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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
[ ] 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 333-31625*
PETSEC ENERGY INC.*
(Exact name of Registrant as specified in its charter)
NEVADA 84-1157209
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
143 RIDGEWAY DRIVE, SUITE 113
LAFAYETTE, LOUISIANA 70503
(Address of principal executive offices) (Zip Code)
(337) 989-1942
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 [ ]
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APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 12, 13 or 15 (d) of the Securities Exchange Act of 1934
subsequent to the distribution of securities under a plan confirmed by a court.
YES [ X ] NO [ ]
(There has been no plan confirmed by a court pursuant to which
securities were distributed.)
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
On May 15, 2000, Petsec Energy Inc. has one class of common stock, and one share
of common stock outstanding.
*Petsec Energy Inc. is a wholly owned operating subsidiary of Petsec Energy Ltd,
a listed Australian public company registered with the Commission as a result of
its public offering of American Depositary Receipts (ADRs) traded on the OTC
Bulletin Board (symbol: PSJEY). Shareholders and holders of American Depositary
Shares are advised to refer to the filings of Petsec Energy Ltd for the
consolidated results.
Forward Looking Statements
- --------------------------
This Form 10-Q includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act and Section 21E of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"). All statements other than statements
of historical facts included in this Form 10-Q, including without limitation
statements regarding the projected cash flows, planned capital expenditures, oil
and gas production and reserve additions, the Company's financial position,
business strategy and other plans and objectives for future operations, are
forward-looking statements. Although the Company believes that the expectations
reflected in such forward-looking statements are reasonable, it can give no
assurance that such expectations will prove to have been correct. There are
numerous risks and uncertainties that can affect the outcome of certain events
including many factors beyond the control of the Company including without
limitation those described in the Company's latest Annual Report filed on Form
10-K with the Securities and Exchange Commission for the year ended December
31, 1999. All written and oral forward-looking statements attributable to the
Company or persons acting on its behalf are expressly qualified in their
entirety by such factors.
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PETSEC ENERGY INC.
INDEX TO FORM 10-Q
Page
PART I. FINANCIAL INFORMATION
IMPORTANT NOTE: The financial information in this Quarterly Report
refers to Petsec Energy Inc., a wholly owned subsidiary of Petsec
Energy Ltd. The publicly listed Petsec Energy Ltd files its annual
consolidated financial statements separately under Form 20-F and a
summary of its quarterly consolidated financial statements under Form
6-K.
Item 1. Financial Statements
Balance Sheets.............................................. 4
Statements of Operations and Accumulated Deficit............ 5
Statements of Cash Flows.................................... 6
Notes to Financial Statements............................... 7-8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations....................................... 8-16
Item 3. Quantitative and Qualitative Disclosures
About Market Risk........................................... 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings .............................................. 16
Item 3. Defaults Upon Senior Securities ................................ 16
Item 6. Exhibits and Reports on Form 8-K................................ 16-17
SIGNATURES................................................................ 18
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PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
PETSEC ENERGY INC.
(DEBTOR-IN-POSSESSION SUBSEQUENT TO MARCH 31, 2000)
A WHOLLY OWNED SUBSIDIARY OF PETSEC ENERGY LTD
BALANCE SHEETS
(UNAUDITED)
(Dollars in thousands, except share amounts)
ASSETS
March 31, December 31,
2000 1999
--------- -------------
Current Assets
Cash $ 2,298 $ 3,907
Accounts receivable 4,204 3,980
Other receivables 31 31
Inventories of crude oil 45 45
Prepaid expenses 2,674 1,363
---------- ----------
Total Current Assets 9,252 9,326
Property, plant and equipment - at cost under the successful
efforts method of accounting for oil and gas properties
Proved oil and gas properties 163,398 163,398
Unproved oil and gas properties 14,036 14,036
Production facilities 47,655 44,483
Other 1,947 1,933
---------- ----------
227,036 223,850
Less accumulated depletion, depreciation and amortization (146,322) (142,263)
---------- ----------
Net property, plant and equipment 80,714 81,587
---------- ----------
Other Assets 4,326 2,595
---------- ----------
Total Assets $ 94,292 $ 93,508
========== ==========
LIABILITIES AND SHAREHOLDER'S DEFICIT
Current Liabilities:
Trade accounts payable 1,243 2,531
Interest payable 9,639 6,497
Other accrued liabilities 7,257 8,011
Bank credit facility 11,815 7,875
Senior Subordinated notes (due 2007, in technical default) 99,691 99,684
---------- ----------
Total Current Liabilities 129,645 124,598
Subordinated shareholder loan 36,811 37,330
Provision for dismantlement 2,989 2,893
---------- ----------
Total Liabilities $169,445 $ 164,821
Shareholder's Deficit:
Common stock, $1 par value; authorized 1,000,000 shares;
issued and outstanding 1 share - -
Additional paid-in-capital 21,867 21,818
Accumulated deficit (97,020) (93,131)
---------- ----------
Total Shareholder's Deficit (75,153) (71,313)
---------- ----------
$ 94,292 $ 93,508
========== ==========
See accompanying notes to financial statements.
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PETSEC ENERGY INC.
(DEBTOR-IN-POSSESSION SUBSEQUENT TO MARCH 31, 2000)
A WHOLLY OWNED SUBSIDIARY OF PETSEC ENERGY LTD
STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
(UNAUDITED)
(Dollars in thousands)
THREE MONTHS ENDED
March 31,
---------------------
2000 1999
---- ----
Revenue:
Oil and gas sales $ 7,202 $ 9,315
Operating expenses:
Lease operating expenses 1,382 1,676
Production taxes 92 64
Exploration expenditures 359 1,645
Abandonments - 888
General and administrative 1,124 1,287
Stock compensation 49 64
Advice on liquidity solutions 806 -
Depletion, depreciation and amortization 4,154 6,475
-------- ---------
Total operating expenses 7,966 12,099
-------- ---------
Loss from operations (764) (2,784)
Other income (expenses):
Interest expense (3,689) (3,663)
Interest income 27 65
Other, principally foreign exchange gain (loss) 537 (188)
-------- ---------
(3,125) (3,786)
-------- ---------
Loss before income taxes (3,889) (6,570)
Income taxes - -
-------- ---------
Net loss (3,889) (6,570)
Accumulated deficit at beginning of period (93,131) (63,643)
-------- ---------
Accumulated deficit at end of period $(97,020) $ (70,213)
======== =========
See accompanying notes to financial statements.
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PETSEC ENERGY INC.
(DEBTOR-IN-POSSESSION SUBSEQUENT TO MARCH 31, 2000)
A WHOLLY OWNED SUBSIDIARY OF PETSEC ENERGY LTD
STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Dollars in thousands)
THREE MONTHS ENDED
March 31,
-------------------
2000 1999
---- ----
Cash flows from operating activities:
Net loss $ (3,889) $ (6,570)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depletion, depreciation and amortization 4,154 6,475
Abandonments - 888
Other (198) 338
Changes in operating assets and liabilities:
Decrease (increase) in receivables (224) 5,155
Decrease (increase) in prepayments (1,311) 83
Decrease in other receivables - 2,697
Decrease in trade accounts payable (487) (2,030)
Increase in other accrued liabilities 431 611
Increase in interest payable 3,142 1,232
------- -------
Net cash provided by operating activities 1,618 8,879
------- -------
Cash flows from investing activities:
Proceeds from sale of oil and gas properties - 68,300
Lease acquisitions - (414)
Exploration and development expenditures (5,157) (3,748)
Other asset additions (15) (1)
------- -------
Net cash (used in) provided by investing activities (5,172) 64,137
------- -------
Cash flows from financing activities:
Proceeds from secured credit facilities 18,685 -
Repayment of secured credit facilities (16,740) (65,000)
------- -------
Net cash provided by (used in) financing activities 1,945 (65,000)
------- -------
Net (decrease) increase in cash (1,609) 8,016
Cash at beginning of period 3,907 1,024
Cash at end of period $ 2,298 $ 9,040
======= =======
See accompanying notes to financial statements.
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PETSEC ENERGY INC.
(DEBTOR-IN-POSSESSION SUBSEQUENT TO MARCH 31, 2000)
A WHOLLY-OWNED SUBSIDIARY OF PETSEC ENERGY LTD
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - The accompanying financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete
financial statements. The financial statements and footnotes should
be read in conjunction with the financial statements and notes
thereto included in Petsec Energy Inc.'s (the "Company's") Annual
Report on Form 10-K for the year ended December 31, 1999 and the
"Management's Discussion and Analysis of Financial Condition and
Results of Operations" section in this Form 10-Q.
The financial information for the three-month periods ended March 31,
2000 and 1999 has not been audited. However, in the opinion of
management, all adjustments (consisting only of normal recurring
adjustments) considered necessary for a fair presentation have been
included. Certain reclassifications have been made to the prior
period to conform to the current period's presentations. The results
of operations for interim periods are not necessarily indicative of
the operating results that may be expected for the full fiscal year.
NOTE 2 - On April 13, 2000, the Company filed a voluntary petition for
relief under Chapter 11 of the United States Bankruptcy Code (the
"Bankruptcy Code") in the United States Bankruptcy Court for the
Western District of Louisiana, Opelousas Division (the "Bankruptcy
Court"). The Bankruptcy Court assumed jurisdiction on that day. The
case name is In Re Petsec Energy Inc., and the docket number is
00BK-50741 (the "Bankruptcy Case"). Subject to the supervision of the
Bankruptcy Court, the Company remains in possession of the Company's
assets and will manage the business for the benefit of the Company's
creditors and equity holders in accordance with Sections 1107 and
1108 of the Bankruptcy Code.
Prior to filing bankruptcy, the Company refinanced its prior
revolving credit facility (the "Chase Credit Facility") with The
Chase Manhattan Bank, N.A., Bank of America, N.A. (formerly
NationsBank, N.A.) and Credit Lyonnais under which it had been in
default since October 29, 1999. The refinancing occurred on January
18, 2000 when the Company entered into a new $30 million revolving
credit facility (the "Foothill Credit Facility") with Foothill
Capital Corporation ("Foothill") and paid off the Chase Credit
Facility. Now that the Company has filed for bankruptcy protection,
the Company is not allowed under bankruptcy law to make any further
draws on the Foothill Credit Facility. The Company obtained
Bankruptcy Court approval through May 12, 2000 to use cash belonging
to the Company but securing the Foothill Credit Facility to pay
certain expenses of the Company. The Company has filed a second
motion with the Bankruptcy Court to allow it to use Foothill's cash
collateral held by the Company to pay certain expenses through June
16, 2000. The Company is negotiating with Foothill to put in place a
new post-petition credit facility. These negotiations are advanced,
and while not certain, the Company believes that it will be able to
reach agreement with Foothill on a post-petition credit facility. The
Company believes that it will be able to obtain court approval to use
the Foothill cash collateral to pay future expenses, including
expenses that fall due beyond June 16, 2000 and/or, after completing
negotiations with Foothill, enter into a new revolving credit
facility with Foothill; however, there can be no assurance that the
Company will obtain authorization from the Bankruptcy Court to do
either.
The Company did not make the $4.75 million interest payment due on
December 15, 1999 to the holders of its 9 1/2% senior subordinated
notes due June 2007 (the "9 1/2% Notes"). On January 18, 2000, after
asking the noteholders to organize, the Company met with an informal
subcommittee (the "Subcommittee") of the holders of the 9 1/2% Notes
in an effort to reach a solution to its financial situation. While
negotiations are continuing and no agreement has yet been reached,
the Subcommittee has told the Company that it desires that either the
Company or its assets be sold, and the sale proceeds be distributed
to the Company's creditors, including the holders of the 9 1/2%
Notes. The Subcommittee has discussed with the Company carving out a
portion of the proceeds that otherwise would be distributed to the
holders of the 9 1/2% Notes and paying this sum to the Company's
employees and the equity owner of the Company.
Now that the Company has filed for protection under Chapter 11 of the
Bankruptcy Code, the Company plans to discuss the Subcommittee's
proposal with the Unsecured Creditors' Committee appointed in the
Bankruptcy Case and its other unsecured creditors, including certain
holders of the 9 1/2% Notes, who are not on the Unsecured Creditors'
Committee. The Company will explore the possibility of reaching a
consensual solution to the Company's financial problems with these
creditors. The Company also intends to explore other alternatives
available to it concurrently with its efforts to reach a consensual
solution with its creditors. Such alternatives, including a
consensual deal with its creditors if one can be agreed to, will be
within the context of the Bankruptcy Case.
Liquidity Position
Although as of May 12, 2000 the Company has $4.6 million in cash on
hand, this cash is collateral for the Foothill Credit Facility. As
such, the Company is prohibited from using this cash without the
consent of Foothill or authorization from the Bankruptcy Court.
Shortly after filing for bankruptcy protection, the Company obtained
Bankruptcy Court approval to use Foothill's cash collateral through
May 12, 2000 to pay certain expenditures. The Company has another
motion pending with the Bankruptcy Court to use Foothill's cash
collateral beyond such date. If the Court grants this motion, then
the Company expects to have adequate cash resources to meet its
expected expenditures through June 16, 2000. The Company expects to
complete negotiations with Foothill on a post-petition revolving
credit facility which, if such negotiations are successful and if the
Bankruptcy Court authorizes the post-petition facility, is expected
to provide the Company with sufficient liquidity throughout the
Bankruptcy Case. Alternatively, the Company will seek authority to
use Foothill's cash collateral to meet its cash requirements during
the Bankruptcy Case. Nevertheless, the Company has inadequate capital
resources to service its debt and meet anticipated capital
requirements necessary to maintain and grow its business over the
long term. In addition, there can be no assurance that agreement on a
post-petition credit facility will be reached by Foothill, or if
agreement is reached between Foothill and the Company, that such a
facility will be approved by the Court; that the Bankruptcy Court
will approve the use by the Company of Foothill's cash collateral at
all, or if so, through June 16, 2000 and beyond; or that the cash
available from such post-petition credit facility or from Foothill's
cash collateral will be sufficient to meet the Company's cash
requirements.
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While the Company expects to be able to meet its anticipated capital
requirements over the near term, this is dependent on the Company
obtaining the Bankruptcy Court's approval or Foothill's consent to
use cash on hand and that which will be generated from operations.
This cash is collateral for the Foothill Credit Facility.
Alternatively, to meet anticipated capital requirements, the Company
will have to obtain post-petition credit from Foothill or other
sources and Bankruptcy Court approval to enter into such
post-petition credit arrangements. The Company is currently
negotiating with Foothill to obtain post-petition financing.
Secured Credit Facilities
The Company completed a refinancing of its Chase Credit Facility with
a $30 million revolving credit facility with Foothill on January 18,
2000. The filing of the Bankruptcy Case constituted a default on the
Foothill Credit Facility. Although the Foothill Credit Facility is
secured by a lien on substantially all of the Company's assets
(including cash held by the Company), Foothill is prohibited from
taking any action to enforce its rights under the Foothill Credit
Facility by the automatic stay provisions of the Bankruptcy Code. The
Company is in the process of negotiating a post-petition credit
facility with Foothill.
Outstanding borrowings accrue interest at the reference rate most
recently announced by Wells Fargo Bank, N.A., (9% per annum as of
April 30, 2000) plus a margin of 2.5% per annum; the default rate is
the reference rate plus 6.5%. The Company is also required to pay an
unused line fee of 0.5% of the unused amount available for borrowing,
a $10,000 per month service charge and certain other fees and
expenses. The Company has paid all interest that is presently due.
Borrowings under the Foothill Credit Facility were $9.7 million at
April 30, 2000.
Public Senior Subordinated Indebtedness
In June 1997 the Company issued $100 million of 9 1/2% Senior
Subordinated Notes. The principal is due in a lump sum in June 2007.
The 9 1/2% Notes were issued at a discount with a yield to maturity
of 9.56% per annum. Interest at the rate of 9.5% per annum is payable
semiannually on June 15 and December 15 of each year.
The Company engaged a financial advisor in October 1999 to assist
with the restructure of its 9 1/2% Notes due 2007. The Company did
not make the interest payment due on the 9 1/2% Notes at December 15,
1999, and is in default under the Indenture governing the 9 1/2%
Notes. The Company began discussions with a subcommittee of holders
of the 9 1/2% Notes on January 18, 2000 to restructure the
indebtedness due under the 9 1/2% Notes. Now that the Company has
filed for protection under Chapter 11 of the Bankruptcy Code, the
Company intends to continue these discussions with the holders of the
9 1/2% Notes and expand the discussions to include the Unsecured
Creditors' Committee and its other creditors in an effort to reach a
consensual solution to the Company's financial problems. The Company
does not intend to make any further public comments about the
restructuring process until either agreement on a solution is reached
with its creditors or it becomes apparent that no such agreement can
be reached. The Company also intends to explore other alternatives
available to it concurrent with its efforts to reach a consensual
solution with its creditors.
Subordinate Loans from Parent
Petsec Energy Ltd made an initial cash investment of $11.4 million in
the Company and subsequently increased this investment with advances
of $18.5 million from an Australian offering of Ordinary Shares in
September 1995 and $31.0 million out of the net proceeds from a U.S.
offering of ADRs in July 1996.
Funds advanced by the Parent historically have been provided
substantially in the form of subordinated loans denominated in
Australian and US dollars. These loans are subordinated to the
payment of both the Foothill Credit Facility and the 9 1/2% Notes. At
March 31, 2000, the US dollar loans bear interest at 7.69% and in the
case of Australian dollar borrowings, 7.37%. However, the Foothill
Credit Facility currently restricts the payment of interest on the
subordinated loans to the Parent, and the biannual interest payment
normally paid in January was not paid in January 2000. The loans from
the Parent do not have mandatory principal payments due until
December 31, 2007. Any payments or distributions made by the Company
to its Parent have been for reimbursement of direct expenses incurred
in connection with the Company's operations and interest under the
subordinated loans. The Parent has no commitments to make any further
advances to the Company.
NOTE 3 - The Company is involved in certain lawsuits arising in the
ordinary course of business. While the outcome of any of these
lawsuits cannot be predicted with certainty, management expects these
matters to have no material adverse effect on the financial position,
results of operations or liquidity of the Company.
NOTE 4 - In June of 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133 (Statement 133),
"Accounting for Derivative Instruments and Hedging Activities".
Statement 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. Statement
133 requires that all derivatives be recognized as either assets or
liabilities in the balance sheet and measured at fair value. The
accounting for changes in the fair value of a derivative (that is,
gains and losses) depends on the intended use of the derivative and
resulting designation. If certain conditions are met, a derivative
may be specifically designated as a "fair value hedge," "cash flow
hedge," or a hedge of the foreign currency exposure of a net
investment in a foreign operation. Statement 133 amends and
supersedes a number of existing Statements of Financial Accounting
Standards, and nullifies or modifies the consensus reached in a
number of issues addressed by the Emerging Issues Task Force.
Statement 133, as amended, is effective for all fiscal quarters of
fiscal years beginning after June 15, 2000. The Company is assessing
the impact of adoption of Statement 133, and at the present time, has
not quantified the effect of adoption or continuing impact of such
adoption.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
The following discussion is intended to assist in the understanding of
Petsec Energy Inc.'s (the "Company's") historical financial position and results
of operations for the three-month periods ended March 31, 2000 and 1999. The
Company's unaudited financial statements and notes thereto should be referred to
in conjunction with the following discussion.
On April 13, 2000, the Company filed a voluntary petition for relief
under Chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Code") in
the United States Bankruptcy Court for the Western District of Louisiana,
Opelousas Division (the "Bankruptcy Court"). The Bankruptcy Court assumed
jurisdiction on that day. The case name is In Re Petsec Energy Inc., and the
docket number is 00BK-50741 (the "Bankruptcy Case"). Subject to the supervision
of the Bankruptcy Court, the Company remains in possession of the Company's
assets and will manage the business for the benefit of the Company's creditors
and equity holders in accordance with Sections 1107 and 1108 of the Bankruptcy
Code.
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Prior to filing bankruptcy, the Company refinanced its prior revolving
credit facility (the "Chase Credit Facility") with The Chase Manhattan Bank,
N.A., Bank of America, N.A. (formerly NationsBank, N.A.) and Credit Lyonnais
under which it had been in default since October 29, 1999. The refinancing
occurred on January 18, 2000 when the Company entered into a new $30 million
revolving credit facility (the "Foothill Credit Facility") with Foothill Capital
Corporation ("Foothill") and paid off the Chase Credit Facility. Now that the
Company has filed for bankruptcy protection, the Company is not allowed under
bankruptcy law to make any further draws on the Foothill Credit Facility. The
Company obtained Bankruptcy Court approval through May 12, 2000 to use cash
belonging to the Company but securing the Foothill Credit Facility to pay
certain expenses of the Company. The Company has filed a second motion with the
Bankruptcy Court to allow it to use Foothill's cash collateral held by the
Company to pay certain expenses through June 16, 2000. The Company is
negotiating with Foothill to put in place a new post-petition credit facility.
These negotiations are advanced, and while not certain, the Company believes
that it will be able to reach agreement with Foothill on a post-petition credit
facility. The Company believes that it will be able to obtain court approval to
use the Foothill cash collateral to pay future expenses, including expenses that
fall due beyond June 16, 2000 and/or, after completing negotiations with
Foothill, enter into a new revolving credit facility with Foothill; however,
there can be no assurance that the Company will obtain authorization from the
Bankruptcy Court to do either.
The liquidity issues faced by the Company are discussed below in detail
in the "Liquidity and Capital Resources" section of this Form 10-Q.
The Company did not make the $4.75 million interest payment due on
December 15, 1999 to the holders of its 9 1/2% senior subordinated notes due
June 2007 (the "9 1/2% Notes"). On January 18, 2000, after asking the
noteholders to organize, the Company met with an informal subcommittee (the
"Subcommittee") of the holders of the 9 1/2% Notes in an effort to reach a
solution to its financial situation. While negotiations are continuing and no
agreement has yet been reached, the Subcommittee has told the Company that it
desires that either the Company or its assets be sold, and the sale proceeds be
distributed to the Company's creditors, including the holders of the 9 1/2%
Notes. The Subcommittee has discussed with the Company carving out a portion of
the proceeds that otherwise would be distributed to the holders of the 9 1/2%
Notes and paying this sum to the Company's employees and the equity owner of the
Company. Details of the Subcommittee's proposal, which expired without being
accepted by the Company, together with a description of information provided to
the noteholders in connection with the negotiations was described in the 8-K
Current Report filed by the Company on April 18, 2000.
Now that the Company has filed for protection under Chapter 11 of the
Bankruptcy Code, the Company plans to discuss the Subcommittee's proposal with
the Unsecured Creditors' Committee appointed in the Bankruptcy Case and its
other creditors, including certain holders of the 9 1/2% Notes, who are not on
the Unsecured Creditors' Committee. The Company will explore the possibility of
reaching a consensual solution to the Company's financial problems with these
creditors. The Company also intends to explore other alternatives available to
it concurrently with its efforts to reach a consensual solution with its
creditors. Such alternatives, including a consensual deal with its creditors if
one can be agreed to, will be within the context of the Bankruptcy Case.
GENERAL INFORMATION
The Company is the wholly owned principal operating subsidiary of
Petsec Energy Ltd, an Australian public company (the "Parent"). The Parent is an
Australian public company with ordinary shares listed on the Australian Stock
Exchange (symbol: PSA) and American Depositary Receipts ("ADRs") traded on the
OTC Bulletin Board (symbol: PSJEY). The results discussed in this report refer
only to the Company. The Parent's results are filed with the Securities and
Exchange Commission
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separately under Forms 6-K (quarterly) and 20-F (annually). Shareholders and ADR
holders are advised to refer to these filings.
The Company explores for, develops and produces hydrocarbons primarily
in state and federal waters in the Gulf of Mexico. A discussion of the Company's
operating history is contained in the Company's most recent Annual Report on
Form 10-K.
The Company sold all of its interests in West Delta 112/113, West
Cameron 515/516/526 and Vermilion 34/47 for $8.45 million effective February 1,
2000. The sale was completed on April 11, 2000. The net proceeds were used to
reduce the Company's secured debt. After this sale, the Company owns interests
in 41 leases in the Gulf of Mexico.
The Company markets its oil and gas production through contracts that
generally reflect spot market conditions in the central Gulf of Mexico. The
Company has historically entered into crude oil and natural gas price swaps to
reduce its exposure to price fluctuations. The results of operations described
herein reflect any hedging transactions undertaken.
The Company follows the successful efforts method of accounting. Under
this method, the Company capitalizes lease acquisition costs, costs to drill and
complete exploration wells in which proved reserves are discovered and costs to
drill and complete development wells. Costs to drill exploratory wells that do
not find proved reserves are expensed. Seismic, geological and geophysical, and
delay rental expenditures are expensed as incurred.
The Company reimburses the Parent for direct expenses incurred in
connection with its operations. In addition, the Company has received
subordinated loans from the Parent to finance its operations. See the discussion
below in the "Liquidity and Capital Resources" section of this Form 10-Q.
The Company's revenues, profitability and cash flow are substantially
dependent upon prevailing prices for oil and gas, which are in turn dependent
upon numerous factors that are beyond the Company's control, such as economic,
political and regulatory developments and competition from other sources of
energy. The energy markets have historically been volatile, and there can be no
assurance that oil and gas prices will not be subject to wide fluctuations in
the future. Notwithstanding the recent increase in oil and gas prices, a
substantial or extended decline in prices could have a material adverse effect
on the Company's existing financial position, results of operations and access
to capital, as well as the quantities of oil and gas reserves that may be
economically produced.
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RESULTS OF OPERATIONS
The following table sets forth certain operating information with
respect to the oil and gas operations of the Company.
Three Months Ended
March 31
---------------------------
2000 1999
---- ----
NET PRODUCTION:
Gas (MMcf) 1,428 2,621
Oil (MBbls) 169 249
Total (MMcfe) 2,442 4,115
NET SALES DATA (IN THOUSANDS):
Gas $ 3,186 $ 6,183
Oil $ 4,016 $ 3,132
Total $ 7,202 $ 9,315
AVERAGE SALES PRICE (1):
Gas (per Mcf) $ 2.23 $ 2.36
Oil (per Bbl) $ 23.76 $ 12.58
Total (per Mcfe) $ 2.95 $ 2.26
AVERAGE COSTS (PER MCFE):
Lease operating expenses $ 0.60 $ 0.42
Depletion, depreciation, and amortization $ 1.70 $ 1.57
General, administrative and stock compensation expense $ 0.48 $ 0.32
(1) Includes effects of hedging activities
GENERAL. The first quarter exploration and development program
consisted of the Grand Isle 45 A-2 exploration well, a re-drill of the Mustang
Island 883 #1 well and completion and development of the Main Pass 90 #1 and
Main Pass 93 #1 wells that were drilled in 1999. The Company farmed out a 30%
working interest in the Grand Isle 45 A-2 well to Westport Oil and Gas. Westport
will earn the 30% working interest by paying 100% of the Company's costs to
drill and complete the well. The Company retained a 14.67% net revenue interest
in the well.
OIL AND GAS REVENUES. Oil and gas revenues for the three months ended
March 31, 2000 were $7.2 million, a decrease of $2.1 million, or 23%, from $9.3
million for the comparable period in 1999. A 46% decrease in gas production
coupled with a 6% decrease in gas prices, resulted in a $3.0 million decrease in
gas revenues. A 32% decrease in oil production offset by an 89% increase in oil
prices resulted in a $0.9 million increase in oil revenues.
For the three months ended March 31, 2000, the average realized gas
price was $2.23 per Mcf, or 9% below the $2.44 per Mcf average gas price before
hedging. Over the same period, the average realized oil price was $23.76 per
Bbl, or 17% below the $28.64 per Bbl average oil price before hedging. Hedging
activities resulted in a $1.1 million decrease in oil and gas revenues for the
three-month period ended March 31, 2000. For the comparable period in 1999 the
average realized gas price was $2.36 per Mcf, or 41% above the $1.67 per Mcf
average gas price before hedging. In the same period the average realized oil
price was $12.58, or 23% above the $10.19 per Bbl average oil price before
hedging. Hedging activities resulted in a $2.4 million increase in oil and gas
revenues for the three-month period ended March 31, 1999.
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LEASE OPERATING EXPENSES (including production taxes). Lease operating
expenses decreased 15% to $1.5 million for the three months ended March 31,
2000, from $1.7 million for the three months ended March 31, 1999. Lease
operating expenses per Mcfe increased from $0.42 for the comparable period in
1999 to $0.60 for the three months ended March 31, 2000 as a result of the
production decline.
DEPLETION, DEPRECIATION AND AMORTIZATION (DD&A). DD&A expense decreased
$2.3 million, or 36% to $4.2 million for the three months ended March 31, 2000,
from $6.5 million for the same period in 1999. Due to downward reserve revisions
by the Company's independent reserve engineers at December 31, 1999, the unit
rate increased to $1.70 per Mcfe for the three months ended March 31, 2000 from
$1.57 per Mcfe for the same period in 1999.
EXPLORATION EXPENDITURES AND ABANDONMENTS. Seismic, geological and
geophysical expenditures of $0.4 million were expensed during the quarter, a
decrease of $1.3 million from the comparable period in 1999. No abandonment
charges were recorded for the three months ended March 31, 2000. An abandonment
charge of $0.9 million was recorded in the quarter ended March 31, 1999 for the
write-off of the West Cameron 480 and 462 leases.
INTEREST EXPENSE. Interest expense for the three months ended March 31,
2000 was $3.7 million, the same as for the comparable period in 1999.
GENERAL, ADMINISTRATIVE AND STOCK COMPENSATION EXPENSE. General,
administrative and stock compensation expense decreased $0.2 million, or 13%, to
$1.2 million for the three months ended March 31, 2000 from $1.4 million for the
comparable period in 1999. On a per Mcfe basis, the rate increased from $0.32
per Mcfe for the three-month period ended March 31, 1999 to $0.48 per Mcfe for
the comparable period in 2000.
ADVICE ON LIQUIDITY SOLUTIONS. Professional services for advice on the
Company's liquidity problems were $0.8 million for the three-month period ended
March 31, 2000. No such costs were recorded for the comparable 1999 period.
NET LOSS. As a result of the conditions noted above, a net loss of $3.9
million was recorded for the three months ended March 31, 2000, a decrease of
$2.7 million from the net loss of $6.6 million for the comparable period in
1999.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity Position
Although as of May 12, 2000 the Company has $4.6 million in cash on
hand, this cash is collateral for the Foothill Credit Facility. As such, the
Company is prohibited from using this cash without the consent of Foothill or
authorization from the Bankruptcy Court. Shortly after filing for bankruptcy
protection, the Company obtained Bankruptcy Court approval to use Foothill's
cash collateral through May 12, 2000 to pay certain expenditures. The Company
has another motion pending with the Bankruptcy Court to use Foothill's cash
collateral beyond such date. If the Court grants this motion, then the Company
expects to have adequate cash resources to meet its expected expenditures
through June 16, 2000. The Company expects to complete negotiations with
Foothill on a post-petition revolving credit facility which, if such
negotiations are successful and if the Bankruptcy Court authorizes the
post-petition facility, is expected to provide the Company with sufficient
liquidity throughout the Bankruptcy Case. Alternatively, the Company will seek
authority to use Foothill's cash collateral to meet its cash requirements during
the Bankruptcy Case. Nevertheless, the Company has inadequate capital resources
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to service its debt and meet anticipated capital requirements necessary to
maintain and grow its business over the long term. In addition, there can be no
assurance that agreement on a post-petition credit facility will be reached by
Foothill, or if agreement is reached between Foothill and the Company, that such
a facility will be approved by the Bankruptcy Court; that the Bankruptcy Court
will approve the use by the Company of Foothill's cash collateral at all, or if
so, through June 16, 2000 and beyond; or that the cash available from such
post-petition credit facility or from Foothill's cash collateral will be
sufficient to meet the Company's cash requirements.
Cash Flow
The following table represents cash flow data for the Company for the
periods indicated:
Three Months Ended
March 31,
-------------------------------
( in thousands)
2000 1999
---- ----
Cash flow data
Net cash provided by operating activities $ 1,618 $ 8,879
Net cash (used in) provided by investing activities (5,172) 64,137
Net cash provided by (used in) financing activities 1,945 (65,000)
The decrease in cash provided by operating activities from 1999 to 2000
was due primarily to lower production. Cash provided by operating activities in
1999 was impacted by positive working capital changes. Cash provided by
operating activities before working capital changes in 2000 and 1999 was $0.1
million and $1.1 million respectively.
The cash used in investing activities in 2000 represents oil and gas
exploration and development activities. The cash provided by investing
activities in 1999 was due primarily to the receipt of proceeds from the sale of
a 50% working interest in certain assets to Apache Corporation.
The cash movements in financing activities in 2000 and 1999 consisted
of repayments and borrowings under the secured credit facilities.
There can be no assurance that the Company will be able to use the cash
flow generated from operations for any particular purpose other than to repay
Foothill. Until Foothill is paid in full or the Company has cash on hand in
excess of what is owed to Foothill, this cash is collateral for the Foothill
Credit Facility. Furthermore, the Company's use of this cash must be approved by
the Bankruptcy Court.
Capital Expenditures and Commitments.
During the three-month period ended March 31, 2000, the Company spent
$5.2 million in capital and exploration expenditures, an increase of $1.0
million from $4.2 million for the comparable period in 1999.
While the Company expects to be able to meet its anticipated capital
requirements over the near term, this is dependent on the Company obtaining the
Bankruptcy Court's approval or Foothill's consent to use cash on hand and that
which will be generated from operations. This cash is collateral for the
Foothill Credit Facility. Alternatively, to meet anticipated capital
requirements, the Company will have to obtain post-petition credit from Foothill
or other sources and Bankruptcy Court approval to enter into such post-petition
credit arrangements. The Company is currently negotiating with Foothill to
obtain post-
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petition financing. See the foregoing discussion in this "Liquidity and Capital
Resources" section of this Form 10-Q.
Secured Credit Facilities
The Company completed a refinancing of its Chase Credit Facility with a
$30 million revolving credit facility with Foothill on January 18, 2000. The
filing of the Bankruptcy Case constituted a default on the Foothill Credit
Facility. Although the Foothill Credit Facility is secured by a lien on
substantially all of the Company's assets (including cash held by the Company),
Foothill is prohibited from taking any action to enforce its rights under the
Foothill Credit Facility by the automatic stay provisions of the Bankruptcy
Code. The Company is in the process of negotiating a post-petition credit
facility with Foothill. See the discussion above in this "Liquidity and Capital
Resources" section of this Form 10-Q.
Outstanding borrowings accrue interest at the reference rate most
recently announced by Wells Fargo Bank N.A., (9% per annum as of April 30, 2000)
plus a margin of 2.5% per annum; the default rate is the reference rate plus
6.5%. The Company is also required to pay an unused line fee of 0.5% of the
unused amount available for borrowing, a $10,000 per month service charge and
certain other fees and expenses. The Company has paid all interest that is
presently due. Borrowings under the Foothill Credit Facility were $9.7 million
at April 30, 2000.
Public Senior Subordinated Indebtedness
In June 1997 the Company issued $100 million of 9 1/2% Senior
Subordinated Notes. The principal is due in a lump sum in June 2007. The 9 1/2%
Notes were issued at a discount with a yield to maturity of 9.56% per annum.
Interest at the rate of 9.5% per annum is payable semiannually on June 15 and
December 15 of each year.
The Company engaged a financial advisor in October 1999 to assist with
the restructure of its 9 1/2% Notes due 2007. The Company did not make the
interest payment due on the 9 1/2% Notes at December 15, 1999, and is in default
under the Indenture governing the 9 1/2% Notes. The Company began discussions
with a subcommittee of holders of the 9 1/2% Notes on January 18, 2000 to
restructure the indebtedness due under the 9 1/2% Notes. Now that the Company
has filed for protection under Chapter 11 of the Bankruptcy Code, the Company
intends to continue these discussions with the holders of the 9 1/2% Notes and
expand the discussions to include the Unsecured Creditors' Committee and its
other creditors in an effort to reach a consensual solution to the
Company's financial problems. The Company does not intend to make any further
public comments about the restructuring process until either agreement on a
solution is reached with its creditors or it becomes apparent that no
such agreement can be reached. The Company also intends to explore other
alternatives available to it concurrent with its efforts to reach a consensual
solution with its creditors.
Subordinate Loans from Parent
Petsec Energy Ltd made an initial cash investment of $11.4 million in
the Company and subsequently increased this investment with advances of $18.5
million from an Australian offering of Ordinary Shares in September 1995 and
$31.0 million out of the net proceeds from a U.S. offering of ADRs in July 1996.
Funds advanced by the Parent historically have been provided
substantially in the form of subordinated loans denominated in Australian and US
dollars. These loans are subordinated to the payment of both the Foothill Credit
Facility and the 9 1/2% Notes. At March 31, 2000, the US dollar loans bear
interest at 7.69% and in the case of Australian dollar borrowings, 7.37%.
However, the
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Foothill Credit Facility currently restricts the payment of interest on the
subordinated loans to the Parent, and the biannual interest payment normally
paid in January was not paid in January 2000. The loans from the Parent do not
have mandatory principal payments due until December 31, 2007. Any payments or
distributions made by the Company to its Parent have been for reimbursement of
direct expenses incurred in connection with the Company's operations and
interest under the subordinated loans. The Parent has no commitments to make any
further advances to the Company.
HEDGING TRANSACTIONS
The Company has utilized hedging transactions with respect to a portion
of its oil and gas production to achieve a more predictable cash flow and to
reduce its exposure to oil and gas price fluctuations. While these hedging
arrangements limit the downside risk of adverse price movements, they also limit
future revenues from favorable price movements. The use of hedging transactions
also involves the risk that the counterparties will be unable to meet the
financial terms of such transactions. When the Company has hedging transactions
in place, the credit worthiness of counterparties is subject to continual
review. The Company limits the duration of the transactions and the percentage
of the Company's expected aggregate oil and gas production that may be hedged.
The Company accounts for these transactions as hedging activities and,
accordingly, gains or losses are included in oil and gas revenues when the
hedged production is delivered.
The Company has in the past entered into forward swap contracts with
major financial institutions to reduce the price volatility on the sale of oil
and gas production. In swap agreements, the Company receives the difference
between a fixed price per unit of production and a floating price issued by a
third party. If the floating price is higher than the fixed price, the Company
pays the difference.
As of March 31, 2000, the following commodity swap contracts were in
place:
Oil Gas
Volume Price Volume Price
Bbls/day $/bbl Mmbtu/d $/mmbtu
-------- ----- ------- --------
2nd Quarter 670 $19.70 15,000 $2.28
3rd Quarter 0 0 10,000 $2.30
4th Quarter 0 0 10,000 $2.30
On April 25, 2000, the Company had hedging arrangements in place with
The Chase Manhattan Bank, N.A., and Bank of America, N.A. The Company was
prohibited by bankruptcy law from paying certain pre-petition debts falling due
on April 25, 2000 with respect to these contracts. On April 26, 2000, the
counterparties drew on letters of credit the Company had posted to secure its
obligations to pay these obligations. In addition, the counterparties terminated
the hedging arrangements with respect to future transactions, and closed out all
hedging arrangements. The cost to terminate these contracts was $3.4 million.
As a consequence of the early termination by The Chase Manhattan Bank,
N.A., and Bank of America, N.A., the Company does not have any hedging
arrangements in place presently. However, the Company has arranged to sell
approximately 40% of its anticipated net daily gas production over the next
three months at $3.305 per mmbtu.
NEW ACCOUNTING PRONOUNCEMENT
In June of 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133 (Statement 133), "Accounting
for Derivative Instruments and Hedging
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Activities". Statement 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. Statement 133 requires that all
derivatives be recognized as either assets or liabilities in the balance sheet
and measured at fair value. The accounting for changes in the fair value of a
derivative (that is, gains and losses) depends on the intended use of the
derivative and resulting designation. If certain conditions are met, a
derivative may be specifically designated as a "fair value hedge," "cash flow
hedge," or a hedge of the foreign currency exposure of a net investment in a
foreign operation. Statement 133 amends and supersedes a number of existing
Statements of Financial Accounting Standards, and nullifies or modifies the
consensus reached in a number of issues addressed by the Emerging Issues Task
Force. Statement 133, as amended, is effective for all fiscal quarters of fiscal
years beginning after June 15, 2000. The Company is assessing the impact of
adoption of Statement 133, and at the present time, has not quantified the
effect of adoption or continuing impact of such adoption.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
Except as described in "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Hedging Transactions," there has
been no material change to the information disclosed in the Company's most
recent Annual Report on Form 10-K.
PART II. OTHER INFORMATION.
ITEM 1. LEGAL PROCEEDINGS.
The Company filed a voluntary petition for relief under Chapter 11 of
the Bankruptcy Code on April 13, 2000. See discussion in the section of this
Form 10-Q under "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
The Company is in default under the indenture governing the 9 1/2%
Notes. As a consequence of the bankruptcy filing, the Company is also in default
of the Foothill Credit Facility. See discussion in the section of this Form 10-Q
under "Management's Discussion and Analysis of Financial Condition and Results
of Operations."
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following instruments and documents are included as Exhibits to this Form
10-Q. Exhibits incorporated by reference are so indicated by parenthetical
information.
Exhibit No. Exhibit
- ----------- --------
27 Financial Data Schedule
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(b) Reports on Form 8-K
Date of Report Item Reported Financial Statements Filed
February 15, 2000 Item 5 None
April 18, 2000 Items 3 and 5 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.
Petsec Energy Inc.
May 15, 2000 By: /s/ Ross A. Keogh
------------------------
Ross A. Keogh
Director, Vice President --
Chief Financial Officer, and
Treasurer
(Principal Financial
and Accounting Officer)
May 15, 2000 By: /s/ James E. Slatten, III
------------------------
James E. Slatten, III
Director, Vice President --
Land and Legal, and Secretary
(Duly Authorized Officer)
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EXHIBIT INDEX
Exhibit No. Exhibit
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27 Financial Data Schedule