SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
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: 39,285,094 shares of common stock,
$.01 par value, issued and outstanding at August 7, 1998.
Transitional Small Business Disclosure Format (check one):
YES [ ] NO [X]
TEXOIL, INC.
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheet as of June 30, 1998 (unaudited).................................................... 3
Consolidated Statements of Operations
for the three and six months ended June 30, 1998 and 1997 (unaudited)................................. 4
Consolidated Statements of Cash Flows
for the six months ended June 30, 1998 and 1997 (unaudited)........................................... 5
Notes to Consolidated Financial Statements (unaudited)........................................................ 6
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.................................................................... 10
PART II. OTHER INFORMATION...................................................................................... 19
2
TEXOIL, INC.
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
June 30,
1998
--------
Assets:
Current Assets:
Cash and cash equivalents ............................................. $ 496
Accounts receivable and other ......................................... 1,776
Notes receivable ...................................................... 120
Other current assets .................................................. 82
--------
Total current assets ........................................... 2,474
Property, plant and equipment, at cost:
Oil and natural gas properties (full-cost method):
Evaluated properties ........................................... 25,549
Unevaluated properties ......................................... 3,831
Office and other equipment .......................................................... 579
--------
29,959
Less - accumulated depletion, depreciation and amortization ......................... (3,474)
--------
Net property, plant and equipment ................................................... 26,485
--------
Other assets ........................................................................ 669
--------
Total assets ................................................... $ 29,628
========
Liabilities and Stockholders' Equity:
Current liabilities:
Accounts payable and accrued liabilities .............................. $ 2,258
Revenue and royalties payable ......................................... 858
--------
Total current liabilities ...................................... 3,116
--------
Long-term debt ...................................................................... 15,055
--------
Stockholders' equity:
Series A preferred stock - $.01 par value with liquidation
preference of $100 per share, 10,000,000 shares authorized,
none issued and outstanding - --
Common stock - $.01 par value; 60,000,000 shares authorized; 39,285,094
shares issued and outstanding .................................. 393
Additional paid-in capital .......................................................... 10,782
Retained earnings ................................................................... 282
--------
Total stockholders' equity ............................................ 11,457
--------
Total liabilities and stockholders' equity ............................ $ 29,628
========
The accompanying notes are an integral
part of these consolidated financial statements.
3
TEXOIL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE AND SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
---------------------------- ----------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
Revenues:
Oil and gas sales ...................... $ 2,366 $ 1,322 $ 4,232 $ 2,604
Operator and management fees ........... 227 171 481 331
Interest and other ..................... 15 42 73 69
------------ ------------ ------------ ------------
Total revenues .................. 2,608 1,535 4,786 3,004
------------ ------------ ------------ ------------
Costs and Expenses:
Lease operating ........................ 1,372 658 2,142 1,135
Workover ............................... 29 102 109 243
Production taxes ....................... 123 79 226 149
General and administrative ............. 389 201 827 451
Depletion, depreciation and amortization 500 194 934 348
Interest ............................... 170 73 279 138
Write-down of oil and gas properties ... 1,208 -- 1,208 --
------------ ------------ ------------ ------------
Total expenses .................. 3,791 1,307 5,725 2,464
------------ ------------ ------------ ------------
Income (loss) before income taxes .................... (1,183) 228 (939) 540
Provision for income taxes
Current ................................ -- (55) -- (90)
Deferred ............................... 307 (22) 215 (93)
------------ ------------ ------------ ------------
Total provision for income taxes 307 (77) 215 (183)
------------ ------------ ------------ ------------
Net income (loss) .................................... $ (876) $ 151 $ (724) $ 357
============ ============ ============ ============
Basic net income (loss) per share .................... $ (.02) $ .01 $ (.02) $ .02
============ ============ ============ ============
Basic weighted average shares ........................ 38,325,911 17,205,125 37,511,087 16,218,514
============ ============ ============ ============
Diluted net income (loss) per share .................. $ (.02) $ .01 $ (.02) $ .02
============ ============ ============ ============
Diluted weighted average shares ...................... 42,568,001 18,411,801 42,418,603 17,286,009
============ ============ ============ ============
The accompanying notes are an integral part of
these consolidated financial statements.
4
TEXOIL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
(IN THOUSANDS)
1998 1997
------- -------
Cash flows from operating activities:
Net income (loss) ................................................................. $ (724) $ 357
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Depletion, depreciation and amortization .................... 934 348
Write-down of oil and gas properties ......................... 1,208 --
Deferred income taxes ........................................ (215) 183
Accounts receivable .......................................... 1,669 (528)
Accounts receivable - related party .......................... 60 101
Notes receivable ............................................. (120) --
Other assets ................................................. (262) (72)
Accounts payable and accrued liabilities ..................... (1,949) 608
Accounts payable - related party ............................. -- (192)
Revenue royalties payable ........................................... (1,029) 534
------- -------
Net cash provided by (used in) operating activities (428) 1,339
------- -------
Cash flows from investing activities:
Additions to oil and gas properties .......................... (7,977) (2,372)
Other equipment additions .................................... (156) (58)
------- -------
Net cash used in investing activities ........................ (8,133) (2,430)
------- -------
Cash flows from financing activities:
Proceeds from issuance of common stock ....................... -- 2,151
Proceeds from long-term debt and other .............................. 5,000 400
Repayments of long-term debt ................................. (2) (1,019)
------- -------
Net cash provided by financing activities ......... 4,998 1,532
------- -------
Net increase (decrease) in cash and cash equivalents .............................. (3,563) 441
Cash and cash equivalents - beginning of period ................................... 4,059 287
------- -------
Cash and cash equivalents - end of period ......................................... $ 496 $ 728
======= =======
Supplemental disclosure of cash flow information: Cash paid during the period
for:
Interest .......................................... $ 379 $ 142
======= =======
Income taxes ...................................... $ -- $ 25
======= =======
Oil and gas properties purchased by issuance of common stock ........ $ 763 $ --
======= =======
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
BUSINESS COMBINATION
On December 31, 1997, pursuant to the terms of a definitive plan of
merger ("Merger Agreement" or "Merger") and a financing arrangement, Texoil,
Inc. ("Texoil" or the "Company"), a Nevada corporation, through a wholly-owned
subsidiary, acquired all of the outstanding common shares of Cliffwood Oil & Gas
Corp. ("Cliffwood"), a Texas corporation. As a result of the Merger, fifty-three
former stockholders of Cliffwood acquired 70% (and voting control) of Texoil
outstanding common stock. The existing stockholders of Texoil retained 30% of
such common stock. Accordingly, for financial reporting purposes, the Merger has
been accounted for as a reverse acquisition of Texoil by Cliffwood. The Texoil
assets ("Texoil Net Assets"), existing on December 31, 1997, have been recorded
at fair value using the purchase method of accounting, as required by generally
accepted accounting principles.
PRO FORMA RESULTS OF OPERATIONS
Selected results of operations for the three and six month periods ended
June 30, 1997, on a pro forma basis giving effect to the Merger, as if it took
place on January 1, 1997, are as follows (in thousands, except per share data):
JUNE 30, 1997
--------------------------------
THREE SIX
MONTHS MONTHS
--------------------------------
Revenues .................................. $ 1,791 $ 3,535
================== ===========
Net Income ................................ $ 203 $ 431
================== ===========
Basic income per share .................... $ .01 $ .02
================== ===========
Basic weighted average shares outstanding . 17,205,125 16,218,514
================== ===========
Diluted income per share .................. $ .01 $ .02
================== ===========
Diluted weighted average shares outstanding 19,398,998 17,901,026
================== ===========
Adjustments to the historical results to estimate the pro forma results
of operations for the three and six months ended June 30, 1997, include
adjustments to (1) reduce general and administrative expenses for the effects of
actual personnel reductions implemented subsequent to the Merger, (2)
recalculate depletion, depreciation and amortization based on the combined
reserves and production of Texoil and Cliffwood and to eliminate the historical
write-down of oil and gas properties recorded in 1997 by Texoil, (3) adjust
interest expense related to debt issued in connection with the Merger, (4)
eliminate preferred dividends on securities converted to common stock as a
condition of the merger and (5) recalculate the provision for income taxes.
6
The unaudited pro forma amounts do not purport to be indicative of the results
of operations which would have been reported had the reverse acquisition
occurred as of January 1, 1997, or that may be reported in the future.
ORGANIZATION AND BASIS OF PRESENTATION
Texoil is engaged in the acquisition, development and production of,
and exploration for, crude oil, natural gas and related products primarily in
Texas and Louisiana. The accompanying consolidated financial statements include
the historical accounts of Cliffwood and its wholly-owned subsidiaries. The
Cliffwood wholly-owned subsidiaries are all collectively referred to herein as
"Texoil" or "The Company", unless otherwise specified. Although Texoil was the
legal acquiror, all events described or referred to as prior to December 31,
1997, relate to Cliffwood, as the accounting acquiror.
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, they 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, 1997,
filed with the SEC.
NET INCOME (LOSS) PER COMMON SHARE
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share", effective for interim and annual reporting periods ending after December
15, 1997. This statement replaces primary net income per common share with a
newly defined basic net income per common share and modifies the computation of
diluted net income per common share. The Company adopted this statement
effective for the fiscal year ending December 31, 1997. All prior period net
income per common share amounts have been restated.
7
Basic net income (loss) per common share is computed based on the
weighted average shares of common stock outstanding. Net income (loss) per share
computations to reconcile basic and diluted net income (loss) for the three and
six month periods ended June 30, 1998 and 1997 consist of the following:
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
--------------------------- ---------------------------
1998 1997 1998 1997
------------ ----------- ------------ -----------
Net Income (Loss) ................. $ (876) $ 151 $ (724) $ 357
Basic weighted average shares ..... 38,325,911 17,205,125 37,511,087 16,218,514
Effect of dilutive securities (1):
Warrants ................... 2,025,968 1,206,676 2,607,123 1,067,495
Options .................... 2,216,122 -- 2,300,393 --
Awards ..................... -- -- -- --
Convertible notes .......... -- -- -- --
Diluted weighted average shares ... 42,568,001 18,411,801 42,418,603 17,286,009
Per common share net income (loss):
Basic ...................... $ (.02) $ .01 $ (.02) $ .02
Diluted .................... $ (.02) $ .01 $ (.02) $ .02
(1) A weighted average year-to-date number of warrants and options to purchase
shares of common stock were outstanding during the three months and six months
ended June 30, 1998, in the amounts of 1,800,000 and 175,000, respectively,
which were not included in the computation of diluted per common share net
income because the exercise prices were greater than the average market price of
the common shares.
NOTE 2: NEW ACCOUNTING STANDARDS
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income", which establishes standards for reporting and display of comprehensive
income and its components in a full set of general purpose financial statements.
The statement requires (a) classification of items of other comprehensive income
by their nature in a financial statement and (b) display of the accumulated
balance of other comprehensive income separate from retained earnings and
additional paid-in capital in the equity section of a statement of financial
position. SFAS No. 130 is effective for interim periods beginning after December
15, 1997. For the quarters ended June 30, 1998 and 1997, there is no difference
between the Company's "traditional" and "comprehensive" net income.
In June 1997, the FASB also issued SFAS No. 131, "Disclosure about
Segments of an Enterprise and Related Information", which establishes standards
for reporting information about operating segments in annual financial
statements and requires that selected information be reported about the
operating segments in interim financial reports issued to the shareholders. It
also establishes standards for related disclosure about products and services,
geographic areas, and major customers. The Company has concluded that it does
not meet the criteria which require business segment reporting.
8
NOTE 3: CREDIT AGREEMENT
In September 1996, the Company entered into a revolving credit agreement
(Credit Agreement) with a bank to finance property acquisitions and for
temporary working capital requirements. The Credit Agreement, as amended,
provides up to $25,000,000 in available borrowings, limited by a borrowing base
calculated according to the assets of the Company, (as defined in the Credit
Agreement) which was $9,000,000 at June 30, 1998. As of June 30, 1998,
borrowings outstanding under the Credit Agreement were $5,050,000. The borrowing
base is redetermined annually (or more frequently at the option of the Company)
and is reduced over a five-year period on a straight-line basis. The Credit
Agreement provides for an annual facility fee of 1/4% of the initial borrowing
base and on any increases thereto, and it also provides for monthly interest
payments at the lender's prime rate plus 1/2%. The average interest rate paid to
the lender was 9.0% for the six months ended June 30, 1998. 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. Under the terms of the Credit Agreement, up to
$500,000 is available under the borrowing base for the issuance of letters of
credit. At June 30, 1998, the Company reserved $124,955 for the issuance of
letters of credit. The Credit Agreement contains covenants which, among other
things, restrict the payment of dividends on any security, 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 4: WRITE-DOWN OF OIL & GAS PROPERTIES
As a direct result of the continued decline of oil prices throughout the
second quarter of 1998, the Company recorded a write-down of oil and gas
properties in the amount of $1,208,000. The write-down reduced net oil and gas
properties to the "full-cost ceiling" as required by the rules of the Securities
and Exchange Commission ("SEC"). Under the SEC rules, the full-cost ceiling is a
limitation on capitalized costs and is calculated as (1) the estimated present
value of future net revenues, from proved reserves after operating expenses and
capital costs, discounted at 10% per annum, using current oil and gas prices and
costs held constant over the life of the properties, (2) the lower of cost or
fair market value of unevaluated oil and gas properties, and (3) related tax
effects. The average price used to calculate the full-cost ceiling was
approximately $12.00 per Bbl of oil and $2.20 per Mcf of natural gas.
The write-down was the result of several factors including, the impact of
the significant reduction in oil and gas prices during the three months ended
June 30, 1998, the transfer of certain unevaluated property costs to evaluated
properties as a result of technical analysis and current market conditions, both
offset by additional quantities of proved reserves recorded as a result of the
Company's acquisition program and technical evaluation of its properties. Oil
and gas reserve estimates, which are the basis for calculating limitations on
capitalized costs are inherently imprecise and are expected to change as future
information becomes available.
9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the unaudited
Consolidated Financial Statements and related notes thereto, included elsewhere
in this 10-QSB.
MERGER
As discussed in the Notes to the Consolidated Financial Statements
included in this quarterly report, the Company underwent a substantial change in
ownership, management, assets and business strategy, all effective December 31,
1997. These significant changes occurred as a result of the acquisition of
Cliffwood (via Merger) and certain related transactions, pursuant to a
definitive Plan and Agreement of Merger. For financial reporting purposes, the
Merger is accounted for as a reverse acquisition of Texoil by Cliffwood. The
historical Consolidated Financial Statements are those of Cliffwood, and
management's discussion and analysis of financial condition and results of
operations presented herein relate to Cliffwood. Both reflect the acquisition of
Texoil net assets (existing immediately prior to the Merger) at fair value,
using purchase accounting, on December 31, 1997, as required by generally
accepted accounting principles.
GENERAL
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 may further be 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 fully
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. Under the full-cost method, to
the extent that capitalized costs (net of DD&A) exceed the discounted future net
revenues of estimated 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 market value of unevaluated properties, both on an after
tax basis, such excess costs are charged to operations as additional DD&A.
Included in capitalized costs subject to amortization for the three and
six month periods ended June 30, 1998, are $149,000 and $265,000, respectively,
of payroll and related costs of technical personnel which are directly
attributable to the Company's oil and gas acquisition, exploration and
development activities. The amount of similar costs capitalized for the
comparable periods of 1997 was not significant. 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 unevaluated
capitalized costs for the three and six month periods ended June 30, 1998, are
interest costs of $107,000 and $201,000, respectively.
No such costs were capitalized for the first and second quarters of 1997.
10
At June 30, 1998, the Company's net evaluated capitalized costs exceed
estimated discounted future net revenues from estimated proved reserves on an
after-tax basis by approximately $1,208,000, resulting in a write-down of oil
and gas assets. The write-down was the net result of the significant decrease in
oil prices which has continued in the second quarter of 1998 offset by
additional quantities of proved developed and undeveloped reserves recorded as a
result of the Company's acquisition and development program and the technical
evaluation of unevaluated properties. Net capitalized costs could exceed
discounted future net revenues in future periods due to downward revisions to
estimates of proved reserve quantities, further 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 prices, estimated reserve quantities or oil and gas prices
subsequently increase. Management believes that current reserve estimates, which
represent the basis for calculating limitations on capital costs, are reasonable
under present operating conditions and circumstances. However, reserve estimates
and forecasts are inherently imprecise and, therefore, subject to significant
future changes.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1998 COMPARED
TO THREE MONTHS ENDED JUNE 30, 1997
The Company recorded a net loss of $876,000 and net income of $151,000
for three months ended June 30, 1998 and 1997, respectively. Excluding the
write-down of oil and gas properties, net income for the second quarter of 1998
would have been approximately $15,000. The $1,027,000 decrease 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 .......................................... $ 1,044
Lease operating expenses ................................... (641)
Production taxes ........................................... (44)
Depletion, depreciation and amortization expense ("DD&A") .. (306)
Write-down of oil & gas properties ......................... (1,208)
General and administrative expenses - net .................. (188)
Interest expense - net ..................................... (97)
Other income - net ......................................... 29
Provision for income taxes ................................. 384
-------
$(1,027)
=======
The following discussion applies to the changes shown above. Comments
applicable to both the comparative three month and six month ended periods are
presented only for the comparative six month periods discussed in the following
section.
The $1,044,000, or 79% increase in net oil and gas sales is primarily
attributable to the increase in production volumes resulting from the
acquisition and development of producing properties. The increase in production
volume was offset by a significant decrease in oil prices as shown in the table
presented immediately below.
11
THREE MONTHS ENDED
JUNE 30,
---------------------------
1998 1997
----------- -----------
Oil Production (Bbls) .......................... 130,540 56,188
=========== ===========
Gas Production (Mcf) ........................... 282,900 175,262
=========== ===========
Average Price Gas (per Mcf) .................... $ 2.33 $ 1.87
=========== ===========
Average Price Oil (per Bbl) .................... $ 12.24 $ 17.84
=========== ===========
Lease operating expenses and workover costs increased $641,000 or 84% due
to the acquisition and development of oil and gas properties since June 30,
1997. The Company has acquired nine additional properties and has further
acquired significant additional working interests in properties owned as of June
30, 1997. On a barrel of oil equivalent ("BOE") basis, production volumes
increased 108% over the comparable period of the prior year. Accordingly, lease
operating expenses have increased as a result of additional production volumes.
Production taxes increased by $44,000 or 56%, due to increased production
volumes and revenues.
The $306,000 or 158% , increase in DD&A expenses is primarily due to the
increase of oil and gas production volumes, reserves and capitalized balances
subject to DD&A resulting from the acquisition and development of producing
properties.
The $188,000 or 94%, increase in net general and administrative expenses
results from increases in management and administrative staffing associated with
the Company's rapid growth.
Interest expense increased by $97,000 primarily due to the increased
long-term debt used to finance acquisitions and prospects.
Other income increased $29,000 or 14%, in 1998 principally due to
increased administrative overhead reimbursements on operated properties,
engineering consulting fees and interest income.
12
SIX MONTHS ENDED JUNE 30, 1998 COMPARED
TO SIX MONTHS ENDED JUNE 30, 1997
The Company recorded a net loss of $724,000 and net income of $357,000
for six months ended June 30, 1998 and 1997, respectively. Excluding the
write-down of oil and gas properties, net income through the second quarter of
1998 would have been approximately $167,000. The $1,081,000 decrease 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 ........................................ $ 1,628
Lease operating and workover costs ....................... (873)
Production taxes ......................................... (77)
Depletion, depreciation and amortization expense ("DD&A") (586)
Write-down of oil and gas properties ..................... (1,208)
General and administrative expenses - net ................ (376)
Interest expense - net ................................... (141)
Other income - net ....................................... 154
Provision for income taxes ............................... 398
-------
$(1,081)
=======
The $1,628,000 or 62% increase in net oil and gas sales is primarily
attributable to the increase in production volumes resulting from the
acquisition and development of producing properties. Production volumes
increased significantly for the six months ended June 30, 1998, as compared to
1997, while prices for oil and gas decreased as follows:
SIX MONTHS ENDED JUNE 30,
-----------------------------
1998 1997
----------- -----------
Oil Production (Bbls) .......... 231,970 99,027
=========== ===========
Gas Production (Mcf) ........... 521,266 294,080
=========== ===========
Average Price Gas (per Mcf) .... $ 2.26 $ 2.12
=========== ===========
Average Price Oil (per Bbl) .... $ 12.88 $ 19.26
=========== ===========
Lease operating expenses and workover costs increased $873,000 or 63%,
due to the acquisition and development of oil and gas properties since June 30,
1997. The Company has acquired nine additional properties and has further
acquired significant additional interests in properties owned as of June 30,
1997. On a barrel of oil equivalent ("BOE") basis, production volumes increased
115% over the comparable period of the prior year. Accordingly, lease operating
expenses have increased as a result of additional production volumes. Production
taxes increased by $77,000 or 52%, due to increased production volumes and
revenues.
13
The $586,000 or 168%, increase in DD&A expenses is primarily due to
the increase of oil and gas production volumes, reserves and capitalized
balances subject to DD&A resulting from the acquisition and development of
producing properties. Gross capitalized costs included in the Full-Cost Pool and
subject to DD&A were $25,548,513 and $7,935,272 at June 30, 1998 and 1997,
respectively. In addition, estimated future development costs associated with
proved undeveloped reserves in the amount of $6,541,600 and $522,000 at June 30,
1998 and 1997, respectively, were included in the DD&A calculations.
The write-down of oil and gas properties in the amount of $1,208,000
represents a non-cash charge to operating expenses, required pursuant to SEC
rules. This write-down was largely the result of a significant downward movement
in oil prices in the second quarter of 1998. The write-down reduces the carrying
cost of assets to the full-cost ceiling as prescribed by SEC rules. Although
management and most industry participants believe the current price environment
is temporary, such current prices, without the benefit of anticipated price
recovery, must be used in calculations. See "Impact of Changing Prices and
Costs" below.
The $376,000 or 83%, increase in net general and administrative expenses
is comprised primarily of increases in management, technical and administrative
staffing associated with the Company's growth. The Company is the operator of
the majority of its properties and, accordingly, must attract and retain
competent technical and administrative personnel to fulfill its contractual
obligations. Although the operator is allowed certain "overhead reimbursements"
pursuant to the terms of applicable operating agreements (reflected as "operator
and management fees" in the Consolidated Statements of Operations), such
reimbursements do not necessarily recover the full amount of Company
expenditures. Furthermore, the Company's growth requires competent senior
management and staff to further the Company's goals. The Company plans to
continue efforts to attract capital and investors and seek acquisitions and/or
merger partners in order to grow and increase shareholder value.
Interest expense increased by $141,000 primarily due to the increased
long-term debt used to finance acquisitions.
Other income increased $154,000 in 1998 principally due to increased
administrative overhead reimbursements on operated properties, engineering
consulting fees and interest income.
IMPACT OF CHANGING PRICES AND COSTS
Texoil's revenues and the carrying value of its oil and gas properties
are subject to significant change due to changes in oil and gas prices. Oil
prices have continued a significant downward trend during the second quarter of
1998. As explained above, Texoil's revenues have increased despite the
significant adverse impact of prices. Should prices continue to fall or fail to
increase to levels which will facilitate repayment of debt and reinvestment of
cash flow to replace current production, the Company could experience difficulty
in continuing its growth, developing its assets and attracting capital. The
Company believes that prices have bottomed out in the second quarter and will
rebound within the next year. The Company has maintained positive net revenues,
notwithstanding its leverage and administrative costs, and not considering the
write-down of oil & gas properties, required pursuant to SEC rules. Oil and
natural gas prices are subject to substantial seasonal, political and other
fluctuations which are beyond the ability of Texoil to control or accurately
predict.
14
Low oil prices have caused many in the industry to reduce capital
spending, which in turn has affected the Company's ability to attract partners
for Company sponsored exploration and development activities and the terms of
such participation. Thus far, the Company has been able to attract partners and
experts to participate in the drilling of up to five wells by year-end.
Prolonged low prices could adversely affect certain projects and the Company may
withdraw certain prospects from the market until 1999.
Although prices have declined to levels which have not existed in the
past decade, the costs of field labor and services have not declined
proportionately. While the Company has benefited by some general industry cost
declines, such costs could increase in the future.
CORPORATE EFFORTS TO OFFSET DECLINING PRICES
Early in the second quarter of 1998, in an effort to mitigate the adverse
effect of low oil prices, the Company implemented numerous cost saving programs
designed to reduce operating and administrative costs and enhance net revenues
during this difficult period in the industry. Rather than impose staff
reductions of technical and other personnel, the Company chose to implement a
salary reduction program and retain its current level of staffing. As a result,
the Company has not lost any of its staff. In addition, the Company has taken
steps to reduce certain occupancy and office expenses. In total, general and
administrative expenses should ultimately be 13 - 16% less than prior levels.
While the reductions have been difficult, staff morale remains high and the
Company has remained committed to its goals.
In addition to general and administrative savings, the Company has
further implemented programs designed to reduce operating expenses and has
deferred certain capital expenditures associated with maintenance, abandonment
and lower revenue producing activities. The Company has continued, however, to
pursue projects that can add economic producing reserves, enhance current
production levels and lower recurring operating expenses.
LIQUIDITY AND CAPITAL RESOURCES
The Company expects to finance its future growth, resulting from its
acquisition, development and exploration activities, through cash flow from
operating activities, its bank credit facility, sale of non-strategic assets,
various means of project finance and ultimately through the additional issuance
of common stock. In addition, the Company intends to finance drilling activities
through the sale of participations to industry partners on a promoted basis,
whereby the Company will earn working interests in reserves and production
greater than its proportionate capital cost.
RIMCO FINANCING
On December 31, 1997, Texoil entered into the RIMCO Agreement which
provided $10,000,000 in new financing. Accordingly, Texoil issued 7.875%
Convertible Subordinated General Obligation Notes in the principal amount of
$10,000,000 to the RIMCO Lenders ("Convertible Notes"), which will mature
December 31, 1999, or upon a change in control, subject to certain extensions
pursuant to the terms of the RIMCO Agreement. At any time prior to the maturity
date, outstanding indebtedness is convertible by the holders, in whole or in
part, into Texoil Common Stock at an initial per share conversion price equal to
15
$1.75, subject to anti-dilution adjustments. Texoil may convert all of the
outstanding indebtedness under the Convertible Notes into Texoil Common Stock if
the average closing price per share during a period of 20 consecutive trading
days equals or exceeds 130% of the conversion price.
If on December 31, 1999, cash availability of the Company and its
subsidiaries, as defined in the RIMCO Agreement, is less than the principal and
accrued and unpaid interest outstanding under the Convertible Notes, the RIMCO
Lenders can be required to convert the outstanding principal and accrued and
unpaid interest into Texoil Common Stock, if the relationship between the
average price and the conversion price satisfies certain conditions set out in
the RIMCO Agreement. The Company granted the holders of the Convertible Notes
certain registration rights in respect of shares of Texoil Common Stock issuable
upon conversion of debt under the Convertible Notes.
The indebtedness under the RIMCO Agreement is subject to the terms of a
subordination agreement among the RIMCO Lenders, Comerica Bank - Texas, N. A.
(as agent for itself and another lender), Cliffwood Oil & Gas Corp., Cliffwood
Energy Company, and Cliffwood Production Co., whereby indebtedness under the
RIMCO Agreement is subordinated in right of payment and the RIMCO Lenders are
subject to restrictions on their right to exercise remedies under the RIMCO
Agreement. The subordination provisions do not affect the ability to convert
indebtedness under the RIMCO Agreement into Common Stock of Texoil.
CREDIT FACILITY
At June 30, 1998, the Company had available borrowing capacity of
$3,950,000, in accordance with a revolving credit agreement ("Credit Agreement")
with a bank, which can be used to finance property acquisitions and temporary
working capital requirements. The borrowing base is redetermined annually, or
more often, at the request of the Company. The Company believes that
acquisitions and production increases which have occurred since the last
redetermination in December 1997, will result in a higher borrowing base. Upon
redetermination, the Company estimates the borrowing base will exceed $13.0
million resulting in approximately $8.0 million of additional borrowing
availability.
CASH FLOW FROM OPERATING ACTIVITIES
For the six months ended June 30, 1998, the Company's net cash flow
used in operating activities was $428,000, down $1,767,000 from the comparable
period in 1997. These decreases are directly attributable to the reduction in
oil and gas prices and the use of cash to reduce current liabilities.
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CAPITAL EXPENDITURES
The Company's net oil & gas capital expenditures for the three and six
month periods ended June 30, 1998, are as follows:
CAPITAL EXPENDITURES
FOR THE PERIODS ENDED
JUNE 30, 1998
-----------------------
THREE SIX
MONTHS MONTHS
------ ------
($000's)
Evaluated properties ......................... $5,768 $7,598
Unevaluated properties ....................... 677 1,143
------ ------
$6,445 $8,741
====== ======
The capital expenditures for the six months ended June 30, 1998, were
financed principally with the proceeds of the RIMCO financing, obtained on
December 31, 1997, and additional bank borrowings. Capital expenditures for the
remainder of 1998 cannot be estimated with precision as many expenditures are
discretionary and can be delayed; however, the Company expects to make
approximately $650,000 of development expenditures associated with proved
properties owned as of June 30, 1998. In addition, the Company expects to make
additional capital expenditures during 1998 to complete the interpretation of
3-D seismic data in its Raceland, Greens Lake and Laurel Grove prospects, to
maintain and acquire additional leases and to drill wells on the prospects.
Together these capital costs are estimated to total approximately $450,000 in
1998. The Company also expects to make capital expenditures in 1998 in
connection with its joint venture with Bechtel Exploration Company. Commitments
include geological, geophysical and leasehold costs for an estimated five (5)
drillable prospects. The Company estimates net capital expenditures of $300,000.
None of these costs includes the estimated costs of drilling such prospects,
which is generally elective on the Company's part, subject to its ability to
sell interests to third parties on a promoted basis. Based on the current
drilling schedule, the Company expects to incur $800,000 of drilling costs net
of proceeds from prospect sales prior to year end. Cost of completion and
facilities would be in addition to the net drilling costs. These costs represent
the Company's 7 1/2 - 15% direct share of drilling. The Company will enjoy a
larger share of well ownership as a result of interests earned in connection
with the sale of prospects. The Company may elect to reduce these costs through
the sale of additional interests to third parties; and, alternatively, pending
incremental cash flows or financing, the Company may obtain additional interests
or elect to drill additional prospects.
In summary, estimated net expenditures to maintain and develop existing
assets are as follows for the next six months:
Property Development and Maintenance ....................... $ 650,000
Company Prospects .......................................... 450,000
Bechtel Joint Venture ...................................... 300,000
Drilling ................................................... 800,000
----------
$2,200,000
==========
17
The Company cannot predict with any accuracy the level of capital
expenditures it may incur in connection with purchasing producing properties.
However, management has set a goal of acquiring at least $10.0 million of proved
producing properties in 1998. Toward that goal, in May 1998, the Company
acquired all of the oil & gas assets of an affiliated limited partnership
("Partnership"), for $4,430,000 and 898,000 shares of common stock.
The Company believes that it will have sufficient capital available
from its credit facility and cash flows from operating activities to fund its
1998 capital obligations. In connection with the acquisition of Partnership
properties, the Company amended and restated the Partnership Agreement to
increase available Partnership capital to $15.0 million for acquisition and
development activities. The Company has a Partnership interest equal to 15%.
Capital available from the Partnership, with capital available directly to the
Company, results in a greater ability to compete for acquisitions. In addition,
the Company believes that funds available from traditional sources of equity,
debt, and project finance and from its demonstrated ability to acquire industry
partners will further expand its ability to pursue strategic corporate and
property acquisitions.
FORWARD-LOOKING INFORMATION
This quarterly report on Form 10-QSB 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
including, without limitation, statements regarding the Company's business
strategy, plans, objectives and beliefs of management for future operations are
forward-looking statements. Although the Company believes the expectations and
beliefs reflected in such forward-looking statements are reasonable, it can give
no assurance that such expectations will prove to have been correct. Important
factors that could cause actual results to differ materially from the Company's
expectations are discussed elsewhere in this report. 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.
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PART II. OTHER INFORMATION
Item 1 - Legal Proceedings - The Company settled its litigation with Aptech
Resources, Inc., and dismissed the proceeding. Settlement costs were not
material. No material change in other legal proceedings reported in Registrant's
Form 10-KSB for the fiscal year ended December 31, 1997.
Item 2 - Change in Securities - As of May 4, 1998, the Company issued 898,000
shares of its common stock to two entities in partial exchange for the oil and
gas assets (the "Assets") of the Cliffwood Acquisition - 1996 Limited
Partnership (the "Partnership"). The purchase price for the Assets also included
$4,430,000 in cash. The shares of common stock were issued pursuant to a private
placement exemption under Section 4(2) of the Securities Act of 1933, as
amended, to two entities who were the limited partners of the Partnership. There
were no underwriters or brokers involved in the transaction. The Company
received the Assets in exchange for the cash and shares of common stock, and the
Assets primarily consist of working interests in seven producing fields in
Texas.
Item 3 - Defaults Upon Senior Securities - None
Item 4 - Submission of Matters to a Vote of Security Holders - Pursuant to a
written consent of shareholders owning in excess of 51% of the issued and
outstanding common stock of the Company, dated May 28, 1998, and an unanimous
written consent of Directors of the Company dated May 26, 1998, the Company was
authorized to amend its Articles of Incorporation to increase the authorized
number of shares of common stock from 50,000,000 to 60,000,000. Pursuant to
written consents, shareholders holding 29,312,209 shares of common stock or
74.6% of the total issued and outstanding and entitled to vote, approved the
transaction. No shares abstained or were voted against the amendment, although
9,972,885 shares did not tender consents. The Company filed a Certificate of
Amendment to increase the number of authorized shares with the Secretary of
State of the State of Nevada on June 2, 1998.
Item 5 - Other Information - None
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits - None
(b) Reports on Form 8-K
On May 12, 1998, the Company filed a report on Form 8-K, including
Item 2, Acquisition of Oil and Gas Properties Related to the
Acquisition of All of the Oil and Gas Assets of an Affiliated
Partnership, for which the Company, through a wholly-owned
subsidiary, served as General Partner. On July 8, 1998, the Company
filed an Amendment on Form 8-K/A-1 related to Item 7, Financial
Statements for the Subject Acquisition.
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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.
TEXOIL, INC.
Date: By:
Frank A. Lodzinski
President and CEO
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