UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
____________________
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NO. 0-25058
FLORES & RUCKS, INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 72-1277752
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
8440 JEFFERSON HIGHWAY, SUITE 420
BATON ROUGE, LOUISIANA 70809
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (504) 927-1450
Securities Registered Pursuant to Section 12(b) of the Act:
COMMON STOCK, $0.01 PAR VALUE
(Title of Class)
Securities Registered Pursuant to Section 12(g) of the Act:
NONE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
19,645,756 shares of the registrant's Common Stock were outstanding as of
May 6, 1997.
FLORES & RUCKS, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
(UNAUDITED)
MARCH 31, DECEMBER 31,
1997 1996
------------ ------------
Current assets:
Cash and cash equivalents $ 340,472 $ 5,758,978
Joint interest receivables 3,171,881 2,001,605
Oil and gas sales receivables 25,965,815 33,770,044
Accounts receivable--other 1,779,943 1,500,000
Assets held for resale - 37,200,000
Prepaid expenses 1,354,613 1,213,143
Other current assets 3,239,606 2,414,803
------------- -------------
Total current assets 35,852,330 83,858,573
Oil and gas properties--full cost method:
Evaluated 571,790,053 464,485,367
Less accumulated depreciation, depletion,
and amortization (211,587,517) (188,692,223)
------------- -------------
360,202,536 275,793,144
Unevaluated properties excluded from
amortization 91,005,543 79,904,974
Other assets:
Furniture and equipment, less accumulated
depreciation of $3,293,121 and $2,772,983
at March 31, 1997 and December 31, 1996,
respectively 4,607,954 4,286,773
Restricted deposits 6,867,972 6,323,515
Deferred financing costs 10,233,389 10,543,226
------------- -------------
Total assets $ 508,769,724 $ 460,710,205
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 60,323,568 $ 47,718,102
Oil and gas sales payable 6,103,370 7,830,415
Accrued interest 13,639,370 5,521,070
Current notes payable 22,519 127,154
Deposit on assets held for resale - 3,720,000
------------- -------------
Total current liabilities 80,088,827 64,916,741
Long-term debt 301,163,998 284,141,999
Deferred hedge revenue 366,667 400,000
Deferred tax liability 12,048,836 6,098,144
Stockholders' equity:
Preferred stock, $.01 par value; authorized
10,000,000 shares, no shares issued or
outstanding at March 31, 1997 and
December 31, 1996 - -
Common stock, $.01 par value; authorized
100,000,000 shares; issued and outstanding
19,641,356 shares and 19,640,656 shares
at March 31, 1997, and December 31, 1996,
respectively 196,414 196,407
Paid-in capital 91,836,382 91,819,465
Retained earnings 23,068,600 13,137,449
------------- -------------
Total stockholders' equity 115,101,396 105,153,321
------------- -------------
Total liabilities and
stockholders' equity $ 508,769,724 $ 460,710,205
============= =============
The accompanying notes to financial statements are an integral part of these
statements.
2
FLORES & RUCKS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
----------------------------
1997 1996
------------ ------------
Oil and gas sales $ 64,476,673 $ 36,828,857
Operating expenses:
Lease operations 12,710,704 8,445,683
Severance taxes 2,672,434 2,885,699
Depreciation, depletion and amortization 22,895,295 14,350,248
------------ ------------
Total operating expenses 38,278,433 25,681,630
General and administrative expenses 4,355,141 3,257,725
Interest expense 6,460,184 4,511,758
Other expense (income) (506,926) 257,922
------------ ------------
Net income before income taxes 15,889,841 3,119,822
Income tax expense 5,958,690 1,219,314
------------ ------------
Net income $ 9,931,151 $ 1,900,508
============ ============
Earnings per common share:
Primary $ 0.48 $ 0.12
Fully diluted 0.48 0.12
Weighted average common and common
equivalent shares outstanding:
Primary 20,890,124 16,093,171
Fully diluted 20,890,124 16,269,574
The accompanying notes to financial statements are an integral part of these
statements.
3
FLORES & RUCKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
---------------------------
1997 1996
------------ ------------
Operating activities:
Net income $ 9,931,151 $ 1,900,508
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation, depletion and amortization:
Oil and gas properties 22,895,295 14,350,248
Furniture and equipment 520,137 293,461
Deferred hedge revenue (33,333) (117,583)
Deferred tax expense 5,950,693 1,201,127
Changes in operating assets and liabilities:
Accrued interest 8,118,300 1,867,443
Receivables 6,354,012 84,713
Prepaid expenses (141,470) (430,304)
Other current assets (824,802) (653,284)
Accounts payable and accrued liabilities (549,659) 1,338,151
Oil and gas sales payable (1,727,050) (44,017)
------------- -------------
Net cash provided by operating activities 50,493,274 19,790,463
------------- -------------
Investing activities:
Additions to oil and gas properties and
furniture and equipment (106,091,449) (13,924,974)
Increase in restricted deposits (544,457) (512,203)
Proceeds from sale of oil and gas properties 33,480,000 -
------------- -------------
Net cash used in investing activities (73,155,906) (14,437,177)
------------- -------------
Financing activities:
Sale of stock 16,924 62,123,504
Borrowings on notes payable 52,500,000 21,000,000
Payments of notes payable (35,604,634) (66,215,526)
Deferred financing costs 331,836 152,196
------------- -------------
Net cash provided by financing activities 17,244,126 17,060,174
------------- -------------
Increase (decrease) in cash and cash
equivalents (5,418,506) 22,413,460
Cash and cash equivalents, beginning of
the period 5,758,978 212,238
------------- -------------
Cash and cash equivalents, end of the period $ 340,472 $ 22,625,698
============= =============
Interest paid during the period $ 231,713 $ 3,176,883
============= =============
The accompanying notes to financial statements are an integral part of these
statements.
4
FLORES & RUCKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. GENERAL INFORMATION
The consolidated financial statements included herein have been prepared by
Flores & Rucks, Inc. (the "Company") without audit and include all
adjustments (of a normal and recurring nature) which are, in the opinion of
management, necessary for the fair presentation of interim results which
are not necessarily indicative of results for the entire year. The
financial statements should be read in conjunction with the consolidated
financial statements and notes thereto included in the Company's latest
annual report.
2. EARNINGS PER SHARE
Earnings per share applicable to common stock are based on the weighted
average number of shares of common stock outstanding for the periods,
including common equivalent shares which reflect the dilutive effect of
stock options granted to certain employees and outside directors on various
dates through March 31, 1997. As of March 31, 1997 and 1996, the Company
had 1,896,602 and 1,498,835 stock options outstanding, respectively. The
table below reflects the weighted average common, primary and fully diluted
shares outstanding for the 1997 and 1996 periods.
THREE MONTHS ENDED
MARCH 31,
---------------------------
1997 1996
------------ ------------
Weighted average common shares
outstanding 19,640,709 15,688,083
Primary common equivalent shares 1,249,415 405,088
------------ ------------
Weighted average common and primary
common equivalent shares outstanding 20,890,124 16,093,171
Additional fully diluted shares - 176,403
------------ ------------
Weighted average common and fully diluted
common equivalent shares outstanding 20,890,124 16,269,574
============ ============
In February, 1997, the Financial Accounting Standards Board issued
Statement No. 128 ("SFAS 128"), "Earnings Per Share", which simplifies the
computation of earnings per share ("EPS"). SFAS 128 is effective for
financial statements issued for periods ending after December 15, 1997, and
requires restatement for all prior period EPS data presented. Pro forma EPS
and EPS assuming dilution calculated in accordance with SFAS 128 was $0.51
per share and $0.48 per share, respectively, for the three months ended
March 31, 1997, and $0.12 per share and $0.12 per share, respectively, for
the three months ended March 31, 1996.
3. HEDGING ACTIVITIES
The Company hedges certain of its production through master swap agreements
("Swap Agreements"). The Swap Agreements provide for separate contracts
tied to the NYMEX light sweet crude oil and natural gas futures contracts.
The Company has contracts which contain specific contracted prices
("Swaps") that are settled monthly based on the differences between the
contract prices and the average NYMEX prices for each month applied to the
related contract volumes. To the extent the average NYMEX price exceeds the
contract price, the Company pays the spread, and to the extent the contract
price exceeds the average NYMEX price the Company receives the spread. In
addition, the Company has combined contracts which have agreed upon price
floors and ceilings ("Costless Collars"). To the extent the average NYMEX
price exceeds the contract ceiling, the Company pays the spread between the
ceiling and the average NYMEX price applied to the related contract
volumes. To the extent the contract floor exceeds the average NYMEX price
the Company receives the spread between the contract floor and the average
NYMEX price applied to the related contract volumes. Under the terms of the
Swap Agreements, each counterparty has extended the Company a $5 million
line of credit for use in conjunction with its hedging activities. As of
May 6, 1997, the fair market value of all contracts covered by the Swap
Agreements was approximately $.1 million.
5
FLORES & RUCKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-(CONTINUED)
As of March 31, 1997, the Company's open forward position on its
outstanding crude oil Swaps was as follows:
AVERAGE
YEAR MBbls PRICE
---- ----- -------
1997 1,425 $ 19.80
1998 300 $ 18.55
1999 300 $ 18.55
2000 300 $ 18.55
----- -------
Total 2,325 $ 19.31
===== =======
The Company currently has no outstanding natural gas Swaps.
As of March 31, 1997, the Company's open forward position on its
outstanding Costless Collars was as follows:
CONTRACTED CONTRACTED CONTRACTED
EFFECTIVE VOLUMES FLOOR CEILING
YEAR FROM THROUGH (MBbls) PRICE PRICE
---- ---- ------- ---------- ---------- ----------
1997 April June 600 $ 20.00 $ 24.25
1997 April June 300 $ 20.00 $ 25.20
1997 April June 75 $ 20.00 $ 24.90
1997 July September 900 $ 20.00 $ 24.40
On March 7, 1997, the Company entered into a basis swap for 9,000 barrels
of oil per month for the period April 1997, through July 1997, with a fixed
price of ($0.11) per barrel basis differential between the monthly calendar
average of Platt's Louisiana Light Sweet and Platt's West Texas
Intermediate crude oil prices.
In addition, on April 7, 1997, the Company entered into a field diesel swap
for 150,000 gallons per month for the month of April 1997, and August 1997
through March 1998, relating to expected future diesel needs. This swap
obligates the Company to make or receive payments on the last day of each
respective calendar month based on the difference between $0.5425 per
gallon and the average of the daily settlement price per gallon for the
respective calendar month Platt's Gulf Coast Pipeline mean high sulfur 2
oil contract.
4. INVESTMENT IN OIL AND GAS PROPERTIES
On January 3, 1997, the Company completed the sale of its interest in the
South Marsh Island 269 field, located in federal waters offshore Louisiana.
The Company realized proceeds of $37.2 million from the sale. The Company
owned a non-operated working interest of approximately 20% in three blocks
in the field. No gain or loss was recognized on the sale.
On March 7, 1997, the Company completed an acquisition of certain interests
in various state leases in the Main Pass Block 69 Field, offshore
Plaquemines Parish, Louisiana for a net purchase price of $55.9 million
(the "Main Pass Acquisition"). The acquisition include interests in 27
producing wells located on 5,898 gross acres situated contiguous to the
Company's pre-existing Main Pass 69 holdings. Following the acquisition,
the Company owns a 100% working interest in the 27 wells.
6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1997
The following table reflects certain information with respect to the Company's
oil and gas operations.
THREE MONTHS ENDED
MARCH 31,
-------------------------
1996 1997
----------- -----------
(DOLLARS IN THOUSANDS,
EXCEPT PER UNIT AMOUNTS)
SALES VOLUMES
Oil (MBbls) 1,558 2,032
Gas (MMcf) 3,310 6,755
Oil and Gas (MBOE) 2,110 3,158
REVENUES/1/
Total Oil Revenues $ 30,005 $ 44,694
Total Gas Revenues 10,672 20,196
AVERAGE SALES PRICES/1/
Oil (per Bbl) $ 19.25 $ 21.99
Gas (per Mcf) 3.22 2.99
Per BOE 19.28 20.55
Severance Taxes $ 2,886 $ 2,672
Lease Operating Expenses 8,446 12,711
Lease Operating Expenses per BOE $ 4.00 $ 4.02
_________________
(1) Excludes results of hedging activities which decreased revenue recognized
in the three months ended March 31, 1996 and 1997, by $3.9 million and $.6
million, respectively. Including the effect of hedging activities, the Company's
average oil price per Bbl received was $18.71 and $21.69 in the three months
ended March 31, 1996 and 1997, respectively. The average gas price per Mcf
received was $2.31 in the three months ended March 31, 1996. The Company did not
enter into any gas hedges in the three months ended March 31, 1997. Also
excluded are revenues relating to plant processing of less than $.1 million for
the three months ended March 31, 1996, and $.2 million for the three months
ended March 31, 1997.
REVENUES. The following table reflects an analysis of differences in the
Company's oil and gas revenues (expressed in thousands of dollars) between the
three months ending March 31, 1997 and the comparable period in 1996:
FIRST QUARTER 1997
COMPARED TO
FIRST QUARTER 1996
------------------
Increase (decrease) in oil and gas revenues
resulting from differences in:
Crude oil and condensate-
Price $ 5,565
Production 9,124
--------
14,689
Natural gas-
Price (1,580)
Production 11,105
--------
9,525
--------
Hedging and other, net 3,434
--------
Increase in oil and gas revenues $ 27,648
========
7
The Company's total revenues increased approximately $27.6 million, or 75%, to
$64.5 million for the three months ended March 31, 1997, from $36.8 million for
the comparable period in 1996. Production levels for the three months ended
March 31, 1997, increased 50% to 3,158 MBOE from 2,110 MBOE for the comparable
period in 1996. The Company's average sales prices (excluding hedging
activities) for oil and natural gas for the three months ended March 31, 1997
were $21.99 per Bbl and $2.99 per Mcf versus $19.25 per Bbl and $3.22 per Mcf in
the prior period. Revenues increased by $20.2 million due to the aforementioned
production increases and by $4.0 million as a result of increased oil and gas
prices. The increases for the three months ended March 31, 1997, included
additional production of 576 MBOE and related revenues of $11.6 million
associated with the acquisition of certain interests in certain oil and gas
producing fields and related production facilities primarily situated in the
shallow federal waters of the central Gulf of Mexico, offshore Louisiana (the
"Central Gulf Properties") on September 26, 1996. For the three months ended
March 31, 1997, the Company's total revenues were further affected by a $3.3
million increase relating to hedging activities. In order to manage its
exposure to price risks in the sale of its crude oil and natural gas, the
Company from time to time enters into price hedging arrangements. See "--Other
Matters - Energy Swap Agreements." The Company's average sales prices
(including hedging activities) for oil for the three months ended March 31,
1997, were $21.69 per Bbl versus $18.71 per Bbl in the prior year period. The
average sales price (including hedging activities) for gas for the three months
ended March 31, 1996, was $2.31 per Mcf. No gas volumes were hedged in the
three months ended March 31, 1997.
LEASE OPERATING EXPENSES. On a BOE basis, lease operating expenses remained
relatively unchanged at $4.02 per BOE for the three months ended March 31, 1997
from $4.00 per BOE in the comparable 1996 period. For the three months ended
March 31, 1997, lease operating expenses were $12.7 million, as compared to $8.4
million in the comparable 1996 period. This increase partially results from
fluctuations in operating expenses associated with increased production and an
increase of approximately $3.2 million relating to lease operating expenses
associated with the newly acquired Central Gulf Properties. In addition,
workover expenses for the three months ended March 31, 1997, increased by $.6
million to $1.7 million, as compared to $1.1 million in the comparable 1996
period.
SEVERANCE TAXES. The effective severance tax rate as a percentage of oil and
gas revenues (excluding the effect of hedging activities) decreased to 4.1% for
the three months ended March 31, 1997, from 7.1% in the comparable period in
1996. The decrease was primarily due to increased production from new wells on
federal leases, including wells located on the Central Gulf Properties, and from
state leases which were exempt from state severance tax under Louisiana's
severance tax abatement program.
GENERAL AND ADMINISTRATIVE EXPENSES. For the three months ended March 31, 1997,
general and administrative expenses were $4.4 million as compared to $3.3
million in the comparable 1996 period. This increase is primarily due to costs
associated with increased corporate staffing associated with both an increase
in drilling activities and the Company's acquisition of the Central Gulf
Properties and an increase in franchise taxes, partially offset in the 1997
period by an increase in the capitalization of a portion of the salaries paid to
employees directly engaged in the acquisition, exploration and development of
oil and gas properties.
DEPRECIATION, DEPLETION, AND AMORTIZATION EXPENSE. For the three months ended
March 31, 1997, depreciation, depletion and amortization ("DD&A") expense was
$22.9 million as compared to $14.4 million in the comparable 1996 period. On a
BOE basis, DD&A for the three months ended March 31, 1997, was $7.25 per BOE as
compared to $6.80 per BOE for the three months ended March 31, 1996. This
variance can primarily be attributed to (i) the Company's increased production
and related current and future capital costs from the 1996 and 1997 drilling
programs and (ii) the Company's purchase of the Central Gulf Properties,
partially offset by the increase to proved reserves resulting from such drilling
programs and the acquisition.
INTEREST EXPENSE. For the three months ended March 31, 1997, interest expense
increased to $6.5 million from interest expense of $4.5 million in the
comparable 1996 period. This increase in interest expense can primarily be
attributed to interest expense of approximately $3.9 million in the three
months ended March 31, 1997, relating to the issuance of $160,000,000 of 9 3/4%
Senior Subordinated Notes due 2006 (the "Senior Subordinated Notes") on
September 26, 1996, partially offset by increases in the amount of interest
capitalized in the 1997 period, resulting from an increase in the Company's
unevaluated assets, including additional seismic data and acreage.
INCOME TAX EXPENSE. For the three months ended March 31, 1997, the Company
recorded income tax expense of $6.0 million, as compared to $1.2 million in the
1996 period.
8
NET INCOME. Due to the factors described above, net income increased to $9.9
million for the three months ended March 31, 1997, from $1.9 million for the
comparable period in 1996.
LIQUIDITY AND CAPITAL RESOURCES
The following summary table reflects comparative cash flows for the Company for
the three months ended March 31, 1996 and 1997:
THREE MONTHS ENDED
MARCH 31,
------------------
1996 1997
-------- --------
(IN THOUSANDS)
Net cash provided by operating activities $ 19,790 $ 50,493
Net cash used in investing activities (14,437) (73,156)
Net cash provided by financing activities 17,060 17,244
For the three months ended March 31, 1997, net cash provided by operating
activities increased by $30.7 million. This increase relates primarily to
increased revenues, partially offset by increases in lease operating expenses
and general and administrative expenses. In addition, timing differences on
certain receivable and payable balances affect cash provided by operating
activities at any period end.
Cash used in investing activities during the three months ended March 31, 1997,
increased to $73.2 million as compared to $14.4 million in the comparable 1996
period. This increase is primarily a result of the Company's Main Pass
Acquisition for a net purchase price of approximately $55.9 million, as well as
increased drilling activity in the 1997 period, partially offset by the sale of
the Company's interest in the South Marsh Island 269 field which generated cash
of $33.5 million in the 1997 period.
Financing activities during the three months ended March 31, 1997, generated
cash of $17.2 million, as compared to $17.1 million in the comparable 1996
period. The increase in cash during the 1997 period was primarily a result of a
$17.0 million increase in net borrowings on the Company's $150 million amended
and restated senior revolving bank credit facility dated March 27, 1997 (the
"Revolving Credit Facility"). The cash generated in the comparable 1996 period
was the result of the issuance of 4.5 million shares of common stock at $14.75
per share on March 19, 1996, of which the Company's net proceeds were
approximately $62.2 million, partially offset by the repayment of debt in the
1996 period totaling $48.4 million.
CAPITAL REQUIREMENTS. The Company's expenditures for property acquisition,
exploration and development for the three months ended March 31, 1996 and 1997,
were as follows:
THREE MONTHS ENDED
MARCH 31,
------------------
1996 1997
-------- --------
(IN THOUSANDS)
Property acquisition costs of evaluated properties $ - $ 50,639
Property acquisition costs of unevaluated properties 1,082 8,942
Exploration costs (drilling and completion) 5,269 11,521
Development costs (drilling and completion) 10,878 27,834
Abandonment costs 140 134
Geological and geophysical costs 422 8,637
Capitalized interest and general and
administrative costs 1,245 3,222
Other capital costs 2,516 7,476
-------- --------
$ 21,552 $118,405
======== ========
A primary component of the Company's strategy is to continue its exploration and
development activities. The Company intends to finance capital expenditures
related to this strategy primarily with funds provided by operations and
borrowings under the Revolving Credit Facility. During the three months ended
March 31, 1997, the Company spent $39.4 million on exploration and development
drilling and $8.6 million on 3-D seismic surveys and other geological and
geophysical costs. Included in property acquisition costs in the three months
ended March 31, 1997 is the $55.9 million net purchase price of the Main Pass
Acquisition. Of the total net purchase price for the Main
9
Pass Acquisition, approximately $50.5 million was allocated to evaluated
properties and $5.4 million was allocated to unevaluated properties. Included in
other capital costs for the three months ended March 31, 1997, is $6.9 million,
which relates primarily to capital costs incurred to install and upgrade
production facilities and flowlines. The Company is also a party to two escrow
agreements which provide for the future plugging and abandonment costs
associated with oil and gas properties. The first agreement, related to East
Bay, requires monthly deposits of $100,000 through June 30, 1998, and $350,000
thereafter until the balance in the escrow account equals $40 million, unless
the Company commits to the plug and abandonment of a certain number of wells in
which case the increase will be deferred. The second agreement, related to Main
Pass 69, required an initial deposit of $250,000 and monthly deposits thereafter
of $50,000 until the balance in the escrow account equals $7,500,000. As of
March 31, 1997, the escrow balances totaled $6.9 million.
In addition to developing its existing reserves, the Company will continue to
attempt to increase its reserve base, production and operating cash flow by
engaging in strategic acquisitions of oil and gas properties. In order to
finance any such possible future acquisitions, the Company may seek to obtain
additional debt or equity financing. The availability and attractiveness of
these sources of financing will depend upon a number of factors, including the
financial condition and performance of the Company, as well as prevailing
interest rates, oil and gas prices and other market conditions. There can be no
assurance that the Company will acquire any additional producing properties. In
addition, the ability of the Company to incur additional indebtedness and grant
security interests with respect thereto will be subject to the terms of the
Indentures (as defined herein).
The Company had budgeted $200 million for 1997 drilling activities and an
additional $50 million for other direct capital expenditures including lease
acquisitions and seismic purchases. In addition, on March 7, 1997, the Company
completed the Main Pass Acquisition for a net purchase price of $55.9 million.
The Company's other primary capital requirements for the remainder of 1997 will
be for the payment of interest of approximately $16.9 million on its
$125,000,000 of 13 1/2% Senior Notes due 2004 (the "Senior Notes"), interest of
$15.6 million on its Senior Subordinated Notes and interest on any borrowings
the Company may incur under the Revolving Credit Facility. The Company expects
to fund its current debt service obligations with operating cash flow.
LIQUIDITY. The ability of the Company to satisfy its obligations and fund
planned capital expenditures will be dependent upon its future performance,
which will be subject to prevailing economic conditions, including oil and gas
prices, and to financial and business conditions and other factors, many of
which are beyond its control, supplemented with existing cash balances and if
necessary, borrowings under the Revolving Credit Facility. The Company expects
that its cash flow from operations, existing cash balances and availability
under the Revolving Credit Facility will be adequate to execute the remainder of
its 1997 business plan. However, no assurance can be given that the Company will
not experience liquidity problems from time to time in the future or on a
long-term basis. If the Company's cash flow from operations, existing cash
balances and availability under the Revolving Credit Facility are not sufficient
to satisfy its cash requirements, there can be no assurance that additional debt
or equity financing will be available to meet its requirements.
The Revolving Credit Facility currently has a borrowing base of $100 million.
The lenders may redetermine the borrowing base at their option once within any
12-month period as well as on scheduled redetermination dates as outlined in the
Revolving Credit Facility. The Revolving Credit Facility terminates on
March 27, 2000, unless the Company requests and is granted a one-year deferral
of such termination.
Under the terms of the Revolving Credit Facility, the Company is required to
comply with certain financial tests which may reduce the $100 million borrowing
base. Currently, the Company does not believe that these financial tests will
reduce the borrowing base. As of May 6, 1997, the Company's outstanding
balance on its Revolving Credit Facility was $38.5 million, including letters of
credit of $2.0 million primarily associated with bonding for future abandonment
obligations. The Company had remaining availability of $61.5 million under the
Revolving Credit Facility as of May 6, 1997.
EFFECTS OF LEVERAGE. The Company is highly leveraged with outstanding long-term
debt of approximately $301.2 million as of March 31, 1997. The Company's level
of indebtedness has several important effects on its future operations,
including (i) a substantial portion of the Company's cash flow from operations
must be dedicated to the payment of interest on its indebtedness and will not be
available for other purposes, (ii) the covenants contained in the Indentures
require the Company to meet certain financial tests, and other restrictions
which may limit its ability to borrow additional funds or to dispose of assets
and may affect the Company's flexibility in planning for, and reacting
10
to, changes in its business, including possible acquisition activities and (iii)
the Company's ability to obtain additional financing in the future for working
capital, expenditures, acquisitions, general corporate purposes or other
purposes may be impaired.
The Company is required to make semi-annual interest payments of approximately
$8.4 million on its Senior Notes each June 1 and December 1 through the year
2004 and semi-annual interest payments of $7.8 million on it Senior Subordinated
Notes each April 1 and October 1 through the year 2006. In addition, the
Company is required to make quarterly interest payments on the Revolving Credit
Facility based on outstanding borrowings for the quarterly period. The Company
may also, at its discretion, make principal payments on the Revolving Credit
Facility.
Pursuant to the indenture governing the Senior Notes (the "Senior Notes
Indenture"), the Company may not incur any Indebtedness other than Permitted
Indebtedness (as defined in the Senior Notes Indenture) unless the Company's
Consolidated Fixed Charge Coverage Ratio (as defined in the Senior Notes
Indenture) for the four full fiscal quarters preceding the proposed new
Indebtedness is greater than 2.75 to 1.0 (3.0 to 1.0 if the indebtedness is
incurred after December 1, 1997) after giving pro forma effect to the proposed
new Indebtedness, the application of such Indebtedness and other significant
transactions during the period. In addition, the Company's Adjusted
Consolidated Net Tangible Assets (as defined in the Senior Notes Indenture) must
be greater than 150% of Indebtedness after giving effect to the proposed new
Indebtedness and related transactions. If the ratio of Adjusted Consolidated
Net Tangible Assets to Indebtedness excluding Subordinated Indebtedness (as
defined in the Senior Notes Indenture) falls below 110%, the Company may be
required to buy back a portion of the Senior Notes. Pursuant to the indenture
governing the Senior Subordinated Notes (the "Senior Subordinated Notes
Indenture" and, together with the Senior Notes Indenture, the "Indentures"), the
Company may not incur any Indebtedness other than Permitted Indebtedness (as
defined in the Senior Subordinated Notes Indenture) unless the Company's
Consolidated Fixed Charge Coverage Ratio (as defined in the Senior Subordinated
Notes Indenture) for the four full fiscal quarters preceding the proposed new
Indebtedness is greater than 2.5 to 1.0 after giving pro forma effect to the
proposed new Indebtedness, the application of the proceeds of such Indebtedness
and other significant transactions during the period.
In accordance with the terms of the Indentures, if the Company disposes of oil
and gas assets, it must apply such proceeds to permanently pay down certain
indebtedness or within a specified time from the date of the asset sale,
purchase additional oil and gas assets. If proceeds not applied as indicated
above exceed $10 million ($15 million with respect to the Senior Subordinated
Notes), the Company shall be required to offer to purchase outstanding Senior
Notes and Senior Subordinated Notes or other pari passu indebtedness in an
amount equal to the unapplied proceeds.
The Company believes it is currently in compliance with all covenants contained
in the Indentures and has been in compliance since the issuance of the Senior
Notes and the Senior Subordinated Notes.
The Company's ability to meet its debt service obligations and to reduce its
total indebtedness will be dependent upon the Company's future performance,
which will be subject to oil and gas prices, general economic conditions and to
financial, business and other factors affecting the operations of the Company,
many of which are beyond its control. There can be no assurance that the
Company's future performance will not be adversely affected by such economic
conditions and financial, business and other factors.
OTHER MATTERS
ENERGY SWAP AGREEMENTS. The Company hedges certain of its production through
master swap agreements ("Swap Agreements"). The Swap Agreements provide for
separate contracts tied to the NYMEX light sweet crude oil and natural gas
futures contracts. The Company has contracts which contain specific contracted
prices ("Swaps") that are settled monthly based on the differences between the
contract prices and the average NYMEX prices for each month applied to the
related contract volumes. To the extent the average NYMEX price exceeds the
contract price, the Company pays the spread, and to the extent the contract
price exceeds the average NYMEX price the Company receives the spread. In
addition, the Company has combined contracts which have agreed upon price floors
and ceilings ("Costless Collars"). To the extent the average NYMEX price
exceeds the contract ceiling, the Company pays the spread between the ceiling
and the average NYMEX price applied to the related contract volumes. To the
extent the contract floor exceeds the average NYMEX price the Company receives
the spread between the contract floor and the
11
average NYMEX price applied to the related contract volumes. Under the terms of
the Swap Agreements, each counterparty has extended the Company a $5 million
line of credit for use in conjunction with its hedging activities. As of May 6,
1997, the fair market value of all contracts covered by the Swap Agreements was
approximately $.1 million.
As of March 31, 1997, the Company's open forward position on its outstanding
crude oil Swaps was as follows:
AVERAGE
YEAR MBbls PRICE
---- ----- -------
1997 1,425 $ 19.80
1998 300 $ 18.55
1999 300 $ 18.55
2000 300 $ 18.55
----- -------
2,325 $ 19.31
===== =======
The Company currently has no outstanding natural gas Swaps.
As of March 31, 1997, the Company's open forward position on its outstanding
Costless Collars was as follows:
CONTRACTED CONTRACTED CONTRACTED
EFFECTIVE VOLUMES FLOOR CEILING
YEAR FROM THROUGH (MBbls) PRICE PRICE
---- ---- ------- ---------- ---------- ----------
1997 April June 600 $ 20.00 $ 24.25
1997 April June 300 $ 20.00 $ 25.20
1997 April June 75 $ 20.00 $ 24.90
1997 July September 900 $ 20.00 $ 24.40
On March 7, 1997, the Company entered into a basis swap for 9,000 barrels of oil
per month for the period April, 1997, through July, 1997, with a fixed price of
($0.11) per barrel basis differential between the monthly calendar average of
Platt's Louisiana Light Sweet and Platt's West Texas Intermediate crude oil
prices.
In addition, on April 7, 1997, the Company entered into a field diesel swap for
150,000 gallons per month for the month of April 1997, and August 1997 through
March 1998, relating to expected future diesel needs. This swap obligates the
Company to make or receive payments on the last day of each respective calendar
month based on the difference between a specified price of $0.5425 per gallon
and the average of the daily settlement price per gallon for the respective
calendar month Platt's Gulf Coast Pipeline mean high sulfur 2 oil contract.
As a result of hedging activity under the Swap Agreement, on a BOE basis, the
Company estimates that approximately 26% of its estimated remaining 1997
production which is classified as proved reserves as of March 31, 1997, will not
be subject to price fluctuation for 1997.
Currently, it is the Company's intention to commit no more than 50% of its total
annual production on a BOE basis to such arrangements. Moreover, under the
Revolving Credit Facility, the Company is prohibited from committing more than
80% of its production estimates for the next 24 months to such arrangements at
any point in time. As the current swap agreements expire, the portion of the
Company's oil and natural gas production which is subject to price fluctuations
will increase significantly, unless the Company enters into additional hedging
transactions.
Despite the measures taken by the Company to attempt to control price risk, the
Company remains subject to price fluctuations for natural gas and oil sold in
the spot market. Prices received for natural gas sold on the spot market are
volatile due primarily to seasonality of demand and other factors beyond the
Company's control. Domestic oil prices generally follow worldwide oil prices
which are subject to price fluctuations resulting from changes in world supply
and demand. While the price the Company receives for its oil and natural gas
production has significant financial impact on the Company, no prediction can be
made as to what price the Company will receive for its oil and natural gas
production in the future.
12
GAS BALANCING. It is customary in the industry for various working interest
partners to produce more or less than their entitlement share of natural gas
from time to time. The Company's net overproduced position on its properties
decreased from 2,059,954 Mcf at December 31, 1996, to 1,038,258 Mcf at
March 31, 1997. This decrease is primarily the result of the Company's Main Pass
Acquisition. During the make-up period for the remaining imbalance, the
Company's gas revenues will be adversely affected, minimized by an unjust
enrichment clause contained in the gas balancing agreement. The Company
recognizes revenue and imbalance obligations under the sales method of
accounting.
CERTAIN STATEMENTS IN THIS FORM 10-Q REGARDING FUTURE EXPECTATIONS AND PLANS FOR
OIL AND GAS EXPLORATION, DEVELOPMENT, PRODUCTION AND ACQUISITIONS MAY BE
REGARDED AS "FORWARD LOOKING STATEMENTS" WITHIN THE MEANING OF THE SECURITIES
LITIGATION REFORM ACT. THEY ARE SUBJECT TO VARIOUS RISKS, SUCH AS OPERATING
HAZARDS, DRILLING RISKS, AND THE INHERENT UNCERTAINTIES IN INTERPRETING
ENGINEERING DATA RELATING TO UNDERGROUND ACCUMULATIONS OF OIL AND GAS, AS WELL
AS OTHER RISKS DISCUSSED IN DETAIL IN THE COMPANY'S SEC FILINGS, INCLUDING THE
ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1996. ACTUAL RESULTS
MAY VARY MATERIALLY.
13
FLORES & RUCKS, INC.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes 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
[A] Exhibits
10.1 Amended and Restated Credit Agreement among FRI Louisiana
and certain lenders in the amount of $150,000,000, dated
March 27, 1997
10.2 First Amendment and Supplement to Mortgage, Assignment of
Production, Security Agreement and Financing Statement by
FRI Louisiana, dated March 27, 1997
10.3 Amended and Restated Guaranty Agreement by the Company in
favor of certain lenders dated March 27, 1997
27.1 Financial Data Schedule
[B] Reports on Form 8-K
None
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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.
Signature Title Date
--------- ----- ----
/s/ James C. Flores Chairman and Chief Executive Officer May 15, 1997
______________________
James C. Flores
/s/ Robert L. Belk Senior Vice President, Chief Financial May 15, 1997
______________________ Officer and Director (Principal Financial
Robert L. Belk and Accounting Officer)
15