19,920 12,458
----------- ---------- ----------- ----------
Income before income taxes........... 5,990 869 15,751 2,268
Provision for income taxes........... (2,006) (328) (5,276) (858)
----------- ---------- ----------- ----------
Net income........................... $ 3,984 $ 541 $ 10,475 $ 1,410
Preferred stock dividends............ (808) -- (2,063) --
----------- ---------- ----------- ----------
Net income attributable to common
shareholders....................... $ 3,176 $ 541 $ 8,412 $ 1,410
=========== ========== =========== ==========
Basic net income per share........... $ .48 $ .08 $ 1.27 $ .22
=========== ========== =========== ==========
Basic weighted average shares........ 6,660,963 6,555,126 6,646,057 6,555,126
=========== ========== =========== ==========
Diluted net income per share......... $ .30 $ .08 $ .79 $ .21
=========== ========== =========== ==========
Diluted weighted average shares...... 13,182,536 6,738,210 13,326,171 6,779,168
=========== ========== =========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
4
TEXOIL, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(UNAUDITED)
(IN THOUSANDS)
2000 1999
------- ------
Cash flows from operating activities:
Net income.............................................. $10,475 $1,410
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depletion, depreciation and amortization........... 5,021 3,485
Deferred income tax provision...................... 5,276 858
Accounts receivable................................ (2,494) (2)
Other assets....................................... (617) (661)
Accounts payable and accrued liabilities........... 59 273
Revenue royalties payable.......................... 1,119 608
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Net cash provided by operating activities..... 18,839 5,971
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Cash flows from investing activities:
Proceeds from sale of assets....................... 577 --
Additions to oil and gas properties................ (11,407) (7,645)
Additions of office and other equipment............ (57) (143)
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Net cash used in investing activities......... (10,887) (7,788)
------- ------
Cash flows from financing activities:
Proceeds from long-term debt and other............. -- 5,400
Repayments of long-term debt....................... (7,500) (2,000)
Proceeds from issuance of common stock............. 274 --
Preferred stock dividends paid in cash............. (228) --
------- ------
Net cash used in financing activities.............. (7,454) 3,400
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Net increase in cash and cash equivalents............... 498 1,583
Cash and cash equivalents -- beginning of period........ 1,223 423
------- ------
Cash and cash equivalents -- end of period.............. $ 1,721 $2,006
======= ======
Supplemental disclosure of cash flow
information:
Interest -- paid in cash........................... $ 1,437 $2,052
======= ======
Preferred Dividends -- paid in cash................ $ 228 $ --
======= ======
The accompanying notes are an integral part of these consolidated financial
statements.
5
TEXOIL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1: -- ORGANIZATION AND ACCOUNTING POLICIES
ORGANIZATION AND BASIS OF PRESENTATION
Texoil, Inc. ("Texoil" or the "Company") operates a single business segment
involved in the acquisition, development and production of, and exploration for,
crude oil, natural gas and related products primarily in Texas and Louisiana.
The financial statements included herein have been prepared by the Company
without audit pursuant to the rules and regulations of the Securities and
Exchange Commission ("SEC"). Accordingly, the statements reflect all adjustments
(which consist solely of normal recurring adjustments) which are, in the opinion
of management, necessary for a fair presentation of the financial results for
interim periods. Certain information and notes normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations. However,
the Company believes that the disclosures are adequate to make the information
presented not misleading. These financial statements should be read in
conjunction with the financial statements and notes thereto included in the
Company's Annual Report on Form 10-KSB for the year ended December 31, 1999.
NET INCOME PER COMMON SHARE
Basic net income per common share is computed based on the weighted average
shares of common stock outstanding. Net income per share computations to
reconcile basic and diluted net income for the quarters ended September 30, 2000
and 1999, consist of the following (in thousands, except share and per share
data):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
2000 1999 2000 1999
----------- ---------- ----------- ----------
Net income available for common......... $ 3,176 $ 541 $ 8,412 $ 1,410
Basic weighted average shares........... 6,660,963 6,555,126 6,646,057 6,555,126
Effect of dilutive securities:
Warrants........................... 263,146 43,029 214,214 56,159
Options............................ 385,615 140,055 593,088 167,883
Convertible preferred stock........ 5,872,813 -- 5,872,813 --
----------- ---------- ----------- ----------
Diluted weighted average shares......... 13,182,536 6,738,210 13,326,171 6,779,168
Per common share net income:
Basic.............................. $ .48 $ .08 $ 1.27 $ .22
Diluted............................ $ .30 $ .08 $ .79 $ .21
NOTE 2: -- NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities." The statement establishes accounting and reporting standards
requiring that every derivative instrument (including certain derivative
instruments embedded in other contracts) be recorded in the balance sheet as
either an asset or liability measured at its fair value. The statement requires
that changes in the derivative's fair value be recognized in earnings currently,
unless specific hedge accounting criteria are met. Special accounting for
qualifying hedges allows gains and losses on derivatives to offset related
results on the hedged item either in the income statement or in the statement of
stockholders' equity, and requires that a company formally document and assess
the effectiveness of transactions that receive hedge accounting. The statement
is effective for fiscal years beginning after June 15, 2000. Texoil has entered
into various hedging contracts related to its oil and gas production. Refer to
6
TEXOIL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Note 5 for further information regarding the Company's hedge positions of
September 30, 2000. At present, hedging gains or losses are reflected in Oil and
Gas sales in the accompanying financial statements. Hedging positions, types of
contracts and commodity prices are subject to change. The Company is currently
evaluating the new standard but has not yet determined the impact it will have
on its financial position and results of operations.
NOTE 3: -- PREFERRED STOCK
Preferred stock dividends include $719,000 and $1,796,000 for the three and
nine month ended September 30, 2000, respectively, which have been paid in
additional preferred shares, rather than cash. In accordance with generally
accepted accounting principles, dividends paid in kind are reflected in the
accompanying financial statements at their estimated fair value, rather than
contractual amounts specified in the preferred stock. The number of preferred
shares issued are computed based on a 9% per annum dividend and a contractually
specified price of $8.00 per share. During the third quarter of 2000, the
Company recorded the preferred stock dividends at an estimated fair value of
$13.38 per preferred share, or $6.69 per equivalent common share. This estimate
was based solely on factors directly related to the preferred shares, including
the dividend rate, liquidation preference, conversion options, mandatory
conversion requirements, and the lack of redemption features. In addition, the
Company considered the lack of market liquidity for such preferred shares and
the limited liquidity in the underlying market for its common shares. The
estimated fair value of the Preferred Shares during the third quarter of 2000 is
approximately 9% below the average closing price of the underlying common stock.
The average underlying common stock price, based on the daily close, during the
third quarter was $7.348 per share and the average trading volume was
approximately 44,000 shares per day. Future estimates of fair value may vary
from those amounts.
NOTE 4: -- CREDIT AGREEMENT
The Company has a revolving credit agreement ("Credit Agreement") with two
banks to finance property acquisitions and for temporary working capital
requirements. The Credit Agreement has been amended to provide up to $100.0
million in available borrowings, limited by a borrowing base (as defined in the
Credit Agreement) which was $49.0 million at September 30, 2000. As of September
30, 2000, borrowings outstanding under the Credit Agreement were $14.5 million.
The borrowing base is redetermined annually by the bank pursuant to the Credit
Agreement (or more frequently at the option of the Company) and is reduced at a
rate of $1.0 million per month commencing September 1, 2000. Amendments to the
Credit Agreement resulted in certain reductions to commitment fees and interest.
In particular, the facility fees on borrowing base increases have been reduced
to 1/2% and interest rates have been reduced to the prime rate plus 0% - 1/4%
depending on the level of borrowings outstanding. In addition, interest rates
based on the optional London Interbank Offering Rate ("LIBOR") have been reduced
to LIBOR plus 1 1/2 - 2%, depending on the level of borrowings outstanding. The
average interest rates paid to the lender were 7.9% and 7.6% for the nine months
ended September 30, 2000 and 1999, respectively. The Company has granted first
mortgages, assignments of production, security agreements and other encumbrances
on its oil and gas properties to the lender, as collateral, pursuant to the
Credit Agreement. The Credit Agreement contains covenants which, among other
things, restrict the payment of dividends on Common Stock, limit the amount of
consolidated debt, limit the Company's ability to make certain loans and
investments, and require that the Company remain in compliance with certain
covenants of the Credit Agreement.
NOTE 5: -- HEDGING ACTIVITIES
OIL AND GAS PRICES
The Company has entered into various oil and gas hedging contracts in an
effort to manage its exposure to product price volatility. Under these
contracts, the Company receives or makes payments based on a differential
between fixed and variable prices for crude oil and natural gas. Such amounts
are reflected
7
TEXOIL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
in oil and gas sales in the accompanying financial statements. Amounts received
or paid under such hedging and financial instrument contracts resulted in a
decrease to oil and gas sales of $1,883,375 and $4,587,526 for the three and
nine months ended September 30, 2000, respectively, as compared to a decrease in
oil and gas sales of $674,484 and $574,259 for the same periods in 1999. For the
nine months ended September 30, 2000, the Company sold 720,000 million Btu's
("MMBtu") at a fixed price of $2.16 per MMBtu, and 600,000 MMBtu at an average
fixed price of $2.74 per MMBtu under two natural gas swap agreements. In
addition to these amounts, the Company has various fixed price swap contracts
which expire in October 2000 covering 150,000 MMBtu of natural gas at a per-unit
average price of $2.35 based on Houston Ship Channel/Beaumont Index pricing. The
Company is also subject to a natural gas hedge, structured as a costless collar,
for the period of October 2000 through July 2001, for 150,000 MMBtu per month,
at a floor price of $3.25 per MMBtu and a ceiling price of $5.25 per MMBtu. For
the nine months ended September 30, 2000, the Company sold 375,000 barrels
("Bbls") at prices ranging from $19.25 to $23.10 per Bbl. The Company has a
fixed price swap covering a total of 50,000 Bbls of oil at prices averaging
$19.35 per Bbl which expires in November 2000. In addition, the Company is
subject to crude oil hedges, structured as a costless collar, for 25,000 Bbl of
oil per month for October through December 2000, with a floor price of $20.50
per barrel and a ceiling price of $30.55 per barrel; 25,000 Bbls per month for
the period October 2000 through January 2001 with a floor price of $24.00 per
barrel and a ceiling price of $31.27 per Bbl; and 20,000 Bbls per month for the
period October 2000 through March 2001 with a floor price of $27.00 per Bbl and
a ceiling price of $33.65 per Bbl.
INTEREST RATES
The Company entered into an interest rate swap effective November 5, 1998,
which fixed the floating portion of its interest rate of 5.25% on $12,000,000
notional amount for the period from November 5, 1998 through November 6, 2000.
For the three and nine months ended September 30, 2000, the Company was paid
$40,023 and $93,777, respectively, pursuant to this swap, which has been
recorded as an adjustment to interest expense. For the comparable period of
1999, the Company received $139 and paid $17,480, respectively.
NOTE 6: -- SUBSEQUENT EVENT
On October 13, 2000 Texoil closed an acquisition of proved properties in
South Texas, which adds approximately 17 billion cubic feet of natural gas and
126,000 barrels of associated oil and condensate to Texoil's reserves. The
properties will immediately add approximately 3.8 million cubic feet of gas per
day ("MMcfd") to Texoil's daily production. Management believes that the
properties, which are located primarily in Colorado and Goliad Counties, have
additional exploration and development potential. Texoil also acquired certain
2-D and 3-D seismic data and undeveloped acreage. The acquisition price, paid at
closing, was approximately $9.9 million, net of closing adjustments.
8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
The following discussion should be read in conjunction with the unaudited
Consolidated Financial Statements and related notes thereto, included elsewhere
in this 10-QSB and should further be read in conjunction with the Company's
Annual Report on Form 10-KSB, for the year-ended December 31, 1999.
FORWARD-LOOKING INFORMATION
This quarterly report on Form 10-QSB, and in particular, this Management's
Discussion and Analysis of Financial Condition and Results of Operations,
contains "forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. All statements other than statements of historical
facts included in this report and, in particular, this section of this report,
including, without limitation, statements regarding the Company's business
strategy, plans, objectives, expectations, intent and beliefs of management
related to current or future operations are forward-looking statements. Such
statements are based on certain assumptions and analyses made by management,
based on its experience and its perception of historical trends, current
conditions, expected future developments and other factors it believes to be
appropriate. The forward-looking statements included in this report are subject
to a number of material risks and uncertainties including assumptions about the
pricing of oil and gas, assumptions about operating costs, production operations
continuing as in the past or as projected by independent engineers, the ability
to generate and take advantage of acquisition opportunities and numerous other
factors which may be subject to material change. A detailed discussion of
important factors that could cause actual results to differ materially from the
Company's expectations is discussed herein and in the Company's Annual Report on
Form 10-KSB for 1999. Forward-looking statements are not guarantees of future
performance and actual results, developments and business decisions may differ
from those envisioned by such forward-looking statements.
GENERAL
Texoil is an independent oil and gas company engaged in the acquisition and
development of oil and gas reserves through a diversified program, which
includes purchases of oil and gas reserves, re-engineering, development and
exploration activities currently focused in Texas and Louisiana. As further
discussed herein, future growth in assets, earnings, cash flows and share values
are dependent upon the Company's ability to acquire, discover and develop
commercial quantities of oil and gas reserves that can be produced at a profit
and assemble an oil and gas reserve base with a market value exceeding its
finding and production costs.
9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION -- (CONTINUED)
Management believes that Texoil's significant growth and financial
performance have enhanced its credibility and standing in the industry.
Management further believes that the acquisition and divestiture market will
continue to provide opportunities for additional growth. These factors and the
Company's financial resources should allow Texoil to compete effectively for
acquisitions that are consistent with its business strategy. However, prevailing
commodity prices may result in seller price expectations that the Company
considers unreasonable and, therefore, further acquisition opportunities could
be economically limited.
Further growth may also be achieved, without additional acquisitions,
through re-engineering, development and exploratory activities that are
associated with Texoil's current property portfolio and through additional
prospects the Company generates. Based on independent and internal engineering
and geological studies Texoil has scheduled approximately $17.0 million of
capital expenditures for such activities over the balance of 2000 and during
2001 (see "Capital Expenditures" below). Such projects have the potential to
increase reserves and production, although Texoil cannot guarantee that any such
increases will occur.
The current corporate strategy is an expansion and adaptation of the
business plan which was conceived and implemented in 1996, and has resulted in
significant growth to date. Following is a brief outline of management's current
plans.
1) Acquire oil and gas properties with producing reserves, current
cash flows and development and exploration potential.
2) Implement development programs within existing fields.
3) Expand the Company's exploration program. Increase direct
participations, but continue to solicit industry partners on a
promoted basis.
4) Continue activities directed toward reducing per-unit operating
and general administrative costs on a long-term sustained basis.
5) Increase equity, long-term or project financing, as necessary.
In addition to its fundamental business strategy, the Company intends to
pursue corporate acquisitions or mergers as a means of continued growth,
increasing share value or creating liquidity for its shareholders. Management
believes that the industry will consolidate and that opportunities may become
available to acquire corporate entities, effect business combinations, or merge
with or be acquired by another corporation. Management intends to consider any
such opportunities which may become available and are beneficial to
shareholders. The primary financial considerations in the evaluation of any such
potential transaction include, but are not limited to: (1) the ability of small
cap oil and gas companies to gain recognition and favor in the public markets;
(2) growth in share price; (3) shareholder liquidity, and (4) capital formation
and cost of capital.
10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION -- (CONTINUED)
OIL AND GAS PROPERTIES
The Company uses the full-cost method of accounting for its investment in
oil and gas properties. Under the full-cost method, all costs of acquisition,
exploration and development of oil and gas reserves are capitalized separately
for each cost center (generally defined as a country). Capitalized balances are
referred to as the "Full-Cost Pool" and are further classified as evaluated or
unevaluated. Evaluated costs are those where proved reserves have been
determined or where the property has been impaired or abandoned. Such costs are
subject to depletion, depreciation and amortization expense ("DD&A").
Unevaluated costs are not subject to DD&A and generally require additional
geological, geophysical and/or engineering evaluation prior to management's
decision to drill, develop or abandon such properties. When such properties are
evaluated, capitalized costs will be transferred to an evaluated status and
included in the calculation of DD&A. Depletion expense is calculated using the
units of production method based on the ratio of current production to total
proved recoverable oil and natural gas reserves. The units of production are
applied to a cost base which includes net capitalized evaluated costs plus
estimated future net development and net projected abandonment costs. Under the
full-cost method, a write-down of oil and gas properties must be charged to
operations if net capitalized costs at the end of each quarterly reporting
period exceed the estimated discounted future net revenues of proved oil and
natural gas reserves, using current oil and gas prices and costs, held constant
over the life of the properties, plus the lower of cost or fair value of
unevaluated properties, both on an after-tax basis (the "full cost ceiling").
Capitalized costs include payroll and related costs of technical personnel
which are directly attributable to the Company's oil and gas acquisition,
exploration and development activities. Amounts capitalized for the three and
nine months ended September 30, were $182,868 and $537,882 for 2000 and $152,685
and $483,477 for 1999, respectively. The Company capitalizes interest
attributable to oil and natural gas properties which are not subject to
amortization and are in the process of being evaluated. Included in the
unevaluated capitalized costs for the three and nine months ended September 30,
are interest costs of $94,967 and $292,008 for 2000 and $84,337 and $320,172 for
1999, respectively.
At the end of the third quarter of 2000, the Company's full-cost ceiling
exceeded its net capitalized costs. Net capitalized costs could exceed the
full-cost ceiling in future periods due to downward revisions to estimated
proved reserve quantities, declines in oil and gas prices, increases in
operating costs, unsuccessful exploration and development activities or other
factors which cannot be reasonably predicted by the Company. Once recorded, a
write-down of oil and gas properties cannot be reversed at a later date even if
the estimated reserve quantities or oil and gas prices subsequently increase.
Management believes that current reserve estimates, which represent the basis
for calculating limitations on capitalized costs, are reasonable under present
operating conditions and circumstances. However, reserve estimates and forecasts
are inherently imprecise and, therefore, subject to significant future changes.
11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION -- (CONTINUED)
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2000, COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1999.
The Company recorded net income of $3,984,000 and $541,000 for three months
ended September 30, 2000 and 1999, respectively. The $3,443,000 increase in the
Company's comparative net income resulted primarily from the following factors:
NET AMOUNT CONTRIBUTING
TO INCREASE (DECREASE)
IN NET INCOME
-----------------------
(000'S)
Oil and gas sales...................................... $ 7,347
Lease operating and workover expenses.................. (1,565)
Production taxes....................................... (887)
General and administrative expenses.................... (135)
Depletion, depreciation and amortization expense
("DD&A")............................................. (189)
Interest expense....................................... 513
Other income -- net.................................... 37
Provision for income taxes............................. (1,678)
-------
$ 3,443
=======
The following discussion applies to the changes in the composition of net
income shown above.
The $7,347,000 or 140% increase in net oil and gas sales is attributable to
an increase in production volumes resulting from the acquisition and development
of properties and an increase in average realized prices (net of hedges) as
shown in the table presented immediately below.
THREE MONTHS ENDED
PERCENT SEPTEMBER 30,
INCREASE -------------------
(DECREASE) 2000 1999
---------- ------ ------
Gas Production (MMcf)................ 27% 1,359 1,068
Oil Production (MBbls)............... 69% 271 160
Barrel of oil equivalent (MBOE)...... 47% 498 338
Average Price Gas (per Mcf).......... 56% $ 3.92 $ 2.51
Average Price Oil (per Bbl).......... 67% $26.85 $16.11
Average Price per BOE................ 63% $25.33 $15.54
12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION -- (CONTINUED)
Lease operating expenses and workover costs increased $1,565,000 or 98%.
The increase is a result of increased production volumes resulting from the
acquisition and development of oil and gas properties. Lease operating expenses
have also increased due to increases in drilling and workover rig rates, and
costs of services, materials and equipment which have occurred in the industry.
In addition, lease operating expenses have increased due to the cost of natural
gas used in gas lift operations.
Production taxes increased by $887,000 or 204% due to increased production
volumes and revenues. In addition, certain of the oil production increases
occurred in tax jurisdictions with higher tax rates.
General and administrative costs increased $135,000 or 27%. The percentage
increase in general and administrative expenses was less than the increases in
production and revenues as a result of continuing cost-containment efforts. On a
BOE basis, general and administrative expenses actually were reduced by 14% in
2000 over 1999 levels. The dollar increase is comprised primarily of increases
in management, operating and administrative staffing associated with the
Company's growth. The Company must attract and retain competent management,
technical and administrative personnel to pursue its business strategy and
fulfill its contractual obligations.
The $189,000 or 14% increase in DD&A expenses is primarily due to the
increase in oil and gas production volumes and capitalized balances subject to
DD&A, offset by increases in estimated recoverable reserves, resulting from the
acquisition and development of gas and oil properties. Refer to the discussion
of DD&A for the nine month periods ended September 30, 2000 and 1999, below for
information related to capitalized costs and reserves used to calculate DD&A.
Interest expense decreased by $513,000 primarily due to a reduction in
long-term debt and repayment of $10,000,000 of convertible subordinated notes.
Other income increased $37,000 for the three months ended September 30,
2000, principally due to increased operations and overhead reimbursements.
The provision for income taxes increased $1,678,000 as a result of the
increase in net income before taxes.
NINE MONTHS ENDED SEPTEMBER 30, 2000, COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1999.
The Company recorded net income of $10,475,000 and $1,410,000 for nine
months ended September 30, 2000 and 1999, respectively. The $9,065,000 increase
in the Company's comparative net income resulted primarily from the following
factors:
NET AMOUNT CONTRIBUTING
TO INCREASE (DECREASE)
IN NET INCOME
------------------------
(000'S)
Oil and gas sales....................... $20,623
Lease operating and workover expenses... (3,975)
Production taxes........................ (2,468)
General and administrative expenses..... (369)
Depletion, depreciation and
amortization expense ("DD&A")......... (1,536)
Interest expense........................ 886
Other income -- net..................... 322
Provision for income taxes.............. (4,418)
-------
$ 9,065
=======
13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION -- (CONTINUED)
The following discussion applies to the changes in the composition of net
income shown above.
The $20,623,000 or 148% increase in net oil and gas sales is attributable
to the increase in production volumes resulting from the acquisition and
development of properties and an increase in average realized prices (net of
hedges) as shown in the table presented immediately below.
NINE MONTHS ENDED
PERCENT SEPTEMBER 30,
INCREASE -------------------
(DECREASE) 2000 1999
----------- ------ ------
Gas Production (MMcf)................ 33% 4,024 3,029
Oil Production (MBbls)............... 73% 868 503
Barrel of oil equivalent (MBOE)...... 53% 1,539 1,008
Average Price Gas (per Mcf).......... 48% $ 3.30 $ 2.23
Average Price Oil (per Bbl).......... 71% $24.49 $14.28
Average Price per BOE................ 62% $22.45 $13.82
Lease operating expenses and workover costs increased $3,975,000 or 85%.
The increase is a result of increased production volumes resulting from the
acquisition and development of oil and gas properties. Lease operating expenses
have increased due to increases in drilling and workover rig rates, and costs of
services, materials and equipment which have occurred in the industry from
increased commodity prices. In addition, lease operating expenses have increased
due to the cost of natural gas used in gas lift operations.
Production taxes increased by $2,468,000 or 236% due to increased
production volumes and revenues. In addition, certain of the oil production
increases occurred in tax jurisdictions with higher tax rates.
General and administrative costs increased $369,000 or 26%. The percentage
increase in general and administrative expenses was less than the increases in
production and revenues as a result of continuing cost-containment efforts. On a
BOE basis, general and administrative expenses actually were reduced by 17% in
2000 over 1999 levels. The dollar increase is comprised primarily of increases
in management, operating and administrative staffing associated with the
Company's growth. The Company must attract and retain competent management,
technical and administrative personnel to pursue its business strategy and
fulfill its contractual obligations.
The $1,536,000 or 44% increase in DD&A expenses is primarily due to the
increase in oil and gas production volumes and capitalized balances subject to
DD&A, offset by increases in estimated recoverable reserves, resulting from the
acquisition and development of gas and oil properties. Capitalized costs
included in the full-cost pool and subject to DD&A were $71.5 million and
$51.5 million at September 30, 2000 and 1999, respectively. In addition,
estimated future development costs associated with proved undeveloped reserves
in the amount of $21.7 million and $14.3 million at September 30, 2000 and 1999,
respectively, were included in the DD&A calculations. The proved reserve
quantities used for the calculation of DD&A were approximately 26.7 million BOE
in 2000.
Interest expense decreased by $886,000 primarily due to a reduction in
long-term debt and repayment of $10,000,000 of convertible subordinated notes.
Other income increased $322,000 for the nine months ended September 30,
2000, principally due to increased operations and overhead reimbursements.
The provision for income taxes increased $4,418,000 as a result of the
increase in net income before taxes.
IMPACT OF ACQUISITION AND DIVESTITURE ACTIVITIES
Management presently estimates that production volumes for the year 2000
will approximate 1.2 million Bbls and 5.7 Bcf, representing, an increase of 57%
and 35%, respectively, over 1999. These estimates
14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION -- (CONTINUED)
are predicated on the results of operations for the nine months ended
September 30, 2000, reserve reports prepared by independent third parties,
recent acquisition and development activities, and management's expectations,
but are subject to change due to numerous uncontrollable factors.
In connection with its acquisitions, the Company generally implements a
capital expenditure program, which it refers to as "re-engineering activities",
designed to increase production or arrest natural or mechanical production
declines, as well as lower recurring expenses. Thereafter, the Company conducts
detailed field studies designed to isolate development and exploration
opportunities, if any. The Company has identified numerous projects in its
existing property portfolio related to proved behind-pipe and undeveloped
reserves and to exploratory prospects. Future cash flows could be favorably
affected if current price levels are sustained, if reductions to per-unit
operating costs can be achieved or by the development of additional reserve
quantities. No assurance can be given, however, that the Company will be able to
successfully and economically develop additional reserves or that commodity
prices will not decline.
On October 13, 2000 Texoil closed an acquisition of proved properties in
South Texas, which adds approximately 17 billion cubic feet of natural gas and
126,000 barrels of associated oil and condensate to Texoil's reserves. The
properties will immediately add approximately 3.8 MMcfd to Texoil's daily gas
production. Management believes that the properties, which are located primarily
in Colorado and Goliad Counties, have additional exploration and development
potential. Texoil also acquired certain 2-D and 3-D seismic data and undeveloped
acreage. The acquisition price, paid at closing, was approximately
$9.9 million, net of closing adjustments.
Texoil has entered into a purchase and sale agreement to sell certain
"non-core" properties for approximately $3.0 million. Pending closing, proceeds
will be applied to debt. The divestiture is expected to close by November 30,
2000. Should this divestiture be closed, production levels are expected to
decrease by approximately 157 barrels of oil per day and 217 Mcf of gas per day.
During the third quarter of 2000, Texoil entered into a like kind exchange
(tax-free) of its interests in certain West Texas properties for additional
interests in the Crowley Field, located in South Louisiana. Through the trade,
the company has vacated West Texas. The West Texas properties were acquired by a
predecessor entity. The trade has a beneficial impact on cash flow and earnings
and further positions the company for additional development activities in one
of its core producing areas.
Management expects that the transactions specified above will have an
immediate favorable impact on cash flow and earnings and will further result in
lower per-unit operating expenses.
IMPACT OF CHANGING PRICES
Texoil's revenues and the carrying value of its oil and gas properties are
subject to significant change due to the volatility of oil and gas prices.
Should prices decrease or fail to remain at levels which will facilitate
repayment of debt and reinvestment of cash flow to replace current production,
the Company could experience difficulty in developing its assets and continuing
its growth.
HEDGING ACTIVITIES
The Company implemented certain hedging activities in May of 1999, in
direct response to market conditions. The intent of the hedging strategy was to
"lock-in" profits and cash flows greater than realized during 1998 and early
1999. Management expects to continue to hedge some portion of production and
believes its hedging strategy will result in greater predictability of
internally generated funds, which can be dedicated to capital development
projects and corporate obligations. The Company has entered into a fixed price
swap for 150,000 MMBtus of gas production which expires in October 2000, at an
average price of $2.35 per MMBtu. The Company is also subject to a natural gas
hedge, structured as a costless collar for the period of October 2000 through
July 2001, for 150,000 MMBtu per month, at a floor price of $3.25 per MMBtu and
a ceiling price of $5.25 per MMBtu. The Company has a fixed price swap for a
total of 50,000
15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION -- (CONTINUED)
Bbls at prices averaging $19.35 per Bbl, which expires in November 2000. In
addition, the Company is subject to crude oil hedges, structured as a costless
collar, for 25,000 barrels of oil per month for October through December 2000,
with a floor price of $20.50 per barrel and a ceiling price of $30.55 per
barrel; 25,000 Bbls per month for the period October 2000 through January 2001
with a floor price of $24.00 per Bbl and a ceiling price of $31.27 per Bbl.; and
20,000 Bbls per month for the period October 2000 through March 2001 with a
floor price of $27.00 per barrel and a ceiling price of $33.65 per barrel.
Amounts paid under such hedging and financial instrument contracts decreased oil
and gas sales by $1,883,375 and $4,587,526 for the three and nine months ended
September 30, 2000. Texoil does not engage in speculative trading activities and
does not hedge all available or anticipated quantities. Texoil's strategy
involves the following factors:
1) Effectively manage cash flow to minimize price volatility and generate
internal funds available for capital development projects and
additional acquisitions;
2) Ensure the Company's ability to fully support its capital expenditures
and administrative and debt service obligations;
3) "Lock-in" growth in revenues, cash flows and profits for financial
reporting purposes; and
4) Allow certain quantities to float, particularly in months with high
price potential.
Management believes that speculation and trading activities are
inappropriate for the Company, but further believes appropriate management of
realized prices is an integral part of managing its business strategy.
LIQUIDITY AND CAPITAL RESOURCES
The Company expects to finance its future acquisition, development and
exploration activities through cash flows from operating activities, its bank
credit facility, sale of non-strategic assets, various means of corporate and
project finance and ultimately through the issuance of additional securities, as
and if necessary. Financing activities have resulted in a net reduction of debt
in the amount of $24.4 million as follows:
SEPTEMBER 30
-----------------
2000 1999
----- -----
(MILLIONS)
Balances outstanding:
Long-term debt....................................... $14.5 $28.9
Convertible subordinated debt........................ $-- $10.0
----- -----
$14.5 $38.9
===== =====
CONVERTIBLE PREFERRED STOCK OFFERING
In November 1999, Texoil issued 2,750,000 shares of Series A Convertible
Preferred Stock at $8.00 per share, convertible into two (2) shares of common
stock. Preferred shareholders may elect to convert to common at any time.
Alternatively, such shares are mandatorily convertible, after December 31, 2002,
based on the achievement of certain net asset and per share values. Net proceeds
were used to reduce bank indebtedness, repay convertible subordinated notes and
for other corporate purposes. The dividend rate is 9% per annum, payable
quarterly. In accordance with the terms of the Preferred Stock Agreement, at
funding, holders were entitled to elect to receive dividends in additional
preferred stock or in cash. Approximately 82% of such holders elected dividends
payable in additional preferred shares. After December 31, 2001, the Company, in
its sole discretion, may elect to pay dividends in cash rather than in
additional preferred shares. In 2000 and 2001, the Company expects to issue
approximately 213,000 and 233,000 shares of preferred stock, respectively. The
cash dividend component is expected to be approximately $356,000 in both 2000
and 2001.
16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION -- (CONTINUED)
CREDIT FACILITY
The Company has a revolving Credit Agreement with two banks which has
recently been amended. The new agreement provides up to $100.0 million in
available borrowings, limited by a borrowing base as redetermined at least
annually. Modifications include interest rate, commitment fee and facility fee
reductions, among other items. The borrowing base is $49.0 million and
borrowings outstanding at September 30, 2000, were $14.5 million.
CASH FLOW FROM OPERATING ACTIVITIES
For the nine months ended September 30, 2000, the Company's net cash
provided by operating activities was $18.8 million, up $12.9 million from the
prior year. These increases are directly attributable to the increases in
production resulting from acquisitions and development activities and increases
in oil and gas prices. The Company expects its recent acquisition and
development activities to result in further production increases and, pending
commodity prices, result in higher cash provided by operating activities in
2001.
CAPITAL EXPENDITURES
The Company's oil and gas capital expenditures for the nine month periods
ended September 30, 2000 and 1999, were $10.0 million and $7.6 million,
respectively.
Capital expenditures in 2000 were financed from cash flow. Management
believes the Company can compete successfully for new acquisition opportunities;
and, accordingly, Texoil has focused a large part of its efforts toward new
corporate and asset acquisitions. In addition, as shown below, Texoil has
scheduled various exploratory and development activities it believes will result
in increased production and reserves. The Company's business strategy has always
been to shift its emphasis among acquisitions, development and exploratory
activities, consistent with changes in the marketplace. Accordingly, the
Company's capital budget is subject to change.
Texoil expects to incur capital expenditures related to its existing
portfolio of properties for re-engineering facilities (surface and down-hole),
restoring shut-in wells to production and recompletions. In addition, the
Company expects to drill certain development wells in existing fields. The
Company also expects to make additional capital expenditures to maintain leases
and complete the interpretation of 3-D seismic data associated with certain
exploratory and development projects. Texoil will continue its practice of
soliciting partners, on a promoted basis, for higher-risk projects.
Texoil has increased its capital expenditure budget for fiscal 2000 to a
total of $23.5 million, including acquisitions. Based solely on its existing
portfolio of properties and projects, the Company presently expects to incur the
following capital expenditures during the remainder of 2000 and in 2001:
2000 2001
---- -----
Development of proved properties:
Re-engineering and well recompletions(1)............... $1.2 $ 3.3
Drilling............................................... 1.0 6.7
Exploration
Land, geological & geophysical......................... .3 1.0
Drilling............................................... 1.0 2.5
---- -----
$3.5 $13.5
==== =====
- ------------
(1) Includes expenditures associated with facilities, equipment, compression
saltwater disposal, restoring shut-in wells to production and
recompletions to other productive zones.
17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION -- (CONTINUED)
Management believes projected expenditures will result in increased
production, cash flows and reserve value and will further expose the Company to
potentially significant upside from exploration. Management further believes the
deferral of certain projects will not result in any material losses. Should the
Company be unable to acquire new properties, or make corporate acquisitions,
capital expenditures associated with existing properties could be adjusted.
PART II. OTHER INFORMATION
Item 1 -- Cause No. 94-7447-278-06; "Ernest H. Cannon, et al vs. J. R.
Parten, et al" has been dismissed with prejudice; no other
material change from legal proceedings.
Item 2 -- Change in Securities -- None
Item 3 -- Defaults Upon Senior Securities -- None
Item 4 -- Submission of Matters to a Vote of Security Holders -- None
Item 5 -- Other Information -- None
Item 6 -- Exhibits and reports on Form 8-K -- None
18
SIGNATURE
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.
TEXOIL, INC.
Date: November 8, 2000 By: /s/ FRANK A. LODZINSKI
------------------------------------
FRANK A. LODZINSKI
PRESIDENT AND CEO
19