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 JUNE 30, 1996
[ ] 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 [ ]
19,555,223 shares of the registrant's Common Stock were outstanding as of August
2, 1996.
FLORES & RUCKS, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
(Unaudited)
June 30, December 31,
1996 1995
---- ----
Current assets:
Cash and cash equivalents $ 819,468 $ 212,238
Joint interest receivables 1,229,810 390,275
Oil and gas sales receivables 16,112,617 17,546,127
Notes and accounts receivable -- stockholders - 129,129
Accounts receivable--other 3,700,000 -
Prepaid expenses 1,019,583 390,412
Other current assets 1,370,150 424,824
--------- -------
Total current assets 24,251,628 19,093,005
Oil and gas properties -- full cost method:
Evaluated 332,287,198 275,581,044
Less accumulated depreciation, depletion, and amortization (143,013,084) (114,040,044)
------------ ------------
189,274,114 161,541,000
Unevaluated properties excluded from amortization 27,106,066 19,041,148
Other assets:
Furniture and equipment, less accumulated depreciation of
$1,891,211 and $1,258,225 in 1996 and 1995, respectively 2,793,110 2,340,641
Restricted deposits 5,269,835 4,259,182
Deferred financing costs 4,823,582 5,127,974
Deferred tax asset 3,202,863 4,692,263
--------- ---------
Total assets $ 256,721,198 $ 216,095,213
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 37,240,733 $ 15,090,791
Oil and gas sales payable 4,548,963 5,177,277
Accrued interest 1,447,287 2,651,097
--------- ---------
Total current liabilities 43,236,983 22,919,165
Long-term debt 128,160,111 157,391,556
Notes payable to be refinanced under revolving line of credit - 14,300,000
Other noncurrent liabilities 638,609 638,609
Deferred hedge revenue 233,167 870,333
Stockholders' equity:
Preferred stock, $.01 par value; authorized 10,000,000 shares,
no shares issued or outstanding at June 30, 1996 - -
Common stock, $.01 par value; authorized 100,000,000 shares;
issued and outstanding 19,555,223 shares and 15,044,125
shares at June 30, 1996 and December 31, 1995, respectively 195,552 150,441
Paid-in capital 89,734,455 27,638,465
Retained earnings (deficit) (5,477,679) (7,813,356)
---------- ----------
Total stockholders' equity 84,452,328 19,975,550
---------- ----------
Total liabilities and stockholders' equity $ 256,721,198 $ 216,095,213
============== =============
The accompanying notes to financial statements are an integral part
of these statements.
2
FLORES & RUCKS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Six Months Ended Three Months Ended
June 30, June 30,
-------------------------- ------------------------------
1996 1995 1996 1995
------------ ------------ ------------ ------------
Revenues:
Oil and gas sales $69,115,492 $55,421,460 $32,303,289 $29,654,943
Plant processing income (loss) (33,473) 450,459 (50,127) 182,960
------- ------- ------- -------
Total revenues 69,082,019 55,871,919 32,253,162 29,837,903
Operating expenses:
Lease operations 16,522,030 14,225,302 8,076,347 7,447,966
Severance taxes 5,521,763 4,744,919 2,636,064 2,540,541
Depreciation, depletion and amortization 28,973,040 23,166,908 14,622,792 12,468,600
---------- ---------- ---------- ----------
Total operating expenses 51,016,833 42,137,129 25,335,203 22,457,107
General and administrative expenses 6,025,000 5,613,381 2,767,275 2,515,344
Interest expense 8,188,026 8,492,613 3,676,268 4,098,180
Other expense (income) 1,779 (120,616) (256,144) (44,199)
----- -------- -------- -------
Net income (loss) before income taxes 3,850,381 (250,588) 730,560 811,471
Income tax expense 1,514,704 - 295,391 -
--------- --------- ------- -------
Net income (loss) $ 2,335,677 $ (250,588) $ 435,169 $ 811,471
============ ============ ============= ==============
Weighted average common shares outstanding 17,620,538 15,042,102 19,552,994 15,044,125
Earnings (loss) per common share $.13 $(.02) $.02 $.05
The accompanying notes to financial statements are an integral part
of these statements.
3
FLORES & RUCKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Six Months Ended
June 30,
1996 1995
---- ----
Operating activities:
Net income (loss) $ 2,335,677 $ (250,588)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation, depletion and amortization 29,606,026 23,441,656
Deferred hedge revenue (637,166) (66,667)
Deferred tax asset 1,489,400 -
Changes in operating assets and liabilities:
Accrued interest (2,503,810) 889,788
Receivables (2,976,896) (2,291,865)
Prepaid expenses (629,171) (133,145)
Other current assets (945,326) (17,100)
Accounts payable and accrued liabilities 22,149,942 18,676,705
Oil and gas sales payable (628,316) 393,319
-------- -------
Net cash provided by operating activities 47,260,360 40,642,103
---------- ----------
Investing activities:
Additions to oil and gas properties and furniture and equipment (65,856,527) (45,608,012)
Increase in restricted deposits (1,010,653) (958,011)
----------- ---------
Net cash used in investing activities (66,867,180) (46,566,023)
------------ ------------
Financing activities:
Sale of stock 62,141,101 369,949
Borrowings on notes payable 30,000,000 42,500,020
Payments of notes payable (72,231,443) (37,528,259)
Deferred financing costs 304,392 120,801
------- -------
Net cash provided by financing activities 20,214,050 5,462,511
---------- ---------
Increase (decrease) in cash and cash equivalents 607,230 (461,409)
Cash and cash equivalents, beginning of the period 212,238 568,690
------- -------
Cash and cash equivalents, end of the period $ 819,468 $ 107,281
============= ============
Interest paid during the period $ 11,917,620 $ 8,781,824
============= ============
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 common share are based on the weighted average number of
shares of common stock outstanding for the periods. The Company had
1,865,735 stock options outstanding as of June 30, 1996. The options were
not reflected as common stock equivalents for the six months nor the three
months ended June 30,1996, as the dilutive effect caused by the options on
earnings per share was less than three percent.
The Company had 760,500 options outstanding as of June 30, 1995, which were
not reflected as common stock equivalents for the six months ended June 30,
1995, as they were anti-dilutive. For the three months ended June 30, 1995,
the stock options were not reflected as common stock equivalents as the
dilutive effect caused by the options on earnings per share was less than
three percent.
3. HEDGING ACTIVITIES
The Company hedges certain of its production through a master swap
agreement ("Swap Agreement") with Enron Capital & Trade Resources Corp.
("ECT"). The Swap Agreement provides for separate contracts tied to the
NYMEX light sweet crude oil and natural gas futures contracts. The Swap
Agreement is settled monthly based on the differences between contract
prices and the average NYMEX prices for that month applied to the related
contract volumes. To the extent the NYMEX price exceeds the contract price,
the Company pays the spread to ECT, and to the extent the contract price
exceeds the NYMEX price, ECT pays the spread to the Company. Under the
terms of the Swap Agreement, if the Company's exposure (i.e., the cost to
buyout all of the contracts covered by the Swap Agreement) exceeds $5
million, ECT can require the Company to establish and maintain a letter of
credit in the amount of such excess, rounded up to the next multiple of
$500,000. As of August 2, 1996, the Company's exposure under all contracts
covered by the Swap Agreement was approximately $2.9 million.
As of June 30, 1996, the Company's open forward position with ECT was as
follows:
Oil Gas
--- ---
Average Average
Year MBbls Price BBtu Price
---- ----- ------ ---- -----
1996 1,550 $18.25 1,230 $1.97
1997 300 $18.55 - -
1998 300 $18.55 - -
1999 300 $18.55 - -
2000 300 $18.55 - -
---- --- ------ ------ -----
Total 2,750 $18.38 1,230 $1.97
===== ====== ===== =====
4. COMMON STOCK OFFERING
On March 19, 1996, the Company completed a public offering of 4,500,000
shares of common stock at a price of $14.75 per share (the "Offering"). Net
proceeds of the Offering were approximately $62.2 million, of which $15.4
million was used to repay a note payable to Shell Offshore, Inc. and
approximately $33.0 million was used to repay indebtedness under the
Company's $50 million borrowing based senior revolving bank credit
facility.
5
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED
JUNE 30, 1995 AND 1996
The following table reflects certain information with respect to the Company's
oil and gas operations.
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- --------------
1995 1996 1995 1996
---- ---- ---- ----
(dollars in thousands, except per unit amounts)
Sales Volumes
Oil (MBbls) 1,398 1,450 2,630 3,008
Gas (MMcf) 2,823 3,705 5,619 7,016
Oil and Gas (MBOE) 1,869 2,068 3,567 4,178
Revenues (1)
Total Oil Revenues $25,460 $29,556 $46,728 $59,561
Total Gas Revenues 5,034 9,360 9,650 20,032
Average Sales Prices (2)
Oil (per Bbl) $18.21 $20.38 $17.77 $19.80
Gas (per Mcf) 1.78 2.53 1.72 2.86
Per BOE 16.32 18.82 15.81 19.05
Severance Taxes $2,541 $2,636 $4,745 $ 5,522
Lease Operating Expenses 7,448 8,076 14,225 16,522
Lease Operating Expenses per BOE $3.99 $3.91 $3.99 $3.95
- ----------
(1)Excludes the results of hedging activities which decreased revenue
recognized in the three months and six months ended June 30, 1995, by $.8
million and $1.0 million, respectively, and decreased revenue recognized in
the three months and six months ended June 30, 1996, by $6.6 million and
$10.5 million, respectively.
(2)Excludes the results of hedging activities. Including the effect of hedging
activities, the Company's average oil price per Bbl received was $17.61 and
$17.32 in the three months and six months ended June 30, 1995, respectively,
and $17.08 and $17.92 in the three months and six months ended June 30, 1996,
respectively. The average gas price per Mcf received was $1.75 in the six
months ended June 30, 1995, and $2.03 and $2.17 in the three months and six
months ended June 30, 1996, respectively. No gas volumes were hedged for the
three months ended June 30, 1995.
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 and six months ending June 30, 1996 and the comparable periods in 1995:
Second Quarter 1996 Six Months 1996
Compared to Compared to
Second Quarter 1995 Six Months 1995
------------------- ---------------
Increase (decrease) in oil and gas revenues
resulting from differences in:
Crude oil and condensate-
Price $ 3,149 $ 6,116
Production 948 6,717
--- ----
4,097 12,833
Natural gas-
Price 2,753 7,982
Production 1,573 2,399
----- -----
4,326 10,381
Plant processing and hedging, net (6,007) (10,004)
------ -------
Increase in oil and gas revenues $ 2,416 $ 13,210
======= ========
6
The Company's total revenues increased approximately $2.4 million, or 8%, to
$32.2 million for the three months ended June 30, 1996, from $29.8 million for
the comparable period in 1995. Production levels for the three months ended June
30, 1996, increased 11% to 2,068 MBOE from 1,869 MBOE for the comparable period
in 1995. The Company's average sales prices (excluding hedging activities) for
oil and natural gas for the three months ended June 30, 1996, were $20.38 per
Bbl and $2.53 per Mcf, respectively, versus $18.21 per Bbl and $1.78 per Mcf,
respectively, in the comparable 1995 period. Revenues increased by $2.5 million
due to the aforementioned production increases and by $5.9 million as a result
of increased oil and gas prices. The Company's total revenues increased
approximately $13.2 million, or 24%, to $69.1 million for the six months ended
June 30, 1996, from $55.9 million for the comparable period in 1995. Production
levels for the six months ended June 30, 1996, increased 17% to 4,178 MBOE from
3,567 MBOE for the comparable period in 1995. The Company's average sales prices
(excluding hedging activities) for oil and natural gas for the six months ended
June 30, 1996 were $19.80 per Bbl and $2.86 per Mcf versus $17.77 per Bbl and
$1.72 per Mcf in the prior period. Revenues increased by $9.1 million due to the
aforementioned production increases and by $14.1 million as a result of
increased oil and gas prices.
The increase in the Company's total revenues for the three months ended June 30,
1996, was partially offset by a $5.8 million decrease in hedging revenues and a
$.2 million decrease in plant processing income. For the six months ended June
30, 1996, the increase in the Company's total revenues was partially offset by a
$9.5 million decrease in hedging revenues and a $.5 million decrease in plant
processing income. 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 and
natural gas for the three months ended June 30, 1996, were $17.08 per Bbl and
$2.03 per Mcf as compared to $17.61 per Bbl in the 1995 period. No gas volumes
were hedged for the three months ended June 30, 1995. The Company's average
sales prices (including hedging activities) for oil and natural gas for the six
months ended June 30, 1996, were $17.92 per Bbl and $2.17 per Mcf versus $17.32
per Bbl and $1.75 per Mcf in the prior period. The Company is also contractually
committed to process its gas production from Main Pass 69 and the East Bay
fields under certain processing agreements. Plant processing income (loss)
represents revenues from the sale of natural gas liquids less the costs of
extracting such liquids, which costs include natural gas shrinkage. Income from
plant processing fluctuates primarily as a result of changes in volumes
processed, and changes in prices for natural gas in comparison to changes in
prices for natural gas liquids. Such price changes are usually not proportionate
due to the generally higher price volatility of natural gas. For the three and
six months ended June 30, 1996, plant processing income decreased due to natural
gas liquid prices remaining relatively stable, while natural gas prices
generally increased.
Lease operating expenses. On a BOE basis, lease operating expenses decreased to
$3.91 per BOE for the three months ended June 30, 1996 from $3.99 per BOE in the
comparable 1995 period. Lease operating expenses decreased to $3.95 per BOE for
the six months ended June 30, 1996, from $3.99 per BOE in the comparable 1995
period. These decreases are primarily the result of increased production at the
Company's East Bay field, which has substantial fixed operating costs due to the
capital intensive nature of the facilities and the underutilization of capacity.
For the three months ended June 30, 1996, lease operating expenses were $8.1
million, as compared to $7.4 million in the comparable 1995 period. This
increase primarily relates to fluctuations in normal operating expenses,
including operating expenses associated with increased production, partially
offset by a $.5 million decrease in workover expenses. Workover expenses for the
three months ended June 30, 1996, were $.1 million, as compared to $.6 million
in the comparable 1995 period. For the six months ended June 30, 1996, lease
operating expenses were $16.5 million, as compared to $14.2 million in the 1995
period. This increase partially results from fluctuations in normal operating
expenses, including operating expenses associated with increased production, as
well as an increase of $.7 million in workover expenses. For the six months
ended June 30, 1996, workover expenses were $1.3 million, as compared to $.6
million in the comparable 1995 period.
Severance taxes. The effective severance tax rate as a percentage of oil and gas
revenues (excluding the effect of hedging activities) decreased to 6.8% for the
three months ended June 30, 1996, from 8.3% in the comparable period in 1995.
The effective severance tax rate as a percentage of oil and gas revenues
(excluding the effect of hedging activities) decreased to 6.9% in the six months
ended June 30, 1996, from 8.4% in the comparable 1995 period. The decrease was
primarily due to increased production from new wells on federal leases and from
state leases which were exempt from state severance tax under Louisiana's
severance tax abatement program.
General and administrative expenses. General and administrative expenses per BOE
decreased to $1.34 per BOE for the three months ended June 30, 1996, from $1.35
per BOE in the comparable period of 1995. General and
7
administrative expenses per BOE also decreased to $1.44 per BOE in the six
months ended June 30, 1996, from $1.57 per BOE in the comparable 1995 period.
These decreases are primarily a result of increased production in the 1996
periods. For the three and six months ended June 30, 1996, general and
administrative expenses were $2.8 million and $6.0 million, respectively, as
compared to $2.5 million and $5.6 million in the comparable 1995 periods. These
increases are primarily due to costs associated with increased corporate
staffing, partially offset in the 1996 periods by increases 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 and six months
ended June 30, 1996, depreciation, depletion and amortization ("DD&A") expense
was $14.6 million, and $29.0 million, respectively, as compared to $12.5 million
and $23.2 million, respectively, in the comparable 1995 periods. On a BOE basis,
DD&A for the three and six months ended June 30, 1996, was $7.07 per BOE and
$6.94 per BOE, respectively, as compared to $6.67 per BOE and $6.50 per BOE for
the three and six months ended June 30, 1995. These variances can primarily be
attributed to the Company's increased production and related capital cost
additions from the 1995 and 1996 drilling programs, partially offset by the
increase to proved reserves resulting from the programs.
Interest expense. For the three months ended June 30, 1996, interest expense
decreased approximately $.4 million to $3.7 million from interest expense of
$4.1 million in the comparable 1995 period. For the six months ended June 30,
1996, interest expense decreased approximately $.3 million to $8.2 million from
$8.5 million in the comparable 1995 period. These decreases in interest expense
can primarily be attributed to the repayment of a portion of the Company's debt
with proceeds from the issuance of 4,500,000 shares of common stock at $14.75
per share on March 19, 1996 (the "Offering"). See Note 4 to the Consolidated
Financial Statements.
Other (income) expense. Other (income) expense increased by $.2 million in the
three months ended June 30, 1996, from the comparable 1995 period, primarily as
a result of increased interest income in the 1996 period from short-term
investments made with a portion of the proceeds from the Offering. Other
(income) expense decreased by $.1 million in the six months ended June 30, 1996,
from the comparable 1995 period. This decrease primarily relates to the Company
recording a $.4 million loss in the first quarter of 1996 associated with the
classification of a portion of its future swap arrangements as speculative,
partially offset by the aforementioned increase in interest income in the 1996
period.
Income tax expense (benefit). For the three and six months ended June 30, 1996,
the Company recorded income tax expense of $.3 million and $1.5 million,
respectively. During the comparable 1995 periods, no income tax benefit was
recorded due to a valuation allowance which existed at June 30, 1995.
Net income. Due to the factors described above, net income decreased from $.8
million for the three months ended June 30, 1995, to $.4 million for the
comparable period in 1996. Net income for the six months ended June 30, 1996,
increased to $2.3 million, an increase of $2.6 million from a net loss of $.3
million for the comparable 1995 period.
Liquidity and Capital Resources
The following summary table reflects comparative cash flows for the Company for
the six months ended June 30, 1995 and 1996:
Six Months Ended
June 30,
1995 1996
-------- -------
(in thousands)
Net cash provided by operating activities $ 40,642 $ 47,260
Net cash used in investing activities (46,566) (66,867)
Net cash provided by financing activities 5,463 20,214
For the six months ended June 30, 1996, net cash provided by operating
activities increased by $6.6 million. This increase relates primarily to
increased revenues, partially offset by increases in lease operating expenses,
severance taxes and general and administrative expenses. In addition, the
Company paid interest of $11.9 million during the six months ended June 30,
1996, as compared to $8.9 million in the comparable 1995 period. This increase
in interest expense is primarily a result of the Company's payment of $2.4
million of accrued interest relating to a $13 million note to Shell Offshore,
Inc. which was repaid in March of 1996. Accounts receivable increased by $3.0
million for the
8
six months ended June 30, 1996. The increase was primarily related to a $3.7
million receivable for monies deposited in association with the potential
acquisition of certain oil and gas properties. Subsequent to June 30, 1996, a
third party exercised preferential purchase rights to acquire the properties.
This increase was partially offset by a decrease in oil and gas sales
receivables. During the six months ended June 30, 1995, accounts receivable
increased by $2.3 million primarily relating to an increase in oil and gas sales
receivables. Finally, accounts payable increased by $22.1 million during the
1996 period as compared to an increase of $18.7 million in the comparable 1995
period. The increase in accounts payable is primarily a result of variances in
vendors payable resulting from a more aggressive drilling program in the 1996
period.
Cash used in investing activities during the six months ended June 30, 1996,
increased to $66.9 million as compared to $46.6 million in the comparable 1995
period, reflecting the more aggressive 1996 drilling program.
Financing activities during the six months ended June 30, 1996, generated cash
of $20.2 million, as compared to $5.5 million in the comparable 1995 period. The
increase in cash during the 1996 period was primarily a result of the issuance
of 4,500,000 shares of common stock at $14.75 per share on March 19, 1996, of
which the Company's net proceeds totaled approximately $62.2 million. This
increase in cash was offset by the payment of a $13 million note to Shell
Offshore, Inc. and a $29.2 million reduction in net borrowings on the Company's
$50 million borrowing based senior revolving bank credit facility (the
"Revolving Credit Facility"). During the 1995 period, the Company increased its
borrowings on the Revolving Credit Facility by $15 million. In addition, the
Company received cash from the sale of stock in the 1995 period of $.4 million.
Capital requirements.. The Company's expenditures for property acquisition,
exploration and development for the six months ended June 30, 1995 and 1996,
were as follows:
Six Months Ended
June 30,
1995 1996
------- ------
(in thousands)
Property acquisition costs of evaluated properties $ 30 $ 39
Property acquisition costs of unevaluated properties 1 3,069
Exploration costs (drilling and completion) 7,339 16,029
Development costs (drilling and completion) 29,642 31,113
Abandonment costs 33 154
Geological and geophysical costs 3,692 3,779
Capitalized interest and general and administrative costs 1,878 2,699
Other capital costs 2,155 7,889
----- -----
$44,770 $64,771
======= =======
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 six months ended June
30, 1996, the Company spent $47.1 million on exploration and development
drilling and $3.8 million on 3-D seismic surveys and other geological and
geophysical costs. Included in other capital costs for the six months ended June
30, 1996, is $6.6 million, which relates primarily to capital costs incurred on
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 June 30, 1996, the escrow balances totaled $5.3 million.
In addition to developing its existing reserves, the Company attempts to
increase its reserve base, production and operating cash flow by engaging in
strategic acquisitions of oil and gas properties. On July 17, 1996, the Company
announced that it had entered into a purchase agreement to acquire interests in
thirteen oil and gas producing fields situated in the Gulf of Mexico, Offshore
Louisiana, for an anticipated purchase price in excess of $100 million.
Estimated net production on the properties subject to the purchase agreement is
in excess of 7,200 barrels of oil equivalent per day. The closing of the
acquisition is expected to occur on September 30, 1996, subject to approvals
9
by the management and Board of Directors of Flores & Rucks, Inc. and the seller
and subject to preferential purchase rights on some of the properties. In order
to finance this or any other 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, some of which will relate to the financial condition and performance of
the Company, and some of which will be beyond the Company's control, such 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 Indenture ("Indenture") governing the Company's $125,000,000
of 13 1/2% Senior Notes due December 1, 2004 (the "Senior Notes").
The Company's other primary capital requirements for the remainder of 1996 will
be for the payment of interest of approximately $8.5 million on its Senior Notes
and on any borrowings the Company may incur under the Revolving Credit Facility.
The Company expects to fund its 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 if necessary with existing cash
balances and borrowings under the Revolving Credit Facility. The Company expects
that its cash flow from operations and availability under the Revolving Credit
Facility will be adequate to execute its 1996 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 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 has a borrowing base of $50 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 borrowing base automatically reduces by an amount
equal to one-sixteenth (1/16) of the borrowing base in effect on March 30, 1997,
and continues to reduce at each quarter end beginning March 31, 1997, unless the
Company requests and is granted a one-year deferral of such reductions.
The Company's ability to draw additional amounts on the Revolving Credit
Facility is limited to the extent that adjusted consolidated net tangible assets
(as defined) minus certain net production revenue (as defined) exceeds 110% of
all indenture indebtedness (as defined). Adjusted consolidated net tangible
assets is determined quarterly, utilizing certain financial information, and is
primarily based on a quarterly estimate of the present value of future net
revenues of the Company's proved oil and gas reserves. Such quarterly estimates
utilize the most recent year end oil and gas prices and vary based on additions
to proved reserves and net production. As of August 2, 1996, the Company's
outstanding balance on its Revolving Credit Facility was $15.5 million,
including $2.0 million which represented a letter of credit associated with
future abandonment obligations. The Company had remaining availability of $34.5
million under the Revolving Credit Facility as of August 2, 1996.
Effects of Leverage. The Company is highly leveraged with outstanding
indebtedness of approximately $128 million as of June 30, 1996. 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 Indenture
related to the Senior Notes 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 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.
During the six months ended June 30, 1996, the Company made aggregate principal
and interest payments of approximately $54.1 million. The Company is required to
make semi-annual interest payments of approximately $8.5 million on its Senior
Notes each June 1 and December 1 through the year 2004. 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.
10
Pursuant to the Indenture, the Company may not incur any indebtedness other than
permitted indebtedness (as defined in the Indenture) unless the Company's
consolidated fixed charge coverage ratio (as defined in the 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 proforma 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 Indenture) must be greater than 150% of indebtedness after giving
effect to the proposed new indebtedness and related transactions. As of June 30,
1996, the Company's consolidated fixed charge coverage ratio was 5.1 to 1.0 for
the preceding four quarters. The Company's adjusted consolidated net tangible
assets was 211% of indebtedness as of June 30, 1996. If the ratio of adjusted
consolidated net tangible assets to indebtedness falls below 110%, the Company
may be required to buy back a portion of the Senior Notes.
In accordance with the terms of the Indenture, if the Company disposes of oil
and gas assets, it must apply such proceeds to permanently pay down indebtedness
other than the Senior Notes or within 270 days of the asset sale, purchase
additional oil and gas properties to replace the properties sold. If proceeds
not applied as indicated above exceed $10 million, the Company shall be required
to offer to purchase outstanding Senior 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 Indenture and has been in compliance since the issuance of the Senior
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. On June 30, 1993, the Company entered into a Master
Energy Price Swap Agreement (the "Swap Agreement") with Enron Capital & Trade
Resources Corp. ("ECT"), pursuant to which the Company and ECT enter into energy
price swap arrangements from time to time. These arrangements obligate the
Company or ECT to make payments to the other at the end of a determination
period based on the difference between a specified fixed price and an average of
floating prices over the determination period, applied to a specified quantity
of crude oil or natural gas. All of the Company's currently outstanding swap
arrangements use a floating price for crude oil based on NYMEX light sweet crude
oil futures contracts. Under the terms of the Swap Agreement, if the Company's
net exposure exceeds $5.0 million, ECT can require the Company to establish and
maintain a letter of credit for the amount of such excess, rounded up to the
next multiple of $500,000. Net exposure is based upon the amount by which the
Company's payment obligations to ECT under energy price swap arrangements under
the Swap Agreement exceed the payment obligations of ECT to the Company under
such arrangements. As of August 2, 1996, the Company's net exposure to ECT under
all contracts covered by the Swap Agreement was approximately $2.9 million.
As of June 30, 1996, the Company's open forward position was as follows:
Oil Gas
--- ---
Average Average
Year MBbls Price BBtu Price
---- ----- ------ ---- -----
1996 1,550 $18.25 1,230 $1.97
1997 300 $18.55 - -
1998 300 $18.55 - -
1999 300 $18.55 - -
2000 300 $18.55 - -
---- --- ------ ------ -----
Total 2,750 $18.38 1,230 $1.97
===== ====== ===== =====
11
As a result of hedging activity under the Swap Agreement, on a BOE basis, the
Company estimates that 36% of its estimated remaining 1996 production which is
classified as proved reserves as of June 30, 1996, will not be subject to price
fluctuation for 1996.
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
75% 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.
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 decreased from
1,080,726 Mcf at December 31, 1995, to 1,014,884 Mcf at June 30, 1996. Under the
provisions of the applicable gas balancing agreement, the underproduced party
can take up to 50% of the Company's entitled share of gas production in future
months to eliminate the imbalance. During the make-up period, 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.
12
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
The Company held its annual meeting of stockholders in Baton Rouge,
Louisiana, on May 14, 1996. The following sets forth matters submitted to a vote
of the stockholders:
[A] The following individuals were elected to the Board of Directors
as stated in the Company's Proxy Statement dated April 8, 1996,
for terms expiring at the 1999 annual stockholders' meeting or
until their successors have been elected and qualified - Class I
Directors: Richard G. Zepernick, Jr., Robert L. Belk and Charles
F. Mitchell, M.D.
Every director was elected by vote of 13,290,878 shares, being
more than a majority of the common stock of the Company, and
28,500 shares withheld.
[B] The stockholders ratified the appointment of Arthur Andersen, LLP
to audit the financial statements of the Company and its
subsidiaries for the year 1996, by a vote of 13,307,153 shares,
being more than a majority of the common stock of the Company,
with 10,800 shares voted against, and 1,425 shares abstained.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
[A] Exhibits
10.1 Modification Agreement effective May 1, 1996 to that MMS
Bonding Agreement, dated January 17, 1995, between FRI
Louisiana and Planet Inemnity Company.
10.2 Form of First Amendment dated as of May 8, 1996, to
Employment Agreements entered into between the Company and
Robert L. Belk, Robert K. Reeves and Richard G. Zepernick,
Jr., effective as of September 1, 1995.
[B] Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the
quarter ended June 30, 1996.
13
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.
FLORES & RUCKS, INC.
By: /s/ James C. Flores
James C. Flores
Chairman and Chief Executive Officer
Date: August 9, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons in the capacities and
on the dates indicated.
Signature Title Date
/s/ James C. Flores Chairman and Chief August 9, 1996
James C. Flores Executive Officer
/s/ Robert L. Belk Senior Vice President, August 9, 1996
Robert L. Belk Chief Financial Officer
and Director (Principal
Financial and Accounting
Officer)
14