SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
COMMISSION FILE NUMBER: 0-22076
ZYDECO ENERGY, INC.
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of incorporation or organization)
76-0404904
(I.R.S. Employer Identification No.)
1710 TWO ALLEN CENTER, 1200 SMITH STREET
HOUSTON, TEXAS
(Address of principal executive offices)
77002
(Zip Code)
(713) 659-2222
(Registrant's telephone number, including area code)
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
--- ---
As of October 31, 1998, there were 10,357,096 shares of Zydeco Energy, Inc.
Common Stock, $.001 par value, issued and outstanding.
1
FORM 10-Q
TABLE OF CONTENTS
Page
Number
------
Part I. Financial Information
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Operations 4
Condensed Consolidated Statements of Cash Flows 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
Part II. Other Information and Signatures
Items 1. to 6. 13
Signatures 14
2
PART I. - FINANCIAL INFORMATION
ITEM 1.
ZYDECO ENERGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
SEPTEMBER 30, 1998 DECEMBER 31, 1997
------------------ -----------------
ASSETS
CURRENT ASSETS
Cash and Cash Equivalents $ 2,012,161 $ 12,200,306
Receivables 1,031,067 254,481
Prepaid Expenses and Other Assets 193,199 1,028,515
----------- ----------
TOTAL CURRENT ASSETS 3,236,427 13,483,302
----------- ----------
Oil & Gas Properties, using successful
efforts method of accounting
Proved Properties 334,972 334,972
Unproved Properties 6,151,008 27,600
Equipment and Software, at cost 2,354,505 2,254,139
----------- ----------
8,840,485 2,616,711
Less: Accumulated Depreciation,
Depletion and Amortization (2,022,551) (1,667,021)
----------- ----------
6,817,934 949,690
----------- ----------
Investment in Wavefield Imaging Technology 903,416 933,409
Operating Bond and Other Assets 314,596 310,049
----------- ----------
TOTAL ASSETS $ 11,272,373 $15,676,450
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts Payable $ 418,676 $ 436,941
Accrued Liabilities 235,109 52,541
----------- ----------
TOTAL CURRENT LIABILITIES 653,785 489,482
----------- ----------
STOCKHOLDERS' EQUITY
Common Stock, Par Value
$.001 Per Share; 50,000,000 Shares
Authorized; 11,338,351 and
11,318,351 Shares Issued; 10,357,096
and 10,537,096 Shares Outstanding, Respectively 11,338 11,318
Additional Paid-In Capital 24,531,668 24,499,688
Accumulated Deficit (13,488,166) (9,316,786)
Less: Treasury Stock, at
Cost; 981,255 and 781,255 Shares
at September 30, 1998 and December 31, 1997,
Respectively (436,252) (7,252)
----------- ----------
TOTAL STOCKHOLDERS' EQUITY 10,618,588 15,186,968
----------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 11,272,373 $15,676,450
=========== ==========
The accompanying notes are an integral part of these financial statements.
3
ZYDECO ENERGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------- -------------------------------
1998 1997 1998 1997
--------------- -------------- ------------- ------------
REVENUES
Oil and Gas Sales $ 75,988 $ 214,542 $ 313,634 $ 845,865
Gain on Sales of Properties 37,000 223,335 37,000 223,335
Other 34,125 - 34,125 -
--------------- -------------- ------------- ------------
147,113 437,877 384,759 1,069,200
EXPENSES
Exploration 646,068 1,884,554 1,926,588 3,748,222
Production 2,690 5,193 12,321 14,617
Research and Development 101,548 49,844 319,855 49,844
Depreciation, Depletion and Amortization 123,030 174,162 397,458 490,855
General and Administrative 873,034 364,411 2,177,416 1,169,300
--------------- -------------- ------------- ------------
1,746,370 2,478,164 4,833,638 5,472,838
--------------- -------------- ------------- ------------
OPERATING LOSS (1,599,257) (2,040,287) (4,448,879) (4,403,638)
OTHER INCOME (EXPENSE)
Interest Income and Expense, net 40,823 83,709 277,499 180,043
--------------- -------------- ------------- ------------
40,823 83,709 277,499 180,043
--------------- -------------- ------------- ------------
NET LOSS $ (1,558,434) $(1,956,578) $(4,171,380) $(4,223,595)
=============== ============== ============= ============
PER COMMON SHARE -
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING (BASIC AND DILUTED) 10,357,096 8,171,184 10,367,777 7,123,423
=============== ============== ============= ============
NET LOSS PER COMMON SHARE
(BASIC AND DILUTED) $ (0.15) $ (0.24) $ (0.40) $ (0.59)
=============== ============== ============= ============
The accompanying notes are an integral part of these financial statements.
4
ZYDECO ENERGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------------
1998 1997
--------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $ (4,171,380) $(4,223,595)
Adjustments to Reconcile Net Loss to Net Cash
Provided by (Used in) Operating Activities:
Depreciation, Depletion and Amortization 397,459 490,855
Gain on sales of properties (37,000) (223,335)
Exploration Costs 1,926,588 3,748,222
Changes in Operating Assets and Liabilities 760,576 183,676
---------- ----------
Net Cash Used in Operating Activities (1,123,757) (24,177)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net Change in Exploration Obligations/Receivables $ (536,254) $(3,929,185)
Exploration Costs (1,684,043) (1,327,905)
Proceeds from (Investment in) Marketable Securities - 845,852
Purchases of Equipment and Software (441,318) (377,712)
Additions to Oil and Gas Properties (6,031,969) (9,747)
Distributions to exploration partner - (2,174,054)
Proceeds from the sales of properties 37,000 373,335
Other (7,962) (25,272)
---------- ----------
Net Cash Used in Investing Activities (8,664,546) (6,624,688)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Acquisition of Treasury Stock $ (429,000) $ -
Proceeds from Common Stock Issuances and Other 29,158 13,942,848
---------- ----------
Net Cash Used in Financing Activities (399,842) 13,942,848
---------- ----------
Net Increase (Decrease) in Cash and Cash Equivalents $(10,188,145) $ 7,293,983
Cash and Cash Equivalents at Beginning of Period 12,200,306 6,906,650
---------- ----------
Cash and Cash Equivalents at End of Period $ 2,012,161 $14,200,633
========== ==========
Cash Paid During the Period for:
Interest $ - $ 12,962
Income Taxes $ - $ -
The accompanying notes are an integral part of these financial statements.
5
ZYDECO ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. PREPARATION OF INTERIM FINANCIAL STATEMENTS.
The accompanying unaudited condensed consolidated financial statements of
Zydeco Energy, Inc. and its wholly owned subsidiaries have been prepared by the
Company without audit pursuant to the rules and regulations of the Securities
and Exchange Commission. In the opinion of management, all adjustments,
consisting only of normal recurring adjustments necessary to present fairly the
financial position as of September 30, 1998 and December 31, 1997, the results
of operations for the three month and nine-month periods ended September 30,
1998 and 1997 and the statements of cash flows for the nine-month periods then
ended have been included. 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, although management believes that the disclosures are adequate to
make the information presented not misleading. Interim period results are not
necessarily indicative of the results to be achieved for an entire year. These
consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes to consolidated financial statements
included in the Company's Annual Report on Form 10-K for the year ended December
31, 1997. As used herein, unless the context indicates otherwise, the term
"Company" refers to Zydeco Energy, Inc. and its wholly owned subsidiaries.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Reclassifications. Certain reclassifications of prior period amounts have
been made to conform to current presentation.
Forward-looking Statements. When used in this document, the words
"anticipate", "believe", "expect", "estimate", "project" and similar expressions
are intended to identify forward-looking statements. Such statements are
subject to certain risks, uncertainties and assumptions. Should one or more of
these risks or uncertainties materialize, or should underlying assumptions prove
incorrect, actual results may vary materially from those anticipated, believed,
expected, estimated or projected.
2. CHENIERE LITIGATION
On April 17, 1998, Zydeco Exploration, Inc., a wholly owned subsidiary of
the Company, filed a petition with the American Arbitration Association for
arbitration in order to resolve certain disputes that arose with Cheniere
Energy, Inc. and Cheniere Energy Operating Co., Inc. ("Cheniere"). Cheniere is
a party to an exploration agreement with Zydeco Exploration, Inc. covering the
Company's West Cameron Seismic Project, located in western Cameron Parish,
Louisiana. Under this exploration agreement, Cheniere may receive up to 50%
interest in leases acquired in the project area by the Company provided it meets
certain funding obligations, including payment of certain seismic costs and its
share of leasehold acquisition and related costs. The arbitration claim sought
to resolve differences over Cheniere's funding obligations, the parties' current
ownership interests in various leases and prospects, the scope of pre-drilling
activities that Cheniere can conduct within the Project Area, the dissemination
by Cheniere of confidential seismic data covering the Project Area, and a
variety of related issues. Cheniere filed a counterclaim in the arbitration
action, and the pleadings have been amended to include Zydeco Energy, Inc., as
well as Zydeco Exploration, Inc. The parties are seeking conflicting
declaratory and injunctive relief and damages from each other. The final
hearing phase of the arbitration commenced on October 19, 1998 before a panel of
three arbitrators. Closing arguments were heard on October 30, 1998, but the
6
arbitration has not yet concluded. The Company expects the panel to render
their decision during the 1998 fourth quarter.
On April 22, 1998, Zydeco Energy, Inc. and Zydeco Exploration, Inc.
(collectively "Zydeco"), initiated a civil suit in state district court in
Harris County, Texas against two individuals who are parties to confidentiality
agreements with Zydeco and who currently are employees of Cheniere. Through
this litigation, Zydeco sought and obtained a Temporary Restraining Order on
April 22, 1998, restraining the individuals from breaching the terms of their
confidentiality agreements with Zydeco. Cheniere intervened in the litigation
on April 27, 1998. On May 4, 1998, Zydeco, Cheniere and the two individuals
agreed to the entry of an Agreed Temporary Injunction. The Agreed Temporary
Injunction expired on June 15, 1998, and the dispute which led to the filing of
this civil suit has been included in the arbitration action by agreement of the
parties, and will be resolved in that forum.
3. CAPITAL RESOURCES
The Company has generated funds from public and private equity offerings,
cash flow from the Company's operations, and cash payments made to it under
exploration agreements. The Company does not maintain any credit facilities.
The company may in the future explore the possibility of obtaining such a
facility in the event the Company increases oil and gas production through the
successful completion of oil and gas wells drilled by the Company. The Company
expects that capital needs for the remainder of 1998 will be satisfied primarily
through cash on hand. The Company anticipates that capital needs during 1999
will be satisfied by cash on hand, cash sales of interests in prospects or
interests in its West Cameron Seismic Project, and, as discussed in "Cheniere
Litigation", payments for billed items to Cheniere sought in arbitration.
Additional capital needs may be met through additional issuances of equity
securities, including the exercise of outstanding warrants and options of the
Company.
4. ACQUISITION OF TREASURY SHARES
On January 15, 1998, the Company executed a termination agreement with a
former employee of the Company. Pursuant to the terms of the termination
agreement, the Company purchased 200,000 shares of the Company's common stock at
the then current price of $2.125 per share from a trust established for the
benefit of the former employee's descendants and assigned to the former employee
a 1/2% of 8/8ths overriding royalty interest in certain Company-owned leases.
These leases were non-productive at the date of assignment. No overriding
royalty interest was assigned to leases in connection with the Company's West
Cameron Seismic Project.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Formed in December 1995, the Company is an independent oil and gas
exploration company engaged in acquiring leases, drilling and producing reserves
utilizing focused geologic concepts and advanced 3D seismic and computer-aided
exploration (CAEX) technology, including enhanced structural and stratigraphic
depth imaging and attribute analysis. The Company has developed comprehensive
in-house technology, software and expertise enabling it to use the most recent
advances in such 3D seismic and CAEX technology. Currently, the Company's
efforts are focused primarily in the Louisiana Transition Zone, a narrow trend
paralleling the coastline of Louisiana. This trend is approximately six miles
wide (three miles on either side of the beach) and extends about 300 miles from
the Sabine River eastward to the Mississippi River.
During 1996, the Company negotiated seismic options covering
approximately 37,000 gross acres (33,000 net acres) and secured other seismic
permits covering approximately 171,000 gross acres (170,000 net acres) in the
Louisiana Transition Zone. At the core of this project, named the West Cameron
Seismic
7
Project ("Project") was a 51,000-acre exclusive seismic permit obtained from the
State of Louisiana. Pursuant to the terms of the State of Louisiana permit, the
state is required to keep the information obtained from the survey confidential
for a period of ten years. The Company commenced seismic data acquisition for
this Project over approximately 230 square miles during the second half of 1996
and completed this phase in July 1997. The seismic processing and interpretive
phases of this Project immediately commenced during mid 1997 and have continued
throughout 1998. Processing of seismic data was completed early in the 1998
fourth quarter. For the Project's initial leasing phase, the major portion of
lease acquisitions occurred during the 1998 second quarter. The Company has
acquired more than 12,000 gross acres in this initial leasing phase through
State of Louisiana lease sales, private land negotiations and a Federal lease
sale. For the near term, the Company intends to continue marketing its prospects
with a view of selling an interest in such prospects or an interest in the
Project to industry participants. The Company believes that the interpretive
phase of this Project will continue well into 1999 and that it will continue to
evaluate its participation in future federal and state competitive bid lease
sales during 1999.
In April 1996, the Company executed the Cheniere Exploration Agreement with
Cheniere Energy Operating Co., Inc. ("Cheniere"), formerly known as FX Energy,
Inc., for the West Cameron Seismic Project, covering an area of land and waters
in western Cameron Parish, Louisiana, including the area covered by the seismic
permits described above. In exchange for earning a 50% interest, Cheniere
agreed to fund the costs of seismic acquisition and processing up to $13.5
million and 50% of such costs in excess of $13.5 million. Such costs include
the purchase of seismic permits, the cost of lease options on the related
onshore acreage of the West Cameron Seismic Project, the purchase of other 3D
seismic data, and data acquisition and processing of a 3D seismic survey of the
onshore and offshore areas. Pursuant to the terms of the Cheniere Exploration
Agreement, as of September 30, 1998 the Company had incurred third party and
processing costs in connection with the West Cameron Seismic Project aggregating
approximately $21,417,819, net of interest earned of $49,228 on the unused
project funds and $46,000 for a reimbursement of seismic costs. Cheniere's and
Zydeco's share of these costs under this agreement was approximately $17,411,534
and $4,006,285, respectively. The Company's portion of geological and
geophysical costs is expensed as exploration expense. Billings to Cheniere for
their estimated share of such costs net of credits amounted to $984,534 as of
September 30, 1998. Such net billings had not been paid as of October 31, 1998,
and are being sought in the pending arbitration proceeding.
The arbitration claim filed by the Company on April 17, 1998, as amended,
seeks to resolve certain disputes under the Cheniere Exploration Agreement,
including funding obligations, the parties' current ownership interests in
various leases and prospects, the scope of pre-drilling activities that Cheniere
can conduct within the Project Area, the dissemination by Cheniere of
confidential seismic data covering the Project Area, and a variety of related
issues. The parties are seeking conflicting declaratory and injunctive relief
and damages from each other. The arbitration hearing commenced on October 19,
1998 before a panel of three arbitrators. The Company expects the panel to
render their decision during the 1998 fourth quarter. On April 22, 1998, Zydeco
initiated a civil action in state district court in Harris County, Texas,
against two individuals who are parties to confidentiality agreements with
Zydeco and who are currently employed by Cheniere. Through this litigation, the
Company sought and obtained a Temporary Restraining Order on April 22, 1998,
enjoining the individuals from breaching the terms of their confidentiality
agreements with the Company. On April 27, 1998, Cheniere Energy, Inc.
intervened in the state district court litigation. On May 4, 1998, the Company,
Cheniere and the two individuals agreed to the filing of an Agreed Temporary
Injunction. The Agreed Temporary Injunction expired on June 15, 1998, and the
dispute which led to the filing of this civil suit has been included in the
arbitration action by agreement of the parties, and will be resolved in that
forum.
The Company accounts for its oil and gas exploration and production
activities using the successful efforts method of accounting. Under this
method, acquisition costs for proved and unproved properties are capitalized
when incurred. Exploration costs, including geological and geophysical costs
and the costs of carrying and retaining unproved properties, are expensed.
Exploratory drilling costs are initially capitalized, but charged to expense if
and when the well is determined not to have found proved reserves. Costs of
productive wells, developmental dry holes, and productive leases are capitalized
and amortized on a property-by-property basis using the units-of-production
method. The estimated costs of future plugging, abandonment, restoration, and
dismantlement are considered as a component of the calculation of depreciation,
depletion, and amortization. Unproved properties with significant acquisition
8
costs are assessed periodically on a property-by-property basis and any
impairment in value is charged to expense.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1997
The Company recorded a loss of $1,558,434, or $.15 per share, for the three
months ended September 30, 1998 compared to a loss of $1,956,578, or $.24 per
share, in the three months ended September 30, 1997. The decrease in the loss
is primarily due to a decline in exploration expenses. However, this decline
was partially offset by an increase in general and administrative expenses and a
decrease in oil and gas revenues.
Exploration expenses decreased from $1,884,554 in the 1997 third quarter to
$646,068 in the comparable 1998 period primarily due to a decline in geological
and geophysical costs associated with the West Cameron Seismic Project. During
the 1998 third quarter, the Company incurred $212,742 of seismic costs in this
project. Because the seismic acquisition phase of this project is substantially
more expensive than the processing and interpretive phases and because such
acquisition phase was completed during the 1997 third quarter, the Company's
share of this project's seismic costs declined $1,238,486 from the 1997 third
quarter. The Company expects that the level of exploration expenses experienced
during the 1998 third quarter will decrease in the near term. However, because
the Company utilizes the successful efforts method of accounting, exploration
expenses typically vary materially from period to period based upon exploration
program activities, the Company's cost participation and other factors. In
addition, the Company has recorded a receivable from Cheniere at September 30,
1998 amounting to $984,534 for Cheniere's share of West Cameron Seismic Project
costs. As discussed in the "Overview", in the arbitration proceedings the
Company seeks resolution to numerous claims including, but not limited to,
Cheniere's payment for its share of such costs. The Company expects the panel
to render their decision during the 1998 fourth quarter. Should the arbitration
panel rule adversely on Zydeco's claims including, but not limited to, cost
reimbursement issues, then the Company may be required to recognize a material
expense item.
General and administrative expenses rose $508,623 from $364,411 in the 1997
third quarter to $873,034 in the comparable 1998 period mostly due to legal
costs associated with the Cheniere litigation and additional personnel costs.
Oil and gas revenues decreased from $214,542 in the three months ended
September 30, 1997 to $75,988 in the comparable 1998 period due mostly to a 54%
decline in gas sales volumes and an 89% decline in oil sales volumes. Gas sales
volumes fell from 75,869 thousand cubic feet ("MCF") in the 1997 third quarter
to 35,255 MCF in the comparable 1998 period. In addition, oil sales volumes
fell from 1,676 barrels ("Bbls") to 178 Bbls in the respective periods. The
decline in such sales volumes is mostly attributable to natural production
declines for the two producing wells in which the Company has interests and
interruptions in production during September 1998 due to storms. Although it
expects that the production rates of these wells will continue to decline during
the near term, the Company cannot ascertain whether the rate of decline
experienced from the 1997 third quarter to the comparable 1998 period will
continue in the near term. In addition, the Company has not assigned any proved
oil and gas reserves to one of these wells.
During the three-month period ended September 30, 1998, the Company
recorded a gain from the sales of properties amounting to $37,000 compared to
$223,335 for the comparable 1997 period. Because the Company expects to
continue the development and sale of some portion or all of its interest in
prospects to other industry participants, the Company will from time to time
record gains or losses for these transactions. However, the timing and amount
of such sales and the extent of their gain or loss are uncertain due to a number
of factors such as, but not limited to, the timing and cost of lease
acquisitions, the availability of leaseholds in particular prospect areas and
market conditions, both generally and in the oil and gas industry, at the time
of sale.
9
The decrease in the net loss per share from $.24 in the 1997 third quarter
to $.15 in the comparable 1998 period was also affected by an increase in the
weighted average number of the Company's Common Shares (basic and diluted)
primarily due to the issuance of 3,680,000 shares in the offering (the
"Offering") in August 1997 and the acquisition of 200,000 treasury shares in
January 1998.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1997
For the nine months ended September 30, 1998, the Company recorded a loss
of $4,171,380, or $.40 per share, compared to a loss of $4,223,595, or $.59 per
share, in the nine months ended September 30, 1997. The slight decrease in the
loss is due to a combination of decreases in oil and gas revenues, exploration
expenses and gains from the sales of properties and increases in general and
administrative expenses and research and development expenses.
General and administrative expenses rose $1,008,116 from $1,169,300 in the
first nine months of 1997 to $2,177,416 in the comparable 1998 period mostly due
to legal costs associated with the Cheniere litigation and additional personnel
costs. The Company incurred $319,855 in research and development expenses during
the first nine months of 1998. Because the company commenced a research and
development program in mid 1997, it incurred only $49,844 in the comparable 1997
period. Exploration expenses decreased from $3,748,222 in the 1997 nine months
to $1,926,588 in the comparable 1998 period primarily due to a decline in
geological and geophysical costs associated with its West Cameron Seismic
project. Compared to project expenses of $2,420,318 in the nine months ended
September 30, 1997, the Company expensed $765,882 during the comparable 1998
period. The Company expects that the level of exploration expenses experienced
during the 1998 third quarter will decrease in the near term but anticipates
that the current level of general and administrative, and research and
development expenses will continue into the near future. However, because the
Company utilizes the successful efforts method of accounting, exploration
expenses typically vary materially from period to period based upon exploration
program activities, the Company's cost participation, and other factors as
discussed in the analysis of results for the three month comparison. As
previously discussed in the three month analysis, the Company filed a petition
with the American Arbitration Association on April 17, 1998, seeking numerous
claims against Cheniere. The final hearing commenced October 19, 1998, and the
Company expects that the arbitration panel will render its decision during the
1998 fourth quarter. Should the arbitration panel rule adversely on Zydeco's
claims, then the Company may be required to recognize a material expense item.
Total revenues decreased from $1,069,200 in the nine months ended September
30, 1997 to $384,759 in the comparable 1998 period due mostly to declines in oil
and gas sales volumes and gains on sales of properties. Gas sales volumes fell
from 274,805 MCF in the 1997 period to 130,706 MCF in the comparable 1998
period. In addition, oil sales volumes fell from 7,885 Bbls to 1,061 Bbls in
the respective periods. As discussed in the analysis of results for the three
month comparison, the Company expects that the production rates of its two wells
will continue to decline during the near term, but that it cannot ascertain
whether the rate of decline experienced from the 1997 period to the comparable
1998 period will continue throughout 1998. As also discussed in the analysis of
results for the three month comparison, the Company expects that it will
continue to develop and then sell some portion of its interest in prospects or
in the West Cameron Seismic Project to other industry participants. However,
the timing of such sales and their resulting gain or loss are uncertain due to a
number of factors such as, but not limited to, the timing and cost of lease
acquisitions, the availability of leaseholds in particular prospect areas and
market conditions, both generally and in the oil and gas industry, at the time
of sale.
The decrease in the net loss per share from $.59 in the 1997 nine months to
$.40 in the comparable 1998 period was also affected by an increase in the
weighted average number of the Company's Common Shares (basic and diluted)
primarily due to the issuance of 3,680,000 shares in the Offering in August 1997
and the acquisition of 200,000 treasury shares in January 1998.
10
LIQUIDITY AND CAPITAL RESOURCES
The Company has generated funds from public and private equity offerings,
cash flow from the Company's operations, and cash payments made to it under
exploration agreements. Sources of funds include approximately $24.1 million
from the sale of securities in 1993, 1994, 1995 and 1997; $21.2 million in
advances under exploration agreements in 1995, 1996, 1997 and the nine months
ended September 30, 1998. The Company does not currently hold any funds advanced
under any such exploration agreement.
The Company has expended approximately $6.0 million on the acquisition
of oil and gas leases during the first nine months of 1998. The Company expects
that capital needs for the remainder of 1998 will be satisfied through cash on
hand of approximately $2.0 million at September 30, 1998, cash expected to be
made available under the Cheniere Exploration Agreement (subject to resolution
of the arbitration proceeding described below), and sales of the Company's
interests in leases acquired during the first nine months of 1998. For the near
term, the Company does not expect any significant expenditures for capital
items. However, the total amount of expenditures is unknown at this time due to
factors such as, but not limited to, leasehold availability, lease terms of
potential leaseholds which may yet be negotiated or bid on in lease sales,
future potential operations proposed under the terms of operating or other
agreements to which the Company is a participant or may become a participant and
the timing of expenditures related to the performance of these activities. The
Company's ability to access additional capital will also depend on a number of
factors including its success in acquiring oil and gas leaseholds, attracting
industry participants to participate in the exploration of and sharing of costs
of such leaseholds and finding commercially productive hydrocarbon deposits.
The Company does not presently maintain any credit facilities.
During the first nine months of 1998, the Company's cash outflow had
increased due to Cheniere's failure to tender its share of billings for West
Cameron Seismic Project costs and its proportionate share of certain lease
acquisitions. Billings to Cheniere for West Cameron Seismic Project costs net of
certain credits amounted to $984,534 as of September 30, 1998. Such net
billings had not been paid as of October 31, 1998. In addition, Cheniere failed
to tender its 50% billed share of costs for the June 8, 1998 State of Louisiana
lease sale at which the Company was awarded leases at an aggregate cost of
$2,898,343. However, Cheniere did tender its 50% billed share of costs for the
July 8, 1998 State of Louisiana lease sale at which the Company was awarded a
lease for a gross cost of $147,471. On April 17, 1998, the Company filed a
petition with the American Arbitration Association for arbitration in order to
resolve certain disputes, including cost reimbursement issues that have arisen
with Cheniere. The final arbitration hearing began on October 19, 1998 before a
panel of three arbitrators. The Company expects the panel to render their
decision during the 1998 fourth quarter. Included among numerous claims, the
Company seeks payment for the billed Project costs and 100% ownership of the
leases in which Cheniere failed to tender its billed share of costs. Should the
arbitration panel rule adversely on Zydeco's claims including, but not limited
to, cost reimbursement issues, then the Company could be adversely impacted by
the loss of this source of funding. The Company has incurred approximately
$706,000 in legal and related costs of litigation on this matter as of September
30, 1998 and expects to incur additional costs of the arbitration and related
litigation during the 1998 fourth quarter.
The additional costs of Cheniere's failure to tender payments and other
capital needs during the nine months ended September 30, 1998 have been funded
from available cash of the Company. Near term future cash needs of the Company
may be satisfied from a combination of available cash, the sale of interests in
prospects located on the West Cameron Seismic Project, interests in the project
itself and payments by Cheniere that are mandated by the arbitration panel. In
addition, the Company may seek other sources of funding from the issuance of
additional equity securities, including the exercise of outstanding warrants and
options on the Company's common stock. The Company anticipates that it may sell
an interest in the West Cameron Seismic Project as a whole. In the future, in
the event the Company increases oil and gas production through the successful
completion of oil and gas wells, the Company may consider obtaining a credit
facility. There can be no assurance that the Company will be successful in
securing additional participants, additional project financing or credit
financing.
Should the Company sell interests in the West Cameron Seismic Project
and/or prospects generated from such project, the amount of capital expenditures
may be impacted by the extent of proceeds
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from such sales and/or reduced expenditures attributed to the reduced working
interest share of expenditures. The Company may also engage in the drilling of
other prospects identified by the Company, the acquisition of interests in
producing wells, and other oil and gas exploration and production related
investment opportunities determined by management and the Board of Directors to
be in the interest of the Company. The amount and timing of these expenditures
will be dependent upon numerous factors including the availability of capital to
the Company, availability of seismic data, the number and type of drilling
prospects, if any, identified as a result of the Company's 3D seismic analysis,
the terms under which industry participants may participate in the Company's
prospects, and the cost of drilling and completing wells in the Louisiana
Transition Zone.
The Company has incurred net losses and negative cash flows from operations
since its inception in 1994. The Company does not expect to generate cash flow
or net income in 1998 unless it sells substantial interests in prospects
generated from the West Cameron Seismic Project or interests in such project.
The Company contemplates that the sale of such interests would include prospect
development commitments and financing provided by the purchasers coupled with
retained interests and back-in rights to the Company, and additional cash
consideration to the Company for recoupment of costs incurred in identifying
such prospective interests. As generally required by the successful efforts
method of accounting, the Company has expensed all of its geological and
geophysical costs in the West Cameron Seismic Project as of September 30, 1998,
and accordingly, reimbursements for such non-capitalized costs would be treated
as revenue to the Company. Sales of interests in prospects generated from the
West Cameron Seismic Project have been hampered by the uncertainties of the
pending arbitration with Cheniere. The Company does not expect any material
sales activity until the ruling is received from the arbitration panel. There
can be no assurance that the Company will be successful in the selling of
significant interests or in receiving payments for the recoupment of the
Company's costs incurred to date on this project or continue to develop
prospects in such project and sell interests in the project's individual
prospects or group of prospects.
The Company currently maintains a $300,000 bond required to hold its
present federal oil and gas leases. A United States Treasury Note
collateralizes this bond. In the event that the Company would act as operator
on a federal offshore lease or is otherwise required to increase its bonding by
federal or state authorities, significant amounts of capital may be required for
additional collateral to satisfy bonding requirements.
The Company is unaware of any possible exposure from actual or potential
claims or lawsuits involving environmental matters. As such, no liability is
accrued at September 30, 1998.
YEAR 2000 COMPLIANCE
The Company has made a preliminary review of both its information
technology and non-information technology systems to determine whether they are
Year 2000 compliant. The Company has not identified any material systems that
are not Year 2000 compliant. The Company does not expect to incur any material
cost to modify and replace its information technology infrastructure to be Year
2000 compliant. The Company does not anticipate any material disruption in its
operations as a result of any failure by the Company to be in compliance. The
Company does not currently have any information concerning the Year 2000
compliance status of its suppliers and customers. In the event that any of the
Company's significant suppliers or customers do not successfully and timely
achieve Year 2000 compliance, the Company's business or operations could be
adversely affected. The Company has not incurred significant costs related to
Year 2000 compliance prior to September 30, 1998 other than immaterial internal
costs to evaluate the extent of compliance.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
On April 17, 1998, Zydeco Exploration, Inc., a wholly owned subsidiary of
the Company, filed a petition with the American Arbitration Association for
arbitration in order to resolve certain disputes that arose with Cheniere
Energy, Inc. and Cheniere Energy Operating Co., Inc. ("Cheniere"). Cheniere is
a party to an exploration agreement with Zydeco Exploration, Inc. covering the
Company's West Cameron Seismic Project, located in western Cameron Parish,
Louisiana. Under this exploration agreement, Cheniere may receive up to 50%
interest in leases acquired in the project area by the Company provided it meets
certain funding obligations, including payment of certain seismic costs and its
share of leasehold acquisition and related costs. The arbitration claim, as
amended, seeks to resolve differences over Cheniere's funding obligations, the
parties' current ownership interests in various leases and prospects, the scope
of pre-drilling activities that Cheniere can conduct within the Project Area,
the dissemination by Cheniere of confidential seismic data covering the Project
Area, and a variety of related issues. Cheniere has filed a counterclaim, as
amended, in the arbitration action. In addition, the pleadings have been amended
to include Zydeco Energy, Inc., as well as Zydeco Exploration, Inc. The parties
are seeking conflicting declaratory and injunctive relief and damages from each
other. The final hearing phase of the arbitration commenced on October 19, 1998
before a panel of three arbitrators. The Company expects the panel to render
their decision during the 1998 fourth quarter.
On April 22, 1998, Zydeco Energy, Inc. and Zydeco Exploration, Inc.
(collectively "Zydeco"), initiated a civil suit in state district court in
Harris County, Texas against two individuals who are parties to confidentiality
agreements with Zydeco and who currently are employees of Cheniere. Through
this litigation, Zydeco sought and obtained a Temporary Restraining Order on
April 22, 1998, restraining the individuals from breaching the terms of their
confidentiality agreements with Zydeco. Cheniere intervened in the litigation
on April 27, 1998. On May 4, 1998, Zydeco, Cheniere and the two individuals
agreed to the entry of an Agreed Temporary Injunction. The Agreed Temporary
Injunction expired on June 15, 1998, and the dispute which led to the filing of
this civil suit has been included in the arbitration action by agreement of the
parties, and will be resolved in that forum.
Items 2, 3, 4 and 5 for which provision is made in the applicable
regulations of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and, therefore, have been omitted.
Item 6.
(a) Exhibits.
Exhibit 27 Financial Data Schedule (follows signature page).
(b) Report on Form 8-K.
None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ZYDECO ENERGY, INC.
/s/ John Misitigh
------------------------------------
John Misitigh
Controller, Chief Accounting Officer and Secretary
(Duly Authorized and Principal Financial Officer)
Dated: November 16, 1998
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