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 MARCH 31, 1999
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 (I.R.S. EMPLOYER
OF 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: 39,295,094 shares of common
stock, $.01 par value, issued and outstanding at April 30, 1999.
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 March 31, 1999................. 3
Consolidated Statements of Income for the three months ended
March 31, 1999 and 1998........................................ 4
Consolidated Statements of Cash Flows for the three months
ended March 31, 1999 and 1998.................................. 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 OPERATIONS........................... 8
PART II. OTHER INFORMATION.......................................... 15
2
TEXOIL, INC.
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
MARCH 31,
1999
---------
Assets:
Current Assets:
Cash and cash equivalents.......... $ 564
Accounts receivable and other...... 3,003
Drilling advances.................. 122
Other current assets............... 53
---------
Total current assets.......... 3,742
Property, plant and equipment, at cost:
Oil and natural gas properties
(full-cost method)
Evaluated properties.......... 43,820
Unevaluated properties........ 6,672
Office and other equipment.............. 625
---------
51,117
Less -- accumulated depletion,
depreciation and amortization......... (6,318)
---------
Net property, plant and equipment....... 44,799
---------
Other assets, net....................... 680
Deferred tax asset...................... 684
---------
Total assets.................. $49,905
=========
Liabilities and Stockholders' Equity:
Current liabilities:
Accounts payable and accrued
liabilities....................... $ 2,237
Current portion--long term debt.... 2,633
Revenue royalties payable.......... 1,440
---------
Total current liabilities..... 6,310
---------
Long-term debt.......................... 22,117
Convertible subordinated notes.......... 10,000
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;
39,295,094 shares issued and
outstanding....................... 393
Additional paid-in capital.............. 10,792
Retained earnings....................... 293
---------
Total stockholders' equity......... 11,478
---------
Total liabilities and stockholders'
equity............................ $49,905
=========
The accompanying notes are an integral part of these consolidated financial
statements.
3
TEXOIL, INC.
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1999 1998
--------- ---------
Revenues:
Oil and gas sales............... $ 3,827 $ 1,866
Operator and management fees.... 242 255
Interest and other.............. 4 57
--------- ---------
Total revenues............. 4,073 2,178
--------- ---------
Costs and Expenses:
Lease operating................. 1,500 770
Workover........................ 2 81
Production taxes................ 274 103
General and administrative...... 447 437
Depletion, depreciation and
amortization................... 1,025 434
Interest........................ 547 109
--------- ---------
Total expenses............. 3,795 1,934
--------- ---------
Income before income taxes........... 278 244
Provision for deferred income
taxes.............................. (105) (92)
--------- ---------
Net income........................... $ 173 $ 152
========= =========
Basic net income per share........... $ -- $ --
========= =========
Basic weighted average shares........ 39,295 36,587
========= =========
Diluted net income per share......... $ -- $ --
========= =========
Diluted weighted average shares...... 41,117 42,374
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
4
TEXOIL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(UNAUDITED)
(IN THOUSANDS)
1999 1998
--------- ---------
Cash flows from operating activities:
Net income........................... $ 173 $ 152
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depletion, depreciation and
amortization................... 1,025 434
Deferred income tax provision... 105 92
Accounts receivable............. 1,042 1,219
Accounts receivable -- related
party.......................... -- 60
Notes receivable................ -- (120)
Other assets.................... (14) (239)
Accounts payable and accrued
liabilities.................... (554) (1,264)
Revenue royalties payable....... (57) (687)
--------- ---------
Net cash provided by (used
in) operating
activities............... 1,720 (353)
--------- ---------
Cash flows from investing activities:
Additions to oil and gas
properties..................... (833) (2,309)
Other equipment additions....... 4 (23)
--------- ---------
Net cash used in investing
activities............... (829) (2,332)
========= =========
Cash flows from financing activities:
Proceeds from issuance of common
stock.......................... -- --
Proceeds from long-term debt and
other.......................... -- --
Repayments of long-term debt.... (750) (1)
--------- ---------
Net cash provided by (used
in) financing
activities............... (750) (1)
--------- ---------
Net increase in cash and cash
equivalents........................ 141 (2,686)
Cash and cash
equivalents -- beginning of
period............................. 423 4,059
--------- ---------
Cash and cash equivalents -- end of
period............................. 564 $ 1,373
========= =========
Supplemental disclosure of cash flow
information:
Cash paid during the period for:
Interest................... $ 680 $ 136
========= =========
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 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, Louisiana and Oklahoma. 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, 1998.
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 March 31, 1999 and
1998 consist of the following (in thousands except per share data):
QUARTER ENDED MARCH 31,
----------------------
1999 1998
--------- ---------
Net Income........................... $ 173 $ 152
Basic weighted average shares........ 39,295 36,587
Effect of dilutive securities:
Warrants........................ 527 3,208
Options......................... 1,295 2,397
Awards.......................... -- 182
Convertible notes............... -- --
--------- ---------
Diluted weighted average shares...... 41,117 42,374
Per common share net income:
Basic........................... $ -- $ --
Diluted......................... $ -- $ --
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 currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows the 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 must formally document, designate and assess
the effectiveness of transactions that receive hedge accounting. The statement
is effective for fiscal years beginning after June 15, 1999. In connection with
the purchase of producing properties on October 30, 1998, the Company hedged
certain quantities of natural gas. 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.
6
TEXOIL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3: UNAUDITED PRO FORMA FINANCIAL INFORMATION
On October 30, 1998, the Company closed on a significant acquisition of oil
and gas properties in South Texas and Louisiana from Sonat Exploration Company
("Sonat Properties"). The acquisition was accounted for using the purchase
method of accounting. The activities of the acquired Sonat Properties were
included in results of operations beginning November 1, 1998. Selected results
of operations for the three months ended March 31, 1998, on a pro forma basis,
giving effect to the acquisition as if it took place on January 1, 1998, are as
follows:
Revenues............................. $ 5,023
=========
Net income........................... $ 218
=========
Basic income per share............... $ .01
=========
Basic weighted average shares
outstanding........................ 36,587
=========
Diluted income per share............. $ .01
=========
Diluted weighted average shares
outstanding........................ 42,374
=========
Adjustments reflected in the historical results to estimate the above pro
forma results of operations for the quarter ended March 31, 1998, include
adjustments to (1) increase operator fees pursuant to operating agreements
associated with acquired properties, (2) recalculate depreciation, depletion and
amortization based upon combined historical production, reserves and cost basis,
(3) reflect interest expense for borrowings under the increased and amended
credit facility at an estimated average annual interest rate of 8.0%, and (4)
adjust income tax expense as a result of the acquisition. The unaudited pro
forma amounts do not purport to represent what the results of operations would
have been had the acquisition of the Sonat Properties occurred on such date or
to project the Company's results of operations for any future period.
NOTE 4: CREDIT AGREEMENT
The Company has 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 $50 million in available
borrowings, limited by a borrowing base (as defined in the Credit Agreement)
which was $27.1 million and $9.5 million at March 31, 1999 and 1998,
respectively. As of March 31, 1999 and 1998, borrowings outstanding under the
Credit Agreement were $24.8 million and $50,000, respectively. 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 over a five-year
period on a straight-line basis. The average interest rate paid to the lender
was 7.4% and 9.0% for the three months ended March 31, 1999 and 1998,
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 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.
7
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 and should further be read in conjunction with the Company's
annual report on Form 10-KSB, for the year-ended December 31, 1998.
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. A detailed discussion of important factors that could cause actual
results to differ materially from the Company's expectations are discussed
herein and in the Company's annual report on form 10-KSB for 1998.
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 an active and diversified program
which includes purchases of oil and gas reserves, re-engineering, development
and exploration activities. 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. Product
prices, particularly the price of crude oil, have dropped significantly during
1998 and early 1999. While prices have recently rebounded, no assurance can be
given that current price levels will be sustained or will continue to increase.
The industry-wide reduction in prices has adversely affected revenues and net
cash flows of the Company, as well as most companies in the industry,
particularly those whose assets were concentrated in oil reserves. Furthermore,
reduced cash flows have adversely affected the capital budgets of major oil
companies and independents. Such depressed industry conditions have led to
certain contractions among many companies including, among others, work-force
reductions, reorganizations, capital budget decreases, and elimination or
deferral of new ventures. Such industry conditions may adversely affect Texoil's
ability to solicit industry partners to participate in projects originated by
Texoil on a promoted basis.
In the opinion of Texoil management, however, current industry conditions
may result in opportunities for companies that can effectively compete for
cost-efficient capital and deploy a business strategy that results in growth.
Costs of labor and certain drilling and field products and services have
declined. In addition, major companies and large independents may continue or
expand divestitures of "non-core" properties as they reorganize, downsize and
attempt to streamline business operations. Smaller companies may be forced to
sell assets that were acquired based on higher product prices, or upon
anticipated development activities which may not be economically attractive at
current price levels. Lastly, companies may choose or be forced to liquidate,
consolidate or merge to reduce costs and improve shareholder value.
Accordingly, Texoil's management has developed a corporate action plan and
intends to acquire, discover and develop oil and gas reserves, aggressively
pursue corporate acquisitions and mergers and
8
achieve continued growth. In addition management continues to focus on reducing
operating and administrative costs on a per unit basis. The plan is merely an
expansion and adaptation of the business plan which was conceived and
implemented by management in early 1996, and has resulted in significant growth
to date. See "Impact of Changing Prices and Costs" and "Corporate Efforts to
Offset Declining Prices" below. Other elements of the action plan are as
follows:
1) Further diversify and enhance the portfolio of proved properties. In
the short-term, focus on natural gas reserves that can favorably
impact operating ratios and cash flows. Acquire properties with
long-term development and exploration potential.
2) Expand the Company's drilling (development and exploration) programs
and increase its direct participation, but continue to solicit
industry or institutional partners on a promoted basis.
3) Continue cost-containment efforts directed toward controlling and
reducing per-unit operating and general and administrative costs.
4) Selectively seek asset or corporate acquisitions and mergers for
cash or Texoil shares.
5) Increase equity and long-term financing through available means,
whether through direct placement of securities or through
acquisition activities.
6) Selectively employ additional technical and management personnel (as
earnings and cash flows permit) with a reasonable incentive program
based on achievement of goals.
While the impact and success of this action plan cannot be predicted with
any accuracy, management's goal is to replace production and further increase
its reserve base at an acquisition or finding cost that will yield current
revenues, cash flows, profits and share appreciation, and will further position
the Company for additional growth when prices recover.
RECENT SIGNIFICANT PROPERTY ACQUISITION
The Company closed a purchase of nine proved oil and gas fields from Sonat
Exploration Company ("Sonat") on October 30, 1998. In the opinion of
management, the acquisition is a significant event for the Company, consistent
with its business strategy and action plan discussed above. Based on independent
engineering evaluations and prior year average prices, absent unforeseen events,
the Company projects gas production to increase by approximately 141% and oil
production to increase by 43%, respectively, in 1999 over 1998 levels. Cash
flows from Company properties are estimated to increase approximately $4.2
million in 1999, based on first quarter production and prices and not
considering development. The projected level of cash flows is approximately 136%
greater than 1998. The Sonat Properties were acquired as proved producing
properties with anticipated future development and drilling potential. Texoil is
the operator of seven fields and receives certain operating fees in addition to
cash flows from production. The acquisition favorably impacts the Company's gas
to oil production ratio from 29% gas to 48% gas, comparing the first quarter of
1998 to the comparable period in 1999. Management believes the impact on
revenues, cash flows and earnings will continue to be positive.
OIL & 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
9
production to total proved recoverable oil and natural gas reserves. The
depletion rate is applied to a cost base which includes net capitalized
evaluated costs plus an estimate of costs to be incurred in the development of
proved undeveloped reserves. 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 months
ended March 31, 1999 and 1998 were $137,000 and $116,000, 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 unevaluated capitalized costs for the three months ended March 31,
1999 and 1998, are interest costs of $122,790 and $94,700, respectively.
At the end of the first quarter of 1999, 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
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.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999, COMPARED TO THREE MONTHS ENDED MARCH 31,
1998.
The Company recorded a net income of $173,000 and $152,000 for three months
ended March 31, 1999 and 1998, respectively. The $21,000 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.................... $1,961
Lease operating and workover
expenses........................... (651)
Production taxes..................... (171)
General and administrative
expenses -- net.................... (10)
Depletion, depreciation and
amortization expense ("DD&A").... (591)
Interest expense -- net.............. (438)
Other income -- net.................. (66)
Provision for income taxes........... (13)
--------
$ 21
========
As further discussed below, the average price of oil in the first quarter
of 1999 was $11.09 per barrel or $2.84 per barrel (20%) less than the comparable
period of the prior year. Had oil and gas prices remained constant for both
periods, oil and gas revenues and net income reported for the three months ended
March 31, 1999, would have increased by approximately $386,000 and $223,000,
respectively.
The following discussion applies to the changes in the composition of net
income shown above.
10
The $1,961,000 or 105% increase in net oil and gas sales is primarily
attributable to the increase in production volumes resulting from the
acquisition and development of properties during 1998. The increase in
production volumes was offset by a significant decrease in oil prices, as shown
in the table presented immediately below.
THREE MONTHS ENDED
PERCENT MARCH 31,
INCREASE --------------------
(DECREASE) 1999 1998
---------- --------- ---------
Gas Production (MMcf)................ 282% 910 238
Oil Production (MBbls)............... 66% 168 101
Barrel of oil equivalent (MBOE)...... 127% 320 141
Average Price Gas (per Mcf).......... 5% $ 2.09 $ 1.99
Average Price Oil (per Bbl).......... (20%) $ 11.09 $ 13.93
Average price per BOE................ (11%) $ 11.74 $ 13.23
Lease operating expenses and workover costs increased $651,000 or 77%. On a
unit-of-production, barrel of oil equivalent ("BOE") basis, costs were
actually reduced 22%. The dollar increase is a result of the acquisition and
development of oil and gas properties in 1998. On a BOE basis, production
volumes increased 127% over the prior year. Accordingly, lease operating
expenses increased primarily as a result of additional production volumes. The
Company expects further reductions to lease operating expenses on a BOE basis in
1999 as a result of the Sonat acquisition and field re-engineering and
development activities. Production taxes increased by $172,000 or 167% due to
increased production volumes and revenues.
General and administrative costs increased $10,000 or 2%. The percentage
increase in general and administrative expenses was considerably less than the
increases in production and revenues as a result of both rigorous cost
containment efforts and production increases. On a BOE basis, general and
administrative expenses actually were reduced by 55% in 1999 over 1998 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 $591,000 or 136% 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 $43.8 and $17.9 million
at March 31, 1999 and 1998, respectively. In addition, estimated future
development costs associated with proved undeveloped reserves in the amount of
$14.6 million and $5.4 million at March 31, 1999 and 1998, respectively, were
included in the DD&A calculations. The proved reserve quantities used for the
calculation of DD&A were approximately 17.6 million barrels of oil equivalent.
This amount is approximately 8.5% larger than the quantities used at year end
1998. The increase is due to upward reserve revisions resulting from the
economics of the higher commodity prices prevailing at March 31, 1999, and other
engineering considerations.
Interest expense increased by $438,000 primarily due to the increased
long-term debt used to finance acquisitions. Interest expense was $547,000 and
$109,000 for the three months ended March 31, 1999 and 1998, respectively, and
is expected to be $2.3 million in 1999; however, the Company plans to replace
some debt with equity and, therefore, reduce projected interest expense.
Other income decreased $66,000 for the three months ended March 31,1999,
principally due to decreases in interest income and consulting fees.
The provision for income taxes increased $13,000 as a result of the
increase in net income.
IMPACT OF PROPERTY ACQUISITIONS AND DEVELOPMENT
Acquisitions and development of the oil and gas properties in 1998 is
expected to increase revenues by approximately $6.0 million in 1999, and net
cash flows from Company properties by approximately
11
$4.2 million, based solely on estimated production from proved producing
reserves. These estimates assume the average prices realized in 1998 will be
realized in 1999 and further assume a reduction of approximately $1.40 per BOE
in total Company operating expense (from $5.71 to $4.31 per BOE). The projected
reduction in per BOE operating expenses is consistent with the prior performance
of the Company and is a direct result of the Sonat Properties (which results in
a higher ratio of gas production with lower operating expenses per BOE),
re-engineering and development activities and cost-containment efforts. These
estimates are exclusive of any projected cash flows from price increases and
additional development activities. Estimates are based on independent reserve
reports prepared by third parties in connection with required year-end
reporting, planned Company activities and first quarter operating results. The
Company financed its activities largely with bank debt and, accordingly, gross
interest expense is expected to increase by approximately $1.3 million on an
annual basis. Based on independent engineering studies, cash flows could
increase as a result of the development of non-producing reserves through
workovers, recompletions and enhancements to production facilities and through
development drilling. In addition, net cash flows could be favorably affected by
price improvements and additional reductions to per-unit operating costs. No
assurance can be given, however, that the Company will be able to successfully
and economically develop additional reserves.
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. As
previously mentioned, oil prices declined appreciably during 1998 and early
1999. Average oil prices for the three months ended March 31, 1999, were 20%
lower than the comparable period in 1998 and 40% and 51% lower than average
prices realized in 1997 and 1996, respectively. Average oil prices for March
1999 improved to about $12.75 per barrel. Although prices have continued to
rebound thereafter, management expects that oil prices will decline in the
short-term, before stabilizing at higher levels. Should prices 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 additional
capital. The Company has maintained positive cash flows including its financing
and administrative costs. Low oil prices have caused many in the industry to
reduce capital spending, which in turn affects 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 generally been able to
attract partners and expects to participate in the drilling of six to eight
wells in 1999. However, prolonged low prices could adversely affect certain
projects and the Company may be required to withdraw certain prospects from the
market. Although prices have declined, the costs of field labor and services
have not declined proportionately. While the Company has benefitted from some
general industry cost declines, such costs could increase in the future.
CORPORATE EFFORTS TO OFFSET DECLINING PRICES
Early in 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. Rather than impose
staff reductions of technical and other personnel, the Company chose to
implement a salary reduction program and defer salary increases. The Company has
not lost any of its staff. In addition, the Company has taken steps to reduce
certain occupancy and office expenses. Certain salaries were restored to prior
levels in connection with the Sonat acquisition, but annual increases continue
to be deferred. 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 expenditures
associated with lower revenue producing activities and projects. The Company has
continued, however, to pursue projects that can add economic producing reserves,
enhance current production levels and lower recurring operating expenses.
12
LIQUIDITY AND CAPITAL RESOURCES
The Company expects to finance its future acquisition, development and
exploration activities through cash flow 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. In
addition, the Company intends to continue to subsidize 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 a Note Purchase Agreement and
issued 7.875% Convertible Subordinated General Obligation Notes in the principal
amount of $10 million. The financing matures on December 31, 1999, and is
subject to certain extensions or conversion to common stock pursuant to the
terms of the agreements. Management expects that the indebtedness will be
refinanced, extended, or converted into Texoil common stock, on or before
maturity.
CREDIT FACILITY
At March 31, 1999 and 1998, the Company had available borrowing capacity of
$2.3 million and $9.5 million, respectively, in accordance with a revolving
credit agreement with its banks, 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. As of
November 1, 1998, a $28 million borrowing base was established. The Company
intends to refinance its bank debt through a corporate offering of securities in
1999 that may provide longer term financing than presently available under its
credit facility. No assurance can be given, however, that the Company will be
able to refinance its debt.
CASH FLOW FROM OPERATING ACTIVITIES
For the three months ended March 31, 1999, the Company's net cash flow
provided by operating activities was $1.7 million up $2.0 million from the prior
year. These increases are directly attributable to the additional acquisitions
in 1998 and lower cash requirements to reduce current liabilities. The Company
expects acquisitions and development activities to increase cash flows from
operating activities significantly in 1999.
CAPITAL EXPENDITURES
The Company's net oil and gas capital expenditures for the three months
ended March 31, 1999 and 1998, are as follows:
CAPITAL EXPENDITURES
FOR THE THREE MONTHS
ENDED
MARCH 31,
--------------------
1999 1998
--------- ---------
($000'S)
Acquisition of properties:
Evaluated properties............ $ 887 $ 1,830
Unevaluated properties.......... 193 466
--------- ---------
$ 1,080 $ 2,296
========= =========
Capital expenditures for the three months ended March 31, 1999, were
financed principally with cash flows from operations.
The Company expects to make additional capital expenditures during 1999 to
complete the interpretation of 3-D seismic data in its Raceland and Greens Lake
prospects and to maintain and acquire additional leases. In addition, the
Company expects to make pre-drilling capital expenditures in 1999 in connection
with its Joint Venture with Bechtel Exploration Company.The Company expects to
fund approximately 10% to 20% of net drilling and completion expenditures. The
Company will enjoy a larger share of well
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ownership as a result of interests earned in connection with the sale of
prospects. Generally carried and reversionary interests are expected to increase
ownership to more than 25%. Pending incremental cash flows or financing, the
Company may retain additional interests or elect to drill additional prospects.
Based solely on its existing portfolio of properties and projects, the
Company expects to incur $4.0 million of capital expenditures during the
remainder of 1999, as follows:
($000'S)
---------
Texoil prospects
Land, geological &
geophysical.................... $ 450
Drilling........................ 850
Bechtel Joint Venture prospects
Land, geological &
geophysical.................... 500
Drilling........................ 420
Development of proved properties
Re-engineering, facilities...... 480
Well recompletions.............. 800
Drilling........................ 500
---------
$ 4,000
=========
The Company believes that it will have sufficient capital available from
its credit facility, cash flows from operating activities, sale of certain
proved properties and sale of drilling participations to industry partners to
fund the above listed capital expenditures. Certain of the projected capital
expenditures are discretionary and can be deferred, reduced or eliminated. Many
development opportunities are held by producing leases and can be deferred
indefinitely, while certain prospects are subject to lease maintenance
requirements which, if not drilled, could result in additional land costs or
potential losses of leases. However, management believes projected expenditures
will result in increased production and cash flows and increases in reserve
value and will further expose the Company to potentially significant upside from
exploration. The Company cannot predict with accuracy the level of capital
expenditures it may incur in 1999 in connection with acquisitions and
development of new producing properties; however, management has set a goal of
$20 million for the acquisition and development of new properties. This goal
will require additional corporate or project financing to be obtained by the
Company.
YEAR 2000 COMPLIANCE
The Company has conducted a review of and will continue to review its
software applications for Year 2000 issues. None of the software applications
utilized by the Company were developed internally and all have been acquired and
routinely updated since early 1996. The Company uses a PC based networked
hardware configuration with widely utilized, accepted and supported software
applications for its basic operating and office support functions. The primary
software applications used by the Company for its oil and gas activities are its
accounting, land, production management, engineering and interpretative
exploration software. All such systems were purchased from third party vendors,
who are responsible for their maintenance and support, pursuant to the terms of
license and use agreements. The most critical systems referred to above are the
accounting, land and production systems. Other systems are primarily analytical
tools which facilitate and support engineering and geological projects. Based on
reviews and inquiries conducted by Company personnel and resultant
representations by software vendors, the Company believes its primary software
applications are Year 2000 compliant. Accordingly, the Company does not expect
to incur any material costs to modify, upgrade or replace its basic business
systems over and above ongoing requirements to expand systems, as required by
growth and operations. However, the Company is not able nor does it possess the
technical expertise to conduct a comprehensive review of programs and systems
purchased from and supported by third parties; therefore, the Company cannot
guarantee that it will not incur problems with such software and business
applications.
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Although the Company does not expect Year 2000 issues to have a material
impact on its internal operations, it is possible that such issues could
adversely affect customers, suppliers and joint venture partners, with the
possibility of an adverse impact on the Company. Major issues include, (i) the
ability of the Company's customers to accurately and timely measure and pay for
quantities of oil and gas production delivered, (ii) the ability of the
Company's vendors and suppliers to accurately invoice for services and products
and to properly process and account for payments received, (iii) the ability of
non-operating partners in Company operated properties to process and pay their
share of joint interest billings, as rendered and due, and (iv) the ability of
operators, where the Company is a non-operating participant, to disburse net
revenue and render joint interest billings to the Company. As part of its basic
operating practices, the Company believes it currently has adequate internal
controls and procedures in place to account for and monitor material aspects of
the above described activities. As Year 2000 approaches, the Company intends to
take additional steps to determine the Year 2000 readiness of third parties and
to implement additional procedures as it deems reasonably necessary, to account
for and take actions necessary to minimize potential problems resulting from
third party customers, vendors and partners outside of the control of the
Company. In the opinion of management, the single most significant issue is the
timely receipt of payment for oil and gas volumes sold. The majority of the
Company's production is from operated properties where the Company sells field
production to a relatively small number of purchasers. The Company can readily
account for production volumes and prices and aggressively pursue collection.
The effect of problems associated with third parties, if any, cannot be
controlled by the Company and the potential financial impact cannot be estimated
with any accuracy. Such matters could have a material impact on the Company.
PART II. OTHER INFORMATION
Item 1 -- Legal Proceedings -- No material change from legal proceedings
reported in Registrant's Form 10-KSB for the fiscal year ended
December 31, 1998.
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
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: May 6, 1999 By: /s/FRANK A. LODZINSKI
FRANK A. LODZINSKI
PRESIDENT AND CEO
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