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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 June 30, 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 [ ]
2
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant 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 August 14, 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 Securities and Exchange
Commission as a result of its public offering of American Depositary Receipts
(ADRs) traded on the OTC Bulletin Board (symbol: PSJEY.OB). Effective April 13,
2000 and as a result of Petsec Energy Inc.'s Chapter 11 bankruptcy filing,
Petsec Energy Inc.'s financial results are no longer consolidated with the
results of Petsec Energy Ltd. Shareholders and holders of American Depositary
Receipts are advised to refer to the filings of Petsec Energy Ltd for the
consolidated results prior to April 13, 2000.
Forward Looking Statements
This Form 10-Q includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933 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.
3
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.
Effective April 13, 2000 and as a result of its Chapter 11 bankruptcy filing, Petsec
Energy Inc. is no longer consolidated in the results of Petsec Energy Ltd.
Item 1. Financial Statements
Balance Sheets................................................................................ 4
Statements of Operations and Accumulated Deficit.............................................. 5
Statements of Cash Flows...................................................................... 6
Notes to Financial Statements................................................................. 7-9
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations......................................................................... 10-16
Item 3. Quantitative and Qualitative Disclosures
About Market Risk............................................................................. 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................................................. 17
Item 3. Defaults Upon Senior Securities................................................................... 17
Item 6. Exhibits and Reports on Form 8-K.................................................................. 18
SIGNATURES.................................................................................................. 19
4
PETSEC ENERGY INC.
(DEBTOR-IN-POSSESSION AS OF APRIL 13, 2000)
A WHOLLY OWNED SUBSIDIARY OF PETSEC ENERGY LTD
BALANCE SHEETS
(Dollars in thousands, except share amounts)
ASSETS
June 30, December 31,
2000 1999
(Unaudited)
----------- ------------
Current Assets
Cash $ 1,629 $ 3,907
Accounts receivable 5,664 3,980
Other receivables 157 31
Inventories of crude oil 45 45
Prepaid expenses 3,258 1,363
---------- ----------
Total Current Assets 10,753 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 161,221 163,398
Unproved oil and gas properties 9,359 14,036
Production facilities 46,484 44,483
Other 1,947 1,933
---------- ----------
219,011 223,850
Less accumulated depletion, depreciation and amortization (150,180) (142,263)
---------- ----------
Net property, plant and equipment 68,831 81,587
---------- ----------
Other Assets 4,391 2,595
---------- ----------
Total Assets $ 83,975 $ 93,508
========== ==========
LIABILITIES AND SHAREHOLDER'S DEFICIT
Liabilities Not Subject to Compromise
Current liabilities:
Trade accounts payable 1,114 --
Interest payable 88 32
Secured credit facility 1,597 7,875
Accrued liabilities 2,918 --
Provision for dismantlement 3,112 2,893
---------- ----------
Total Current Liabilities Not Subject to Compromise 8,829 10,800
Liabilities Subject to Compromise
Trade accounts payable 2,319 2,531
Interest payable 9,908 6,465
Unsecured debt:
Senior subordinated notes 99,692 99,684
Shareholder loans 36,595 37,330
Accrued liabilities 785 8,011
---------- ----------
149,299 154,021
---------- ----------
Total Liabilities 158,128 164,821
---------- ----------
Shareholder's Deficit:
Common stock, $1 par value; authorized 1,000,000 shares;
issued and outstanding 1 share -- --
Additional paid-in-capital 21,897 21,818
Accumulated deficit (96,050) (93,131)
---------- ----------
Total Shareholder's Deficit (74,153) (71,313)
---------- ----------
Total Liabilities and Shareholder's Deficit $ 83,975 $ 93,508
========== ==========
See accompanying notes to financial statements.
5
PETSEC ENERGY INC.
(DEBTOR-IN-POSSESSION AS OF APRIL 13, 2000)
A WHOLLY OWNED SUBSIDIARY OF PETSEC ENERGY LTD
STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
(UNAUDITED)
(Dollars in thousands)
Three Months Ended Six Months Ended
June 30, June 30,
------------------- ------------------
2000 1999 2000 1999
---- ---- ---- ----
Revenue:
Oil and gas sales $ 9,887 $ 8,031 $ 17,089 $ 17,346
Operating expenses:
Lease operating expenses 1,300 1,739 2,682 3,415
Production taxes 99 62 191 126
Exploration expenditures 161 268 520 1,913
Abandonments 671 -- 671 888
General and administrative 1,114 1,340 2,238 2,627
Stock compensation 30 83 79 147
Advice on liquidity solutions 140 -- 946 --
Depletion, depreciation and amortization 4,476 5,289 8,630 11,764
-------- -------- --------- ---------
Total operating expenses 7,991 8,781 15,957 20,880
-------- -------- --------- ---------
Income (loss) from operations 1,896 (750) 1,132 (3,534)
Other income (expenses):
Interest expense (contractual interest $3,700 and
$7,389 for the three and six month periods ended
June 30, 2000, respectively) (964) (3,284) (4,653) (6,947)
Interest income 4 95 31 160
Other 806 (181) 1,343 (369)
-------- -------- --------- ---------
(154) (3,370) (3,279) (7,156)
--------- -------- --------- ---------
Income (loss) before bankruptcy items and income taxes 1,742 (4,120) (2,147) (10,690)
Bankruptcy items:
Advice on liquidity solutions (834) -- (834) --
Interest earned on accumulated cash 62 62
-------- --------- --------- ---------
(772) -- (772) --
-------- --------- --------- ---------
Income (loss) before income taxes 970 (4,120) (2,919) (10,690)
Income taxes -- -- -- --
-------- --------- --------- ---------
Net income (loss) 970 (4,120) (2,919) (10,690)
Accumulated deficit at beginning of period (97,020) (70,213) (93,131) (63,643)
-------- --------- --------- --------
Accumulated deficit at end of period $(96,050) $ (74,333) $ (96,050) $(74,333)
======== ========= ========= ========
See accompanying notes to financial statements.
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PETSEC ENERGY INC.
(DEBTOR-IN-POSSESSION AS OF APRIL 13, 2000)
A WHOLLY OWNED SUBSIDIARY OF PETSEC ENERGY LTD
STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Dollars in thousands)
Six Months Ended
June 30,
--------------------
2000 1999
---- ----
Cash flows from operating activities:
Loss before bankruptcy items $ (2,147) $ (10,690)
Adjustments to reconcile loss before bankruptcy items to
net cash provided by operating activities:
Depletion, depreciation and amortization 8,630 11,764
Abandonments 671 888
Gain on the sale of assets (593) --
Other (196) 670
Changes in operating assets and liabilities:
Decrease (increase) in receivables (1,684) 4,098
Decrease (increase) in prepayments (1,895) 141
Decrease (increase) in other receivables (126) 3,460
Increase (decrease) in trade accounts payable 562 (2,231)
Decrease in other accrued liabilities (500) (466)
Increase (decrease) in interest payable 3,529 (570)
-------- ---------
Net cash provided by operating activities before bankruptcy items 6,251 7,064
Operating cash flows from bankruptcy items:
Interest received on accumulated cash 62 --
Payments for advice on liquidity solutions (all accrued at
June 30, 2000) -- --
-------- ---------
Net cash provided by bankruptcy items 62 --
-------- ---------
Net cash provided by operating activities 6,313 7,064
Cash flows from investing activities:
Proceeds from sale of oil and gas properties 8,450 70,045
Lease acquisitions -- (1,985)
Exploration and development expenditures (8,483) (6,691)
Other asset additions (15) --
-------- ---------
Net cash (used in) provided by investing activities (48) 61,369
-------- ---------
Cash flows from financing activities:
Proceeds from secured credit facilities (pre-petition) 19,330 --
Repayment of secured credit facilities (pre-petition) (21,515) (65,000)
Proceeds from secured credit facilities (post-petition) 17,358 --
Repayment of secured credit facilities (post-petition) (23,716) --
-------- ---------
Net cash used in financing activities (8,543) (65,000)
-------- ---------
Net (decrease) increase in cash (2,278) 3,433
Cash at beginning of period 3,907 1,024
-------- ---------
Cash at end of period $ 1,629 $ 4,457
======== =========
See accompanying notes to financial statements.
7
PETSEC ENERGY INC.
(DEBTOR-IN-POSSESSION AS OF APRIL 13, 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 and six-month periods ended
June 30, 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 holder in accordance with Sections 1107 and 1108
of the Bankruptcy Code.
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 of the holders of the 9 1/2% Notes in an effort to reach
a solution to its financial situation. On June 16, 2000, an agreement
was reached among the Company, Petsec (USA) Inc., as equity owner
("PUSA"), certain senior management of the Company, the Official
Committee of Unsecured Creditors in the Bankruptcy Case and certain
holders of the 9 1/2% Notes. The agreement provides for the sale of
the Company or all of its assets and for distribution of the sale
proceeds to the Company's creditors, PUSA and certain of the
Company's senior management team in the USA. Upon confirmation by the
Bankruptcy Court of a Plan of Reorganization incorporating the
agreement discussed above, the Company will adopt the liquidation
basis of accounting. As of June 30, 2000, no adjustments have been
made to reflect this basis of accounting. Details of the June 16,
2000 agreement are described in the 8-K current report filed by the
Company with the Securities and Exchange Commission on June 19, 2000.
On June 30, 2000, the Company filed a Plan of Reorganization (the
"Plan") and a Disclosure Statement (the Disclosure Statement, and
together with the Plan, collectively the "Plan Documents") that
incorporates the provisions of the June 16, 2000 agreement. Neither
the Disclosure Statement nor the Plan has been approved by the
Bankruptcy Court. A hearing on the adequacy of the Disclosure
Statement was held by the Bankruptcy Court on July 31, 2000. The
Bankruptcy Court adjourned the Disclosure Statement hearing until
August 16, 2000.
Liquidity Position
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. After filing for bankruptcy
protection, the Company entered into a post-petition revolving credit
facility with Foothill Capital Corporation ("Foothill"), the
Company's pre-petition lender,
8
which was approved by the Bankruptcy Court on June 20, 2000. The
revolving facility is for $30 million, subject to monthly borrowing
base adjustments, and is expected to provide the Company with
sufficient liquidity throughout the Bankruptcy Case although there
can be no assurance of this. On August 10, 2000, $1.7 million was
drawn on the facility and $1.0 million cash was on hand.
Secured Credit Facility
On June 20, 2000, the Company entered into a $30 million revolving
credit facility with Foothill. Under the facility, outstanding
borrowings accrue interest at the reference rate most recently
announced by Wells Fargo Bank N.A., (9.5% per annum as of July 31,
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.
Public Senior Subordinated Indebtedness
In June 1997 the Company issued $100 million of 9 1/2% 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 did not make the interest payment due in the amount of
$4.75 million 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
did not make the interest payment due in the amount of $4.75 million
on June 15, 2000. The 9 1/2% Notes and accrued interest are
classified as "liabilities subject to compromise" and the Company has
discontinued accruing interest effective April 13, 2000.
Subordinate Loans from PUSA
Petsec Energy Ltd ("PEL"), indirectly through PUSA, 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 PUSA 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. The biannual interest
payments on these loans were not paid in January and July, 2000.
These loans and accrued interest are classified as "liabilities
subject to compromise" and the Company has discontinued accruing
interest effective April 13, 2000. The loans from PUSA do not have
mandatory principal payments due until December 31, 2007. Any
payments or distributions made by the Company to PEL and PUSA have
been for reimbursement of direct expenses incurred in connection with
the Company's operations and interest under the subordinated loans.
Neither PEL nor PUSA has any 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.
9
NOTE 4 - 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.
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 $3.0
million. At June 30, 2000, $1.6 million of this cost is included in
prepaid expenses and will be recognized over the original terms of
the agreements until adoption of the liquidation basis of accounting.
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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 and six-month periods ended June 30, 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 holder in accordance with Sections 1107 and 1108 of the Bankruptcy
Code.
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 of the
holders of the 9 1/2% Notes in an effort to reach a solution to its financial
situation. On June 16, 2000, an agreement was reached among the Company, Petsec
(USA) Inc., as equity owner ("PUSA"), certain senior management of the Company,
the Official Committee of Unsecured Creditors in the Bankruptcy Case and certain
holders of the 9 1/2% Notes. The agreement provides for the sale of the Company
or all of its assets and for distribution of the sale proceeds to the Company's
creditors, PUSA and certain of the Company's senior management team in the USA.
Upon confirmation by the Bankruptcy Court of a Plan of Reorganization
incorporating the agreement discussed above, the Company will adopt the
liquidation basis of accounting. As of June 30, 2000, no adjustments have been
made to reflect this basis of accounting. Details of the June 16, 2000
agreement are described in the 8-K current report filed by the Company with
the Securities and Exchange Commission on June 19, 2000.
On June 30, 2000, the Company filed a Plan of Reorganization (the
"Plan") and a Disclosure Statement (the Disclosure Statement, and together with
the Plan, collectively the "Plan Documents") that incorporates the provisions of
the June 16, 2000 agreement. Neither the Disclosure Statement nor the Plan has
been approved by the Bankruptcy Court. A hearing on the adequacy of the
Disclosure Statement was held by the Bankruptcy Court on July 31, 2000. The
Bankruptcy Court adjourned the Disclosure Statement hearing until August 16,
2000.
Consistent with the Plan Documents and the June 16, 2000 agreement, the
Company has commenced a marketing process to sell the Company or all of its
assets. The investment banking firm of Houlihan, Lokey, Howard & Zukin Capital,
L.P., ("HLHZ") has been approved by the Bankruptcy Court as the transaction
broker. The Company, through HLHZ, has distributed an information memorandum
describing the Company and its assets to certain potential acquirers, and a data
room was opened on July 13, 2000 to facilitate the sale process.
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GENERAL INFORMATION
The Company is the wholly owned principal operating subsidiary of
Petsec Energy Ltd ("PEL"), 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.OB). The
results discussed in this report refer only to the Company. PEL's results are
filed with the Securities and Exchange Commission separately under Forms 6-K
(quarterly) and 20-F (annually). PEL's shareholders and holders of ADRs are
advised to refer to these filings for information pertaining to PEL.
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.
On August 3, 2000, the Company entered into a purchase and sale
agreement with LLOG Exploration Offshore, Inc. ("LLOG") to sell to LLOG
effective as of August 1, 2000 all of the Company's interest in six exploratory
leases and one producing lease in the Mustang Island area for a cash payment of
$6.4 million. Net reserves attributable to the Mustang Island 883S producing
lease, estimated by Ryder Scott Company, L.P., the Company's independent reserve
engineering firm, are 83,986 barrels of oil and 3.2 Bcf of gas as of July 1,
2000. The sale is conditioned upon obtaining the approval of the Bankruptcy
Court after notice of the sale has been provided to interested parties who will
have the opportunity to make "higher and better" competitive offers under the
Bankruptcy Code. Other customary closing conditions are contained in the
purchase and sale agreement. The leases subject to the sale cover portions of
Mustang Island blocks 748L, 749L, 795L, 797L, 883S, 940S and 941S. Not taking
into account the potential sale to LLOG, the Company has 40 leases in state and
federal waters off the Louisiana and Texas coasts, 21 of which are producing.
At the request of the Company, Ryder Scott Company, L.P., issued a
mid-year reserve analysis on June 12, 2000, effective as of July 1, 2000. The
Company had this mid-year report prepared for use in connection with the sale
process. The report was not prepared in accordance with Securities and Exchange
Commission rules; it used pricing assumptions selected by the Company and was
prepared using a forward looking effective date. The pricing assumptions,
present value calculations and reserve estimates were disclosed by the Company
in an 8-K Current Report filed with the Securities and Exchange Commission on
June 19, 2000.
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 PEL and PUSA for direct expenses incurred in
connection with its operations. In addition, the Company has received
subordinated loans from PUSA 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.
12
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 SIX MONTHS ENDED
JUNE 30 JUNE 30
------------------------ ------------------------
2000 1999 2000 1999
---- ---- ---- ----
NET PRODUCTION:
Gas (MMcf) 1,935 2,140 3,363 4,761
Oil (MBls) 176 202 345 451
Total (MMcfe) 2,991 3,352 5,433 7,467
NET SALES DATA (IN THOUSANDS):
Gas $5,361 $4,780 $ 8,547 $10,963
Oil $4,526 $3,251 $ 8,542 $ 6,383
Total $9,887 $8,031 $17,089 $17,346
AVERAGE SALES PRICE (1):
Gas (per Mcf) $ 2.77 $ 2.23 $ 2.54 $ 2.30
Oil (per Bbl) $25.72 $16.09 $24.76 $ 14.15
Total (per Mcfe) $ 3.31 $ 2.40 $ 3.15 $ 2.32
AVERAGE COSTS (PER MCFE):
Lease operating expenses $ 0.47 $ 0.54 $ 0.53 $ 0.47
Depletion, depreciation, and amortization $ 1.50 $ 1.58 $ 1.59 $ 1.58
General, administrative and other expenses $ 0.38 $ 0.42 $ 0.43 $ 0.37
(1) Includes effects of hedging activities
GENERAL. During the three months ended June 30, 2000, four wells were
brought into production: Grand Isle 45 #2, Mustang Island 883S #1ST, Main Pass
90 #1 and Main Pass 93 #1.
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 and resulted in a gain of $0.6
million. The net proceeds were used to reduce the Company's secured debt.
OIL AND GAS REVENUES. Oil and gas revenues for the three months ended
June 30, 2000 were $9.9 million, an increase of $1.9 million, or 24%, from $8.0
million for the comparable period in 1999. A 10% decrease in gas production
coupled with a 24% increase in gas prices, resulted in a $0.6 million increase
in gas revenues. A 13% decrease in oil production offset by a 60% increase in
oil prices resulted in a $1.3 million increase in oil revenues.
Oil and gas revenues for the six-month period ended June 30, 2000 were
$17.1 million, a decrease of $0.2 million, or 1% below $17.3 million for the
comparable period in 1999. Oil production in the first half of 2000 decreased
24% and gas production decreased 29% over the comparable 1999 period. The
average realized price of oil increased by 75% and gas increased by 10%.
For the three months ended June 30, 2000, the average realized gas
price was $2.77 per Mcf, or 16% below the $3.31 per Mcf average gas price before
hedging. Over the same period, the average realized oil price was $25.72 per
Bbl, or 7% below the $27.80 per Bbl average oil price before hedging. Hedging
activities resulted in a $1.4 million decrease in oil and gas revenues. For the
comparable period in 1999 the average realized gas price was $2.23 per Mcf, or
12% above the
13
$2.00 per Mcf average gas price before hedging. In the same period the average
realized oil price was $16.09, or 3% below the $16.64 per Bbl average oil price
before hedging. Hedging activities resulted in a $0.4 million increase in oil
and gas revenues for the three-month period ended June 30, 1999.
For the six months ended June 30, 2000, the average realized gas price
was $2.54 per Mcf, or 14% below the $2.94 per Mcf average gas price before
hedging. Over the same period, the average realized oil price was $24.76 per
Bbl, or 12% below the $28.21 per Bbl average oil price before hedging. Hedging
activities resulted in a $2.5 million decrease in oil and gas revenues for the
six-month period ended June 30, 2000. For the comparable period in 1999, the
average realized gas price was $2.30 per Mcf, or 26% above the $1.82 per Mcf
average gas price before hedging. In the same period the average realized oil
price was $14.15, or 8% above the $13.08 per Bbl average oil price before
hedging. Hedging activities resulted in a $2.8 million increase in oil and gas
revenues for the six-month period ended June 30, 1999.
LEASE OPERATING EXPENSES (including production taxes). Lease operating
expenses decreased 22% to $1.4 million for the three months ended June 30, 2000,
from $1.8 million for the three months ended June 30, 1999. Lease operating
expenses per Mcfe decreased from $0.54 for the comparable period in 1999 to
$0.47 for the three months ended June 30, 2000 as a result of lower workover
costs.
Lease operating expenses for the six-month period ended June 30, 2000
were $2.9 million, a decrease of 17% from the corresponding period in 1999.
Lease operating expenses per Mcfe increased from $0.47 for the comparable period
in 1999 to $0.53 for the first half of 2000 due to production decline.
DEPLETION, DEPRECIATION AND AMORTIZATION ("DD&A"). DD&A expense
decreased $0.8 million, or 15% to $4.5 million for the three months ended June
30, 2000, from $5.3 million for the same period in 1999. Due to reserve
revisions by the Company's independent reserve engineers at June 30, 2000 the
unit rate decreased to $1.50 per Mcfe for the three months ended June 30, 2000
from $1.58 per Mcfe for the same period in 1999.
DD&A expense for the six-month period ended June 30, 2000 decreased 27%
to $8.6 million from $11.8 million for the corresponding period in 1999. The
depletion rate per unit of $1.59 per Mcfe for the six-month period ended June
30, 2000 increased slightly from $1.58 per Mcfe for the corresponding period in
1999.
EXPLORATION EXPENDITURES AND ABANDONMENTS. Seismic, geological and
geophysical expenditures of $0.2 million were expensed during the quarter, a
decrease of $0.1 million from the comparable period in 1999. Abandonment charges
of $0.7 million were recorded for the three months ended June 30, 2000 for the
West Cameron 542 lease, which went offline and has expired.
Exploration expenditures for the six months ended June 30, 2000 were
$0.5 million, a decrease of $1.4 million over the comparable period in 1999.
Abandonment charges for the six months ended June 30, 2000 were $0.7 million
compared to $0.9 million for the same period in 1999.
INTEREST EXPENSE. Interest expense decreased $2.3 million, or 70% to
$1.0 million for the three months ended June 30, 2000, from $3.3 million for the
same period in 1999.
For the six months ended June 30, 2000, interest expense was $4.7
million compared to interest expense of $6.9 million during the same period in
1999 primarily due to the automatic stay as a result of the bankruptcy filing.
Contractual interest for the three and six month periods ended June 30, 2000
would have been $3.7 million and $7.4 million, respectively.
14
GENERAL, ADMINISTRATIVE AND STOCK COMPENSATION EXPENSE. General,
administrative and stock compensation expense decreased $0.2 million, or 15%, to
$1.1 million for the three months ended June 30, 2000 from $1.3 million for the
comparable period in 1999. On a per Mcfe basis, the rate was $0.38 per Mcfe for
both periods.
For the six-month period ended June 30, 2000, the general,
administrative and stock compensation expense decreased $0.5 million to $2.3
million from $2.8 million for the comparable period in 1999. On a per Mcfe
basis, the rate increased from $0.37 per Mcfe for the six-month period ended
June 30, 1999 to $0.43 per Mcfe for the comparable period in 2000 due to
production decline.
ADVICE ON LIQUIDITY SOLUTIONS. For the three-month period ended June
30, 2000, professional services for advice on the Company's liquidity problems
were $0.1 million prior to April 13, 2000 and $0.8 million thereafter.
For the six-month period ended June 30, 2000, professional services for
advice on the Company's liquidity problems was $1.8 million.
NET INCOME (LOSS). Net income of $1.0 million was recorded for the
three months ended June 30, 2000, an increase of $5.1 million from the net loss
of $4.1 million for the comparable period in 1999. The net loss for the six
months ended June 30, 2000 was $2.9 million, an improvement of $7.8 million over
the comparable 1999 period.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity Position
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. After filing for bankruptcy protection, the Company
entered into a post-petition revolving credit facility with Foothill Capital
Corporation ("Foothill"), the Company's pre-petition lender, which was approved
by the Bankruptcy Court on June 20, 2000. The revolving credit facility is for
$30 million, subject to monthly borrowing base adjustments, and is expected to
provide the Company with sufficient liquidity throughout the Bankruptcy Case
although there can be no assurance of this. On August 10, 2000, $1.7 million was
drawn on the facility and $1.0 million cash was on hand.
Cash Flow
The following table represents cash flow data for the Company for the
periods indicated:
Six Months Ended
June 30,
--------------------------------
( in thousands)
2000 1999
---- ----
Cash flow data
Net cash provided by operating activities $6,313 $ 7,064
Net cash (used in) provided by investing activities (48) 61,369
Net cash used in financing activities (8,543) (65,000)
15
The decrease in cash provided by operating activities from 1999 to 2000
was due primarily to lower production and the effect of working capital changes.
Cash provided by operating activities in both years was impacted by positive
working capital changes. Cash provided by operating activities before working
capital changes in 2000 and 1999 was $6.4 million and $2.6 million,
respectively.
The cash provided by investing activities in 2000 resulted from the
receipt of net proceeds from the sale of certain oil and gas assets net of
expenditures on 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.
Capital Expenditures
During the three-month period ended June 30, 2000, the Company spent
$3.2 million in capital and exploration expenditures, and in the six months
ended June 30, 2000 spent $8.5 million. In the comparable periods in 1999, the
Company spent $4.5 million and $8.7 million, respectively.
To meet anticipated capital requirements, the Company has obtained
post-petition credit from Foothill, which was approved by the Bankruptcy Court
on June 20, 2000. See the foregoing discussion in this "Liquidity and Capital
Resources" section of this Form 10-Q.
Secured Credit Facility
On June 20, 2000, the Company entered into a $30 million revolving
credit facility with Foothill. Under the facility, outstanding borrowings accrue
interest at the reference rate most recently announced by Wells Fargo Bank N.A.,
(9.5% per annum as of July 31, 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.
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 did not make the interest payment due in the amount of
$4.75 million 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 did not make the interest
payment due in the amount of $4.75 million on June 15, 2000.
Subordinate Loans from PUSA
PEL, indirectly through PUSA, 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.
16
Funds advanced by PUSA 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. The biannual interest payments on these loans were not paid in
January and July, 2000, and as a result of the Chapter 11 filing, interest has
ceased to be accrued as of April 13, 2000. The loans from PUSA do not have
mandatory principal payments due until December 31, 2007. Any payments or
distributions made by the Company to PEL and PUSA have been for reimbursement of
direct expenses incurred in connection with the Company's operations and
interest under the subordinated loans. Neither PEL nor PUSA has any commitments
to make any further advances to the Company.
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 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 Note 4 to the unaudited financial statements,
there has been no material change to the information disclosed in the Company's
most recent Annual Report on Form 10-K.
17
PART II. OTHER INFORMATION.
ITEM 1. LEGAL PROCEEDINGS.
As reported in the Form 10-Q filed by the Company on May 15, 2000, the
Company filed a voluntary petition for relief under Chapter 11 of the Bankruptcy
Code on April 13, 2000. Other than the filing of the Plan Documents with the
Bankruptcy Court (see discussion in the section of this Form 10-Q under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations"), there have not been any material developments in the Bankruptcy
Case during the period covered by this Form 10-Q.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
The Company is in default under the indenture governing the 9 1/2%
Notes. See discussion in the section of this Form 10-Q under "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
18
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
- ----------- -------
2.1 Plan of Reorganization filed with the Bankruptcy Court dated June 30, 2000.
10.11 Term Sheet dated June 16, 2000 entered into, among others, by and among
Petsec Energy Inc., the Official Committee of Unsecured Creditors of In Re
Petsec Energy Inc., and certain holders of Petsec's 9 1/2% subordinated
notes due 2007.
10.12 Post-Petition Loan and Security Agreement executed by and between Petsec
Energy Inc., as Borrower, and certain Financial Institutions
Named Therein, as Lenders, and Foothill Capital Corporation,
as Agent, dated as of June 20, 2000.
10.13 Purchase and Sale Agreement between Petsec Energy Inc., as Seller, and LLOG
Exploration Offshore, Inc., as Buyer, dated August 3, 2000
27 Financial Data Schedule
(b) Reports on Form 8-K
Date of Report Item Reported Financial Statements Filed
April 20, 2000 Items 3 and 5 None
June 19, 2000 Item 5 None
19
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.
August 14, 2000 By: Ross A. Keogh
-----------------------------
Ross A. Keogh
Director, Vice President--Chief Financial Officer, and
Treasurer
(Principal Financial and Accounting Officer)
August 14, 2000 By: James E. Slatten, III
------------------------
James E. Slatten, III
Director, Vice President--Land and Legal, and Secretary
(Duly Authorized Officer)
20
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
2.1 Plan of Reorganization filed with the Bankruptcy Court dated June 30, 2000.
10.11 Term Sheet dated June 16, 2000 entered into, among others, by and among
Petsec Energy Inc., the Official Committee of Unsecured Creditors of In Re
Petsec Energy Inc., and certain holders of Petsec's 9 1/2% subordinated
notes due 2007.
10.12 Post-Petition Loan and Security Agreement executed by and between Petsec
Energy Inc., as Borrower, and certain Financial Institutions
Named Therein, as Lenders, and Foothill Capital Corporation,
as Agent, dated as of June 20, 2000.
10.13 Purchase and Sale Agreement between Petsec Energy Inc., as Seller, and LLOG
Exploration Offshore, Inc., as Buyer, dated August 3, 2000
27 Financial Data Schedule